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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
                            ------------------------

(MARK ONE)

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       OR

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

          FOR THE TRANSITION PERIOD                TO                .

                        COMMISSION FILE NUMBER: 0-20815

                                     AVIRON
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      77-0309686
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)
</TABLE>

           297 NORTH BERNARDO AVENUE, MOUNTAIN VIEW, CALIFORNIA 94043
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)

                                 (650) 919-6500
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

           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

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

    Based on the closing sale price of $39.6875 on March 1, 2000, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
$551,770,193.

    On March 1, 2000, there were outstanding 17,163,183 shares of the
Registrant's Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE
                        (TO THE EXTENT INDICATED HEREIN)

    Part III -- Portions of the Registrant's Definitive Proxy Statement for the
Registrant's Annual Meeting of Stockholders to be held June 1, 2000, which will
be filed with the Securities and Exchange Commission, are incorporated by
reference to the extent stated here.

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                               TABLE OF CONTENTS

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<CAPTION>
                                                                          PAGE
                                                                          ----
<S>         <C>                                                           <C>
PART I..................................................................    3
  Item 1.   Business....................................................    3
  Item 2.   Properties..................................................   31
  Item 3.   Legal Proceedings...........................................   32
  Item 4.   Submission of Matters to a Vote of Security Holders.........   32
PART II.................................................................   33
  Item 5.   Market for the Registrant's Common Stock and Related Stock
            Matters.....................................................   33
  Item 6.   Selected Financial Data.....................................   34
  Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................   35
  Item 7A.  Quantitative and Qualitative Disclosures About Market
            Risk........................................................   38
  Item 8.   Financial Statements and Supplementary Data.................   38
  Item 9.   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure....................................   38
PART III................................................................   39
  Item 10.  Directors and Executive Officers of the Registrant..........   39
  Item 11.  Executive Compensation......................................   39
  Item 12.  Security Ownership of Certain Beneficial Owners and
            Management..................................................   39
  Item 13.  Certain Relationships and Related Transactions..............   39
PART IV.................................................................   40
  Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form
            8-K.........................................................   40
INDEX TO FINANCIAL STATEMENTS...........................................   40
SIGNATURES..............................................................   41
POWER OF ATTORNEY.......................................................   41
</TABLE>

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                                    PART I.

ITEM 1. BUSINESS

     The following section contains forward-looking statements that involve
risks and uncertainties. When used herein, the words "expects," "anticipates,"
"estimates," "intends," "plans" and similar expressions are intended to identify
such forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Business Risks' and elsewhere in this
Form 10-K.

OVERVIEW

     We are a biopharmaceutical company focused on the prevention of disease
through innovative vaccine technology. We are currently focusing our product
development and commercialization efforts on our lead product candidate,
FluMist, an investigational live virus vaccine for influenza delivered as a
nasal spray. Our goal is to become a leader in the discovery, development,
manufacture and marketing of innovative vaccines which are safe, effective and
economical enough to merit their use in immunization programs targeting the
general population. Our vaccine programs are based both on techniques for
producing weakened live virus vaccines and on our proprietary genetic
engineering technologies. Live virus vaccines, including those for smallpox,
polio, measles, mumps, rubella and chicken pox, have had a long record of
preventing disease.

     According to the Centers for Disease Control and Prevention, or CDC,
epidemics of influenza occur during the winter months nearly every year and are
responsible for an average of approximately 20,000 deaths per year in the United
States. Influenza viruses also can cause global epidemics of disease during
which rates of illness and death from influenza-related complications can
increase dramatically. Influenza viruses cause disease in all age groups. Rates
of infection are highest among children, but rates of serious illness and death
are highest among persons age 65 or older, and persons of any age who have
medical conditions that place them at high risk for complications from
influenza.

     FluMist is designed to prevent influenza. We are developing and intend to
commercialize FluMist primarily in collaboration with our partner Wyeth Lederle
Vaccines, a business unit of the pharmaceutical division of American Home
Products Corporation, or AHP. FluMist has been shown to provide a high
protection rate against influenza in Phase 3 clinical trials in children and
healthy adults. In a separate trial conducted in healthy working adults,
reductions in days of illness, antibiotic use, health resource use and missed
work because of illness were observed across several illness definitions. Based
on our clinical data, we intend to submit a Biologics License Application, or
BLA, with the U.S. Food and Drug Administration, or FDA, during the fourth
quarter of 2000.

     The FDA notified us in 1998 that, in order to support a BLA filing for
FluMist, we must demonstrate the clinical equivalence between FluMist produced
in our new manufacturing facility located in Pennsylvania and FluMist used in
our Phase 3 trials. We must also provide additional data on manufacturing
validation and stability. In June 1999, we reported the results of a clinical
trial that we believe demonstrated the required clinical equivalence. We are in
the process of completing the manufacturing validation exercises, stability
studies and documentation we believe necessary to support a BLA for FluMist,
which we intend to submit during the fourth quarter of 2000.

     The current formulation of FluMist requires freezer storage throughout
distribution. Because international markets do not have distribution channels
well suited to the sale of frozen vaccines, Wyeth Lederle has initiated a Phase
2 clinical trial outside of the United States for our second generation
refrigerator stable, or liquid, formulation of FluMist.

     We also have a number of other vaccines in various stages of development:

     - a parainfluenza virus type 3 vaccine to prevent the most common cause of
       croup, a respiratory infection in children, for which we have completed a
       successful Phase 2 clinical trial;

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     - an Epstein-Barr virus vaccine to prevent infectious mononucleosis for
       which our collaborative partner, SmithKline Beecham Biologicals S.A., has
       completed a successful Phase 1 clinical trial; and

     - a vaccine for cytomegalovirus, the leading infectious cause of birth
       defects, for which we plan to start a Phase 1 clinical trial during 2000.

     We are also using our proprietary vaccine design technologies to discover
new vaccines, including vaccine candidates for herpes simplex virus type 2, the
virus responsible for genital herpes, and respiratory syncytial virus, a virus
responsible for a severe lower respiratory infection in infants and young
children.

BACKGROUND

     PREVENTION TECHNOLOGY IN THE ERA OF MANAGED CARE AND COST CONTAINMENT

     Health care decision makers in the United States, such as managed care
organizations, clinical practice committees and government health authorities,
are becoming more interested in disease prevention that can be more cost
effective than treating a disease once it is present. In determining whether to
use a vaccine approved as safe and effective by the FDA, decision makers
consider whether it is cost effective and whether it has been recommended by the
ACIP, and by medical specialty societies, such as the Redbook Committee of the
AAP, and the American Academy of Family Physicians, or AAFP.

     THE IMMUNE SYSTEM AND VACCINES

     The body's own immune system provides protection against infection.
Infections occur when a disease-causing virus or bacterium invades the body and
begins to multiply. The human immune system responds in different ways to
contain and eliminate this threat. The process begins when specialized cells
recognize foreign molecules on the surface of an invading virus or bacterium,
called antigens. Immune responses to contain and eliminate the infection
include:

     - Antibodies: Antigens stimulate the immune system to produce specific
       molecules, or antibodies, which neutralize the virus or bacterium. These
       antibodies circulate throughout the body.

     - Cell-mediated response: An effective immune response typically also leads
       to the creation of specific types of white blood cells, a cell-mediated
       response, that deactivate the virus or bacterium or destroy infected
       cells, which limits the spread of the virus or bacterium.

     - Mucosal immunity: In addition to circulating antibodies and the
       cell-mediated response, antibodies are also produced in the body's mucous
       membranes, such as those which line the nose and throat. Mucosal immunity
       is particularly important in protecting against viruses or bacteria which
       enter the body through the nose and throat.

     When a vaccine activates the immune system against a specific virus or
bacterium, the body remembers that response. This memory primes the immune
system to respond if the specific virus or bacterium is encountered again. This
memory may be achieved through vaccination with one of several techniques,
including introduction of a weakened live virus or bacterium, an antigen
fragment, also called a subunit, or with an inactivated, or killed, virus or
bacterium.

     Current challenges for vaccine innovation include providing effective
protection against the major infectious diseases for which no vaccines are
currently available and improving on current vaccines to achieve higher efficacy
or greater ease of administration. In the case of influenza viruses, since the
circulating strains change frequently, the body may not produce an immune
response if it has not been exposed to the specific influenza strain
circulating.

TYPES OF VACCINES

  Inactivated and Subunit Virus Vaccines

     Inactivated virus vaccines are produced by killing a virus using chemicals.
Some vaccines, such as the hepatitis A vaccine, are based on the whole,
inactivated virus. Other vaccines are the result of various degrees

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of purification to concentrate surface proteins of the virus, called subunits,
most responsible for producing immunity. Inactivated and subunit vaccines offer
the advantage of little or no risk of infection from the vaccine itself,
assuming the virus has been adequately inactivated. Good manufacturing
techniques also minimize the possibility of contamination with other viruses or
fragments of DNA which could combine with a person's genes.

     The main disadvantage of inactivated and subunit vaccines for many viruses
has been a lack of success in triggering enough of an immune response to provide
protection against the naturally occurring, or wild-type, virus. Successfully
creating a subunit vaccine requires knowledge of which specific antigens are
responsible for providing protection. Subunit and inactivated vaccines can
produce antibodies in the bloodstream, but are less able to produce antibodies
in the mucous membranes where the wild-type virus enters the body.

  Live Virus Vaccines

     Live virus vaccines expose the immune system to a weakened form of the
virus which is infectious enough to trigger a lasting immune response to the
wild-type virus. All of the live virus vaccines in use today are strains
initially derived from natural infections of humans. The weakening of existing
live viruses, the basis of vaccines for polio, yellow fever, measles, mumps and
rubella, and chicken pox, is accomplished by multiplying these viruses
repeatedly in non-human cells. As a result of this process, these viruses
gradually change in a way that decreases the ability of the virus to cause
disease in humans. The changed virus strain is then tested in animal models, if
available, or directly in human subjects to see if it has been appropriately
weakened without losing its ability to trigger an immune response. Following
testing of safety and the ability to trigger an immune response, in a limited
number of human subjects, larger-scale trials are used to demonstrate that the
vaccine works in preventing naturally acquired infections.

     When a person experiences a natural infection, the body activates an immune
response to that specific infection. The principal advantage of live virus
vaccines is their ability to activate the same protective mechanisms of the
immune system as a natural infection. This process results in a balanced immune
response activating all parts of the immune system, including antibodies at the
site of the infection as well as circulating antibodies and cell-mediated
immunity. As a result, live viruses are often considered to be more effective
than other types of vaccines in providing immunity to natural variations in the
wild-type viruses which cause disease. Live virus vaccines may also be easier to
administer through their natural route of infection, such as through the nose or
mouth.

     However, a weakened live virus vaccine could cause disease resembling a
wild-type virus infection in people with an immune system that is not working
properly because of a pre-existing disease, HIV infection or drug treatment for
cancer or organ transplantation.

     Although beneficial and widely used, there are three theoretical risks with
live virus vaccines. First, live virus strains can change as they multiply in
human hosts, and it is theoretically possible that a vaccine virus could change
back to the wild-type virus. This potential is a small but recognized problem
for some of the current live virus vaccines, including polio. Second, a weakened
vaccine virus may exchange genetic information with wild-type strains after the
vaccine has been given to a person, with the resulting new strain having the
potential to cause disease similar to the wild-type strain. Third, the DNA of a
live virus vaccine could combine with the DNA of the person receiving the
vaccine and cause cancer or other problems in the future.

     The live virus vaccines in widespread use rarely have been associated with
significant adverse events. However, the safety of a live virus vaccine can only
be finally determined after widespread use.

BUSINESS STRATEGY

     Our objective is to discover, develop, manufacture and market innovative
vaccines that are effective, safe and sufficiently economical to merit their
widespread use. The key elements of our business strategy are to:

     Apply Our Own Vaccine Design Technologies to a Range of Viruses. We believe
that our genetic engineering technologies may be used to create weakened live
virus vaccines for a wide range of viruses,

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including other airborne viruses related to influenza, chronic virus infections
related to herpes simplex virus, and potentially to create viruses that can be
used in gene therapy and the treatment of cancer. One potential advantage of our
vaccine design technology is that we believe engineered viruses, like FluMist,
are less likely to change back to wild-type viruses than vaccines created by
traditional methods.

     Acquire Promising Products and Technologies. We intend to continue to
evaluate opportunities to in-license or otherwise acquire rights to promising
products and technologies and intend to add programs that complement our core
technologies and capabilities. For example, we obtained exclusive rights to the
cold adapted influenza vaccine technology which was used to develop FluMist from
the University of Michigan and the NIH, and to our parainfluenza virus 3 vaccine
from the NIH.

     Select Programs and Market Vaccines Based on Pharmacoeconomic Data. In
setting our internal product development priorities, we will evaluate the
potential of each vaccine to protect health and will consider the costs of
implementing widespread vaccine programs in relation to potential cost savings
to governments and managed health care systems. We also intend to collect data
on effectiveness endpoints which allows careful cost effectiveness analyses of
our products.

     Establish Collaborative Arrangements to Help Product Development
Efforts. We intend to continue to enter into collaborative arrangements to gain
access to specific technologies and skills that may speed up product development
and provide additional funding for our research and development and
commercialization efforts, particularly outside of the United States. We have
entered into a worldwide collaboration for the marketing of FluMist with Wyeth
Lederle Vaccines and CSL Limited. We also have an agreement with SmithKline
Beecham for the development of a vaccine against mononucleosis.

     Establish Commercialization Capabilities. We have established worldwide
marketing collaborations for FluMist and will co-promote the vaccine in the
United States with our own dedicated sales force. We will also develop the
systems and infrastructure necessary to support the manufacturing and
commercialization of our products.

OUR TECHNOLOGY

     Our vaccine programs are based both on classical techniques for producing
weakened live virus vaccines and on our own genetic engineering technologies.

     COLD ADAPTED INFLUENZA TECHNOLOGY

     We are applying our expertise in the biology of influenza to develop a live
virus vaccine discovered using classical cold-adaptation techniques. The cold
adapted influenza vaccine technology developed by Dr. H. F. Maassab at the
University of Michigan, created weakened influenza strains by growing the virus
in progressively colder conditions until the strains had lost the ability to
grow well at human body temperature. We have obtained worldwide exclusive rights
to this cold adapted influenza vaccine technology.

     The cold adapted influenza vaccine technology includes the master donor
strains for influenza, as well as techniques useful for updating the vaccine
each year according to recommendations of the CDC and the FDA. Updated strains
are made by combining the master donor strains with current strains to obtain
viruses with the weakened properties of the cold adapted master donor strain and
the antigenic properties of the current wild-type strain, so that the vaccine
will be safe and will also trigger an immune response against the current
influenza virus. After cells are infected with two different strains of virus,
the resulting eight RNA genes of influenza mix at random in the cells. We select
two genes for the antigens of the current wild-type strain and the six remaining
genes from the cold adapted master donor strain to combine into the vaccine.
This process is called reassortment. We have received the technology for
updating the cold adapted master strains from the University of Michigan and
have extended this approach with our own techniques. One such technique, reverse
genetics, allows the direct combination of genes from the current wild-type
virus into the cold adapted master donor strains.

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     PROPRIETARY VACCINE DESIGN

     Since Aviron's founding, our core vaccine discovery strategy has been to
apply genetic engineering techniques to create weakened live virus vaccine
candidates for illnesses where traditional techniques for creating vaccines have
not worked. We believe that our vaccine design approach is more flexible and
systematic than traditional methods of live vaccine discovery and can be applied
to many illnesses and, potentially, to the creation of viruses that can be used
in gene therapy and the treatment of cancer. We also believe that our vaccine
design approach allows for the design of vaccines that are more genetically
stable than classically derived vaccines. Three ways of implementing this
approach are:

     - Adding antigenic information from the vaccine virus. An example of this
       strategy is our creation of a weakened live virus vaccine for CMV, which
       begins with a vaccine candidate thought to be too weak to trigger the
       necessary immune response. We discovered genes for certain antigen
       structures present in wild-type CMV viruses. These genes are now being
       engineered into the vaccine to create a vaccine with a better immune
       response. We have identified several vaccine candidates using this
       approach. We believe this technique of adding antigen structures may
       someday allow us to create combination vaccines against more than one
       virus in a single vaccine. The National Institute of Allergies and
       Infectious Diseases, or NIAID, an institute of the NIH, has filed an
       Investigational New Drug application, or IND, for the testing of our
       initial vaccine candidates for CMV.

     - Deleting or modifying specific parts of a virus which cause illness,
       called virulence proteins. Virulence proteins are parts of a virus that
       contribute to disease, but that are not required for the virus to
       stimulate a strong immune response. We have a program based on this
       strategy to create a live attenuated vaccine against the HSV-2 virus
       which causes genital herpes. One of our founders, Dr. Bernard Roizman,
       discovered a particular protein important in the ability of HSV-2 to grow
       in nerve cells. Since nerve cells are the reservoir from which HSV-2
       reactivates itself to cause painful skin sores, deletion of the gene for
       this protein eliminates the virus' ability to cause infection. This is
       the basis of our vaccine design program for development of a vaccine for
       HSV-2.

     - Changing the genetic information used by the virus in its own
       multiplication. An example of this strategy is work by our scientists to
       create weakened live virus vaccine candidates for RSV, and a future
       generation vaccine for influenza in the elderly. Until recently, it was
       impossible to genetically engineer influenza vaccine strains. Dr. Peter
       Palese, one of our founders, discovered how to create genetically
       engineered influenza viruses using reverse genetics. Our scientists have
       employed this reverse genetics technology to engineer mutations into a
       gene used by the influenza virus to make copies of itself. The resulting
       virus has been shown to be weakened in animal models and has been
       identified as a potential candidate for clinical trials in humans.

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VACCINE PRODUCTS UNDER DEVELOPMENT

     The following table summarizes our most advanced potential products under
research and development.

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          PROGRAM                 VACCINE TYPE                     STATUS                COMMERCIAL RIGHTS
------------------------------------------------------------------------------------------------------------
<S>                          <C>                      <C>                               <C>
 Influenza
   Frozen FluMist
     Children                Cold adapted live virus  Pivotal Phase 3 clinical trial    Aviron/CSL/Wyeth
                                                        completed, BLA planned          Lederle
     Adults                  Cold adapted live virus  Challenge efficacy study          Aviron/CSL/Wyeth
                                                        completed, Phase 3 safety and   Lederle
                                                        effectiveness trial completed,
                                                        BLA planned
     Elderly and High-risk   Cold adapted live virus  Clinical trial completed          Aviron/CSL/Wyeth
     Adults                    (co-administered with                                    Lederle
                               inactivated vaccine)
   Liquid FluMist            Cold adapted live virus  Phase 2 bridging study in         Aviron/CSL/Wyeth
                                                        progress                        Lederle
 Parainfluenza Virus Type 3  Bovine live virus        Phase 2 clinical trial completed  Aviron
 Epstein-Barr Virus          Recombinant subunit      Phase 1 clinical trial completed  SmithKline Beecham
                               Glycoprotein
 Cytomegalovirus             Genetically engineered   Clinical trial planned            Aviron
                               live virus
 Herpes Simplex Virus Type   Genetically engineered   Preclinical                       Aviron
 2                             live virus
 Respiratory Syncytial       Genetically engineered   Preclinical                       Aviron
 Virus                         live virus
------------------------------------------------------------------------------------------------------------
</TABLE>

"Pivotal Phase 3 clinical trial completed, BLA planned" means we have completed
a multi-center, double-blind, placebo-controlled clinical trial for safety and
effectiveness. Our goal is to submit a BLA during the fourth quarter of 2000.

"Challenge efficacy study completed" means we have completed vaccination of
patients in a multi-center, double-blind, placebo-controlled clinical trial for
safety, immunogenicity and effectiveness.

"Phase 3 safety and effectiveness trial completed, BLA Planned" means we have
completed a multi-center, double-blind, placebo-controlled clinical trial in
healthy working adults for effectiveness endpoints such as days of respiratory
illness, absence from work and medication use.

"Clinical trial completed" indicates that clinical trials have been completed
and the data are either being analyzed or the data remain blinded while the
analytical plan is under review.

"Phase 2 bridging study in progress" indicates that there is a study measuring
clinical equivalence of frozen and liquid FluMist.

"Phase 2 clinical trial completed" means that we are analyzing data from a
double-blind placebo-controlled clinical trial for safety and efficacy in
infants.

"Phase 1 clinical trial completed" indicates that a Phase 1 clinical trial in
healthy adults has been conducted by SmithKline Beecham.

"Clinical trial planned" indicates that we have or are preparing a final
regulatory filing prior to initiation of a clinical trial.

"Preclinical" includes assessment of specific vaccine candidates for growth
properties in cell culture and for attenuation or immunogenicity in animal
models.

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    INFLUENZA

     Influenza is a widespread and potentially devastating disease. Influenza
symptoms usually last for approximately one week, result in an average of
approximately three days of lost work or missed school, and cause approximately
20,000 deaths each year in the United States. Children are a major factor in
spreading influenza to others, including those at high risk of developing
serious complications from the disease. According to the CDC, more than 80
percent of influenza-related deaths occur in people over age 65. Children under
age five and women in the last three months of pregnancy are also at higher risk
for serious complications. Several times during the 1900's, influenza caused
serious disease in a much larger percentage of the population, called a
pandemic. Major pandemics occur when the influenza virus undergoes "antigenic
shift," which happens when one influenza strain is replaced by a different
strain that the population has not experienced before and against which
antibodies have not been developed.

     The variability of the influenza virus requires that the influenza vaccine
be changed each year to match the most common current strains. The CDC and the
World Health Organization, or WHO, maintain a global network which monitors the
occurrence of annual outbreaks. Based on these data, the FDA and the CDC choose
the influenza strains to be included in the following season's influenza vaccine
in the United States. A similar process is undertaken in Europe by the WHO and
various national authorities. Influenza vaccines contain three strains of
influenza virus. Typically one or sometimes two of the strains in these vaccines
are updated each year. According to the CDC, current vaccines are 70 percent to
90 percent effective in preventing illness, pneumonia, hospitalization, and
death due to complications from influenza in healthy persons under age 65, and
considerably less effective in the elderly.

     The ACIP has identified the main target groups for the current influenza
vaccine as those at increased risk for influenza-related complications,
including persons age 65 or older, residents of long-term care facilities,
adults and children with chronic lung or heart disease, chronic metabolic
diseases such as diabetes, immunosuppression, children and teenagers receiving
long-term aspirin therapy and therefore at risk of developing Reye syndrome, and
pregnant women. The next level of priority for vaccination identified by the
ACIP includes people that may transmit influenza to high-risk persons,
including, health care workers and family members of such persons. Furthermore,
the ACIP recommends the influenza vaccine for any person who wishes to reduce
the chance of becoming ill with influenza. The AAFP has recently extended its
recommendations to include healthy adults aged 50 years and older compared to
aged 65 and older in its previous recommendations.

     The FDA estimates that approximately 80 to 90 million influenza vaccine
doses were manufactured for use in the United States in 1999. According to the
CDC, 65 percent of the 34 million Americans over age 65 received the influenza
vaccine during 1997, up from less than 25 percent a few years earlier. We
believe that a lower percentage of high-risk individuals under age 65 are
vaccinated, and that the majority of influenza vaccine doses used in the United
States are being given to healthy adults under age 65, many of whom participate
in work place vaccination programs. Experts suggest that very few of the 70
million children in the United States under age 18 receive the influenza
vaccine, even those at high risk for complications.

     AVIRON'S COLD ADAPTED INFLUENZA VACCINE

     Our lead product candidate, FluMist, is based on the live cold adapted
influenza vaccine technology developed by Dr. H. F. Maassab, licensed from the
University of Michigan and subject to a Cooperative Research and Development
Agreement, or CRADA, with the NIH. FluMist has undergone, and is currently
undergoing, extensive clinical trials, many of which are coordinated with
NIH-sponsored investigators. At least 90 clinical trials of the cold adapted
influenza vaccine technology were performed prior to Aviron involvement,
including more than 15,000 volunteers, of whom more than 8,000 received the cold
adapted influenza vaccine.

     FluMist is an investigational influenza vaccine delivered as a nasal spray.
It has been tested in more than 13,000 children and adults and has been shown to
provide a high protection rate against influenza in Phase 3 clinical trials in
children and healthy adults. In a Phase 3 effectiveness trial conducted at 13
sites nationwide

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in healthy working adults, reductions in days of illness, antibiotic use, health
resource use and missed work due to illness were observed.

     We are developing FluMist for use every year in children and adults and for
use in conjunction with the flu shot for potentially improved protection in
high-risk adults, including the elderly. The immune response triggered by
FluMist differs from that triggered by the flu shot, which is an inactivated
vaccine. FluMist triggers an immune response similar to the natural immune
response to wild-type influenza, while the response to the flu shot is more
narrowly focused. In addition, FluMist is delivered in the nose, which is the
natural point of entry for airborne infections such as the influenza virus. In
addition, because FluMist is delivered as a nasal spray, we believe that it
provides a more convenient and comfortable way to vaccinate children each year.
Children are an important target population because, while most deaths from
influenza each year are in the elderly, much of the illness occurs in young
children. Children are also an important factor in the spread of influenza
throughout the population. Influenza is also associated with middle ear
infections, a leading cause of doctor visits and antibiotic use. We expect that
FluMist will be given to children in doctors' offices and other locations where
the current flu shot is given.

     We are also targeting healthy adults, many of whom are being offered flu
shots by their employer and who may prefer FluMist. We believe that many adults
who regularly receive the flu shot will select FluMist if given the choice, and
that people who have avoided flu shots in the past may receive a vaccination if
FluMist is available. We believe that vaccination programs based on FluMist may
also decrease the time per vaccination compared to the flu shot. In addition, we
are developing FluMist for use with the flu shot for high-risk adults, including
the elderly. While efficacy in the elderly has not been conclusively tested, a
nursing home study suggests that administration of FluMist alongside the flu
shot offers added protection compared to the flu shot alone. We intend to seek
recommendations from the ACIP and the AAP and other medical advisory bodies for
use of the FluMist vaccine in appropriate populations.

INFLUENZA CLINICAL TRIALS

     To date, we have tested FluMist in more than 13,000 children and adults,
including enrolling a total of:

     - 647 participants in Phase 1/2 clinical trials;

     - 92 participants in a challenge efficacy study in adults, in collaboration
       with the NIH;

     - 1,602 children in year 1 of the Phase 3 pediatric protective efficacy
       trial, 1,358 of whom have returned for year 2 of the trial;

     - 4,298 children in year 1 and 5,252 children in year 2 of a community
       protection trial; and

     - 4,561 adults in the healthy working adult effectiveness trial.

                                       10
<PAGE>   11

     We have limited data on the efficacy of FluMist against
laboratory-confirmed influenza from clinical trials in healthy adults. Our
clinical trials are being designed to support a BLA seeking approval of FluMist
in several target populations. The following table lists the major clinical
trials completed or in progress related to FluMist.

     FLUMIST CLINICAL TRIALS

<TABLE>
------------------------------------------------------------------------------------------------------
          TRIAL                      PURPOSE OF TRIAL             NUMBER OF SUBJECTS    YEAR OF TRIAL
------------------------------------------------------------------------------------------------------
<S>                        <C>                                   <C>                   <C>
 FROZEN FLUMIST
 HEALTHY CHILDREN
 AV002/AV002-2             Phase 1/2                                     356              1995-1996
                           Dose Escalation
                           Safety and Immunogenicity
 AV006                     Phase 3 Field                                1,602             1996-1997
                           Pediatric Protective Efficacy (1st
                           year)
 AV006                     Phase 3 Field                                 1358             1997-1998
                           Pediatric Protective Efficacy (2nd
                           year)
 AV007                     Phase 3                                       500                1997
                           Manufacturing Consistency
 AR001                     Phase 3                                        65              1997-1998
                           Safety
 AV011                     Phase 3                                       222                1998
                           H1N1 Challenge
 AV012                     Phase 3 Field                           4,298 (1st year)       1998-1999
                           Community Intervention                  5,252 (2nd year)       1999-2000
 AV014                     Phase 3                                       225              1998-1999
                           Manufacturing "Bridge"
                           Safety and Immunogenicity
------------------------------------------------------------------------------------------------------
 "HIGH RISK" CHILDREN
 AV010                     Phase 3                                        48                1997
                           Safety in Children with Asthma
 DMID#99-012               Phase 2                                        49              1999-2000
                           Safety in Children with HIV
------------------------------------------------------------------------------------------------------
 HEALTHY ADULTS
 AV001                     Phase 1                                       239           1995 1994-1995
                           Safety and Immunogenicity
                           (nasal drops vs. nasal spray)
 AV003                     Phase 3                                        92              1995-1996
                           Challenge
 AV004                     Phase 2                                        20              1995-1996
 AV005                     Phase 2                                        32              1996-1997
 AR001                     Phase 3                                       384              1997-1998
                           Safety
 AV009                     Phase 3                                      4,561             1997-1998
                           Effectiveness
------------------------------------------------------------------------------------------------------
 "HIGH RISK" ADULTS
 AV008                     Phase 3                                       200              1997-1998
                           Safety of Co-administration
                           with Flu Shot
 Veterans                  Phase 3 Field Safety and Efficacy of         2,215             1998-1999
 Administration            Co- Administration with Flu Shot in
                           Subjects with Chronic Obstructive
                           Pulmonary Disease
------------------------------------------------------------------------------------------------------
 LIQUID FLUMIST
 D153-P500                 Phase 2                                1,300 planned and         2000
                           Bridging Study                         over 500 currently
                                                                       enrolled
------------------------------------------------------------------------------------------------------
</TABLE>

                                       11
<PAGE>   12

     PHASE 3 CLINICAL TRIALS IN HEALTHY CHILDREN

     Based on trials by others which showed that a modest immune response in
young children to one or two of the strains after a single dose could be boosted
significantly by a second dose approximately two months later, we initiated a
two-year pivotal Phase 3 clinical trial to evaluate one-and two-dose regimens in
children. Our clinical trial data suggest that a repeat or booster dose may be
beneficial in young children who do not have previous exposure to influenza or
influenza vaccines. Two doses of the flu shot are recommended each year for
young children receiving an influenza vaccine for the first time. We enrolled
1,602 children at 10 clinical sites in the pivotal Phase 3 clinical trial, of
which 1,314 were vaccinated with a second dose 46 to 74 days after their first
vaccination. The primary endpoint of the first stage of the study was defined as
protection of children from laboratory-confirmed influenza during the flu
season.

     The influenza epidemic in the 1996-1997 influenza season was widespread
enough in the general population to allow the data to be unblinded following a
single year of enrolling patients. We and the NIAID announced that, based on an
initial analysis of the first stage of the Phase 3 trial, FluMist demonstrated a
93 percent protection rate against culture confirmed influenza in those children
receiving two doses, the primary endpoint of the study. Only one percent of
children receiving two doses of FluMist experienced culture-confirmed influenza,
compared to 18 percent of those receiving the placebo. These results were
statistically significant. No serious adverse events attributable to FluMist
were seen in any subjects to whom FluMist was administered.

     The clinical investigators presented the initial findings of this trial at
a scientific conference in the fall of 1997 and, in May 1998, data from the
first year of a Phase 3 clinical trial of FluMist were published in The New
England Journal of Medicine. In the study, results show that only 14 of the
1,070 children vaccinated with FluMist experienced laboratory-confirmed
influenza, while 95 of the 532 placebo recipients experienced
laboratory-confirmed influenza. Of the children who received FluMist, only one
child developed influenza-associated ear infection, while 20 of the placebo
recipients developed influenza-associated ear infections. Throughout the entire
cough, cold and flu season, 1,070 children vaccinated with FluMist experienced
30 percent fewer ear infections with fever than children who received placebo,
and demonstrated a 35 percent reduction in related antibiotic use for ear
infections with fever.

     The children who participated in the first year of this study were invited
back to participate for a second year of the study during 1997-1998 and were
either vaccinated with a single dose of FluMist or a placebo spray. In September
1998, the results of the second year of this study were presented at the
Interscience Conference on Antimicrobial Agents and Chemotherapy, or ICAAC, and
were subsequently published in the Journal of Pediatrics in February 2000. The
study showed that FluMist provided 100 percent protection against
laboratory-confirmed influenza strains included in the 1997-1998 flu vaccine,
and 86 percent protection against A/Sydney, an unexpected influenza strain which
was not included in any vaccine but was the predominant strain of influenza
circulating during the 1997-1998 flu season. Overall, FluMist provided 87
percent protection against all laboratory-confirmed influenza. In the 1,358
participants, there were five cases of influenza due to influenza strains
included in the vaccine and 66 cases caused by A/Sydney. Only two percent of
children vaccinated with FluMist, 15 out of 917, experienced
laboratory-confirmed influenza, all of which was attributable to the A/Sydney
strain, while 13 percent of the placebo recipients, 56 out of 441, experienced
laboratory-confirmed influenza. The difference between these two influenza
attack rates is used to calculate the overall protection rate of 87 percent.

     The incidence of pneumonia and other lower respiratory diseases was also
reduced in those children vaccinated with FluMist, compared to placebo. Eight
children in the placebo group developed influenza-related wheezing, bronchitis
or pneumonia, all of which were due to the A/Sydney strain. No children who
received FluMist experienced lower respiratory complications. Among the 15 of
the 917 children receiving FluMist who did contract influenza from the variant
strain, the illness appeared to be milder than in the control group, based on
frequency of complications and duration of fever.

     The NIH and Aviron began a large scale clinical trial in August 1998 to
assess the impact of community-wide influenza immunization. The three-year
trial, taking place in Temple, Texas, is funded by a $3.0 million grant from the
NIH awarded to the Baylor College of Medicine. In the first year of the trial,
4,298 children

                                       12
<PAGE>   13

enrolled and in the second year the enrollment increased to 5,252. The trial
will evaluate the impact of vaccinating pre-school and school-age children with
FluMist on the spread of influenza into the community as measured by the number
of doctor visits for flu-related illness.

    PHASE 3 ADULT CHALLENGE TRIAL

     FluMist has been tested in a 1995-1996 challenge efficacy study at two
Vaccine Treatment Evaluation Units involving 92 healthy young adults. Subjects
either received FluMist, the flu shot or placebo. There were no serious adverse
events attributable to FluMist, and there were no statistically significant
differences in the occurrence of any potential reactions assessed in the study
between either vaccine or placebo. Following vaccination, wild-type influenza
virus was given through the nose. Seven percent of those vaccinated with FluMist
and 13 percent of those vaccinated with the flu shot became ill with
laboratory-documented influenza, compared to 45 percent of those who received
placebo. This translates to an 85 percent protection rate for FluMist and a 71
percent protection rate for the flu shot compared to placebo, both of which were
statistically significant. The difference between 85 percent protection for
FluMist and 71 percent protection for the flu shot was not statistically
significant given the small number of people involved in the study.

     Of the FluMist recipients, 10 percent experienced moderate or severe
symptoms following administration of the wild-type influenza virus, a
statistically significant reduction compared to 39 percent of placebo
recipients. The rate of moderate or severe symptoms observed following
administration of the wild-type influenza virus to those who had received the
flu shot was 22 percent which was not statistically significant compared to
placebo. While the rate of illness seen in the placebo group was consistent with
previous influenza challenge efficacy trials by others, the rate of fever or
systemic illness was lower than in previous trials. These data were published in
Vaccine in December 1999.

    PHASE 3 CLINICAL TRIAL IN HEALTHY ADULTS

     On December 5, 1998, preliminary results reported from a Phase 3 trial in
4,561 healthy working adults showed that those receiving FluMist experienced
statistically significant reductions in illness-associated missed work days and
health care provider visits, as well as prescription and over-the-counter
medication use associated with illness. The study was conducted to assess the
impact of immunization on the frequency of influenza-like illness, utilization
of health care services, and absenteeism from work. We intend to use this data
to support a label claim for the use of FluMist in healthy adults. These data
will also be used to support analysis of the cost-savings potential of
immunization programs based on FluMist.

     Data from this trial were presented at the first International Symposium on
Influenza and Other Respiratory Viruses and published in the Journal of the
American Medical Association. Those receiving FluMist compared to those who
received the placebo spray missed 28 percent fewer days of work due to upper
respiratory illness with fever and had 40 percent fewer days of health care
provider visits. Participants also experienced a 45.5 percent reduction in days
of prescription antibiotic use, a 17.0 percent reduction in days of
non-antibiotic prescription drug use and 28 percent fewer days of
over-the-counter, or OTC, medicine use.

     Study results show FluMist recipients had reductions in the occurrence of
illness by multiple definitions measured in the study including severe
influenza-like illness, 18 percent less, and upper respiratory tract illness
with fever, 23 percent less. The number of days of illness was also reduced in
FluMist recipients by 23 to 28 percent, depending on the specific illness
definitions. The prospectively determined primary endpoint was occurrence of
illness using the broadest definition, which was reduced in FluMist recipients
by 9.8 percent, a trend which did not reach statistical significance.

     The trial was a double-blind, placebo-controlled study conducted in 13
clinical sites nationwide during the 1997-1998 flu season. Most study subjects
self-administered FluMist under the supervision of investigators at their
worksite or nearby clinic. Study participants reported their symptoms and health
events monthly. Because laboratory tests were not performed to diagnose
influenza, several pre-specified illness definitions were used to identify
health events that could have been due to influenza virus infection. These
included a very broad definition of influenza-like illness, which did not
necessarily include respiratory tract symptoms, as well as more severe
influenza-like illness and upper respiratory illness with fever.

                                       13
<PAGE>   14

    PHASE 3 CLINICAL TRIAL IN HIGH-RISK ADULTS

     We have completed a clinical trial for safety in 200 elderly high-risk
adults for the use of FluMist for co-administration with the currently available
injectable vaccine. Many of the participants in this trial self-administered
FluMist. We intend to use the data from this study to support a label claim for
safety for such co-administration in high-risk adults, including the elderly. As
this trial was not designed to generate efficacy data on use of FluMist in
high-risk adults, we cannot be certain that data from this trial, combined with
data from our other clinical trials and prior trials, will be sufficient to
support FDA approval of an indication for use of FluMist in high-risk adults.
Early in the fourth quarter of 1998, the Cooperative Studies program of the
Department of Veterans Affairs Office of Research and Development began a
one-year trial to evaluate the potential additional benefit of co-administration
of FluMist with the flu shot, compared to the flu shot alone, in high-risk
patients with chronic obstructive pulmonary disease. This study has been
completed with more 2,215 volunteers enrolled at 20 participating VA Medical
Centers in the United States. Results from this trial are being prepared for
analysis by the VA.

    CLINICAL TRIALS FOR MANUFACTURING CONSISTENCY AND PROCESS

     In February 1998, we reported positive results from a manufacturing
consistency lot trial of vaccine manufactured, blended, and filled into sprayers
at Medeva. We conducted a randomized, double-blind, placebo-controlled trial in
500 children, designed to evaluate the safety and immunogenicity of three
manufacturing lots of FluMist. The children were vaccinated between April and
September 1997. Analysis of patient diary cards and antibody responses following
two doses of FluMist showed consistent safety and immunogenicity for the
different lots according to the pre-defined endpoints. Evidence that different
lots of vaccine can be manufactured at a consistent quality level is generally
required by the FDA prior to approval of such products for commercial sale.

     We have completed a bridging study designed to evaluate clinical
equivalence of vaccine blended and filled at our Pennsylvania facility, compared
to vaccine blended and filled at Medeva that was representative of vaccine used
in earlier clinical trials. This 225-person trial was completed in Australia in
collaboration with CSL Limited. The study's primary endpoint was to show that
the lot of FluMist blended and filled at our Pennsylvania facility had similar
immunogenicity for all three 1997-98 influenza strains to the lot of vaccine
blended and filled at Medeva. The secondary endpoint was to show that the two
lots of vaccine had similar safety and tolerability profiles. The trial was
conducted from December 1998 through March 1999. Participants were children age
12 to 42 months, randomized to receive vaccine blended and filled at one of the
two manufacturing sites. The study met the primary end-points for immunogenicity
and safety and we will include the data from this trial in our BLA. We cannot be
certain that the FDA will find these data sufficient to demonstrate consistency
of manufacture.

     PHASE 2 BRIDGING STUDY WITH LIQUID FLUMIST

     In March 2000, Wyeth Lederle, in conjunction with us, initiated a Phase 2
bridging study with a refrigerator-stable liquid formulation of FluMist in the
southern hemisphere.

     This trial is intended to demonstrate clinical equivalence between first
generation frozen FluMist and liquid FluMist. To date, more than 500 of an
anticipated 1,300 children, age one to three years, have been enrolled.
Participants in this randomized, single-blind study will receive either frozen
or liquid FluMist.

FLUMIST BLA SUBMISSION

     We are in the process of completing the manufacturing validation
requirements we believe necessary to support a BLA submission for FluMist during
the fourth quarter of 2000. This process includes validating the tests needed to
characterize and release our product and ensuring that all our manufacturing
processes, facilities and equipment, including those at our contract
manufacturing partner, Medeva, comply with FDA standards.

                                       14
<PAGE>   15

     Last fall, we announced that we would not submit a BLA for FluMist in 1999
due to inconsistent test results observed during validation exercises. At that
time, we initiated an investigation into these results. Importantly, the
investigation concluded that the inconsistencies were only associated with
certain assays, or tests, and not associated with FluMist or the manufacturing
process. We and Wyeth Lederle are addressing these issues to ensure consistent
assay performance at commercial scale.

     Celltech Medeva, or Medeva, the international marketing arm of the Celltech
Group, plc, notified us that it received a warning letter from the FDA regarding
their UK facility where several key stages of the FluMist manufacturing process
take place. Some of the comments in the letter referred to the general utility
systems in the facility, such as water and clean steam, which are used to
prepare supplies used in the manufacture of FluMist. We have been informed by
Medeva that it is taking the necessary steps to bring its systems and facility
into compliance, and it is working with the FDA to fulfill that objective. While
we believe Medeva has taken the necessary steps to bring the relevant general
utility systems into compliance, we have also begun to implement plans to
eliminate our dependence on these utilities in connection with our planned
fourth quarter 2000 BLA submission. Those plans, which will require FDA
approval, involve the use of disposable supplies instead of relying on the
shared utility systems at Medeva.

OTHER PRODUCTS IN DEVELOPMENT

     PARAINFLUENZA VIRUS TYPE 3

     We are currently developing a vaccine for the treatment of the
parainfluenza virus type 3, or PIV-3, a common respiratory virus of childhood is
a cause of croup, cough, fever and pneumonia. Every year, primarily during the
spring and summer months, PIV-3 infects infants, children and adults. In the
United States, at least 60 percent of children are infected by the time they
reach two years of age, and 80 percent by four years of age. Children are also a
major factor in introducing PIV-3 infection into the family setting. PIV-3
frequently recurs and children typically experience two to three infections of
decreasing severity. Unlike influenza, PIV-3 undergoes only a very minor degree
of variation in the surface proteins from year to year; therefore, a PIV-3
vaccine will not require annual updates.

     Both circulating and nasal antibodies against PIV-3 play a role in
protection against PIV-3 disease. It is thought that protection of the lower
respiratory tract from PIV-3 replication and disease requires high circulating
levels, whereas resistance to infection and protection against disease in the
upper respiratory tract requires mucosal antibodies in the nose. There is
currently no available vaccine to protect against PIV-3 infection and no drug
for treatment of PIV-3 disease.

     Aviron's Live Parainfluenza Virus Type 3 Vaccine. Our live intranasal
vaccine program for PIV-3 utilizes bovine PIV-3, or bPIV-3, vaccine technology
licensed from the NIH. Use of bPIV-3 as a vaccine to protect humans against
human PIV-3 strains is based on the successful strategy first used by Jenner for
smallpox vaccination, in which an animal virus is used as a vaccine to protect
humans from the related human virus. It is thought that the attenuation of
bPIV-3 seen in primates is due to mutations sustained throughout its genome
during its long evolutionary adaptation to the bovine host.

     Clinical Results. Prior to our in-licensing of the bPIV-3 vaccine, it had
been tested in Phase 1 clinical trials in almost 100 adults, children and
infants. In all age groups, the bPIV-3 vaccine appeared satisfactorily
attenuated, safe and genetically stable. Eighty-five percent of infants and
children who had not been previously exposed had an immune response from the
tested dose; 61 percent of bPIV-3 recipients developed a rise in antibody to the
human PIV-3 virus. The vaccine strain caused an immune response in 92 percent of
infants younger than six months of age, even in the presence of maternal PIV-3
antibodies. The bPIV-3 vaccine stimulated an immune response to human PIV-3 in
42 percent of these young infants. A preliminary review of a Phase 2 clinical
trial announced in December 1998 found that after three doses, 79 percent of the
vaccine recipients showed evidence of immunization compared to seven percent of
placebo recipients. The trial met our pre-determined objectives for safety and
immunogenicity. We intend to move forward with additional clinical development
in 2001.

                                       15
<PAGE>   16

     EPSTEIN-BARR VIRUS

     We are currently developing a vaccine for the Epstein-Barr virus, a
herpesvirus that causes infectious mononucleosis and infects most people at some
point in their lifetime. Infection at a young age may cause mild symptoms, but
the debilitating syndrome of infectious mononucleosis is most common when
infection first occurs in adolescence or young adulthood. Sore throat and
swollen neck glands are followed by a period of fatigue and lethargy which can
last for weeks or even months. Many high school and college students become
infected with EBV each year in the United States, of which half or more may
develop infectious mononucleosis. The disease usually runs its course without
significant medical intervention; however, the long duration of infectious
mononucleosis can be a serious problem for high school and college students, and
workers.

     Enlargement of the liver and spleen are also common, which is the reason
doctors typically prohibit participation in athletic activities to prevent
serious injuries. EBV is one of the viruses implicated as a contributing cause
of cancer in humans, including Hodgkin's disease, post-transplant and other
lymphomas, nasopharyngeal carcinoma, the most common head and neck cancer
throughout much of Asia, and Burkitt's lymphoma, a significant disease in
Africa.

     We are developing a subunit vaccine for EBV based on the single surface
antigen responsible for most of the neutralizing antibodies stimulated by EBV
infection. Quantities of this antigen have been expressed, purified and
evaluated in a rabbit model, where preliminary results indicate that the antigen
is immunogenic when combined with an adjuvant. In 1995 we entered into a
worldwide collaboration with SmithKline Beecham, excluding Korea, whereby
SmithKline Beecham will fund the development of our EBV vaccine in exchange for
marketing rights. In August 1999, we announced that SmithKline Beecham completed
a Phase 1 clinical trial in Europe of the subunit vaccine in healthy adults to
evaluate safety and immunogenicity. The study showed that the vaccine tested was
safe and well-tolerated whether or not subjects had been exposed to EBV prior to
the study. Although the study was not designed to evaluate the efficacy of the
vaccine, laboratory tests showed evidence of immune response in vaccine
recipients.

     CYTOMEGALOVIRUS

     We are currently developing a vaccine for CMV, another member of the
herpesvirus group. Most people become infected with CMV at some time in their
life. In the United States approximately 50 percent of the population is
infected with CMV. These infections are typically asymptomatic or result in mild
illness with sore throat, headache, fatigue and swollen glands. CMV also can
cause an infectious mononucleosis syndrome clinically indistinguishable from
that associated with EBV infection. More serious CMV disease is associated with
a weakened immune system, as is often found in AIDS, cancer and transplant
patients, which may be due to reactivation of CMV acquired earlier in life, or a
new infection. Importantly, if a woman is first exposed to this virus during
pregnancy, the resulting infection can cause serious abnormalities in the child.
Approximately 40,000 infants in the United States are infected each year,
resulting in varying levels of brain damage, physical handicaps, or deafness in
over 10 percent of these infants. Congenital CMV syndrome results in significant
expenditures for neonatal intensive care and potentially lifelong custodial
care.

     No vaccine currently is available for CMV. Recently, the Institute of
Medicine, a part of the National Academy of Sciences, issued a report in which
CMV was identified as a level I (most favorable) priority for development as a
vaccine, based on the public health benefit associated with CMV prevention.
Antibodies from persons with high levels of immunity are available in the form
of hyperimmune globulins for certain high-risk patients, but use of these
products can be costly and of limited efficacy. These products are not used to
prevent congenital infection of newborn infants. We believe that widespread
vaccination of children/adolescents with a safe and effective CMV vaccine is
justified for the same reason that children in the United States are vaccinated
against rubella: to protect unborn children from birth defects caused by
congenital infection by reducing the risk that mothers can acquire CMV during
pregnancy.

     A weakened live virus vaccine candidate for CMV, known as the Towne strain,
has been tested by third parties in several hundred people. This strain was
reported to be well tolerated, but did not provide sufficient protection in
mothers of children in day care who were at risk for CMV infection, or in
transplant recipients at

                                       16
<PAGE>   17

risk of acquiring CMV from the donor organs. Our scientists have discovered key
differences between Towne strain and the naturally occurring CMV virus. Based on
this knowledge, we have used our rational vaccine design approach to create new
recombinant CMV vaccine candidates in an attempt to achieve the appropriate
balance between attenuation and protection. The NIAID filed an IND for a Phase 1
clinical trial of several of Aviron's CMV vaccine candidates in December 1998.
We expect to initiate the first clinical trial for a CMV vaccine in 2000, in
conjunction with the NIAID.

     HERPES SIMPLEX VIRUS TYPE 2

     It is estimated that HSV-2, the cause of genital herpes, infects between 40
million and 60 million persons in the United States. Only one-third of those
infected experience symptoms, but a significant portion of new infections are
caused by transmission from people who do not have any symptoms. Genital herpes
is an incurable disease that invades the body once and settles in for a
lifetime, often manifesting its presence several times a year with painful sores
in the genital area. It is estimated that there are over 500,000 new cases of
genital herpes per year in the United States, and that the disease is
responsible for over 600,000 physician visits per year.

     Genital herpes also can be acquired by newborn babies as they pass through
the birth canal of infected mothers. Neonatal herpes simplex infection can
result in serious damage to the brain and many other organs. Each year in the
United States, approximately 1,500 infants are infected and these infants have
almost a 50 percent risk of death or severe, permanent neurologic damage. In
addition, efforts to prevent neonatal herpes contribute significantly to the
cost of the disease. For example, women in the United States with a history of
genital herpes are often advised to undergo a Cesarean section when prenatal
examinations suggest a herpes virus recurrence near the time of delivery. HSV-2
infection can also lead to serious and fatal complications in adults with poor
immune systems due to AIDS or drug therapy for organ transplants.

     The most widely used drug therapy for HSV-2 disease is acyclovir, which has
been shown to reduce the severity and duration of herpetic lesions, although
most patients treated still experience symptoms for several days. When taken
several times a day as a preventative for HSV-2, acyclovir also has been shown
to reduce the frequency of recurrences. Several additional therapeutics are
available or are in the late stages of clinical trials, and several preventative
vaccines are in clinical trials; however, no vaccine currently is available to
prevent genital herpes. One company recently reported a lack of efficacy in
Phase 3 clinical trials of a subunit vaccine. A second company is conducting a
Phase 3 clinical trial of a different subunit vaccine, and a third company has
announced commencement of a Phase 2 clinical trial of a disabled virus which can
undergo only a single cycle of replication after injection.

     We have used our rational vaccine design approach to create live attenuated
vaccine candidates intended to prevent HSV-2 disease in uninfected children and
young adults. Two of our founders, Dr. Bernard Roizman and Dr. Richard Whitley,
in collaboration with Pasteur Merieux Serums et Vaccins, developed a prototype
live herpes vaccine based on an oral herpes virus, or HSV-1. After extensive
preclinical testing, the virus was tested in humans; however, the immune
response following vaccination was deemed insufficient. This insufficiency most
likely resulted because too many genes had been deleted, thus rendering the
virus over-attenuated. We have licensed technology, along with patents covering
strategies for more specific deletions, from ARCH Development Corporation. We
have used this technology to create proprietary live vaccine candidates using an
HSV-2 backbone, which we have evaluated in preclinical models. Several
candidates have shown attenuation in various rodent models, as well as efficacy
in protecting guinea pigs and primates from challenge with a lethal dose of
wild-type HSV-2. We are developing additional vaccine candidates and intend to
use the results of further animal studies to select one or more candidates for
evaluation in clinical trials.

     In July 1996, we licensed a portion of our patent rights covering or
related to the use of HSV-2 for treatment of cancer and for gene therapy, but
excluding use for vaccines, to NeuroVir Research, Inc., a private Delaware
corporation. In exchange, we received shares of capital stock and warrants to
purchase shares of capital stock, representing a minority interest in the
outstanding equity securities of NeuroVir on a fully diluted basis. We are under
no obligation to fund development of this technology by NeuroVir.

                                       17
<PAGE>   18

     RESPIRATORY SYNCYTIAL VIRUS

     RSV is the major cause of lower respiratory tract illness in the very
young, responsible for over 90,000 hospitalizations and more than 4,500 deaths a
year in the United States. RSV can also cause the common cold. Infection is
manifested as cough and fever and, in some cases, pneumonia. While RSV infection
can occur at any time of year, epidemics generally occur in the winter. Most
cases are in children under age four, with the peak of severe illness under six
months of age, particularly in infants with pre-existing heart and lung disease.
The leading product used for the prevention of RSV is a humanized monoclonal
antibody against RSV and is delivered by injection. One company is testing a
cold adapted weakened live virus vaccine for RSV in infants. Available drug
therapy is reserved for the most serious cases as it has significant side
effects. We are developing a genetically engineered weakened live virus vaccine
for RSV using proprietary reverse genetics technology. Our objective is to use
this technology to create a number of live virus vaccine candidates that can be
tested in animal models before selecting a candidate for testing in humans.
However, no assurance can be given that we will be successful in identifying a
vaccine candidate.

     LIVE VIRUSES AS VECTORS

     We believe that our virus engineering technology may be used to create
strains which carry "foreign" genes and are able to deliver genetic or antigenic
information to specific tissues in the host. For example, it is possible to
engineer antigens from other viruses into influenza, as has already been
demonstrated for small antigenic regions from agents such as HIV and malaria.
RSV and PIV-3 are two other important causes of childhood infections which may
be targeted by using the influenza virus as a vector to deliver antigens.

FLUMIST PRODUCTION AND MANUFACTURING

     PRODUCTION

     Master Virus Seed Production. After the FDA and the CDC select the
influenza strains to be included in the vaccine, we create the respective master
virus seeds for use in large-scale production. These contain the hemagglutinin,
or HA, and neuraminidase, or NA, genes of the expected epidemic strain and six
genes which hold the cold adapted, weakened properties of the master donor
strain. Two processes are available for us to make the master virus seeds:
classical reassortment and reverse genetics. In the classical reassortment
process, which we intend to include in our BLA submission, laboratory virus
cells are infected with both the expected strain in circulation and our cold
adapted master donor strain, which results in random genetic reassortments
between the two strains. The specific reassortment desired is isolated using
monoclonal antibodies. This process takes approximately four to six weeks and
has been used by scientists at the University of Michigan and Aviron to create
more than 20 different vaccine strains that have been tested in human clinical
trials. In the reverse genetics approach, which may be submitted in future
amendments to our BLA filing, HA and NA genes are isolated from the expected
circulating strain and introduced into the cold adapted master donor strain
using our proprietary reverse genetics technology. Potential advantages of this
process are that it may be somewhat faster and may offer lower risk of
contamination than classical reassortment. We have conducted a clinical trial to
evaluate safety of the reverse genetics process compared to the classical
reassortment process.

     Bulk Monovalent Formulation Production. Under our current arrangement with
Medeva, the master virus seeds for each vaccine strain are transferred to Medeva
for large scale production of the bulk monovalent formulations of the three
vaccine strains, which involves infection, incubation and harvesting from hens'
eggs. The eggs used in this process are supplied by a third party that maintains
flocks certified to be free of specific pathogenic agents.

     Trivalent Formulation Production. The bulk formulation is frozen and
transferred to our facility in Pennsylvania where the monovalent vaccine
material is blended into the trivalent formulation, filled into nasal spray
devices, packaged and labeled.

     MANUFACTURING FACILITIES AND CONTRACTS

     We currently do not have licensed facilities to manufacture FluMist and
have no direct experience with large scale manufacturing of this potential
product. All of the cold adapted vaccine material used in our early

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<PAGE>   19

stage clinical trials was supplied solely by Medeva pursuant to an agreement
between us and Medeva entered into in November 1995. Pursuant to this agreement,
we have received timely and sufficient supplies for our clinical trials of
FluMist through four influenza seasons. Medeva is one of four companies licensed
by the FDA to produce influenza vaccine for sale in the United States and
produces its own injectable inactivated influenza vaccine. Since 1998 we have
been producing supplies for all frozen FluMist clinical trials through creation
of master virus seeds at our California facility, production of bulk monovalents
at Medeva and the blending and filling into the trivalent formulation at our
Pennsylvania facility.

     We initially plan to obtain commercial quantities of bulk vaccine of frozen
FluMist from Medeva. Under an agreement between Aviron and Medeva entered into
in April 1997, Medeva agreed to manufacture frozen FluMist in bulk until
December 31, 2001. In July 1999, this agreement was revised and extended to
December 2005.

     In October 1997, we entered into a nonexclusive arrangement with Packaging
Coordinators, Inc., a division of Cardinal Health, Inc., or PCI, for the
blending, filling, packaging, and labeling of FluMist for commercial sale until
October 2004. Under this agreement, we and PCI opened a 34,000-square-foot
manufacturing suite in Philadelphia, Pennsylvania at PCI's site in 1998, in
which PCI has blended, filled and packaged doses of FluMist for use in 1998-1999
clinical trials. All activities at this site are now referred to collectively as
"Aviron PA". If regulatory approval is received, this Aviron PA facility is
expected to be used for blending, filling, packaging, labeling and storage of
FluMist.

     The production of FluMist is subject to the availability of a large number
of specific pathogen-free eggs, for which there are currently a limited number
of suppliers. In June 1999, we entered into a non-exclusive agreement with
Specific Pathogen-Free Avian Supply, a division of Charles River Laboratories
for the acquisition of pathogen-free hens' eggs through December 2001. This
agreement may be renewed by mutual agreement of the parties for an additional
term of three years.

     In August 1998, Aviron and Becton Dickinson and Company entered into a
worldwide exclusive supply agreement under which Becton Dickinson will supply us
with its AccuSpray non-invasive nasal spray delivery system for the
administration of FluMist through the 2001-2002 flu season. In addition, we
depend on the submission by Becton Dickinson of a Device Master File
application, or DMF, for separate review by regulatory authorities. We will
reference the DMF as part of the BLA submission for FluMist.

     Our current frozen formulation of FluMist is being designed to meet an
acceptable level of stability for the U.S. market. In addition to its current
frozen formulation, we are exploring alternative formulations and presentations
for FluMist which may enable improved distribution and longer shelf life. We
believe that a liquid formulation of FluMist will be required to address markets
outside the United States and Canada. Aviron and Wyeth Lederle are jointly
producing clinical trial material for the liquid formulation of FluMist at our
facilities in California and Pennsylvania and in Wyeth Lederle's facilities. As
part of our agreement with Wyeth Lederle, both companies have the ability to
manufacture liquid FluMist bulk materials.

MARKETING AND SALES

     The current purchasers of vaccines are principally physicians, large HMOs
and state and federal government agencies. We intend to sell our products to
HMOs, large employers, and government health care agencies, physicians and
pharmacies, either directly or through our partners.

     Clinical trials of FluMist have been conducted to provide information
regarding its use in three market segments: children, healthy adults, and adults
at high-risk of influenza complications due to age or to the presence of chronic
medical conditions such as heart or lung disease or diabetes. Use of influenza
vaccines in these three segments is subject to somewhat different market forces,
and customers are accessed by different channels of distribution.

     CHILDREN

     There are approximately 70 million children age 18 and under in the United
States. Influenza among children causes significant impact on families,
especially when a parent has to stay home from work to care for

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<PAGE>   20

a sick child. The current injectable vaccine is rarely used in healthy children,
although children have the highest attack rate of influenza and play a major
role in the spread of the influenza epidemic. The current injectable influenza
vaccine is used in children at high-risk of influenza complications due to
conditions such as asthma and congenital heart disease, but public health
authorities are concerned that coverage rates are below optimal. Our objective
is to develop a new market for influenza prevention in healthy and high-risk
children by offering an innovative vaccine to prevent influenza. Because FluMist
is delivered as a comfortable nasal spray we believe it would provide an
attractive way to immunize children on an annual basis. In addition, FluMist can
have an impact in reducing middle ear infections and associated antibiotic use,
which increases its value in this population. While clinical data in healthy
children appears strong, FluMist studies in high-risk children are limited. We
cannot be sure that we will receive a labeling claim for high-risk children.

    HEALTHY ADULTS

     We believe that a large proportion of the current injectable influenza
vaccine used in the United States is being administered to healthy adults,
either via workplace immunization programs or in programs offered through
clinics, pharmacies or other retail outlets. There are approximately 120 million
adults in the United States between 18 and 50 years of age who are not
classified by the CDC or the ACIP as being at high-risk for influenza
complications, but who still could be susceptible to influenza. Our objective is
to expand the current market for influenza prevention by offering a unique
alternative for individuals who value flu prevention. We believe that
immunization programs using FluMist may also decrease the time per vaccination
compared to the current influenza injection and therefore allow improved
flexibility and efficiency of operation.

    HIGH-RISK ADULTS

     We have completed a clinical trial in high-risk adults to evaluate the
efficacy of FluMist when co-administered with the injectable influenza vaccine,
compared to the injectable influenza vaccine alone. If this trial is successful,
and regulatory approval is received, we intend to market FluMist to be used in
conjunction with the injectable influenza vaccine for adults over age 65,
approximately 34 million persons in the United States, and for adults under age
65 with conditions which put them at higher risk of influenza complications.

COLLABORATIVE AGREEMENTS

     Our strategy for the development, clinical trials, manufacturing and
commercialization of certain of our products includes maintaining and entering
into various collaborations with corporate partners, licensors, licensees and
others. To date we have entered into the following collaborative agreements.

     FLUMIST AGREEMENTS

  Wyeth Lederle Vaccines

     In January 1999, Wyeth Lederle and Aviron announced a worldwide
collaboration for the marketing of FluMist. This agreement became effective in
March 1999.

     Under this agreement, we granted Wyeth Lederle exclusive worldwide rights
to market FluMist, excluding Korea, Australia, New Zealand and certain South
Pacific countries. We and Wyeth Lederle will co-promote FluMist in the United
States, while Wyeth Lederle will have the exclusive right to market the product
outside the United States. In each case, Wyeth Lederle will hold the marketing
rights for up to 11 years. We and Wyeth Lederle will also collaborate on the
regulatory, clinical, and marketing programs for FluMist.

     We have received a cash payment of $15.0 million from Wyeth Lederle under
the collaboration, and will receive an additional $15.5 million upon acceptance
by the FDA of a BLA filing and an additional $20.0 million upon FDA marketing
approval for FluMist. We can also earn an additional $20.0 million in milestone
payments for expansions in labelling claims and advisory body recommendations.
In addition, we are entitled to receive a $10.0 million payment for the
submission of a license application in Europe, a

                                       20
<PAGE>   21

$27.5 million payment for the approval of a liquid formulation of FluMist, and
up to $50.0 million upon licensure in international regions. Compensation for
achieving additional development and regulatory milestones is included in the
agreement terms. The granting of other rights under the license would trigger
additional payments to us by Wyeth Lederle in excess of $140.0 million.

     Wyeth Lederle committed to provide up to $40.0 million in financing to us,
of which $1.3 million had been provided as of December 31, 1999. Subsequent to
December 31, 1999, Wyeth Lederle provided $4.0 million of financing. Of the
remaining $34.7 million, $20.0 million is available only upon FDA approval of
FluMist. The total potential value for the license fees, milestones and
financing support that we could receive exceeds $400.0 million.

     Wyeth Lederle will distribute FluMist and record all product sales. In
addition to the payments mentioned above, we anticipate that we will receive
approximately 40 percent of FluMist revenues from Wyeth Lederle, in the form of
product transfer payments and royalties, which increase at higher sales levels.
We will incur expenses to supply and co-promote FluMist.

  CSL Limited

     In June 1998, Aviron and CSL Limited of Victoria, Australia, announced that
they will collaborate on the development, sale and distribution of FluMist, in
Australia, New Zealand and certain countries in the South Pacific. We and CSL
Limited will jointly carry out additional clinical trials in Australia for
FluMist. Under the agreement, CSL Limited will sponsor the marketing application
with the Therapeutic Goods Administration, Australia's equivalent to the FDA.
CSL Limited will have exclusive rights to sell and distribute FluMist in the
above listed territory. We and CSL Limited will share profits of FluMist in the
Territory. We also will benefit from expansion of CSL Limited's current flu
vaccine in pediatric and healthy adult market segments following the approval to
market FluMist in the territory. In addition, CSL Limited has agreed, under an
option agreement, to grant warrants to us to purchase CSL Limited common stock
upon CSL Limited's attainment of certain milestones.

  National Institute of Allergy and Infectious Diseases -- Cold Adapted
Influenza Vaccine

     Following a competitive application process, we entered into a
Collaborative Research and Development Agreement, or CRADA, in March 1995 with
the NIAID of the NIH to conduct clinical trials of our cold adapted influenza
vaccine. Wyeth-Ayerst licensed certain rights to the vaccine from the NIH in
1991 and was developing it for sale in collaboration with the NIH until
relinquishing its rights in 1993. We have obtained from the NIH and the
University of Michigan exclusive rights to trial results and data from the work
at the VTEUs and Wyeth-Ayerst. The NIH has agreed to support the trials by
enrolling subjects in its network of VTEUs. In addition, we acquired exclusive
commercial rights to data generated from all previous clinical trials conducted
by the NIH and Wyeth-Ayerst using the vaccine. The term of the CRADA will not
exceed five years without a written amendment by the parties. Aviron and the
NIAID are discussing a possible extension of the CRADA. Either party may
terminate the CRADA for material breach.

  University of Michigan

     In February 1995, we entered into a materials transfer and intellectual
property agreement with the University of Michigan. Pursuant to the agreement,
the University of Michigan granted us exclusive worldwide rights to certain
intellectual property and technology relating to the cold adapted influenza
vaccine and proprietary master donor strains of influenza viruses useful in the
production of products for vaccination against influenza and potentially for
gene therapy and other uses. Specifically, we obtained the exclusive right to
develop, manufacture, use, market and sell products incorporating any such
intellectual property or utilizing the master strains worldwide. In
consideration for the rights granted to us, we:

     - made an initial cash payment to the university;

     - agreed to pay a royalty to the university on net sales of products
       subject to the license;

     - entered into a sponsored research agreement with the university for a
       period of at least two years; and
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<PAGE>   22

     - issued to the university 1,323,734 shares of Series B Preferred Stock,
       which automatically converted into 264,746 shares of the common stock at
       the time of our initial public offering.

     The original agreement had also provided that, in the event that we receive
approval to commercially market a product based on the university's technology,
we agreed to issue a warrant to the university to purchase shares of our common
stock at a price of $10.00 per share, for a number of shares to be based on 1.25
percent of the common stock outstanding on the date of the first commercial sale
of the product incorporating the university's technology. In February 2000, the
agreement was amended to immediately grant the university a warrant to purchase
340,000 shares of our common stock at an exercise price of $10.00 per share.
Upon the date of the first commercial sale of FluMist, if 1.25 percent of our
common stock then outstanding exceeds 340,000 shares, we will issue a separate
warrant for the excess of that amount of shares over 340,000 allowing the
university to purchase the excess shares on the same terms.

     Pursuant to the agreement, we are required to grant to the university an
irrevocable, royalty-free license for research purposes, or for transfer to a
subsequent licensee should the agreement be terminated, to (1) all improvements
developed by us, our affiliates or sublicensees, whether or not patentable;
relating to delivery mechanisms and processes for administration and
manufacturing of products, as well as packaging, storage and preservation
processes for the master strains, and (2) all new technical information acquired
by us, our affiliates or sublicensees relating to the master strains and
products.

     The term of the agreement is until the later of the last to expire of the
university's patents licensed to Aviron or 20 years from the date of first
commercial sale of a product incorporating the university's technology. We have
the further right to terminate for any reason upon 12 months notice to the
university.

     OTHER COLLABORATIVE AGREEMENTS

  National Institute of Allergy and Infectious Diseases -- Parainfluenza Virus
Type 3

     In May 1996, we obtained exclusive rights from the NIAID of the NIH to
certain biological materials and clinical trial data for our PIV-3 program. The
NIH granted to us exclusive rights in specific strains of bovine parainfluenza
virus to develop, test, manufacture, use and sell products for vaccination
against human parainfluenza virus and other human and animal diseases. In
addition, we obtained from the NIAID the right to reference an existing IND and
certain data relating to the licensed materials. The NIH retained rights to the
licensed materials on behalf of the United States Government to conduct research
and to grant research licenses to third parties under certain circumstances. In
return for the rights granted by NIH, we will make payments to NIH on the
achievement of specified milestones and will make certain royalty payments to
NIH. Unless otherwise terminated, the agreement will terminate on cessation of
commercial sales of licensed products by us or our sublicensee. We have the
unilateral right to terminate the agreement in any country upon providing 60
days notice to NIH.

  SmithKline Beecham Biologicals S.A.

     In October 1995, we signed an agreement with SmithKline Beecham
Biologicals, S.A. defining a collaboration on our EBV vaccine technology. Under
the terms of our agreement, we granted SmithKline Beecham an exclusive license
to produce, use and sell inactivated EBV vaccines incorporating our technology
for prophylactic and therapeutic uses on a worldwide basis, except in Korea. In
addition, SmithKline Beecham obtained a right of first refusal to an exclusive,
worldwide, except Korea, license under any intellectual property rights relating
to any live EBV vaccine technology developed or controlled by us during the term
of this agreement. We have retained the right to co-market a monovalent
formulation of the EBV vaccine in the United States and to have SmithKline
Beecham supply such vaccine.

     SmithKline Beecham agreed to fund research and development at Aviron
related to the EBV vaccine, in specified minimum amounts, during the first two
years of this agreement. SmithKline Beecham made an initial up-front payment to
us and agreed to make additional payments upon the achievement of certain
product development milestones; the first such milestone payment was made in
1997. We are entitled to royalties from SmithKline Beecham based on net sales of
the vaccine. Unless otherwise terminated, the

                                       22
<PAGE>   23

agreement will expire on a country-by-country basis upon the expiration or
invalidation of the last remaining patent covered by the agreement or 10 years
from the date of first commercial sale of the vaccine, whichever is later. The
agreement may be terminated by SmithKline Beecham with respect to any country at
any time.

  Sang-A Pharm. Co., Ltd.

     In May 1995, we entered into a Development and License Agreement with
Sang-A Pharm. Co., Ltd. We granted to Sang-A exclusive clinical development,
manufacturing and marketing rights in Korea for specified products developed by
Aviron, including vaccines for influenza, cold adapted and recombinant EBV, CMV,
HSV-2 and RSV. However, we are under no obligation to develop any product.
Sang-A also will make payments to us upon Sang-A's meeting certain regulatory
milestones for each product in Korea and will pay a royalty to us on net sales
of such products in South and North Korea.

     The term of this agreement extends, on a product-by-product basis, until 10
years from the date of first commercial sale of each product in Korea. At the
conclusion of the term, Sang-A has an option to extend the agreement on a
product-by-product basis, for the longer of an additional 10 years or the
expiration of the patents covering such product. During any such extension,
Sang-A will have either no royalty obligation to us or a reduced royalty
obligation, depending on the product.

     Sang-A also is obligated to establish a manufacturing facility with at
least enough capacity to meet demand for all Korean product requirements for
each product that reaches commercialization, if any. Sang-A has notified Aviron
that, at this point, it does not intend to establish a manufacturing plant. In
January 1997, Sang-A declared bankruptcy and continues to operate while in
receivership. We are unable to predict what, if any, long-term effect the
bankruptcy will have on Sang-A and on our agreement with Sang-A.

  The Mount Sinai School of Medicine

     In February 1993, we entered into a technology transfer agreement with The
Mount Sinai School of Medicine. Under this agreement, Mount Sinai assigned to us
all of its rights, title and interest in and to certain patents and patent
applications, as well as all associated know-how and other technical information
relating to recombinant negative strand RNA virus expression systems and
vaccines, attenuated influenza viruses and certain other technology. Mount Sinai
also granted to us (1) an option to acquire any improvements to the inventions
disclosed in the assigned patents and patent applications thereafter developed
by Mount Sinai and (2) a right of first negotiation for a license or assignment
to additional related technology. In consideration for these rights, we issued
to Mount Sinai 35,000 shares of our common stock. We also issued to Mount Sinai
four warrants to purchase up to a total of 45,000 shares of our common stock,
each exercisable for a term of five years commencing upon the occurrence of
milestone events.

  ARCH Development Corporation

     In July 1992, we entered into a license agreement with ARCH Development
Corporation ARCH, pursuant to which we obtained an exclusive, worldwide
commercialization license, with the right to sublicense, to patent rights and
related intellectual property and materials pertaining to the herpes simplex
viruses, EBV and various recombinant methods and materials. In return for the
rights granted to us under this agreement, we will make payments to ARCH upon
the achievement of certain milestones in the development of products covered by
the license and will pay royalties to ARCH on net sales of such products. ARCH
also granted us rights to improvements and additional related technology. The
term of this agreement extends until the expiration of the last-to-expire patent
rights covered under the license. ARCH has asserted an interpretation of the
financial terms of this agreement with us, relating to the license by us of its
EBV technology to SmithKline Beecham, which would require us to pay ARCH
one-half of any future or past payments, including sublicense fees and milestone
payments we received under the SmithKline Beecham agreement. We dispute ARCH's
interpretation of the financial terms of the agreement.

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<PAGE>   24

BUSINESS RISKS

     This Form 10-K contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. When used
herein, the words "expects," "anticipates," "estimates," "intends," "plans" and
similar expressions are intended to identify such forward-looking statements.
Our actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below, as well as those discussed elsewhere
in this Form 10-K.

RISKS RELATED TO FLUMIST

     For the foreseeable future, the risks relating to Aviron are primarily
those related to the development and commercialization of FluMist. All of our
potential near-term revenues are dependent on the commercialization of FluMist.
Because of the seasonality of influenza, FluMist must be available in the third
or fourth quarter of the year for us to achieve revenues for that season. Delay
in availability of FluMist in the initial year of commercialization or in
subsequent years could cause us to lose revenues for an entire influenza season
and require us to raise additional capital to cover the costs of additional
research and development, related expenses and ongoing fixed costs.

POSTPONING THE SUBMISSION OF OUR APPLICATION TO THE FDA FOR FLUMIST WILL DELAY
THE COMMERCIALIZATION OF FLUMIST.

     In 1998, we submitted an application for FluMist, which was not accepted
for filing by the FDA. Additional information required before we resubmit our
application includes data on manufacturing validation, stability and clinical
equivalence. If our manufacturing validation exercises and studies to confirm
sufficient shelf-life stability are not successful, or if our facilities
validation is delayed, or we encounter additional problems, we will postpone our
submission beyond 2000, which will delay commercialization of FluMist.

IF THE FDA FINDS THAT OUR APPLICATION FOR FLUMIST DOES NOT SUPPORT APPROVAL, OR
IF ITS INSPECTORS FIND THAT OUR MANUFACTURING FACILITIES ARE NOT ADEQUATE,
COMMERCIALIZATION OF FLUMIST MAY BE DELAYED BY ONE OR MORE INFLUENZA SEASONS.

     Approval risk related to manufacturing. If the FDA finds that the
validation, clinical or other required data in our application is insufficient,
it could refuse to accept our application for filing or could require corrective
action or additional data which could delay or prevent approval. The FDA is
likely to inspect each of the facilities involved in manufacturing FluMist. FDA
inspectors may find deficiencies in the facilities or processes that may lead to
delay in FluMist approval or prevent it from being approved at all.

     Celltech Medeva, or Medeva, the international marketing arm of Celltech
Group, plc, notified us that it received a warning letter from the FDA regarding
their UK facility where several key stages of the FluMist manufacturing process
take place. Some of the comments in the letter referred to the general utility
systems in the facility, such as water and clean steam, which are used to
prepare supplies used in the manufacture of FluMist. We have been informed by
Medeva that it is taking the necessary steps to bring its systems and facility
into compliance, and it is working with the FDA to fulfill that objective. While
we believe Medeva has taken the necessary steps to bring the relevant general
utility systems into compliance, we have also begun to implement plans to
eliminate our dependence on these utilities in connection with our planned
fourth quarter 2000 BLA submission. Those plans, which will require FDA
approval, involve the use of disposable supplies, instead of relying on the
shared utility systems at Medeva.

     Approval risk related to FluMist indications and claims. We are initially
seeking FDA approval for use of FluMist in children and healthy adults. The FDA
may not find our clinical data adequate to support use in any particular group
and may exclude any segment of the population. The FDA may request additional
clinical data to support the safety of FluMist. We may be required to commence
and complete additional clinical trials to generate additional data to support
product approval for one or more of our target populations,

                                       24
<PAGE>   25

which may lead to substantial delay in FluMist approval or prevent it from being
approved for any of those population segments.

IF WE ARE UNABLE TO PERFORM THE COMPLEX ANNUAL UPDATE OF THE FLUMIST FORMULATION
FOR NEW INFLUENZA STRAINS IN A TIMELY MANNER, OUR SALES FOR THAT YEAR WILL BE
LIMITED OR WE MAY HAVE NO SALES AT ALL.

     Early each year, the FDA determines which strains will be included in the
upcoming season's influenza vaccines. After the FDA makes its decision, we will
have approximately six months to include the selected strains and manufacture
FluMist for use in the upcoming influenza season. The major factors that may
delay availability of FluMist each year are:

     - The FDA may delay its selection of strains for a given influenza season.

     - We may experience difficulty or delay in the technically demanding
       process we follow each year to update the formulation of FluMist.

     - The FDA could require as a release test a brief clinical trial designed
       to show the safety and activity of the vaccine including the new strains
       selected for that particular year.

IF WE HAVE DIFFICULTIES WITH OUR MANUFACTURING PROCESS, WE MAY NOT HAVE
SUFFICIENT QUANTITIES OF VACCINE.

     We may not have sufficient quantities of vaccine in time to assure
availability for the season due to problems with updated strains or performance
of suppliers or contract manufacturers. Following inoculation with our updated
strains, bulk vaccine is harvested from special hens' eggs. This is a
labor-intensive process which must be conducted under strict controls and tight
timelines. We are dependent on our contract manufacturer, Medeva, for successful
staffing, training and supervision for this process. We are currently dependent
on a single supplier for an adequate and timely supply of eggs.

     We may have difficulty with the blending, filling and packaging of FluMist.
The bulk vaccine for three strains of influenza must be diluted and blended
together prior to filling the nasal spray device. This process must be conducted
under strict controls and tight timelines. We depend upon a single supplier for
our nasal spray device. We also depend upon our packaging contractor for
packaging of the vaccine. The vaccine is subject to strict quality control
testing during production and prior to release. Any quality control failures
could lead to a reduction in the available supply of FluMist.

IF THE MARKET DEMAND FOR FLUMIST EXCEEDS OUR MANUFACTURING CAPACITY, OUR REVENUE
MAY BE LIMITED.

     We may be capacity constrained in our supply of vaccine. In order to secure
future production capacity, we may extend and expand existing arrangements,
collaborate with other third parties, or establish additional manufacturing
facilities. Using an alternative supplier or building a new facility would
require a substantial amount of funds and additional clinical trials and
testing. We cannot be sure that an additional source of supply will be
established on a timely basis, or that we will have or be able to obtain funds
sufficient for building or equipping a new facility.

THE SUCCESS OF FLUMIST IS HIGHLY DEPENDENT ON OUR PARTNER, WYETH LEDERLE, FOR
MARKETING, PROMOTION, SALES AND DISTRIBUTION ACTIVITIES.

     We have entered into an exclusive agreement with Wyeth Lederle to
co-promote, sell, and distribute FluMist. We believe that for FluMist to be
widely adopted, the efforts of an experienced pharmaceutical sales force are
needed. If Wyeth Lederle fails to devote appropriate resources to promote, sell,
and distribute FluMist, sales of FluMist could be reduced. Distribution of
FluMist will be challenging for several reasons. First, influenza vaccine is a
seasonal product with a shipping period between August and January. Second,
FluMist is a frozen product and must remain frozen prior to use. It must be
maintained under recommended frozen storage conditions. Although Wyeth Lederle
has a distribution system that supports frozen vaccines, if it does not manage
these distribution challenges our revenues could be reduced.

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<PAGE>   26

     Wyeth Lederle also will participate in the development, manufacturing,
promoting, and selling of a liquid formulation of FluMist, which will be
particularly important if FluMist is to be accepted outside of the United
States. If Wyeth Lederle does not devote sufficient resources to the development
and commercialization of this formulation, its commercial availability will be
delayed.

     If Wyeth Lederle breaches or terminates its agreement with us or otherwise
fails to conduct their FluMist related activities in a timely manner or if there
is a dispute about our or their respective obligations, we may need to seek
another partner. If any of these events occurs, revenues associated with
milestone payments or FluMist commercialization could be delayed, reduced or be
substantially more expensive for us to achieve.

IF MEDICAL ADVISORY BODIES, DOCTORS, AND OTHER HEALTH CARE PROVIDERS DO NOT
RECOMMEND FLUMIST ITS MARKET OPPORTUNITY WILL BE LIMITED.

     We believe recommendations from advisory bodies such as the Advisory
Committee on Immunization Practices, or ACIP, of the CDC, and the American
Academy of Pediatrics, or AAP, will be important to encourage doctors and other
healthcare providers to recommend FluMist. If these bodies do not recommend
FluMist, the product's market opportunity will be limited. We will also need to
educate doctors and other healthcare advisors of the safety and clinical
efficacy of FluMist and its potential advantages over other influenza vaccines.

WHETHER OR NOT DOCTORS, OTHER HEALTH CARE PROVIDERS AND MEDICAL ADVISORY BODIES
RECOMMEND FLUMIST, IF THE MARKET DOES NOT ACCEPT FLUMIST, OUR SALES WILL BE
REDUCED.

     FluMist acceptance may be limited by a number of factors, including:

     - perceived effectiveness of competing influenza vaccines, including the
       flu shot;

     - unfavorable publicity concerning other vaccines;

     - pricing of FluMist;

     - broad accessibility to FluMist;

     - reimbursement polices of government and third-party payors;

     - side effects, such as the runny nose, sore throat or fever seen in some
       clinical trial participants; and

     - the requirement of frozen storage capacity by those distributing and
       administering the vaccine.

WE FACE COMPETITION FROM COMPANIES WITH SUBSTANTIAL FINANCIAL, TECHNICAL, AND
MARKETING RESOURCES, WHICH COULD SERIOUSLY LIMIT OUR FUTURE REVENUES FROM
FLUMIST.

     FluMist will be competing against the flu shot, which is sold by large
pharmaceutical companies, including Wyeth Lederle and Medeva.

     We also operate in a rapidly evolving field. Other companies are working to
improve the efficacy of flu shots. In addition, we are aware of efforts to
develop non-injectable influenza vaccines that would be more directly
competitive with FluMist. For example:

     - A nasally administered inactivated vaccine is being developed by
       Biovector Therapeutics, S.A and Biochem Pharma, Inc. which has been
       licensed to SmithKline Beecham; and

     - A nasally administered live influenza vaccine has been developed and used
       in Russia.

     In 1999, the FDA approved two new products for the treatment of influenza:
zanamivir and oseltamivir. Zanamivir is marketed as Relenza and is sold by Glaxo
Wellcome plc and oseltamivir is marketed as Tamiflu and is sold by Roche
Holdings AG. These products inhibit the ability of the influenza virus to
replicate. Both zanamivir, delivered via an inhaled powder, and oseltamivir, a
pill, were approved for influenza treatment, but neither are approved for the
prevention of influenza. When administered within two days of contracting
influenza, zanamivir and oseltamivir may reduce the duration of influenza by
approximately one day. Clinical

                                       26
<PAGE>   27

data also has shown that taking zanamivir or oseltamivir daily for a period of
time during the influenza season can have a preventative effect.

THE FLUMIST MASTER DONOR STRAINS ARE NOT PROTECTED BY PATENTS AND IF THE STRAINS
ARE DUPLICATED, THIRD PARTIES MAY BE ABLE TO DEVELOP, MARKET AND SELL A
COMPETING VACCINE.

     We have no issued patents covering the FluMist master donor strains. Our
rights to the master donor strains are substantially based on (1) an exclusive
worldwide license of materials and know-how from the University of Michigan,
which owns the master donor strains from which our vaccine is derived; and (2)
an exclusive license of know-how and clinical trial data from the National
Institutes of Health, or NIH. Neither the University of Michigan nor the NIH has
been issued any patents covering the master donor strains. A third party may
gain access by some means to the University of Michigan master donor strains and
attempt to reproduce FluMist or develop another live virus influenza vaccine
that might be comparable to FluMist in terms of safety and effectiveness.

FAILURE TO RAISE ADDITIONAL CAPITAL COULD DELAY FLUMIST COMMERCIALIZATION AND
DELAY THE DEVELOPMENT OF A SECOND GENERATION FORMULATION OF FLUMIST AND OF OUR
OTHER POTENTIAL PRODUCTS.

     Our operations to date have consumed substantial and increasing amounts of
cash. As of December 31, 1999, we had an accumulated deficit of approximately
$183.3 million. The negative cash flow from operations is expected to continue
and to accelerate in the foreseeable future. The commercialization of FluMist
will require a commitment of substantial funds for manufacturing, continued
clinical trial efforts and other commercialization activities. We also expect to
spend a substantial amount to develop a liquid formulation of FluMist. In
addition, we expect to continue funding the research, preclinical testing and
clinical trials necessary to develop our early-stage products. We expect our
current capital resources and financing commitments will enable us to maintain
our current and planned operations until 2001. We expect that we will need to
raise additional funds in the future. Our future capital requirements will
depend upon many factors, including:

     - product commercialization activities;

     - time and costs involved in obtaining regulatory approvals;

     - increasing manufacturing capacity for FluMist;

     - the progress of preclinical testing and clinical trials;

     - continued scientific progress in the research and development of our
       vaccine programs; and

     - the addition of other early-stage programs to our product pipeline.

If adequate funds are not available, the commercialization of FluMist may be
delayed, we may need to delay the development of a liquid formulation of
FluMist, and we will be required to delay, reduce the scope of, or eliminate one
or more of our research or development programs. If additional funds are raised
by issuing equity or convertible securities, percentage ownership in Aviron by
existing stockholders will be reduced.

IF WE ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL, OUR
ABILITY TO COMMERCIALIZE FLUMIST AND DEVELOP A LIQUID FORMULATION OF FLUMIST MAY
BE DELAYED.

     Attracting and retaining significant additional qualified personnel will be
critical to our success. To pursue the development and commercialization of
FluMist, we will be required to hire additional qualified personnel, especially
those with expertise in development, commercial-scale manufacturing, and quality
functions. Expansion in these areas is also expected to require the addition of
management personnel and the development of additional expertise by existing
management personnel. We face competition for qualified individuals from
numerous pharmaceutical, biopharmaceutical and biotechnology companies.

                                       27
<PAGE>   28

OTHER RISKS RELATED TO OUR COMPANY

SAFETY OF VACCINES CAN ONLY BE DETERMINED AFTER WIDESPREAD USE IN THE
POPULATION.

     A vaccine could be licensed by the FDA and still be associated with adverse
events which reduce or eliminate revenue. For example, in 1998 the FDA approved
the use of a vaccine to prevent infant diarrhea, but the product was
subsequently withdrawn from the market due to a possible link between a serious
bowel disorder and the vaccine. This adverse event occurred at a frequency that
was not detectable in a typical clinical development program. In addition there
are a number of theoretical risks related to live virus vaccines, including
changing back to the naturally-occurring, or wild-type, and re-combining to form
a new strain which may cause disease. Also, because of the way it works, a
weakened live virus could make an individual more susceptible to secondary
infection. In addition, a weakened live virus could cause disease resembling a
wild-type virus infection in people with an immune system that is not working
properly because of a pre-existing disease, HIV infection or drug treatment for
cancer or organ transplantation. The potential for adverse events after
introduction to the market is an issue for all vaccines, including FluMist.

OTHER THAN FLUMIST, OUR PRODUCT CANDIDATES ARE AT EARLY STAGES OF DEVELOPMENT,
AND IF WE ARE UNABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE PRODUCTS, WE WILL
NOT GENERATE REVENUES FROM THESE PRODUCTS.

     To date, none of our product candidates has been commercialized. Other than
FluMist, all of our product candidates are in early stages of development. We
face the risk of failure normally found in developing biotechnology products
based on new technologies. Successfully developing, manufacturing, introducing
and marketing our early-stage product candidates will require several years and
substantial additional capital. Moreover, we must demonstrate safety and
efficacy and gain regulatory approval for these products. We are aware of
several companies that are marketing or are in late-stage development of
products that would be competitive with our early-stage product candidates.

     In 1996, we completed construction of a pilot manufacturing facility for
our potential vaccine products other than FluMist. We currently do not have
facilities to manufacture any of our other potential products in commercial
quantities and have no experience with commercial manufacture of vaccine
products. We are alternatively considering the use of contract manufacturers for
the commercial production of our other potential products. We are aware of only
a limited number of manufacturers that we believe have the ability and capacity
to manufacture our other potential products in a timely manner.

WE MAY NOT RECEIVE PATENT PROTECTION FOR OUR POTENTIAL PRODUCTS AND
MANUFACTURING PROCESSES.

     Our success depends to a significant degree upon our ability to develop
proprietary products. Since patent applications in the United States are
maintained in secrecy until patents issue and since publication of discoveries
in the scientific or patent literature often lag behind actual discoveries, we
cannot be certain that we were the first to make the inventions covered by each
of our pending patent applications or that we were the first to file patent
applications for these inventions. The patent positions of biotechnology and
pharmaceutical companies can be highly uncertain and involve complex legal and
factual questions. Therefore, the breadth of claims allowed in biotechnology and
pharmaceutical patents, or their enforceability, cannot be predicted. We cannot
be sure that any of our owned or licensed patents or patent applications will
issue or, if issued, will not be invalidated or circumvented, or that the rights
granted by them will provide any protection or competitive advantages to us.

     The European Patent Office has informed us of its intention to deny claims
relating to methods and compositions of recombinant non-segmented
negative-strand RNA viruses contained in one of our granted European patents.
Although this decision will not affect our FluMist cold-adapted influenza
product, it may affect the European patent protection afforded our other vaccine
candidates, including recombinant RSV and recombinant PIV.

                                       28
<PAGE>   29

OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, CAUSING
COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.

     Our success will also depend upon us not infringing patents issued to
others. A number of pharmaceutical companies, biotechnology companies,
universities and research institutions have filed patent applications or
received patents in the areas of our research and development programs. Some of
these patent applications or patents may limit the scope of claims issuing from
our patent applications, prevent certain claims from being issued, or conflict
in certain respects with claims made under our applications.

OUR BUSINESS EXPOSES US TO PRODUCT LIABILITY CLAIMS AND THE DEFENSE OR LOSS OF
ANY SUCH CLAIM COULD BE COSTLY.

     Our business exposes us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of vaccines. We have
obtained clinical trial liability insurance for our clinical trials. We also
intend to seek product liability insurance in the future for products approved
for marketing. However, we cannot be sure that we will be able to acquire or
maintain insurance at a reasonable cost or in sufficient amounts to protect us
from liability risks. A successful product liability claim or a series of claims
brought against us could seriously harm our business. We intend to seek
inclusion of some of our products in the United States National Vaccine Injury
Compensation Program, a no-fault compensation program for claims against vaccine
manufacturers, which administers a trust funded by excise taxes on sales of a
number of recommended childhood vaccines. We cannot be sure that this government
program will continue or that our proposed vaccines will be included in the
program.

WE USE HAZARDOUS MATERIALS IN OUR BUSINESS AND AN ACCIDENT COULD BE COSTLY.

     Our business activities involve the controlled use of hazardous materials,
chemicals, various radioactive substances and viruses. Although we believe that
our safety procedures for handling and disposing of these materials comply with
state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of such an
accident, we could be held liable for any damages that result and any such
liability would seriously harm our business. In addition, we may incur
substantial costs to comply with environmental regulations if we develop
manufacturing capacity.

OUR STOCK PRICE IS VOLATILE AND YOU MAY LOSE ALL OR A PART OF YOUR INVESTMENT.

     The market price of our common stock has fluctuated significantly to date.
The market price of the common stock may fluctuate significantly in response to
the following factors, most of which are beyond our control:

     - variations in our quarterly operating results;

     - changes in securities analysts' estimates of our financial performance;

     - changes in market valuations of similar companies;

     - announcements by us or our competitors of significant contracts,
       acquisitions, strategic partnerships, joint ventures or capital
       commitments;

     - additions or departures of key personnel; and

     - fluctuations in stock market price and volume, which are particularly
       common among securities of biopharmaceutical companies.

WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY.

     In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially relevant for us because biopharmaceutical companies have
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities class
action claims than companies in other

                                       29
<PAGE>   30

industries. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources, and could seriously harm our business.

WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS WHICH COULD DISCOURAGE OR PREVENT A
TAKEOVER, EVEN IF AN ACQUISITION COULD BE BENEFICIAL TO OUR STOCKHOLDERS.

     Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so could be beneficial to our
stockholders. These provisions include:

     - establishment of a classified board of directors requiring that not all
       members of the board may be elected at one time;

     - prohibiting cumulative voting in the election of directors, which would
       otherwise allow less than a majority of stockholders to elect director
       candidates;

     - limitations on the ability of stockholders to call special meetings of
       stockholders;

     - prohibiting stockholder action by written consent, thereby requiring all
       stockholder actions to be taken at a meeting of our stockholders; and

     - establishing advance notice requirements for nominations for election to
       the board of directors or for proposing matters that can be acted upon by
       stockholders at stockholder meetings.

     In October 1997, our board of directors adopted a share purchase rights
plan, commonly referred to as a "poison pill." In addition, Section 203 of the
Delaware General Corporations Law and the terms of our stock option plans may
discourage, delay or prevent a change in control of our company.

EXECUTIVE OFFICERS AND SENIOR MANAGEMENT

     The names of our executive officers and senior management as of December
31, 1999 and information about them is presented below.

<TABLE>
<CAPTION>
                    NAME                       AGE                      POSITION
                    ----                       ---                      --------
<S>                                            <C>   <C>
EXECUTIVE OFFICERS
C. Boyd Clarke...............................  51    Chief Executive Officer, President and Director
Fred Kurland.................................  50    Senior Vice President and Chief Financial
                                                     Officer
Carol A. Olson...............................  42    Senior Vice President, Commercial Development
SENIOR MANAGEMENT
Edward J. Arcuri, Ph.D. .....................  49    Vice President, Manufacturing
Dianne L. Mastilock..........................  48    Vice President, Human Resources
Paul M. Mendelman, M.D. .....................  52    Vice President, Clinical Research
Eric J. Patzer, Ph.D. .......................  50    Vice President, Development
Rayasam S. Prasad............................  47    Vice President, Technical Affairs
</TABLE>

     C. Boyd Clarke, has been our President and Chief Executive Officer since
December 1999. From 1998 until joining us, Mr. Clarke was Chief Executive
Officer and President of U.S. Bioscience, Inc., a biotechnology company. Mr.
Clarke served as President and Chief Operating Officer of U.S. Bioscience, Inc.
from 1996 to 1998. From 1977 to 1996, Mr. Clarke held a number of positions at
Merck & Co., Inc., including being the first president of Pasteur-Merieux MSD,
and most recently as Vice President of Merck Vaccines. Mr. Clarke has a B.S. in
Biochemistry, and an M.A. in History from the University of Calgary.

     Fred Kurland, has been our Senior Vice President and Chief Financial
Officer since January 1998. Prior to joining us, Mr. Kurland was Vice President
and Chief Financial Officer of Protein Design Labs, Inc., a biotechnology
company, from 1996 to 1998. From 1995 to 1996, Mr. Kurland was Vice President
and Chief Financial Officer at Applied Immune Sciences, a biotechnology company,
and from 1987 to 1995, he held a

                                       30
<PAGE>   31

number of positions at Syntex Corporation, a pharmaceutical company, most
recently as Vice President and Controller. Mr. Kurland, a Certified Public
Accountant, holds a B.S. in Business and Economics from Lehigh University, and
an M.B.A. and a J.D. from the University of Chicago.

     Carol A. Olson, has been our Senior Vice President, Commercial Development
since May 1998. Prior to joining us, Ms. Olson was the founder and managing
director of the Churchill Madison Group, a management consulting firm focused on
building new businesses in the medical, life sciences and high technology
industries. From 1984 to 1993, Ms. Olson worked for the Hewlett Packard Company.
Ms. Olson holds a B.A. in Economics with honors from Yale University and an
M.B.A. from Stanford University.

     Edward J. Arcuri, Ph.D., has been our Vice President, Manufacturing since
July 1999. Dr. Arcuri joined us from North American Vaccine, Inc., or NAVA,
where he served as Vice President, Manufacturing Operations and Process
Development from January 1995 to July 1999. Prior to joining NAVA, Dr. Arcuri
served as Senior Director, Biological Manufacturing at Merck and Co. from 1991
to 1994. Dr. Arcuri holds a B.S. degree in Biology from the State University of
New York at Albany and a masters degree and Ph.D. in Biology from Rensselaer
Polytechnic Institute.

     Dianne L. Mastilock, has been our Vice President, Human Resources since
February 2000, and has held various positions at Aviron since April 1999. Ms.
Mastilock joined us from Digital Link, where she served as Vice President, Human
Resources from August 1994 to April 1999. Prior to joining Digital Link, Ms.
Mastilock served as Director, Human Resources at Humphry Instruments from 1993
to 1994. Prior to that, Ms. Mastilock was Director, Human Resources at Vitaphore
Corp. from 1991 to 1993. Ms. Mastilock holds a B.S. degree in Recreation and
Leisure Studies from San Jose State University and a Masters degree in Human
Resources and Organizational Development from the University of San Francisco.

     Paul M. Mendelman, M.D., has been our Vice President, Clinical Research
since 1996. Dr. Mendelman also is currently consulting professor in the
Department of Pediatrics at the Stanford University School of Medicine. Prior to
joining Aviron, Dr. Mendelman was Director, Clinical Research, Infectious
Diseases for Merck Research Laboratories, a pharmaceutical company, since 1991.
From 1983 to 1991, Dr. Mendelman was Clinical Instructor, Assistant Professor
and then Associate Professor of Pediatrics at the University of Washington. Dr.
Mendelman holds a B.S. and an M.D. from Ohio State University and is a fellow of
the American Academy of Pediatrics.

     Eric J. Patzer, Ph.D., has been our Vice President, Development since 1996.
Prior to joining the company, Dr. Patzer held various positions with Genentech,
Inc, a pharmaceutical company, since 1981, most recently as Vice President,
Development. Dr. Patzer holds a B.S. in Mechanical Engineering from The
Pennsylvania State University and a Ph.D. in Microbiology from the University of
Virginia.

     Rayasam (Ray) S. Prasad, has been our Vice President, Technical Affairs
since September 1999. Mr. Prasad joined Aviron from Chiron Vaccines, the global
vaccines business unit of Chiron Corporation, a biotechnology company, where he
served as Head of Regulatory, Quality and Drug Safety from October 1994 to
September 1999. Mr. Prasad also served as Director of Quality Assurance for
Therapeutics and Vaccines at Chiron. Prior to joining Chiron, Mr. Prasad held
positions in quality assurance and biological manufacturing operations at
Genentech from 1986 to 1994, and Burroughs Wellcome Co. from 1981 to 1986. Mr.
Prasad holds a B.S. in Pharmacy from Andhra University, India.

ITEM 2. PROPERTIES

     We lease approximately 52,800 square feet of office and laboratory space in
Mountain View, California. We have leased this facility through October 2005 and
have two options to extend the lease for successive five-year periods. In
addition, we are leasing space pursuant to our agreement with PCI. In February
1999, we entered into a lease agreement for approximately 69,000 square feet of
office, laboratory and manufacturing space in Santa Clara, California. We have
leased this facility through January 2019, with an option to renew for seven
years. In July 1999, we obtained an additional 20,000 square feet of laboratory
and office space in a building near our current Mountain View facility under a
sublease arrangement through June 2001. In October 1999, we leased an additional
52,000 square feet of space in buildings adjacent to its current

                                       31
<PAGE>   32

Mountain View facility that is covered by the same lease terms as that facility.
This facility is being subleased to another party through April 2001. We expect
that, after taking possession of this space at the end of the sublease, we will
be able to meet our facility needs for office and lab space through 2001. We
expect that we may need to obtain additional space for manufacturing, research
and development activities and offices in the future.

ITEM 3. LEGAL PROCEEDINGS

     On June 30, 1999, the European Patent Office held oral proceedings in an
Opposition filed by American Cyanamid against Aviron's granted European Patent
No. 0490972 relating to methods and compositions of recombinant negative-strand
RNA viruses. At the oral proceedings, the Opposition Division of the European
Patent Office informed us of its intent to issue a written opinion which upholds
claims limited to influenza and denies claims directed to non-segmented
negative-strand RNA viruses. This decision will not affect our FluMist
cold-adapted influenza product. We intend to appeal the decision insofar as it
relates to the denied claims; the appeal will request the Technical Board of
Appeals to reverse the decision with respect to the denial of the claims
directed to non-segmented RNA viruses. There can be no assurance that we will be
successful in obtaining claims directed to non-segmented RNA viruses as a result
of the appeal. If we do not succeed in the appeal of the claims directed to
non-segmented RNA viruses it could negatively impact our ability to exclude
others from commercializing an RSV or PIV vaccine based on genetically
engineered candidates in Europe.

     On July 8, 1999, a lawsuit entitled Joany Chou v. The University of
Chicago, ARCH Development Corp., Bernard Roizman and Aviron Company, was filed
in the U.S. District Court for the Northern District of Illinois, Eastern
Division, or Court, by an individual formerly associated with the University of
Chicago. On February 18, 2000, the Court granted Aviron's motion to dismiss,
thereby dismissing without prejudice all pending claims made by the plaintiff
against Aviron. We cannot be sure that we will prevail in the defense of this
lawsuit in the event that the plaintiff appeals the Court's ruling and is
successful in reinstating her claims or in bringing new claims against Aviron.

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

     No matters were submitted to vote of the Aviron's security holders during
the fourth quarter of the fiscal year ended December 31, 1999.

                                       32
<PAGE>   33

                                    PART II.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCK MATTERS

     Our common stock is traded on the Nasdaq National Market under the symbol
"AVIR." We commenced trading on the Nasdaq National Market on November 5, 1996.
The following table presents the high and low per share sales prices of our
common stock as reported by the Nasdaq National Market.

<TABLE>
<CAPTION>
                                                              COMMON STOCK PRICE
                                                              ------------------
                                                               HIGH        LOW
                                                              -------    -------
<S>                                                           <C>        <C>
YEAR ENDED DECEMBER 31, 1998
  First Quarter.............................................  $28.00     $22.88
  Second Quarter............................................   33.00      22.00
  Third Quarter.............................................   33.00      11.50
  Fourth Quarter............................................   26.63      11.50
YEAR ENDED DECEMBER 31, 1999
  First Quarter.............................................  $26.75     $17.50
  Second Quarter............................................   28.75      17.13
  Third Quarter.............................................   34.06      21.00
  Fourth Quarter............................................   28.75      14.81
YEAR ENDED DECEMBER 31, 2000
  First Quarter (through March 7, 2000).....................  $54.38     $15.00
</TABLE>

     On March 7, 2000, the last reported sales price of our common stock on the
Nasdaq National Market was $44.44 per share. As of March 1, 2000, there were 402
record holders of our common stock.

RECENT SALES OF UNREGISTERED SECURITIES

     On December 16, 1999, we sold and issued to American Home Products
Corporation 86,136 shares of our common stock, for a purchase price of $15.48
per share, in a private placement. We are obligated to register the shares
within 180 days of the purchase date. No underwriter or placement agent was
involved in the transaction. The sale of the shares was made in reliance on
Section 4(2) of the Securities Act of 1933, as amended. The common stock
purchase agreement is attached as Exhibit 4.11 hereto.

     On February 3, 2000, we sold and issued to American Home Products
Corporation 103,332 shares of our common stock, for a purchase price of $19.36
per share, in a private placement. We are obligated to register the shares
within 180 days of the purchase date. No underwriter or placement agent was
involved in the transaction. The sale of the shares was made in reliance on
Section 4(2) of the Securities Act of 1933, as amended. The common stock
purchase agreement is attached as Exhibit 4.13 hereto.

     On March 6, 2000, we sold and issued to American Home Products Corporation
121,212 shares of our common stock, for a purchase price of $16.50 per share, in
a private placement, pursuant to a December 30, 1999 agreement. We are obligated
to register the shares within 180 days of the purchase date. No underwriter or
placement agent was involved in the transaction. The sale of the shares was made
in reliance on Section 4(2) of the Securities Act of 1933, as amended. The
common stock purchase agreement is attached as Exhibit 4.12 hereto.

                                       33
<PAGE>   34

ITEM 6. SELECTED FINANCIAL DATA

     The following statement of operations and balance sheet data are derived
from our audited financial statements. Our audited financial statements at
December 31, 1998 and 1999 and for each of the three years in the period ended
December 31, 1999, are included elsewhere in this Form 10-K. You should read our
selected financial data set forth below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and related notes thereto contained elsewhere in this
Form 10-K.

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                     ----------------------------------------------------------
                                       1995        1996        1997         1998         1999
                                     --------    --------    --------     --------     --------
                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                  <C>         <C>         <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.....................  $  1,707    $  1,625    $  1,477     $    745     $ 22,232
Operating expenses:
  Research and development.........    10,220      14,997      24,254       46,583       68,212
  General, administrative and
     marketing.....................     3,252       4,595       5,978       10,085       13,159
                                     --------    --------    --------     --------     --------
          Total operating
            expenses...............    13,472      19,592      30,232       56,668       81,371
                                     --------    --------    --------     --------     --------
Loss from operations...............   (11,765)    (17,967)    (28,755)     (55,923)     (59,139)
Interest income, net of interest
  expense..........................       362         466       2,253        1,121       (2,731)
                                     --------    --------    --------     --------     --------
Net loss...........................  $(11,403)   $(17,501)   $(26,502)    $(54,802)    $(61,870)
                                     ========    ========    ========     ========     ========
Basic and diluted net loss per
  share............................  $ (20.79)   $  (7.27)   $  (1.94)    $  (3.49)    $  (3.90)
                                     ========    ========    ========     ========     ========
Shares used in computing basic and
  diluted net loss per share.......       546       2,406      13,684       15,724       15,848
                                     ========    ========    ========     ========     ========
</TABLE>

<TABLE>
<CAPTION>
                                                         AS OF DECEMBER 31,
                                     ----------------------------------------------------------
                                       1995        1996        1997        1998         1999
                                     --------    --------    --------    ---------    ---------
                                                           (IN THOUSANDS)
<S>                                  <C>         <C>         <C>         <C>          <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
  short-term investments...........  $ 17,819    $ 17,872    $ 62,524    $  88,856    $  52,316
Working capital....................    16,775      16,411      54,580       79,369       42,215
Total assets.......................    19,878      21,592      85,325      120,985       91,694
Long-term debt, excluding current
  portion..........................        --          --          --      100,000      112,666
Deferred compensation..............       180       1,099         588          237           96
Accumulated deficit................   (22,444)    (39,935)    (66,411)    (121,254)    (183,279)
Total stockholders' equity
  (deficit)........................    17,537      17,947      75,742        8,966      (39,619)
</TABLE>

                                       34
<PAGE>   35

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

     The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. When used herein, the words "expects," "anticipates,"
"estimates," "intends," "plans" and similar expressions are intended to identify
such forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Business -- Business Risks" elsewhere
in this Form 10-K.

OVERVIEW

     Since our inception in April 1992, we have devoted substantially all of our
resources to our research and development programs. To date, we have not
generated any revenues from the sale of products and do not expect to generate
any revenues from the sale of products until 2001 at the earliest. We have
incurred cumulative net losses of approximately $183.3 million as of December
31, 1999, and expect to incur substantial operating losses over at least the
next several years.

     We expect our research and development expenditures, which include
pre-marketing manufacturing expenses, to increase substantially over the next
several years as we expand our research and development efforts, preclinical
testing and clinical trials with respect to certain of our programs, and
early-stage commercial manufacturing activities principally in regard to
FluMist. In addition, general, administrative and marketing expenses are
expected to continue to increase as we expand our operations and prepare for the
potential commercial launch of FluMist.

     In February 2000, we amended our agreement with the University of Michigan
to accelerate the issuance of a warrant to the university. As a result of this
amendment, we granted the university a warrant to purchase 340,000 shares of our
common stock at an exercise price of $10.00 per share. As a result of this
amendment, we will record a one-time charge of approximately $10.9 million in
the first quarter of 2000. Upon the date of the first commercial sale of
FluMist, if 1.25 percent of the common stock then outstanding exceeds 340,000
shares, we will issue an additional warrant allowing the university to purchase
the excess shares on the same terms.

     To motivate our employees and align their interests with our stockholders,
on February 9, 2000, we granted options for the purchase of a total of 1,264,900
shares of our common stock at an exercise price of $24.00, the closing price of
our stock on February 8, 2000. Approximately 27 percent of the options become
exercisable upon the acceptance by the FDA of our BLA submission and another 40
percent become exercisable when FluMist is approved for marketing in the United
States. These options will become exercisable in February 2005 unless these
events related to FluMist occur earlier. The final 33 percent of these options
will become exercisable when FluMist is approved for marketing in the United
States, but only if this event occurs in 2001. If FDA approval for FluMist is
not obtained by December 31, 2001, these options will be cancelled. If the final
33 percent of these options become exercisable, we anticipate incurring
compensation expense in the period in which they become exercisable in an amount
equal to the difference between the exercise price of the options and the then
current fair market value of our common stock.

RESULTS OF OPERATIONS

    YEARS ENDED DECEMBER 31, 1999 AND 1998

     Revenues. We earned $22.2 million in revenues for the year ended December
31, 1999, compared to $0.7 million for the year ended December 31, 1998. The
1999 revenues are comprised primarily of amounts earned from Wyeth Lederle under
the FluMist collaboration agreement, which included a non-refundable initial
payment in the amount of $15.0 million, $6.0 million in expense reimbursement
from Wyeth Lederle for clinical and commercialization expenses, and revenues
from other contracts and research grants. The 1998 revenues were from a grant
payment from the NIH for research on our cytomegalovirus, or CMV, vaccine and
from payments received for services rendered to other biotechnology companies.

                                       35
<PAGE>   36

     Operating Expenses. Research and development expenses increased to $68.2
million in the year ended December 31, 1999, from $46.6 million for the year
ended December 31, 1998. The increase was due primarily to an increase in
development activities, depreciation, documentation, validation, and other
expenses associated with the commercial scale-up of the manufacturing facilities
associated with FluMist. We expect these expenses to increase in the future as
development and manufacturing activities expand in preparation for potential
commercialization of FluMist.

     General, administrative and marketing expenses increased to $13.2 million
in the year ended December 31, 1999, from $10.1 million for the year ended
December 31, 1998. This increase was due to additional staffing, legal and other
infrastructure costs necessary to support the development of FluMist and other
products. These expenses are expected to increase in the future in continued
support of these activities.

     Net Interest Income (Expense). Net interest decreased to a net expense of
$2.7 million for the year ended December 31, 1999, as compared to net interest
income of $1.1 million for the year ended December 31, 1998. The decrease in net
interest is due to a combination of increased interest expense associated with
the issuance of our convertible subordinated notes on March 30, 1998 and
decreased interest income associated with a reduction in the average balances of
cash, cash equivalents, and investments as funds have been used to meet
operating expenses and capital requirements.

  YEARS ENDED DECEMBER 31, 1998 AND 1997

     Revenues. Total revenues for the year ended December 31, 1998 were $0.7
million, compared to $1.5 million for the year ended December 31, 1997. Revenues
for 1998 were comprised of payments under governmental research grants and
contract revenue for services provided for others by our animal research
facility. Revenues for 1997 were principally payments for research support and
milestones due to us under our license and development agreement with SmithKline
Beecham for our Epstein-Barr virus vaccine, or EBV.

     Operating Expenses. Research and development costs rose to $46.6 million in
1998 from $24.3 million in 1997. These increases were primarily due to increases
in research and development activities and clinical trials of FluMist and
parainfluenza virus 3, or PIV-3, vaccine, preclinical testing associated with
other programs, and depreciation and other expenses associated with the
documentation, validation, and test production at manufacturing facilities.

     General, administrative and marketing costs rose to $10.1 million in 1998
from $6.0 million in 1997. This increase was due to increase in staffing and
infrastructure costs and market research activities principally associated with
the proposed commercial launch of FluMist.

     Net Interest Income. Our net interest income decreased to $1.1 million in
the year ended December 31, 1998, from $2.3 million in the year ended December
31, 1997. Net interest income is the result of increased interest income on our
increase in average cash, cash equivalent and investment balances, due to our
public offering of common stock in August 1997 and the private offering of
convertible subordinated notes in March 1998, offset by the increase in interest
expense related to these notes.

LIQUIDITY AND CAPITAL RESOURCES

     We had cash, cash equivalents and marketable securities at December 31,
1999 of approximately $52.3 million. In order to preserve principal and maintain
liquidity, our funds are invested primarily in United States Treasury
obligations, highly rated corporate obligations and other liquid investments.

     Through December 31, 1999, we raised approximately $263.0 million from
sales of equity and convertible debt securities, and debt financing. During
1999, we entered into two credit facilities that could provide a total of up to
$27.0 million of additional financing during 1999 and 2000, of which we had
drawn $15.4 million at December 31, 1999. The credit facilities are secured by
various assets and require the maintenance of a minimum balance of cash and
investments in the amount of $20.0 million. The loans must be repaid over
periods ranging from 48 to 72 months in amounts ranging from 1.9 percent to 2.6
percent of the original principal sum of each advance. One of the credit
facilities has a residual payment of 5.0 percent of the original

                                       36
<PAGE>   37

principal amount that will be due at the 73rd month. No principal payments on
our $100.0 million unsecured convertible subordinated notes are required prior
to 2005.

RECENT FINANCINGS

     On January 10, 2000, we received a commitment for up to $48.0 million in
equity financing from Acqua Wellington North America Equities Fund, Ltd., or
Acqua Wellington, in amounts of up to $4.0 million per month, at our discretion,
through January 2001. The commitment is reduced by $4.0 million each month
whether we draw on the commitment or not. We currently have $44.0 million of
these funds available. The price at which this equity is issued is based on the
volume weighted average market price for the 18 trading days ending two days
prior to sale. In addition to the above commitment, on March 6, 2000, we sold
253,935 shares of common stock to Acqua Wellington for total proceeds of $8.0
million or approximately $31.50 per share. This price was based on the weighted
average market price for the 18 trading days period ending on March 2, 2000.

     On February 3, 2000, we sold 309,995 shares of common stock to Ridgeway
Investment Ltd., or Ridgeway, for total proceeds of $6.0 million or $19.36 per
share. This share price was based on the volume weighted average market price
for the 18 trading days ending two days prior to sale.

     On February 3, 2000, we sold 103,332 shares of common stock to AHP for
total proceeds of $2.0 million at the same share price and terms as those for
the Ridgeway investment described above. On March 6, 2000, we sold 121,212
shares of common stock to AHP for total proceeds of $2.0 million, or $16.50 per
share, which were sold pursuant to a December 30, 1999 agreement with AHP.

     Cash used in operations was $58.4 million, $49.5 million and $19.8 million
for 1999, 1998 and 1997 respectively. Net cash used in operating activities
increased primarily due to increased research and development expenditures. We
expect expenditures for research and development, clinical trials and marketing,
general and administrative expenses to continue to increase in 2000 as we
develop our products, expand our clinical trials and prepare for the potential
commercial launch of FluMist. Cash expended for capital additions and to repay
lease financing arrangements amounted to approximately $12.3 million, $14.4
million and $6.3 million for 1999, 1998 and 1997, respectively. Capital
expenditures decreased in 1999 primarily due to a decrease in the level of
expenditures for our facilities and equipment at Aviron PA and those at Medeva,
which is partially offset by increases in expenditures for our Santa Clara and
Mountain View facilities. Capital expenditures are expected to decrease during
the year 2000 but are likely to increase in the future if we decide to expand
our product development and manufacturing capabilities. Our FluMist
manufacturing agreement with Medeva requires annual minimum payments which will
total 25.0 million British Pounds Sterling over the period from July 1999 to
December 2005.

     We anticipate that our existing cash, cash equivalents and marketable
securities, revenues from existing collaborations, and committed financing
arrangements will enable us to maintain our current and planned operations until
2001. Our future cash requirements will depend on numerous factors, including
continued scientific progress in the research and development of our technology
and vaccine programs; the size and complexity of these programs; our ability to
establish and maintain collaborative arrangements; progress with preclinical
testing and clinical trials; the time and costs involved in obtaining regulatory
approvals; the cost involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims; the cost of constructing additional manufacturing
facilities, should they be deemed necessary; and product commercialization
activities.

INCOME TAXES

     At December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $178.4 million and $10.2 million, respectively.
We also had federal and state research and other tax credit carryforwards of
approximately $3.9 million and $2.5 million respectively. The federal net
operating loss and other tax credit carryforwards will expire at various dates
beginning in the year 2007 through 2019, if not utilized. The state net
operating losses will expire at various dates beginning in 2000 through 2004, if
not utilized. Utilization of the net operating losses and credits may be subject
to a substantial annual limitation

                                       37
<PAGE>   38

due to the "ownership change" provisions of the Internal Revenue Code of 1986.
See Note 12 of notes to financial statements for additional information on
income taxes.

IMPACT OF "YEAR 2000"

     We are not aware of any material problems resulting from Year 2000 issues,
either with our internal systems or the products and services of third parties.
We expensed approximately $50,000 during 1999 in connection with remediating our
systems. We will continue to monitor our mission critical computer applications
and those of our suppliers and vendors throughout the year 2000 to ensure that
any Year 2000 matters that may arise are addressed promptly.

RECENT ACCOUNTING PRONOUNCEMENT

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", or
SAB 101. Among other things, SAB 101 discusses the SEC staff's view on
accounting for non-refundable up-front fees received in connection with
collaboration agreements. We are currently evaluating the impact of SAB 101 on
the accounting for up-front license fees received from Wyeth Lederle. Should we
determine that a change in its accounting policy is necessary, such a change
will be made effective January 1, 2000 and would result in a charge to results
of operations for the cumulative effect of the change. This amount, if
recognized, would be recorded as deferred revenue and recognized as revenue in
future periods. Prior financial statements would not be restated.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are exposed to market risk, including changes to interest rates and
foreign currency exchange rates.

     Interest Rates. Our investment and interest income is sensitive to changes
in the general level of interest rates, primarily U.S. interest rates. In this
regard, changes in U.S. interest rates affect the interest earned on our cash
equivalents and investments. To mitigate the impact of fluctuations in U.S.
interest rates, we place our investments that meet high credit standards, as
specified in our investment policy guidelines; the policy also limits the amount
of credit exposure to any one issue, issuer, or type of investment and does not
permit derivative financial instruments in its investment portfolio. In
addition, the average maturity of portfolio is less than one year. As a result,
we do not expect any material loss with respect to our investment portfolio.

     Foreign Currency Exchange Rates. We pay for the costs of manufacturing and
development activities, equipment, and facilities modifications at Medeva, which
is located in the United Kingdom in British Pounds Sterling. As a result, Our
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in the United Kingdom. We
are exposed to changes in exchange rates in the United Kingdom. When the U.S.
dollar strengthens against the British Pounds Sterling, the U.S. dollar value of
British Pounds Sterling-based expenses decreases; when the U.S. dollar weakens,
the U.S. dollar value of British Pounds Sterling-based expenses increases.
Accordingly, changes in exchange rates, and in particular a weakening of the
U.S. dollar, may adversely affect our financial position as expressed in U.S.
dollars. We currently do not hedge our obligations in British Pounds Sterling.

     Cash, Cash Equivalents and Investments. At December 31, 1999 we had cash
and cash equivalents of $28.1 million, with a weighted average interest rate of
5.57 percent per year, and short-term investments with a basis of $24.2 million
and a fair value of $24.0 million, with a weighted average interest rate of 5.46
percent.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Our financial statements and notes thereto appear on pages 42 through 59 in
this Form 10-K.

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

     Not applicable.

                                       38
<PAGE>   39

                                   PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item will be contained in our definitive
Proxy Statement with respect our Annual Meeting of Stockholders, to be held on
June 1, 2000, under the captions "Election of Directors -- Nominees," and
"Security Ownership of Certain Beneficial Owners and Management -- Compliance
with the Reporting Requirement of Section 16(a)," and is incorporated by
reference. The information relating to our executive officers of is contained in
Part I, Item 1 of this report.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item will be contained in our definitive
Proxy Statement with respect our Annual Meeting of Stockholders, to be held June
1, 2000, under the caption "Executive Compensation," and is hereby incorporated
by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item will be contained in the our
definitive Proxy Statement with respect to our Annual Meeting of Stockholders,
to be held June 1, 2000, under the captain "Security Ownership of Certain
Beneficial Owners and Management," and is incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders, to be held
June 1, 2000, under the caption "Certain Transactions," and is hereby
incorporated by reference.

                                       39
<PAGE>   40

                                    PART IV.

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

(a) (1) INDEX TO FINANCIAL STATEMENTS

     The Financial Statements required by this item are submitted in a separate
section beginning on page 50 of this report.

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Ernst & Young LLP, Independent Auditors...........   42
Balance Sheets at December 31, 1998 and 1999................   43
Statements of Operations for each of the three years in the
  period ended December 31, 1999............................   44
Statement of Stockholders' Equity for the three years in the
  period ended December 31, 1999............................   45
Statements of Cash Flows for each of the three years in the
  period ended December 31, 1999............................   46
Notes to Financial Statements...............................   47
</TABLE>

(2) INDEX TO FINANCIAL STATEMENTS SCHEDULES

     All schedules are omitted because they are not applicable or the required
information is shown in the Financial Statements or in the notes thereto.

(3) EXHIBITS

     See Exhibit Index.

                                       40
<PAGE>   41

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 8, 2000.

                                          AVIRON

                                          By:      /s/ C. BOYD CLARKE
                                            ------------------------------------
                                            C. Boyd Clarke
                                            President and Chief Executive
                                              Officer

                               POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints C. Boyd Clarke and Fred Kurland, or
either of them, his or her attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report, and to file the same, with exhibits thereto and other documents
in connections therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his or her
substitute or substitutes, may do or cause to be done by virtue hereof.

     In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates stated.

<TABLE>
<CAPTION>
              SIGNATURE                                 TITLE                       DATE
              ---------                                 -----                       ----
<C>                                     <C>                                     <S>

          /s/ C. BOYD CLARKE            President and Chief Executive Officer   March 8, 2000
--------------------------------------      (Principal Executive Officer)
            C. Boyd Clarke

           /s/ FRED KURLAND                Senior Vice President and Chief      March 8, 2000
--------------------------------------            Financial Officer
             Fred Kurland                (Principal Financial and Accounting
                                                       Officer)

      /s/ J. LEIGHTON READ, M.D.                Chairman of the Board           March 8, 2000
--------------------------------------
        J. Leighton Read, M.D.

          /s/ REID W. DENNIS                           Director                 March 8, 2000
--------------------------------------
            Reid W. Dennis

     /s/ DENNIS M. FENTON, PH.D.                       Director                 March 8, 2000
--------------------------------------
       Dennis M. Fenton, Ph.D.

    /s/ WAYNE T. HOCKMEYER, PH.D.                      Director                 March 8, 2000
--------------------------------------
      Wayne T. Hockmeyer, Ph.D.

       /s/ PAUL H. KLINGENSTEIN                        Director                 March 8, 2000
--------------------------------------
         Paul H. Klingenstein

      /s/ BERNARD ROIZMAN, SC.D.                       Director                 March 8, 2000
--------------------------------------
        Bernard Roizman, Sc.D.

       /s/ JANE E. SHAW, PH.D.                         Director                 March 8, 2000
--------------------------------------
         Jane E. Shaw, Ph.D.
</TABLE>

                                       41
<PAGE>   42

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Aviron

     We have audited the accompanying balance sheets of Aviron as of December
31, 1999 and 1998, and the related statements of operations, stockholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aviron at December 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States.

                                          ERNST & YOUNG LLP

Palo Alto, California
February 17, 2000

                                       42
<PAGE>   43

                                     AVIRON

                                 BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1998         1999
                                                              ---------    ---------
<S>                                                           <C>          <C>
CURRENT ASSETS:
  Cash and cash equivalents.................................  $  28,164    $  28,081
  Short-term investments....................................     60,692       24,235
  Accounts receivable.......................................         --        3,241
  Inventory.................................................         --        2,082
  Prepaid expenses and other current assets.................      1,303        1,009
                                                              ---------    ---------
          Total current assets..............................     90,159       58,648
  Long-term investments.....................................      6,002           --
  Property and equipment, net...............................     18,521       25,635
  Deposits and other assets.................................      6,303        7,411
                                                              ---------    ---------
TOTAL ASSETS................................................  $ 120,985    $  91,694
                                                              =========    =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
  Accounts payable..........................................  $   2,792    $   3,038
  Accrued compensation......................................        804        1,739
  Accrued clinical trial costs..............................        757          846
  Accrued expenses and other liabilities....................      6,029        8,029
  Current portion of capital lease obligations..............        408          101
  Current portion of long-term debt.........................         --        2,680
                                                              ---------    ---------
          Total current liabilities.........................     10,790       16,433
  Deferred rent.............................................      1,116        2,214
  Capital lease obligations, net of current portion.........        113            9
  Long-term debt, net of current portion....................    100,000      112,657
  Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT):
  Preferred stock, $0.001 par value; 5,000,000 shares
     authorized; issuable in series; none outstanding at
     December 31, 1998 and 1999.............................         --           --
  Common stock, $0.001 par value; 30,000,000 shares
     authorized; 15,723,343 and 16,669,018 shares
     outstanding at December 31, 1998 and 1999,
     respectively...........................................         16           17
  Additional paid-in capital................................    130,524      143,822
  Notes receivable from stockholders........................        (83)         (83)
  Deferred compensation.....................................       (237)         (96)
  Accumulated deficit.......................................   (121,254)    (183,279)
                                                              ---------    ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)........................      8,966      (39,619)
                                                              ---------    ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........  $ 120,985    $  91,694
                                                              =========    =========
</TABLE>

                            See accompanying notes.

                                       43
<PAGE>   44

                                     AVIRON

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

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1997        1998        1999
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
REVENUES:
  Contract revenue and grants..............................  $  1,477    $    745    $ 22,232
                                                             --------    --------    --------
OPERATING EXPENSES:
  Research and development.................................    24,254      46,583      68,212
  General, administrative and marketing....................     5,978      10,085      13,159
                                                             --------    --------    --------
TOTAL OPERATING EXPENSES...................................    30,232      56,668      81,371
                                                             --------    --------    --------
LOSS FROM OPERATIONS.......................................   (28,755)    (55,923)    (59,139)
OTHER INCOME (EXPENSE):
  Interest income..........................................     2,433       6,003       3,633
  Interest expense.........................................      (180)     (4,882)     (6,364)
                                                             --------    --------    --------
TOTAL OTHER INCOME (EXPENSE), NET..........................     2,253       1,121      (2,731)
                                                             --------    --------    --------
NET LOSS...................................................  $(26,502)   $(54,802)   $(61,870)
                                                             ========    ========    ========
BASIC AND DILUTED NET LOSS PER SHARE.......................  $  (1.94)   $  (3.49)   $  (3.90)
                                                             ========    ========    ========
SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER
  SHARE....................................................    13,684      15,724      15,848
                                                             ========    ========    ========
</TABLE>

                            See accompanying notes.

                                       44
<PAGE>   45

                                     AVIRON

                  STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                     ADDITIONAL                                                  TOTAL
                                            COMMON    PAID-IN       NOTES        DEFERRED     ACCUMULATED    STOCKHOLDERS'
                                            STOCK     CAPITAL     RECEIVABLE   COMPENSATION     DEFICIT     EQUITY (DEFICIT)
                                            ------   ----------   ----------   ------------   -----------   ----------------
<S>                                         <C>      <C>          <C>          <C>            <C>           <C>
BALANCE AT DECEMBER 31, 1996..............   $11      $ 59,127      $(157)       $(1,099)      $ (39,935)       $ 17,947
Issuance of 1,714,286 shares of common
  stock in private placement, net of
  offering costs of $59...................     2        14,939         --             --              --          14,941
Issuance of 2,690,000 shares of common
  stock in secondary public offering net
  of offering costs of $4,766.............     3        67,979         --             --              --          67,982
Issuance of 226,157 shares of common stock
  upon exercise of stock options, warrants
  and purchase of shares through employee
  stock purchase plan, net of
  repurchases.............................    --           477         --             --              --             477
Deferred compensation recorded relating to
  grant of certain stock options..........    --           218         --           (218)             --              --
Issuance of warrants in lieu of a cash
  payment for services rendered...........    --           100         --             --              --             100
Amortization of deferred compensation.....    --            --         --            729              --             729
Payment of notes receivable...............    --            --         42             --              --              42
Change in net unrealized loss on
  available-for-sale investments..........    --            --         --             --              26              26
Net loss..................................    --            --         --             --         (26,502)        (26,502)
                                             ---      --------      -----        -------       ---------        --------
BALANCE AT DECEMBER 31, 1997..............    16       142,840       (115)          (588)        (66,411)         75,742
Issuance of 181,578 shares of common stock
  upon exercise of stock options, warrants
  and purchase of shares through employee
  stock purchase plan, net of
  repurchase..............................    --         1,019         --             --              --           1,019
Deferred compensation recorded relating to
  grant of certain stock options..........    --            14         --            (14)             --              --
Amortization of deferred compensation.....    --            --         --            365              --             365
Repurchase of 540,711 shares of common
  stock...................................    --       (13,349)        --             --              --         (13,349)
Payment of notes receivable...............    --            --         32             --              --              32
Change in net unrealized loss on
  available-for-sale investments..........    --            --         --             --             (41)            (41)
Net loss..................................    --            --         --             --         (54,802)        (54,802)
                                             ---      --------      -----        -------       ---------        --------
BALANCE AT DECEMBER 31, 1998..............    16       130,524        (83)          (237)       (121,254)          8,966
Issuance of 708,180 shares of common stock
  in private placements, net of offering
  costs of $73............................     1        11,259         --             --              --          11,260
Issuance of 237,495 shares of common stock
  upon exercise of stock options and
  warrants, and purchase of shares through
  employee stock purchase plan............    --         1,691         --             --              --           1,691
Stock compensation for options granted to
  consultants.............................    --           348         --             --              --             348
Amortization of deferred compensation.....    --            --         --            141              --             141
Change in net unrealized loss on
  available-for-sale investments..........    --            --         --             --            (155)           (155)
Net loss..................................    --            --         --             --         (61,870)        (61,870)
                                             ---      --------      -----        -------       ---------        --------
BALANCE AT DECEMBER 31, 1999..............   $17      $143,822      $ (83)       $   (96)      $(183,279)       $(39,619)
                                             ===      ========      =====        =======       =========        ========
</TABLE>

                             See accompanying notes
                                       45
<PAGE>   46

                                     AVIRON

                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              1997        1998         1999
                                                            --------    ---------    --------
<S>                                                         <C>         <C>          <C>
Cash flows from operating activities:
Net loss..................................................  $(26,502)   $ (54,802)   $(61,870)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization...........................       657        3,019       4,800
  Amortization of convertible debt offering costs.........        --          423         570
  Amortization of deferred compensation...................       729          365         141
  Stock compensation for options granted to consultants...        --           --         348
  Changes in assets and liabilities:
     Accounts receivable..................................       471           29      (3,241)
     Inventory............................................        --           --      (2,082)
     Prepaid expenses and other current assets............      (188)        (302)        294
     Deposits and other assets............................    (1,514)      (1,179)     (1,678)
     Accounts payable.....................................     2,963         (844)        246
     Accrued expenses and other liabilities...............     3,542        3,757       3,024
     Deferred rent........................................        --           --       1,098
                                                            --------    ---------    --------
Net cash used in operating activities.....................   (19,842)     (49,534)    (58,350)
Cash flows from investing activities:
  Purchases of investments................................   (74,028)    (105,990)    (43,980)
  Maturities of investments...............................    19,888       99,127      86,284
  Expenditures for property and equipment.................    (5,767)     (13,958)    (11,914)
                                                            --------    ---------    --------
Net cash provided by (used in) investing activities.......   (59,907)     (20,821)     30,390
Cash flow from financing activities:
  Principal payments on capital lease and other
     obligations..........................................      (578)        (445)       (411)
  Proceeds from issuance of:
     Convertible subordinated debt........................        --       96,055          --
     Debt financing.......................................        --           --      15,337
     Common stock.........................................    83,400        1,019      12,951
  Repurchase of common stock..............................        --      (13,349)         --
                                                            --------    ---------    --------
Net cash provided by financing activities.................    82,822       83,280      27,877
Net increase (decrease) in cash and cash equivalents......     3,073       12,925         (83)
Cash and cash equivalents, at beginning of year...........    12,166       15,239      28,164
                                                            --------    ---------    --------
Cash and cash equivalents, at end of year.................  $ 15,239    $  28,164    $ 28,081
                                                            ========    =========    ========
Supplemental schedule of non-cash financing and investing
  activities:
  Equipment acquired under lease line of credit...........       153           --          --
  Deferred compensation related to grant of certain stock
     options, less cancellations..........................       218           14          --
  Warrant issued in lieu of payment of legal fees.........       100           --          --
Supplemental disclosures of cash flow information:
  Cash paid for interest..................................       179        2,999       6,364
</TABLE>

                            See accompanying notes.

                                       46
<PAGE>   47

                                     AVIRON

                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 1999

 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Organization and Business

     Aviron (the "Company") was incorporated in the State of California in April
1992 and was reincorporated in the State of Delaware in November 1996. The
Company is a biopharmaceutical company focused on the prevention of disease
through innovative vaccine technology. The Company is currently focusing its
product development and commercialization efforts on its lead product candidate,
FLUMIST(TM), an investigational live virus vaccine for influenza delivered as a
nasal spray. The Company expects to submit an application for regulatory
approval to market FLUMIST(TM) in 2000.

     The Company anticipates working on a number of other long-term development
projects which involve experimental and unproven technology. The projects may
require many years and substantial expenditures to complete, and may ultimately
be unsuccessful. Therefore, the Company will need to obtain additional funds
from outside sources to continue its research and development activities, fund
operating expenses, pursue regulatory approvals and build production, sales and
marketing capabilities, as necessary.

  Use of Estimates

     The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

  Concentration of Credit Risk

     Cash, cash equivalents and investments are financial instruments that
potentially subject the Company to concentrations of credit risk. The Company
primarily invests in money market funds, U.S. government obligations, notes of
U.S. corporations, certificates of deposit, commercial paper and foreign
government securities. By policy, the Company limits the amount of credit
exposure to any one entity or financial institution and to any one type of
investment other than securities issued by the U.S. government.

  Cash and Cash Equivalents

     The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. Cash equivalents include
approximately $4,295,000 and $26,654,000 in money market funds at December 31,
1998 and 1999, respectively.

  Investments

     The Company's entire investment portfolio is currently classified as
available-for-sale and is carried at fair value based on quoted market prices
with the unrealized gains and losses included in stockholders' equity. The
amortized cost of debt securities classified as available-for-sale is adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains or losses and
declines in value judged to be other-than-temporary, if any, are included in
other income. The cost of securities sold is based on the specific
identification method. The Company has not experienced any significant realized
gains or losses on its investments.

  Accounts Receivable

     Accounts receivable is comprised principally of amounts receivable in
connection with reimbursement of certain expenses associated with the
development and commercialization of FLUMIST(TM), the Company's live
cold-adapted virus vaccine (see Note 3).

  Inventory

     Inventory is comprised principally of sprayer components that will be used
in the manufacture of commercial batches of FLUMIST(TM) for sale. Inventory is
stated at the lower of cost (FIFO) or market value.

                                       47
<PAGE>   48
                                     AVIRON

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1999

  Property and Equipment

     Property and equipment is stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the respective assets
which range from three to seven years. Property and equipment at December 31,
1999 includes approximately $280,000 of construction in progress. No
depreciation has been charged for these assets during 1999 because such assets
have not been placed in service. Leasehold improvements are amortized on a
straight-line basis over the shorter of their useful lives or the term of the
lease.

     As of January 1, 1999, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 requires companies to capitalize certain
qualifying computer software costs, which are incurred during the application
development stage, and amortize them over the software's estimated useful life.
The adoption of SOP 98-1 did not have a significant effect on the results of
operations or the financial position of the Company.

  Revenue Recognition

     Collaborative research revenue and grant revenue are earned based on
research expenses incurred. Amounts received in advance of services to be
performed are recorded as deferred revenue until the related expenses are
incurred. Non-refundable license fees are recognized as revenue when all
obligations related to the fees have been met. Milestone payments are recognized
as revenue in the period earned. Contract revenue for services provided by the
Company's animal research facility is earned when services are provided per the
contract.

  Stock Compensation

     The Company accounts for stock options granted to employees using the
intrinsic-value method and thus recognizes no compensation expense for options
granted with exercise prices equal to the fair value of the Company's common
stock on the date of the grant.

  Net Loss per Share

     The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS
128 requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented. In
accordance with SFAS 128, basic net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period.
Diluted net loss per share has not been presented separately as, given the
Company's net loss position, the result would be anti-dilutive.

     Had the Company been in a net income position, diluted earnings per share
would have been presented separately and would have included the shares used in
the computation of basic net loss per share as well as the effect of an
additional 427,613, 3,159,451, and 3,485,233 shares for the years ended December
31, 1997, 1998 and 1999, respectively, related to the exercise of outstanding
options and warrants and the conversion of the convertible subordinated notes
into common stock, which shares are not included above. The number of additional
shares has been determined using the treasury stock method for options and
warrants and the as if converted method for convertible debt.

  Reporting Comprehensive Income (Loss)

     As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 establishes rules for reporting and display of comprehensive income (loss)
and its components. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale investments, which are reported in the
stockholders' equity, to be included in the comprehensive income (loss). As such
items have not been material, separate presentation has not been

                                       48
<PAGE>   49
                                     AVIRON

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1999

included in the Statement of Stockholders' Equity. However, the amounts of the
change in net unrealized gain (loss) in available-for-sale investments for the
years ended December 31, 1997, 1998, and 1999 approximate $26,000, ($41,000),
and ($155,000), respectively. There was no impact from the adoption on the
Company's financial position or results of operations.

  Segment Reporting

     As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. As the Company has only one segment and
operates solely within the United States, the adoption of SFAS 131 had no impact
on the Company.

  New Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which is required to be adopted for the year ending December 31, 2001.
Management does not anticipate that the adoption of SFAS 133 will have a
significant effect on the results of operations or the financial position of the
Company.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). Among other things, SAB 101 discusses the SEC staff's view on accounting
for non-refundable up-front fees received in connection with collaboration
agreements. The Company is currently evaluating the impact of SAB 101 on the
accounting for up-front license fees received from Wyeth Lederle Vaccines, a
business unit of Wyeth-Ayerst Laboratories, the pharmaceutical division of
American Home Products Corporation (see note 3). Should the Company determine
that a change in its accounting policy is necessary, such a change will be made
effective January 1, 2000 and would result in a charge to results of operations
for the cumulative effect of the change. This amount, if recognized, would be
recorded as deferred revenue and recognized as revenue in future periods. Prior
financial statements would not be restated.

 2. LICENSE AGREEMENTS

  ARCH Development Corporation

     In July 1992, the Company entered into an exclusive license agreement with
ARCH Development Corporation ("ARCH") to acquire the rights to use or sublicense
certain technology and make, use or sell certain licensed products. The
agreement calls for the Company to make certain payments to ARCH totaling as
much as $2.6 million as certain milestones are met. No benchmark payments were
made or were due through 1999. If commercialization is achieved, the Company
will be required to pay ARCH royalties based on net sales of the licensed
products. Further, if the Company were to sublicense the technology, it would be
required to pay ARCH royalties on net sales of the sublicensee and, under
certain circumstances, up to 50% of the license fee paid by the sublicensee.
During 1997, ARCH asserted an interpretation of the financial terms of the
agreement with the Company relating to the license for Epstein-Barr virus
technology. The assertion would require the Company to pay ARCH one-half of any
future or past payments (including sublicense fees and milestone payments)
received by the Company under its agreement with SmithKline Beecham (see Note
5). As of December 31, 1999, the Company had received $3,352,000 from SmithKline
Beecham. The Company disputes ARCH's interpretation of the financial terms of
the agreement. No assurance can be given, however, that the Company's
interpretation will prevail. Failure of the Company to prevail could have a
material adverse effect on the Company's results of operations.

                                       49
<PAGE>   50
                                     AVIRON

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1999

  The Mount Sinai School of Medicine

     In 1993, the Company entered into a technology transfer agreement with The
Mount Sinai School of Medicine of the City University of New York ("Mount
Sinai") to acquire certain patent rights and technical information. Pursuant to
the agreement, the Company issued to Mount Sinai 35,000 shares of common stock
which resulted in a charge to research and development expense of approximately
$8,750, and warrants to purchase, in the aggregate, 225,000 shares of Series A
preferred stock. Upon the closing of the Company's initial public offering,
warrants previously exercisable for 45,000 shares of Series A preferred stock
became exercisable for 9,000 shares of common stock at $4.50 per share; warrants
covering an additional 148,750 shares of Series A preferred stock became
exercisable for 29,750 shares of common stock at $10.00 per share; and the
remaining warrants were canceled. These warrants expire on various dates through
2001. As of December 31, 1999 warrants covering 6,234 shares at $4.50 a share,
and 1,148 shares at $10.00 per share have been exercised. The Company is also
required to reimburse Mount Sinai for costs incurred in connection with the
maintenance and protection of certain patents.

  University of Michigan

     In February 1995, the Company signed a license agreement with the
University of Michigan which gives the Company a worldwide license to the
University of Michigan's inventions and discoveries related to a cold adapted
influenza vaccine, including the ability to develop, use, sublicense,
manufacture and sell products and processes claimed in the patent rights. Under
the arrangement, the Company paid the University of Michigan and expensed a
$100,000 fee and issued shares of Series B preferred stock (which converted into
264,746 shares of common stock upon the closing of the Company's initial public
offering), resulting in a charge to research and development expense of
approximately $1,588,000. Upon commercialization of the vaccine product, the
license agreement provides that the Company will pay royalties based on net
revenues and will issue a warrant to purchase 1.25% of the Company's then total
outstanding common stock at an exercise price equal to $10.00 per share. The
warrant will be exercisable for five years after its issuance date.

     On February 16, 2000, the Company amended its agreement with the University
of Michigan to accelerate the issuance of a warrant to the university. As a
result of this amendment, the Company granted the University of Michigan a
warrant to purchase 340,000 shares of Aviron common stock at an exercise price
of $10.00 per share. As a result of this amendment, the Company will record a
one-time charge of approximately $10.9 million in the first quarter of 2000.
Upon the date of the first commercial sale of FLUMIST(TM), if 1.25% of the
common stock then outstanding exceeds 340,000 shares, the Company will issue a
separate warrant allowing the University of Michigan to purchase the excess
shares on the same terms.

     As of December 31, 1999, the Company had funded $1,050,000 of research at
the University of Michigan and has no further obligations to fund research.

  NeuroVir Research, Inc.

     In July 1996, the Company licensed certain of its patent rights covering or
relating to the use of HSV-2 for treatment of cancer and for gene therapy, but
excluding use in vaccines, to NeuroVir Research Inc. ("NeuroVir"), a private
Delaware corporation. In exchange, the Company received 458,334 shares of common
stock, 3,208,332 shares of preferred stock and a warrant to purchase 1,000,000
shares of common stock. At December 31, 1999, the Company owned approximately
12% of NeuroVir's outstanding capital stock. The Company's investment has a
carrying value of zero and Aviron is under no obligation to provide any funding
to NeuroVir. As no market exists for NeuroVir's capital stock, it is not
practicable to determine the fair value of shares held by the Company.

                                       50
<PAGE>   51
                                     AVIRON

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1999

 3. COLLABORATION AGREEMENT

     On January 12, 1999, the Company announced a worldwide collaboration for
the marketing of FLUMIST(TM) with Wyeth Lederle Vaccines, a business unit of
Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products
Corporation ("Wyeth"). This agreement became effective in March 1999.

     Under the agreement, Aviron granted Wyeth exclusive worldwide rights to
market FLUMIST(TM). Wyeth and Aviron will co-promote FLUMIST(TM) in the United
States, while Wyeth has the exclusive right to market the product outside the
United States. In each case, Wyeth holds the marketing rights for up to eleven
years. The collaboration excludes Korea, Australia, New Zealand and certain
South Pacific countries. The companies will collaborate on the regulatory,
clinical, and marketing programs for the product.

     As consideration under the agreement, the Company received a non-refundable
cash payment of $15.0 million for the license that was recognized as revenue
during the quarter ended March 31, 1999. During the period from March 15 through
December 31, 1999, the Company recorded $6 million of revenue in expense
reimbursements from Wyeth for a portion of its clinical development and
commercialization costs.

     In addition, the Company will receive $15.5 million upon acceptance by the
U.S. Food and Drug Administration ("FDA") of a BLA filing and $20.0 million upon
FDA marketing approval for FLUMIST(TM). The Company can also earn an additional
$20.0 million in milestone payments for expansions in labelling claims and
advisory body recommendations. In addition, the Company is entitled to receive a
$10.0 million payment for submission of a license application in Europe, a $27.5
million payment for the approval of a liquid formulation of FLUMIST(TM), and up
to $50.0 million upon licensure in international regions. Compensation for
achieving additional development and regulatory milestones is included in the
agreement terms. The granting of certain rights under the license would trigger
additional payments in excess of $140.0 million to the Company. Consideration
for the license also includes a commitment to provide up to $40.0 million in
future financing to the Company from Wyeth, a portion of which is contingent
upon regulatory approval of the product, with the remaining amount to come from
participation in the Company's future securities offerings. The potential value
for the license fees, milestones and financing support that the Company could
receive under the collaboration exceeds $400.0 million. In addition to the
payments mentioned above, if FLUMIST(TM) is approved for marketing the Company
anticipates that it will earn product revenues from Wyeth, in the form of
product transfer payments and royalties, which increase at higher sales levels.
The Company will incur expenses to supply and co-promote the product.

 4. MANUFACTURING AGREEMENT

     On July 2, 1999 the Company and Celltech Medeva ("Medeva"), the
international marketing arm of Celltech Group, plc, extended their collaboration
covering the manufacture of key components of FLUMIST(TM) through December 2005.
The Company paid Medeva $1.0 million as an up-front fee upon execution of the
agreement and an additional $1.0 million of such fees has been accrued as of
December 31, 1999. These amounts were charged to expense.

     Under the terms of the new agreement, the Company will make specified
payments to Medeva for reaching certain technological, regulatory, and
employment milestones, supplying the vaccine components of FLUMIST(TM), and
providing the use of facilities. The Company is required to make annual minimum
payments to Medeva which will total 25 million British Pounds Sterling over the
term of the agreement. These minimum payments include all of the milestone,
supply, and facility use payments described above.

     In addition, the Company could make payments to Medeva totaling up to $20.0
million over the term of the agreement based on net sales of FLUMIST(TM).

     The Company recorded expense associated with the Medeva contracts during
1997, 1998, and 1999 in the amounts of $1.1 million, $6.6 million, and $7.0
million, respectively.

                                       51
<PAGE>   52
                                     AVIRON

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1999

 5. DEVELOPMENT AGREEMENTS

  SmithKline Beecham Biologicals S.A.

     In October 1995, the Company signed an agreement with SmithKline Beecham
defining a collaboration on the Company's EBV vaccine technology. Under the
terms of this agreement, the Company granted SmithKline Beecham an exclusive
license to produce, use and sell non-live EBV vaccines incorporating the
Company's technology for prophylactic and therapeutic uses on a worldwide basis,
except in Korea. The Company retained U.S. co-marketing rights to a monovalent
EBV vaccine formulation which will be supplied by SmithKline Beecham. The
Company is entitled to royalties from SmithKline Beecham based on net sales of
the non-live EBV vaccine. No assurance can be given, however, that the Company
will receive any future payments from SmithKline Beecham or that SmithKline
Beecham will not terminate this agreement.

     The Company recorded revenue under this agreement during 1997 of
$1,477,000. No revenue was recorded under this agreement in 1998 or 1999.

  Sang-A Pharm. Co., Ltd.

     In May 1995, the Company entered into a Development and License Agreement
with Sang-A Pharm. Co., Ltd. ("Sang-A"). The Company granted to Sang-A certain
exclusive clinical development and marketing rights in Korea for specified
products developed by the Company, including vaccines for influenza cold-adapted
and recombinant EBV, CMV, HSV-2 and RSV on meeting certain conditions. However,
the Company is under no obligation to develop any product. Sang-A also will make
payments to the Company upon Sang-A's meeting certain regulatory milestones for
each product in Korea and will pay a royalty to the Company on net sales of such
products in South and North Korea. No assurance can be given, however, that the
Company will receive any future payments from Sang-A or that Sang-A will not
terminate its agreement with the Company. In January 1997, Sang-A declared
bankruptcy and continues to operate in receivership. The Company is unable to
predict what, if any, long-term effect the bankruptcy will have on Sang-A and on
the Company's agreement with Sang-A.

 6. INVESTMENTS

     Investments consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                         GROSS         GROSS
                                                       UNREALIZED    UNREALIZED    MARKET
                                             COST        GAINS         LOSSES       VALUE
                                            -------    ----------    ----------    -------
<S>                                         <C>        <C>           <C>           <C>
As of December 31, 1998:
  Certificates of deposit.................  $ 5,663       $ 30         $  --       $ 5,693
  Corporate commercial paper..............   28,415         --           (12)       28,403
  U.S. corporate bonds....................   36,688        125          (175)       36,638
  U.S. government agency obligations......   11,960         21            (8)       11,973
  Municipal bonds.........................    2,153          1            --         2,154
  Foreign government securities...........    5,702          4            (4)        5,702
                                            -------       ----         -----       -------
                                            $90,581       $181         $(199)      $90,563
                                            =======       ====         =====       =======
As of December 31, 1999:
  Corporate commercial paper..............  $ 4,386       $ 25         $  --       $ 4,411
  U.S. corporate notes....................    9,251         --          (139)        9,112
  U.S. corporate bonds....................    9,385          3           (40)        9,348
  U.S. government agency obligations......    1,004         --           (13)          991
  Municipal bonds.........................    1,810         --            (9)        1,801
                                            -------       ----         -----       -------
                                            $25,836       $ 28         $(201)      $25,663
                                            =======       ====         =====       =======
</TABLE>

                                       52
<PAGE>   53
                                     AVIRON

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1999

     Included in the above table are U.S. corporate bonds and commercial paper
and U.S. government agency obligations with fair values of $23,869,000 and
$1,428,000 at December 31, 1998 and 1999, respectively, which have been
classified as cash equivalents in the accompanying balance sheet. All securities
had maturities of one year or less except for securities with a market value of
$6,002,000 at December 31, 1998, which had maturities no greater than two years.

 7. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1998       1999
                                                              -------    -------
<S>                                                           <C>        <C>
Manufacturing equipment.....................................  $ 4,288    $ 5,978
Laboratory equipment........................................    2,790      5,992
Computer equipment..........................................    1,488      3,113
Office equipment............................................      776      1,070
Leasehold improvements......................................   12,773     18,930
Construction in progress....................................    1,334        280
                                                              -------    -------
                                                               23,449     35,363
Less accumulated depreciation and amortization..............   (4,928)    (9,728)
                                                              -------    -------
                                                              $18,521    $25,635
                                                              =======    =======
</TABLE>

     Included in property and equipment at December 31, 1998 and 1999, are
assets with costs of $2,874,000 and accumulated depreciation of approximately
$2,253,800 and $2,848,000, respectively, which have been financed pursuant to
the lease line of credit. In addition, $5,445,000 of property and equipment,
with accumulated depreciation of $389,000, has been pledged as collateral under
the terms of a credit facility entered into during 1999 (see Note 10).

 8. ACCRUED EXPENSES AND OTHER LIABILITIES

     Accrued expenses and other liabilities consisted of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              ----------------
                                                               1998      1999
                                                              ------    ------
<S>                                                           <C>       <C>
Accrued interest............................................  $1,445    $1,438
Accrued manufacturing.......................................   3,219     3,394
Accrued legal expenses......................................     477       965
Accrued testing services....................................     433       775
Accrued expense other.......................................     455     1,457
                                                              ------    ------
          Total.............................................  $6,029    $8,029
                                                              ======    ======
</TABLE>

 9. LEASE ARRANGEMENTS

     The Company leases certain office, equipment, warehouse and manufacturing
facilities under capital and operating lease agreements. Several leases include
options for renewal or purchase, and contain clauses for payment of operating
costs, including real estate taxes, utilities, insurance and maintenance. Lease
terms range from 2000 to 2019, with options to renew at varying terms. The
Company also sub-leases a portion of their leased facilities.

     Rent expense for all operating leases charged against earnings for the
years ended December 31, 1997, 1998 and 1999, net of sub-lease income was
approximately $1,831,000, $3,787,000 and $6,042,000, respectively.

                                       53
<PAGE>   54
                                     AVIRON

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1999

     At December 31, 1999, the Company's aggregate commitments under such
arrangements, net of sub-lease income, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                              CAPITAL LEASE   OPERATING
                                                               OBLIGATIONS      LEASE
                                                              -------------   ---------
<S>                                                           <C>             <C>
Years ending December 31, 2000..............................      $ 107        $ 5,168
  2001......................................................         10          6,728
  2002......................................................         --          7,134
  2003......................................................         --          8,377
  2004......................................................         --          7,758
  Thereafter................................................         --         33,892
                                                                  -----        -------
                                                                    117        $69,057
                                                                               =======
Less amounts representing interest..........................         (7)
                                                                  -----
                                                                    110
Less current portion........................................       (101)
                                                                  -----
                                                                  $   9
                                                                  =====
</TABLE>

     In October 1997, the Company entered into a 7 year operating lease
agreement for a facility to be used in the manufacturing, packaging and storage
of its products. The facility is owned by a contract manufacturer who will
provide services to the Company. The lease includes an option allowing the
Company to extend the lease beyond the initial term. The agreement requires the
Company to pay certain operating costs including a portion of utilities and
insurance. The agreement provides for the deferral of 40% of the base monthly
rental for a 2-year period. This amount has been accounted for as deferred rent
in the accompanying balance sheet. The Company is required to deposit and
maintain the deferred amount in an escrow account. As of December 31, 1998 and
1999 deferred rent amounted to approximately $1,116,000 and $2,214,000,
respectively. The agreement also requires the lessor to provide a $1,000,000
improvement allowance for construction and improvements to the facility. The
Company will repay $500,000 of the improvement allowance to the lessor through
an additional charge per unit of production. The $500,000 is presently deposited
in an escrow account.

10. LONG-TERM DEBT

  Convertible Debt

     On March 30, 1998, the Company sold unsecured convertible subordinated
notes in the aggregate principal amount of $100,000,000 at an interest rate of
5 3/4% due 2005 (the "Notes"). Net proceeds to the Company, after deducting
legal and other expenses, were approximately $96,055,000.

     The Notes are convertible into common stock at any time after 90 days
following the original issuance through maturity, unless previously redeemed, at
a conversion price of $30.904 per share (equivalent to a conversion rate of
approximately 32.3583 shares per $1,000 principal amount of Notes), which is
subject to adjustment in certain events. Interest on the Notes is paid
semi-annually on April 1 and October 1. The Notes can be redeemed by the Company
on or after April 6, 2001.

     The fair market value of the Notes as of December 31, 1998 and 1999
approximated $100,250,000 and $70,500,000, respectively, based on quoted market
prices.

  Credit Facilities

     During 1999, the Company entered into two new credit facilities that could
provide a total of up to $27 million of additional financing during 1999 and
2000. The credit facilities are secured by various assets of the Company and
require the maintenance of a minimum balance of cash and investments in the
amount of $20 million. On December 29, 1999, $15.4 million was drawn under these
credit facilities Once drawn, the

                                       54
<PAGE>   55
                                     AVIRON

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1999

loans will be repaid over varying terms ranging from 48 to 72 months in monthly
payments (which include principal and interest) ranging from 1.9 to 2.6% of the
original principal sum of each advance. One of the credit facilities will have a
residual payment of 5% of the original principal amount that will be due at the
73rd month.

     The loan amounts drawn in December 1999 bear interest at rates ranging from
11.63% to 13.76% with a weighted average rate of 12.37%.

     Principal payments during each of the years from 2000 through 2004 are $2.6
million, $3.1 million, $3.4 million, $3.7 million, and $1.3 million,
respectively.

11. STOCKHOLDERS' EQUITY

  Common Stock

     Certain shares of common stock issued to members of management in 1996
through exercises of stock options are subject to repurchase by the Company at
$0.50 - $2.50 per share. The above shares vest over periods specified by the
Board of Directors. At December 31, 1998 and 1999, there were 37,920 and 10,540
shares, respectively, remaining subject to the Company's right of repurchase.

     On January 10, 2000, the Company received a commitment for up to $48.0
million in equity financing from Acqua Wellington North American Equity Fund,
Ltd. ("Acqua Wellington") in amounts of up to $4.0 million per month, at the
Company's discretion, through January 2001. The commitment is reduced by $4.0
million each month whether the Company draws on the commitment or not. The price
at which this equity is issued is based on the volume weighted average market
price for the 18 trading days ending two days prior to sale.

     On February 3, 2000, the Company sold 309,995 shares of common stock to
Ridgeway Investment Ltd. for total proceeds of $6.0 million, or $19.36 per
share, and sold 103,332 shares of common stock to American Home Products
("AHP"), at the same per share price, for total proceeds of $2.0 million.

     In March 2000, the Company issued further shares (see Note 16).

  Warrants

     Outstanding warrants to purchase common stock are as follows at December
31, 1999:

<TABLE>
<CAPTION>
                   NUMBER                     EXERCISE
                 OF SHARES                     PRICE      EXPIRATION
                 ---------                    --------   -------------
<S>                                           <C>        <C>
16,666......................................   $ 2.00    January 2000
 2,766......................................   $ 4.50    May 2000
28,602......................................   $10.00    November 2001
</TABLE>

     On February 16, 2000 the Company granted the University of Michigan a
warrant to purchase 340,000 shares of Aviron's common stock (see note 2).

  Employee Stock Purchase Plan

     The Company has adopted an Employee Stock Purchase Plan under which
employees can purchase shares of the Company's common stock based on a
percentage of their compensation but not greater than 15 percent of their
earnings. The purchase price per share must be equal to the lower of 85% of the
market value at the beginning or end of the applicable offering period. A total
of 350,000 shares of common stock are reserved for issuance under the plan. As
of December 31, 1999, 105,325 shares had been issued under the Plan.

                                       55
<PAGE>   56
                                     AVIRON

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1999

  Stock Options

     On September 15, 1992, the Board of Directors adopted the 1992 Stock Option
Plan (the "1992 Plan"). In March 1996, the Company amended and restated the 1992
Plan as the 1996 Equity Incentive Plan (the "1996 Plan"). On June 3, 1999, an
amendment of the 1996 Plan was approved by the shareholders to increase the
total shares of common stock reserved for future issuance under the 1996 Plan to
4,030,000. The 1996 Plan provides for the grant of incentive and nonstatutory
stock options to employees and consultants of the Company and became effective
in November 1996 upon the closing of the initial public offering.

     In March 1996, the Company adopted the 1996 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") under which 200,000 shares of common stock
are reserved for issuance pursuant to nonstatutory stock options. The Directors'
Plan became effective upon the closing of the initial public offering.

     On September 21, 1999, the Board of Directors adopted the 1999 Non-Officer
Equity Incentive Plan (the "1999 Plan"). Under the 1999 Plan, 1,900,000 shares
of common stock were reserved for future issuance. The 1999 Plan provides for
the grant of nonstatutory stock options, stock bonuses, rights to purchase
restricted stock, and stock appreciation rights to consultants and employees who
are not officers or directors of the Company.

     The Company's Plans had 2,456,375 shares available to grant options to
employees, consultants and directors at December 31, 1999. Most of the options
granted have 10 year terms and vest ratably over 50 months of continued
employment.

     In addition, the Company has issued non-qualified stock options outside of
the above plans.

     A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:

<TABLE>
<CAPTION>
                                            1997                   1998                    1999
                                    --------------------   ---------------------   ---------------------
                                                WEIGHTED                WEIGHTED                WEIGHTED
                                                AVERAGE                 AVERAGE                 AVERAGE
                                                EXERCISE                EXERCISE                EXERCISE
                                     OPTIONS     PRICE      OPTIONS      PRICE      OPTIONS      PRICE
                                    ---------   --------   ----------   --------   ----------   --------
<S>                                 <C>         <C>        <C>          <C>        <C>          <C>
Outstanding -- beginning of
  year............................    611,936    $ 1.60       885,819    $ 8.87     1,714,535    $19.08
Granted...........................    441,780    $16.08     1,068,717    $24.69     2,017,200    $20.55
Exercised.........................   (141,032)   $ 0.70      (155,553)   $ 2.80      (198,577)   $ 5.66
Forfeited.........................    (26,865)   $ 2.70       (84,448)   $13.25      (248,382)   $22.89
                                    ---------              ----------              ----------
Outstanding -- end of year........    885,819    $ 8.86     1,714,535    $19.08     3,284,776    $20.51
                                    =========              ==========              ==========
Weighted-average fair value of
  options granted during year.....  $   11.07              $    19.23              $    16.34
</TABLE>

     During 1995, officers of the Company exercised options granted outside the
Plan for 168,000 shares by signing promissory notes amounting to $310,000 which
bear interest at 5.73% subject to the Company's right of repurchase which lapses
over fifty months. As of December 31, 1999, $82,500 of the promissory notes were
still outstanding and 10,540 shares were subject to repurchase.

     The Company has recognized deferred compensation for certain options
granted in 1997 and 1998. Total deferred compensation of approximately
$2,094,000 recorded through December 31, 1999 is being amortized over the
vesting period of such options on an accelerated basis. A portion of these
options vested immediately upon grant.

                                       56
<PAGE>   57
                                     AVIRON

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1999

     The options outstanding at December 31, 1999 have been segregated for
additional disclosure as follows:

<TABLE>
<CAPTION>
                                                 OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
                                  --------------------------------------------------   --------------------------
                                                                                          OPTIONS       WEIGHTED-
                                     OPTIONS       WEIGHTED-AVERAGE     WEIGHTED-        CURRENTLY       AVERAGE
                                  OUTSTANDING AT      REMAINING          AVERAGE       EXERCISABLE AT   EXERCISE
    RANGE OF EXERCISE PRICES      DEC. 31, 1999    CONTRACTUAL LIFE   EXERCISE PRICE   DEC. 31, 1999      PRICE
    ------------------------      --------------   ----------------   --------------   --------------   ---------
<S>                               <C>              <C>                <C>              <C>              <C>
$ 0.25 - $ 1.00.................       22,632            4.7              $ 0.52           22,632        $ 0.52
$ 1.01 - $ 5.00.................       94,431            6.5              $ 1.25           71,815        $ 1.25
$ 5.01 - $10.00.................      131,175            7.0              $ 8.77           93,591        $ 8.56
$10.01 - $20.00.................    1,183,989            9.6              $16.66           83,766        $15.38
$20.01 - $30.38.................    1,852,549            8.8              $25.02          481,107        $25.47
</TABLE>

     To motivate the Company's employees and align their interests with the
Company's stockholders, on February 9, 2000, the Company granted options for the
purchase of a total of 1,264,900 shares of common stock at an exercise price of
$24.00, the closing price of our stock on February 8, 2000. Approximately 27% of
the options become exercisable upon the acceptance by the FDA of the Company's
BLA submission and another 40% become exercisable when FLUMIST(TM)is approved
for marketing in the United States. These options will become exercisable in
February 2005 unless these events related to FLUMIST(TM) occur earlier. The
final 33% of these options will become exercisable when FLUMIST(TM) is approved
for marketing in the United States, but only if this event occurs in 2001. If
FDA approval for FLUMIST(TM) is not obtained by December 31, 2001, these options
will be cancelled. If the final 33% of these options become exercisable, the
Company will incur compensation expense in the period in which they become
exercisable in an amount equal to the difference between the exercise price of
the options and the then current fair market value of the Company's common
stock.

     The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, if the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.

     Pro forma net loss and net loss per share information is required by SFAS
123, which also requires that the information be determined as if the Company
has accounted for its employee stock options granted subsequent to December 31,
1994 under the fair market value method of that statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions: risk free
interest rates of 6.80% for 1997, 4.85% for 1998, and 6.65% for 1999,
respectively; volatility factors of the expected market price of the Company's
common stock of 0.80 for 1997, 0.80 for 1998, and 0.79 for 1999; no expected
dividends; and a weighted-average expected life of the options of 5.0 years for
1997, 7.2 years for 1998, and 7.9 years for 1999.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and employee stock
purchase plans have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair market value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options and shares issued pursuant to the employee stock
purchase plan.

                                       57
<PAGE>   58
                                     AVIRON

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1999

     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for net loss per share
information):

<TABLE>
<CAPTION>
                                                   1997       1998       1999
                                                 --------   --------   --------
<S>                                              <C>        <C>        <C>
Pro forma net loss.............................  $(27,733)  $(64,883)  $(72,122)
Pro forma net loss per share (basic)...........  $  (2.03)  $  (4.13)  $  (4.55)
</TABLE>

  Share Purchase Rights

     In October 1997, the Company's Board of Directors adopted a Share Purchase
Rights Plan. The Share Purchase Rights Plan provides for the distribution of
certain rights to acquire shares of the Company's Series A Junior Participating
Preferred Stock, par value $0.001 (the "Rights") as a dividend for each share of
Common Stock held of record as of October 23, 1997. The Rights are triggered and
become exercisable upon the occurrence of either (i) the date of a public
announcement of the acquisition of 20% or more beneficial ownership of the
Company's Common Stock by a person or group (an "Acquiring Person"), or (ii) ten
business days (or such later time as may be set by the Board of Directors) after
a public announcement of a tender or exchange offer for 20% or more beneficial
ownership of the Company's Common Stock by an Acquiring Person. If the Rights
are triggered, each Right effectively provides its holder, the right to purchase
shares of Common Stock at a 50% discount from the market price at that time,
upon payment of an exercise price of $150 per Right.

  Reserved Shares

     As of December 31, 1999, the Company has reserved shares of common stock
for future issuance as follows:

<TABLE>
<S>                                                           <C>
Options:
  Outstanding...............................................  3,284,776
  Available for grant.......................................  2,456,375
  Employee Stock Purchase Plan..............................    244,675
  Warrants..................................................     48,034
  Conversion of debt........................................  3,235,827
                                                              ---------
                                                              9,269,687
                                                              =========
</TABLE>

12. INCOME TAXES

     As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $178.4 million and $10.2 million,
respectively. The Company also had federal and California research and other tax
credit carryforwards of approximately $3,900,000 and $2,500,000, respectively.
The federal net operating loss and credit carryforwards will expire at various
dates beginning in the year 2007 through 2019, if not utilized. The state of
California net operating loss and credit carryforwards will expire at various
dates beginning in 2000 through 2004, if not utilized.

     Utilization of the federal and state net operating loss and credit
carryforwards may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986. The
annual limitation may result in the expiration of net operating losses and
credits before utilization.

     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets for financial reporting and the amount
used for income tax purposes. Significant components of the

                                       58
<PAGE>   59
                                     AVIRON

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1999

Company's deferred tax assets for federal and state income taxes as of December
31 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                1998        1999
                                                              --------    --------
<S>                                                           <C>         <C>
Net operating loss carryforwards............................  $ 41,200    $ 61,300
Research tax credits........................................     5,500       6,400
Capitalized research and development expenses...............     3,300       2,900
Deferred revenue............................................        --         800
Other -- Net................................................       600       3,800
                                                              --------    --------
Net deferred tax assets.....................................    50,600      75,200
Valuation allowance.........................................   (50,600)    (75,200)
                                                              --------    --------
                                                              $     --    $     --
                                                              ========    ========
</TABLE>

     Due to the Company's lack of earnings history, the net deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $12.3 million and $22.4 million during the years ended December 31,
1997 and 1998, respectively.

     Approximately $2,000,000 of the valuation allowance for deferred tax assets
relates to benefits of stock option deductions which, when recognized, will be
allocated directly to contributed capital.

13. COMMITMENTS

     In August 1998, the Company announced the signing of a worldwide multiyear
supply agreement with Becton Dickinson and Company ("Becton Dickinson"), in
which Becton Dickinson will supply its AccuSpray(TM) non-invasive nasal spray
delivery system for administration of FLUMIST(TM). The agreement requires the
Company to advance a total of $2,000,000 to Becton Dickinson for facility
expansion of plant capacity. As of December 31, 1999, the entire advance had
been paid and is included in other assets in the accompanying balance sheet.

14. RELATED PARTY TRANSACTIONS

     In 1995, the Company made unsecured loans to members of senior management
totaling $100,000 which bear interest at 7.75% and are due in April 2000. In
1997, the Company made two additional unsecured loans to members of senior
management totaling $200,000, which bear interest at 7.75% and are due in
February and July 2001, respectively. As of December 31, 1999, the unpaid
balance was $110,000.

15. LITIGATION

     On July 8, 1999 a lawsuit entitled Joany Chou v. The University of Chicago,
ARCH Development Corp., Bernard Roizman and Aviron Company, was filed in the
U.S. District Court for the Northern District of Illinois, Eastern Division
("Court"), by an individual formerly associated with the University of Chicago.
On February 18, 2000, the Court granted Aviron's motion to dismiss, thereby
dismissing without prejudice all pending claims made by the plaintiff against
Aviron. There can be no assurance that we will prevail in the defense of this
lawsuit in the event that the plaintiff appeals the Court's ruling and is
successful in reinstating her claims or in bringing new claims against Aviron.

16. SUBSEQUENT EVENTS (UNAUDITED)

     In addition to the commitment described in note 11, on March 6, 2000, the
Company sold 253,935 shares of common stock to Acqua Wellington for total
proceeds of $8.0 million, or $31.50 per share. Also on March 6, 2000, the
Company sold 121,212 shares of common stock to AHP for total proceeds of $2.0
million, or $16.50 per share, pursuant to a December 1999 agreement with AHP.

                                       59
<PAGE>   60

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 ITEM                             DESCRIPTION
 ----                             -----------
<C>       <S>
   3.1    Bylaws of the Registrant(2).
   3.2    Restated Certificate of Incorporation of the Registrant(2).
   4.1    Reference is made to Exhibits 3.1 and 3.2.
   4.2    Specimen Stock Certificate(1).
   4.3    Warrant for Series A Preferred Stock, issued to The Mount
          Sinai School of Medicine of the City of New York(1).
   4.4    Warrant for Series A Preferred Stock, issued to The Mount
          Sinai School of Medicine of the City of New York(1).
   4.5    Warrant for Series A Preferred Stock, issued to The Mount
          Sinai School of Medicine of the City of New York(1).
   4.6    Warrant or Series A Preferred Stock, issued to The Mount
          Sinai School of Medicine of the City of New York(1).
   4.7    Warrant for Series C Preferred Stock, issued to Raymond,
          James & Associates(1).
   4.8    Investors Rights Agreement, dated July 18, 1995, among the
          Registrant and the investors named therein(1).
   4.9    Common Stock Purchase Agreement between the Registrant and
          Biotech Target, S.A., dated as of March 27, 1997(3).
   4.10   Rights Agreement between the Registrant and BankBoston,
          N.A., dated as of October 8, 1997(5).
   4.11   Common Stock Purchase Agreement between the Registrant and
          American Home Products Corporation, dated as of December 16,
          1999.
   4.12   Common Stock Purchase Agreement between the Registrant and
          American Home Products Corporation, dated as of December 30,
          1999.
   4.13   Common Stock Purchase Agreement between the Registrant and
          American Home Products Corporation, dated as of February 3,
          2000.
   4.14   Warrant for Common Stock, issued to University of Michigan.
 +10.1    License Agreement between the Registrant and ARCH
          Development Corporation, dated July 1, 1992(1).
 +10.2    Technology Transfer Agreement between the Registrant and The
          Mount Sinai School of Medicine of the City University of New
          York, dated February 9, 1993(1).
 +10.3    Materials Transfer and Intellectual Property Agreement
          between the Registrant and the Regents of the University of
          Michigan, dated February 24, 1995(1).
  10.4    Stock Transfer Agreement between the Registrant and the
          Regents of the University of Michigan, dated February 24,
          1995(1).
 +10.5    Development and License Agreement between the Registrant and
          Sang-A Pharm. Co., Ltd., dated May 3, 1995(1).
 +10.6    Cooperative Research and Development Agreement between the
          Registrant and the National Institutes of Health, dated May
          30, 1995(1).
 +10.7    Heads of Agreement between the Registrant and SmithKline
          Beecham Biologicals S.A., dated October 8, 1995(1).
 +10.8    Manufacturing and Development Agreement between the
          Registrant and Evans Medical Limited, dated November 7,
          1995(1).
 *10.9    1996 Equity Incentive Plan(1).
 *10.10   1996 Non-Employee Directors' Stock Option Plan(1).
 *10.11   1996 Employee Stock Purchase Plan(1).
</TABLE>
<PAGE>   61

<TABLE>
<CAPTION>
 ITEM                             DESCRIPTION
 ----                             -----------
<C>       <S>
  10.12   Industrial lease between the Registrant and the Vanni
          Business Park General Partnership, dated August 29, 1995(1).
 +10.13   First Amendment to License Agreement between the Registrant
          and ARCH Development Corporation dated March 15, 1996(1).
 +10.14   Biological Materials License Agreement between the
          Registrant and the National Institutes of Health, dated May
          31, 1996(1).
 +10.15   Contract Manufacture Agreement between the Registrant and
          Evans Medical Limited, dated as of April 16, 1997(4).
 +10.16   Production Agreement between the Registrant and Packaging
          Coordinators, Inc., dated as of October 31, 1997(6).
  10.17   Facility Reservation Agreement between the Registrant and
          Packaging Coordinators, Inc., dated as of October 31,
          1997(6).
 +10.18   Influenza Vaccine Collaboration and License Distributor
          Agreement between the Registrant and CSL Limited, dated June
          19, 1998(7).
 +10.19   Supply Agreement between the Registrant and Becton Dickinson
          and Company dated July 1, 1998(8).
 +10.20   United States License and Co-Promotion Agreement between the
          Registrant and Wyeth Lederle Vaccines dated January 11,
          1999(9).
 +10.21   International FluMist(TM) License Agreement between the
          Registrant and Wyeth dated January 11, 1999(9).
 +10.22   FluMist(TM) Supply Agreement between the Registrant and
          Wyeth Lederle Vaccines dated January 11, 1999(9).
 +10.23   Credit Agreement between the Registrant and American Home
          Products Corporation dated January 11, 1999(9).
 +10.24   Letter Amendment to the Materials Transfer and Intellectual
          Property Agreement between the Registrant and the Regents of
          the University of Michigan dated February 24, 1999(10).
  10.25   Real Property Lease by and between the Registrant and
          Spieker Properties, L.P. dated February 5, 1999(11).
 +10.26   First Amendment to the Influenza Vaccine Collaboration and
          License and Distribution Agreement by and between the
          Registrant and CSL Limited, A.C.N. dated June 7, 1999(11).
  10.27   Loan and Security Agreement by and between the Registrant
          and Transamerica Business Credit Corporation dated June 23,
          1999(11).
  10.28   Master Loan and Security Agreement by and between the
          Registrant and FINOVA Capital Corporation dated July 23,
          1999(12).
++10.29   Amended and Restated Contract Manufacture Agreement by and
          between the Registrant and Medeva Pharma Limited dated June,
          1999, as amended.
  10.30   Real Property Lease by and between the Registrant and MELP
          VII L.P., dated October 12, 1999.
  10.31   Offer Letter, as amended, by and between the Registrant and
          C. Boyd Clarke, dated November 24, 1999.
  10.32   Employment Agreement by and between the Registrant and J.
          Leighton Read, dated December 6, 1999.
  10.33   Amendment No. 1 to Stock Transfer Agreement by and between
          the Registrant and The Regents of the University of
          Michigan, dated February 16, 2000.
  23.1    Consent of Ernst & Young LLP, Independent Auditors.
  24.1    Power of Attorney. See Signature Page.
  27.1    Financial Data Schedule.
</TABLE>
<PAGE>   62

---------------
 + Confidential treatment has been granted for portions of this exhibit.

++ Confidential treatment has been requested for portions of this exhibit.

 * Compensatory Plan or Agreement

 (1) Incorporated by reference to the correspondingly numbered exhibit to our
     Registration Statement on Form S-1, File No. 333-05209, filed June 5, 1996,
     as amended.

 (2) Incorporated by reference to the correspondingly numbered exhibit to our
     Quarterly Report on Form 10-Q, File No. 0-20815, for the quarter ended
     September 30, 1996, filed December 20, 1996.

 (3) Incorporated by reference to the correspondingly numbered exhibit to our
     Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, File
     No. 0-20815, filed May 15, 1997.

 (4) Incorporated by reference to the correspondingly numbered exhibit to our
     Current Report on Form 8-K, File No. 0-20815, dated April 16, 1997 and
     filed July 21, 1997.

 (5) Incorporated by reference to the correspondingly numbered exhibit to our
     Current Report on Form 8-K, File No. 0-20815, dated October 8, 1997 and
     filed October 10, 1997.

 (6) Incorporated by reference to the correspondingly numbered exhibit to our
     Registration Statement on Form S-3, File No. 333-41649, filed December 10,
     1997.

 (7) Incorporated by reference to the correspondingly numbered exhibit to our
     Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No.
     0-20815, filed August 14, 1998.

 (8) Incorporated by reference to the correspondingly numbered exhibit to our
     Quarterly Report on Form 10-Q for the quarter ended September 30, 1998,
     File No. 0-20815, filed November 16, 1998.

 (9) Incorporated by reference to the correspondingly numbered exhibit to our
     Annual Report on Form 10-K for the year ended on December 31, 1998, File
     No. 0-20815 filed March 31, 1999.

(10) Incorporated by reference to the correspondingly numbered exhibit to our
     Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, File
     No. 0-20815, filed May 13, 1999.

(11) Incorporated by reference to the correspondingly numbered exhibit to our
     Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, File No.
     0-20815, filed August 13, 1999.

(12) Incorporated by reference to the correspondingly numbered exhibit to our
     Quarterly Report on Form 10-Q for the quarter ended September 30, 1999,
     File No. 0-20815, filed November 15, 1999.