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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, 2000

                                       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)

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

           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. [X]

     Based on the closing sale price of $29.81 on March 22, 2001, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
$896,144,225.

    On March 22, 2001, there were outstanding 30,570,518 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 14, 2001, 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

<TABLE>
<CAPTION>
                                                                                                               PAGE
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<S>                                                                                                           <C>
PART I........................................................................................................   3
  Item 1.  Business...........................................................................................   3
  Item 2.  Properties.........................................................................................  30
  Item 3.  Legal Proceedings..................................................................................  31
  Item 4.  Submission of Matters to a Vote of Security Holders................................................  31
PART II.......................................................................................................  32
  Item 5.  Market for the Registrant's Common Stock and Related Stock Matters.................................  32
  Item 6.  Selected Consolidated Financial Data...............................................................  33
  Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations..............  34
  Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................................  38
  Item 8.  Financial Statements and Supplementary Data........................................................  40
  Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............  40
PART III......................................................................................................  41
  Item 10. Directors and Executive Officers of the Registrant.................................................  41
  Item 11. Executive Compensation.............................................................................  42
  Item 12. Security Ownership of Certain Beneficial Owners and Management.....................................  42
  Item 13. Certain Relationships and Related Transactions.....................................................  42
PART IV.......................................................................................................  43
  Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................  43
SIGNATURES....................................................................................................  44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................................................... F-1
</TABLE>


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                                     PART I.

    Some of the statements in the sections entitled "Business," "Business
Risks," "Management's Discussions and Analysis of Financial Condition and
Results of Operations," and elsewhere in this Form 10-K constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's results,
levels of activity or achievements to be materially different from any future
results, levels of activity or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Business Risk" and elsewhere in this Form 10-K.

    In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "intend," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential," or "continue," or the negative of
such terms or other comparable terminology.

    Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, and
levels of activity, performance or achievements. Except as may be required by
law, we undertake no obligation to publicly update any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.

ITEM 1. BUSINESS

OVERVIEW

    We are a biopharmaceutical company focused on the prevention of disease
through innovative vaccine technology. We currently are focusing our product
development and commercialization efforts on our lead product candidate,
FLUMIST(TM), an investigational live virus vaccine delivered as a nasal mist for
the prevention of influenza. Our goal is to become a leader in the discovery,
development, manufacture and marketing of innovative vaccines which are safe,
effective and suitable for widespread use. Our vaccine development programs are
based on techniques for producing attenuated (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.

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. Vaccines are a
well-recognized method for preventing disease. In determining whether to use a
vaccine approved as safe and effective by the U.S. Food and Drug Administration,
or FDA, decision makers consider whether it is cost-effective and whether it has
been recommended by the Advisory Committee on Immunization Practices, or ACIP,
and by medical specialty societies, such as the American Academy of Family
Physicians, or AAFP, and the Redbook Committee of the American Academy of
Pediatrics, or AAP.

    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:

    -   Systemic immunity: 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, limiting the spread of the virus or bacterium.


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    -   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 that line the nose and throat. Mucosal
        immunity is particularly important in protecting against viruses or
        bacteria that 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 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 adequate
immune response to an inactivated influenza vaccine if it has not been exposed
to the specific influenza strain circulating.

    Aviron's lead product candidate, FluMist, was developed to be delivered
conveniently via a nasal mist -- where influenza viruses enter the body. Unlike
the flu shot, it is designed to induce systemic and mucosal immunity, similar to
natural infection.

    TYPES OF VACCINES

    Inactivated and Subunit Virus Vaccines

    Inactivated virus vaccines are produced by killing a virus using chemicals
or by making pieces of viruses using molecular or biochemical techniques. Some
vaccines, such as the hepatitis A vaccine, are based on the whole, inactivated
virus. Other vaccines are the result of various degrees of purification that
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 usually are less able to produce
antibodies in the mucous membranes where many wild-type viruses enter the body.

    Live Virus Vaccines

    Live virus vaccines expose the immune system to a weakened form of the virus
that can trigger a lasting immune response to the wild-type virus without
causing illness. 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, measles, mumps, rubella and
chicken pox, is accomplished by multiplying these viruses repeatedly in 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 vaccine
candidate strain is then tested in animal models, if available, or directly in
human participants to see if it has been sufficiently 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 participants,
large-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 protective mechanisms of the immune system
similar to those activated by 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 that cause disease. Live virus vaccines may
also be easier to administer through their natural route of infection, such as
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, e.g., because of a pre-existing disease, HIV infection or drug
treatment for cancer or organ transplantation.


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    Although beneficial and widely used, there are four primary 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 basic virus in
a live virus vaccine could change back to the wild-type, or a more virulent,
virus. This potential is a small, but recognized, problem for some of the
current live virus vaccines, including polio. Second, a weakened virus of a live
virus vaccine 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, or worse than, the wild-type strain. This
is a highly unlikely theoretical risk. Third, if the live virus vaccine is a DNA
virus or a retrovirus, the genome (genetic material) of the virus could combine
with the DNA of the person receiving the vaccine and cause cancer or other
problems in the future. This is a theoretical and highly unlikely risk. Fourth,
there is the possibility that, in some circumstances, the live virus strain
could transmit to and potentially cause disease similar to, or worse than, the
wild-type strain in susceptible people or animals.

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

BUSINESS STRATEGY

    Our objective is to discover, develop, manufacture and market innovative
vaccines that are safe, effective, and suitable for 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, including other airborne viruses
related to influenza and chronic virus infections such as herpes simplex virus
and cytomegalovirus.

    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 to add programs that complement our core
technologies and capabilities. For example, we obtained exclusive rights to the
cold-adapted influenza vaccine technology that was used to develop FluMist from
the University of Michigan and the National Institutes of Health, or NIH, and to
our parainfluenza virus type 3 vaccine from the NIH.

    Select Programs and Market Vaccines Based on Unmet Medical Need. In setting
our internal product development priorities, we evaluate the potential of each
vaccine to protect health in large patient populations or where there exists
significant disease burden, particularly where there is no existing means of
prevention. We also consider the benefits of implementing widespread vaccine
programs, the potential cost savings and the quality of life benefits based on
protection provided by the vaccine.

    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. We have entered into collaborations for the
development and marketing of FluMist with Wyeth Lederle Vaccines, or Wyeth, a
division of American Home Products, or AHP, and CSL Limited. We also have an
agreement with SmithKline Beecham for the development of a vaccine against
Epstein-Barr virus, or EBV, a leading cause of infectious 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 on innovative delivery, classical techniques
for producing weakened live virus vaccines and 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.


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    The cold-adapted influenza vaccine technology includes these master donor
strains for influenza, as well as techniques useful for updating the vaccine
each year according to recommendations of 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.

    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. 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. Our creation of a
        weakened live virus vaccine for cytomegalovirus, or CMV, 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 potentially better immune response.
        We have identified several vaccine candidates using this approach. We
        believe this technique of adding antigen structures may eventually 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, began a Phase 1 clinical
        trial of our initial vaccine candidates for CMV in the second quarter of
        2000.

    -   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 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 herpes simplex virus type
        2, or HSV-2, that 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.

    -   Changing the genetic information used by the virus in its own
        multiplication. Our scientists are working to create weakened live virus
        vaccine candidates for respiratory syncytial virus, or RSV. Until
        recently, it was impossible to genetically engineer influenza vaccine
        strains. Dr. Peter Palese, another one of our founders, discovered how
        to create genetically engineered influenza viruses using reverse
        genetics and assigned the technology to us.


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VACCINE PRODUCTS UNDER DEVELOPMENT

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


<TABLE>
<CAPTION>
PROGRAM                                    VACCINE TYPE                               STATUS                COMMERCIAL RIGHTS
-------                                    ------------                               ------                -----------------
<S>                                 <C>                                    <C>                              <C>
INFLUENZA

   FROZEN FLUMIST                                                          Biologics License Application    Aviron/CSL/Wyeth
                                                                            under review
     Children                       Cold-adapted live virus                Pivotal Phase 3 clinical trial
                                                                            completed,
     Adults                         Cold-adapted live virus                Challenge efficacy study
                                                                            completed, Phase 3 safety and
                                                                            effectiveness trial completed
     Elderly and High-risk Adults   Cold-adapted live virus                Phase 3 clinical trial
                                     (co-administered with                  completed
                                     Inactivated vaccine)

   LIQUID FLUMIST                   Cold-adapted live virus                Three Phase 3 trials in          Aviron/CSL/Wyeth
                                                                            progress,
                                                                            Phase 2 bridging study
                                                                            completed

 PARAINFLUENZA VIRUS TYPE 3         Bovine live virus                      Phase 2 clinical trial           Aviron
                                                                            completed

 EPSTEIN-BARR VIRUS                 Recombinant subunit glycoprotein       Phase 2 clinical trial in        Aviron/SmithKline
                                                                            progress                          Beecham

 CYTOMEGALOVIRUS                    Genetically engineered live virus      Phase 1 clinical trial in        Aviron
                                                                            progress

 HERPES SIMPLEX VIRUS TYPE 2        Genetically engineered live virus      Preclinical                      Aviron

 RESPIRATORY SYNCYTIAL VIRUS        Genetically engineered live virus      Preclinical                      Aviron
</TABLE>

    "Pivotal Phase 3 clinical trial completed" means we have completed a
multi-center, double-blind, placebo-controlled clinical trial for safety and
efficacy.

    "Challenge efficacy study completed" means we have completed a multi-center,
double-blind, placebo-controlled clinical trial for safety, immunogenicity
(immune response) and effectiveness.

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

    "Phase 3 clinical trial completed" means 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.

    "Three Phase 3 trials in progress" means that Wyeth is currently conducting
three Phase 3 trials. Primary endpoints in the studies are protection against
culture-confirmed influenza or immunogenicity by age.

    "Phase 2 bridging study completed" means a clinical trial has been
completed, and the data are either being analyzed or the data remain blinded
while the analytical plan is under review.

    "Phase 2 clinical trial completed" means we have completed a double-blind,
placebo-controlled clinical trial for safety and immunogenicity in infants.

    "Phase 2 clinical trial in progress" means a Phase 2 clinical trial in
healthy adults is being conducted by SmithKline Beecham under a license
agreement with Aviron.

    "Phase 1 clinical trial in progress" means that a Phase 1 clinical trial is
being conducted in healthy adults who already have the antibodies to the virus
in their blood.

    "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. The Centers
for Disease Control and Prevention, or CDC, estimates that each year
approximately 10 to 20 percent of the U.S. population develops influenza, more
than 110,000 persons are hospitalized from influenza-related complications and
approximately 20,000 people die from influenza complications. Influenza symptoms
usually last for approximately one week, resulting in an average of
approximately three days of lost work or missed school. In addition, the Health
Care Financing Administration estimates that the cost of influenza in the United
States was $12.0 billion in 1992. 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 the age of 64. 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 1900s, 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 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 maintain a global network that monitors the occurrence
of annual outbreaks. Based on these data, the FDA selects the influenza strains
to be included in the following season's influenza vaccine in the United States.
The World Health Organization and various national authorities undertake a
similar process in Europe. Influenza vaccines contain three strains of influenza
virus. Typically, one or two of the strains in these vaccines are updated each
year. According to the CDC, when the strains selected for the vaccine match
those circulating in the community, current injectable vaccines are 70 to 90
percent effective in preventing illness, pneumonia, hospitalization and death
due to complications from influenza in healthy adults under age 65, and are
considerably less effective in the elderly.

    The ACIP has recently identified the main target groups for the current
influenza vaccine as those at increased risk for influenza-related
complications, including persons age 50 and over, residents of long-term care
facilities, adults and children with chronic lung or heart disease, with chronic
metabolic diseases such as diabetes, or with 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 FDA estimated that approximately 75 million influenza vaccine doses were
manufactured for use in the United States for the 2000-2001 influenza season.
According to the CDC, 65 percent of the 35 million Americans over the age of 64
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 a significant number of influenza vaccine doses
used in the United States are being given to healthy adults under age 65, many
of whom participate in workplace vaccination programs. Experts suggest that very
few of the 75 million children in the United States under age 19 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 is an investigational live virus
vaccine delivered as a nasal mist for the prevention of influenza.

    We are developing FluMist for use every year in healthy children and healthy
adults. FluMist has undergone, and is currently undergoing, extensive clinical
trials, many of which are coordinated with NIH-sponsored investigators. In
clinical trials of the cold-adapted influenza vaccine performed prior to Aviron
involvement, more than 8,000 participants received the cold-adapted influenza
vaccine. FluMist has been tested in an additional 24,000 children and adults
since Aviron involvement. FluMist has been shown to provide a high protection
rate against influenza in Phase 3 clinical trials in healthy children and
healthy adults. FluMist has been generally well tolerated in clinical trials.
FluMist recipients were more likely than placebo recipients to report side
effects, such as sore throat, runny nose and low-grade fever. The side effects
were transitory in nature.

    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. Because FluMist is delivered as a nasal
mist, we believe that it provides a more convenient and comfortable way to


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<PAGE>   9
vaccinate individuals, including children, each year. Children are an important
target population because much of the illness occurs in young children, and they
are also at high-risk for complications related to influenza. 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.

    Healthy adults are also an important market segment for FluMist. In a Phase
3 effectiveness trial conducted at 13 sites nationwide in healthy working
adults, reductions in days of illness, antibiotic use, health resource use and
missed work due to illness were observed. We believe that many adults who
regularly receive the flu shot will often 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 also
may increase the convenience of vaccination compared to the flu shot.

    We intend to seek recommendations from the ACIP and other medical advisory
bodies for use of FluMist in appropriate populations.

INFLUENZA CLINICAL TRIALS

    The Biologics License Application, or BLA, for frozen FluMist was submitted
to the FDA on October 31, 2000 and is under review. Data from 16 completed
clinical trials were included in the BLA. These trials involved more than 10,000
children and adults to whom over 13,000 doses of FluMist were administered.

    The Safety Update Report, or SUR, for FluMist that was submitted recently to
the FDA presented data from over 21,000 doses of FluMist that were administered
to more than 15,000 participants in trials covered by this report.

    In addition, we have recently completed trials in which more than 1,200
children or adults received FluMist, and we are engaged in ongoing clinical
trials involving more than 14,000 children, approximately 8,000 of whom have
received FluMist. Thus, across all trials, completed or ongoing, approximately
24,000 participants have received at least one dose of FluMist.


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    FLUMIST CLINICAL TRIALS

<TABLE>
<CAPTION>
             TRIAL                            PURPOSE OF TRIAL                         NUMBER OF SUBJECTS     YEAR OF TRIAL
             -----                            ----------------                         ------------------     -------------
<S>                      <C>                                                         <C>                      <C>
   FROZEN FLUMIST

     HEALTHY CHILDREN
   AV002/AV002-2         Phase 1 and 2 Dose Escalation Safety and Immunogenicity               356             1995 -- 1996
   AV006                 Phase 3 Field Pediatric Protective Efficacy                    1,602 (1st year)       1996 -- 1997
                                                                                        1,358 (2nd year)       1997 -- 1998
   AV007                 Phase 3 Manufacturing Consistency                                     500                 1997
   AR001                 Phase 3 Safety                                                        65              1997 -- 1998
   AV011                 Phase 3 H1N1 Challenge                                                222                 1998
   AV012                 Phase 3 Field Community Intervention                           4,298 (1st year)       1998 -- 1999
                                                                                        5,252 (2nd year)       1999 -- 2000
                                                                                       5,137 (3rd year)(a)     2000 -- 2001
   AV014                 Phase 3 Manufacturing "Bridge" Safety and                             225             1998 -- 1999
                           Immunogenicity
   AV015                 Phase 3 Third Year Revaccination                                     949(b)           1998 -- 1999
   AV017                 Phase 3 Fourth Year Revaccination                                   1,245(c)          1999 -- 2000
   D145-P500             Phase 3 Evaluation of Transmission                                    197             1999 -- 2000
   AV018                 Phase 3 Concurrent Use with MMR II (R) and Varivax(R)        81 currently enrolled    2000 -- 2001
   AV019                 Phase 3 Safety                                                      9,732(a)          2000 -- 2001
   DMID #99-020          Phase 2 Immune Response in Adenoids and Tonsils              3 currently enrolled     2000 -- 2001

     "HIGH-RISK" CHILDREN
   AV010                 Phase 3 Safety in Children with Asthma                                48                  1997
   DMID #99-012          Phase 2 Safety in Children with HIV                                   49              1999 -- 2000

     HEALTHY ADULTS
   AV001                 Phase 1 Safety and Immunogenicity, delivery method                    239                 1995
   AV003                 Phase 3 Wild-type Challenge                                           103             1995 -- 1996
   AV004                 Phase 2 Safety                                                        20              1995 -- 1996
   AV005                 Phase 2 Safety                                                        32              1996 -- 1997
   AR001                 Phase 3 Safety                                                        375             1997 -- 1998
   AV009                 Phase 3 Effectiveness                                                4,561            1997 -- 1998

     "HIGH-RISK" ADULTS
   DMID #98-005          Phase 2 Safety in Adults with HIV                                     111                 1998
   AR001                 Phase 3 Safety                                                         9              1997 -- 1998
   AV008                 Phase 3 Safety of Co-administration with Flu Shot                     200             1997 -- 1998
   Veterans              Phase 3 Field Safety and Efficacy of                                 2,215            1998 -- 1999
      Administration       Co-Administration with Flu Shot in Participants
      CSP #448             with Chronic Obstructive Pulmonary Disease

   LIQUID FLUMIST
     HEALTHY CHILDREN
   D153-P500             Phase 2 Bridging Study                                              1,395(a)              2000
   D153-P501             Phase 3 Pan-Asian Efficacy                                          3,175(a)          2000 -- 2001
   D153-P502             Phase 3 Pan-European Day Care Efficacy                              1,677(a)          2000 -- 2001
   D153-P503             Phase 3 European Safety and Immunogenicity                           517(a)           2000 -- 2001

   "BRIDGE" FROZEN / LIQUID FLUMIST
     HEALTHY ADULTS, HIGH-RISK ADULTS, AND CHILDREN
   AL002                 Phase 1 Safety and Immunogenicity                                     524             1998 -- 1999
</TABLE>

--------------

(a) Enrollment is complete. However, the number is preliminary and may change
    slightly as final data are compiled.

(b) The total of 949 includes 650 revaccinees and 299 participants receiving
    FluMist for the first time.

(c) The total of 1245 includes 870 revaccinees, 305 initial vaccinees and 70
    placebo recipients.


                                       10
<PAGE>   11
    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. We enrolled 1,602 children at 10 clinical sites in the pivotal
Phase 3 clinical trial, of whom 1,314 were vaccinated with a second dose 46 to
74 days after their first vaccination. The primary endpoint of the study was
defined as the protection of children from laboratory-confirmed influenza during
the influenza season. Our clinical trial data suggest that a repeat or booster
dose may be beneficial for young children who do not have previous exposure to
influenza or influenza vaccines. Two doses of the flu shot vaccine are
recommended for young children receiving an influenza vaccine for the first
time.

    The influenza epidemic in the 1996 -- 1997 influenza season was widespread
enough in the general population to allow the data from this study to be
unblinded following a single year of enrolling participants. Aviron and the
NIAID announced that, based on an initial analysis of the first year of the
Phase 3 trial, FluMist demonstrated a 93 percent protection rate against
culture-confirmed influenza in those children receiving one or two doses in this
study. Only one percent of children receiving FluMist experienced
culture-confirmed influenza, compared to 18 percent of those receiving the
placebo. In a subgroup analysis of those children who received a single dose,
the efficacy was 89 percent. These results were statistically significant.

    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 this 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 an
influenza-associated ear infection, while 20 of the placebo recipients developed
influenza-associated ear infections. Throughout the entire influenza 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 and were
subsequently published in the Journal of Pediatrics in February 2000. In this
study year, FluMist provided 100 percent protection against laboratory-confirmed
influenza strains included in the 1997 -- 1998 flu vaccine. In addition, the
vaccine provided 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 influenza season. Overall, FluMist
provided 87 percent protection against all laboratory-confirmed influenza. Among
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,
approximately 4,300 children enrolled and in the second year the enrollment
increased to more than 5,200. The trial will evaluate the impact of vaccinating
preschool 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. During the 2000 -- 2001 influenza season, the third year of this trial,
more than 5,100 participants have been enrolled.

    In October 2000, Kaiser Permanente initiated a large-scale clinical trial of
FluMist. During the 2000 -- 2001 influenza season, more than 9,700 participants,
age one to 17 years, have been enrolled. The study will evaluate a variety of
endpoints to compare the rates of different medically attended events in the
group receiving FluMist versus the group receiving placebo.


                                       11
<PAGE>   12
    PHASE 3 ADULT CHALLENGE TRIAL

    FluMist was also 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 vaccine and 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, only 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 these 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 in 1999. During the peak outbreak periods, 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
41 percent fewer days of health care provider visits. Participants also
experienced a 45 percent reduction in days of prescription antibiotic use and 28
percent fewer days of over-the-counter 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, 17 percent less, and upper respiratory tract illness
with fever, 22 percent less. The number of days of illness was also reduced in
FluMist recipients by 23 to 27 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 10 percent, a trend that did not reach statistical significance.

    The trial was a double-blind, placebo-controlled study conducted in 13
clinical sites nationwide during the 1997 -- 1998 influenza 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.

    PHASE 3 CLINICAL TRIALS IN HIGH-RISK ADULTS

    We have completed a clinical trial for safety in 200 elderly high-risk
adults for the use of FluMist in co-administration with the currently available
injectable vaccine. Many of the participants in this trial self-administered
FluMist. This trial was not designed to generate efficacy data on use of FluMist
in high-risk adults.


                                       12
<PAGE>   13
    Early in the fourth quarter of 1998, the Cooperative Studies program of the
Department of Veterans Affairs Office of Research and Development, or VA, 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 than 2,200 volunteers enrolled at 20 participating VA
Medical Centers in the United States. The VA is analyzing the efficacy results,
and we expect that those efficacy data will be available later this year.
Serious adverse events have been analyzed and submitted to the FDA in our recent
SUR. Incident rates of serious adverse events were similar in both arms of the
study, those receiving FluMist and those receiving the placebo.

    CLINICAL TRIALS FOR MANUFACTURING CONSISTENCY

    In February 1998, we reported positive results from a manufacturing
consistency lot trial of vaccine manufactured, blended and filled into sprayers
at our contract manufacturer. We conducted a randomized, double-blind,
placebo-controlled trial in 500 children, designed to evaluate the safety and
immunogenicity (immune response) 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
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 our contract manufacturer 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 our contract manufacturer. 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 endpoints for immunogenicity and safety, and the data from this trial
are included in our BLA. We cannot be certain that the FDA will find these data
sufficient to demonstrate consistency of manufacture.

    LIQUID FLUMIST CLINICAL TRIALS

    The current formulation of FluMist requires freezer storage throughout
distribution. Because many international markets do not have distribution
channels well suited to the sale of frozen vaccines, we are developing a second
generation refrigerator stable, or liquid, formulation of FluMist, in
conjunction with Wyeth.

    In March 2000, Wyeth initiated a randomized, single-blind Phase 2 clinical
trial of liquid FluMist in more than 1,300 children in the southern hemisphere.
This trial is intended to demonstrate clinical equivalence between frozen and
liquid FluMist.

    During the fourth quarter of 2000, Wyeth initiated three Phase 3 clinical
trials with liquid FluMist:

    -   A Pan-Asian efficacy trial enrolled more than 3,000 participants from 12
        to 36 months of age. The primary endpoint is protection against
        culture-confirmed influenza.

    -   A Pan-European pediatric day care efficacy trial enrolled more than
        1,500 children in day care from 6 to 36 months of age. The primary
        endpoint is protection against culture-confirmed influenza.

    -   A safety and immunogenicity study enrolled more than 500 participants
        from 6 to 17 years of age in Europe. The primary endpoint is the level
        of immune response by age.

FLUMIST BLA

    We submitted a BLA for FluMist on October 31, 2000, and it is currently
under review by the FDA. Following review of the BLA, the FDA will advise us in
writing as to what action has been taken and request additional information if
needed. Prior to approval for marketing by the FDA, we expect the FDA will
inspect each of our manufacturing facilities and convene a meeting of the
Vaccines and Related Biological Products Advisory Committee to evaluate the data
submitted in our BLA.


                                       13
<PAGE>   14
OTHER PRODUCTS IN DEVELOPMENT

    PARAINFLUENZA VIRUS TYPE 3, OR PIV-3

    We are currently developing a vaccine for the treatment of PIV-3, a common
childhood respiratory virus that 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 vaccine available 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 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 (genetic
material) during its long evolutionary adaptation to the bovine host. Our bPIV-3
vaccine potentially could be used as a vector for vaccines against other
viruses, such as PIV-1, PIV-2 and RSV.

    Clinical Results. Prior to our in-licensing of the bPIV-3 vaccine, it had
been tested in Phase 1 clinical trials in 18 adults and 78 children and infants,
primarily as a single dose regimen. In all age groups, the bPIV-3 vaccine
appeared satisfactorily attenuated, safe and genetically stable.

    We conducted a Phase 2 double-blind, placebo-controlled, randomized trial in
192 infants to evaluate two different dosages of bPIV-3. Children were
vaccinated at 2, 4, 6, and 12 to 15 months of age. Preliminary data were
presented at scientific meetings in December 1998 and May 1999. Following three
primary doses, approximately 80 percent of children showed evidence of
immunization by either seroconversion (i.e., developed at least a four-fold
increase in antibody titer) or shedding of vaccine virus. The trial met our
pre-determined objectives for safety and immunogenicity.

    EPSTEIN-BARR VIRUS, OR EBV

    The Epstein-Barr virus is a herpesvirus that is a leading cause of
infectious mononucleosis, or mono, and infects most people at some point in
their lifetime. Infection at a young age may cause mild symptoms, but the
debilitating syndrome of mono 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 mono. The disease usually runs
its course without significant medical intervention; however, the long duration
of mono can be a serious problem for high school and college students as well as
workers. No vaccine is currently available for EBV. Mono affects an estimated
250,000 young adults in the United States and Europe annually. Studies of the
U.S. population indicate that approximately 90 percent of adults have been
infected with EBV.

    We developed 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 causes an
immune response when combined with an adjuvant. Adjuvants are substances
included in vaccines to further stimulate the immune system. In 1995, we entered
into a worldwide collaboration with SmithKline Beecham, or SBB, a division of
GlaxoSmithKline, excluding Korea, whereby SBB will fund the development of the
EBV vaccine in exchange for marketing rights. In August 1999, we announced that
SBB 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 with two different adjuvants (immune response stimulators) was
safe and well tolerated. Although the study was not designed to evaluate the
efficacy of the vaccine, laboratory tests showed evidence of immune response in
vaccine recipients. In November 2000, SBB completed enrollment of a Phase 2
clinical trial in Europe of the subunit vaccine in healthy adults to evaluate
safety and immunogenicity.


                                       14
<PAGE>   15
    CYTOMEGALOVIRUS, OR CMV

    We currently are developing a vaccine for CMV, another member of the
herpesvirus group. Most people become infected with CMV at some time in their
lives. 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
due to 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
7,500 to 10,000 of these infants. Congenital CMV syndrome results in significant
expenditures for neonatal and postnatal care and potentially lifelong custodial
care.

    No vaccine currently is available for CMV. In January 1999, the Institute of
Medicine, a part of the National Academy of Sciences, issued a report in which
CMV was identified as a level 1 (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 risk of acquiring CMV from the donor organs. Our
scientists have discovered key differences between the 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 potential protection. In June 2000, the NIAID initiated the first clinical
trial with four of our CMV vaccine candidates.

    HERPES SIMPLEX VIRUS TYPE 2, OR HSV-2

    An estimated 40 to 60 million persons in the United States currently are
infected with HSV-2, the cause of genital herpes. 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, often manifesting its presence
several times a year with painful sores in the genital area. It is estimated
that there are more than 500,000 new cases of genital herpes annually in the
United States and that the disease is responsible for more than 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 neurological damage. In addition, efforts to prevent neonatal herpes
contribute significantly to the cost of the disease. For example, women with a
history of genital herpes are often advised to undergo a Caesarean section when
prenatal examinations suggest a herpes virus recurrence near the time of
delivery. HSV-2 infection also can lead to serious and fatal complications in
adults with poor immune systems due to AIDS or as a consequence of 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 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.

    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-


                                       15
<PAGE>   16
attenuated. We have licensed technology, along with patents covering strategies
for more specific deletions, from ARCH Development Corporation, or ARCH. 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 Therapeutics Inc., or NeuroVir, formerly NeuroVir
Research, Inc. 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.

    RESPIRATORY SYNCYTIAL VIRUS, OR RSV

    RSV is the major cause of lower respiratory tract illness in the very young
and is responsible for more than 90,000 hospitalizations and 4,500 deaths a year
in the United States. RSV also is one of the causes of 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 delivered by injection. There is no
vaccine currently available for RSV. 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 that carry "foreign" genes 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 that may be
targeted by using the influenza virus as a vector to deliver antigens. BPIV-3
represents an alternative live viral vector to use to immunize against RSV or
PIV-1 and 2.

FLUMIST PRODUCTION AND MANUFACTURING

    MANUFACTURING PROCESS

    Master Virus Seed Preparation. After the FDA selects 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 included in our BLA submission, laboratory virus cells are infected with both
the expected strain in circulation and our cold-adapted master donor strain,
resulting in random genetic reassortments between the two strains. The specific
reassortment desired is then isolated. This process takes approximately four to
eight weeks.

    The master virus seeds for each of the vaccine strains are then transferred
to our U.K. facility. Individual master seed vials are used to produce the
master working seed banks for each of the three vaccine strains. This production
involves the infection, incubation and harvesting of virus from pathogen-free
hens' eggs. The eggs used in each stage of our manufacturing process are
supplied by a third party that maintains flocks certified to be free of specific
pathogenic agents.

    Bulk Production. The master working virus seeds for each of the vaccine
strains are then used to produce large-scale quantities of bulk vaccine strains.
This production, which occurs in our U.K. facility, involves the infection,
incubation and harvesting from hens' eggs. The diluent for the product, normal
allantoic fluid, or NAF, is harvested from hens' eggs and used in the final
formulation of FluMist.


                                       16
<PAGE>   17
    Trivalent Formulation Production. The bulk vaccine strains and NAF are
frozen in our U.K. facility and transferred to our facility in Pennsylvania
where they are blended into the trivalent formulation, filled into nasal spray
devices, packaged, labeled and shipped.

    MANUFACTURING FACILITIES AND CONTRACTS

    Since 1998, we have been producing supplies for all frozen FluMist clinical
trials through preparation of master virus seeds at our California facility,
production of bulk monovalents and diluent at the U.K. facility and the blending
and filling into the trivalent formulation at our Pennsylvania facility. Our
existing manufacturing facilities are not yet licensed for the manufacture of
FluMist and have not yet manufactured FluMist at a sustained commercial scale.
We have begun the initial stages of commercial scale manufacturing of FluMist
for sale during the 2001 -- 2002 influenza season, pending receipt of marketing
approval from the FDA.

    In October 2000, we restructured the agreement previously in place with
Evans Vaccines for bulk production in the Speke, U.K. facility. The new
agreement, which runs through June 2006, transferred responsibility for bulk
production and transferred approximately 100 Evans employees to Aviron UK Ltd.,
our wholly-owned U.K. subsidiary. We have also agreed to acquire the remaining
24 years of a 25-year lease from Celltech Group Plc of approximately eight acres
of land in Speke, U.K. We intend to utilize an existing 45,000 square foot
structure on the property to build a new FluMist manufacturing facility.

    In 1998, Aviron opened a 34,000 square foot manufacturing suite in
Philadelphia, Pennsylvania, in which we blend and fill doses of FluMist. This
suite is adjacent to the facility of the company with which we contract for the
labeling and packaging of FluMist. This site is referred to as Aviron PA. If
regulatory approval is received, this Aviron PA facility is expected to be used
for blending, filling, labeling, packaging and storage of commercial lots of
FluMist. Our original arrangement with Packaging Coordinators, Inc., or PCI, a
division of Cardinal Health, Inc., provided for the labeling and packaging of
FluMist for commercial sale until October 2004. In August 2000, we entered into
amended agreements with PCI extending the term of our original agreement until
December 2004, with options to extend for up to two additional terms of three
years.

    The production of FluMist is subject to the availability of a large number
of specific pathogen-free eggs, for which there is 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
purchase 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, we entered into a worldwide supply agreement under which
Becton Dickinson and Company, or Becton Dickinson, to will supply us with its
AccuSpray(TM) non-invasive nasal spray delivery system for the administration of
FluMist, for which we retain exclusivity through the 2001 -- 2002 influenza
season. This agreement provides for an initial term of five years with automatic
annual renewal until terminated. In addition, we depend on the existing
submission by Becton Dickinson of a Device Master File application, or DMF. We
referenced 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 that 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 are jointly producing
clinical trial material for the liquid formulation of FluMist at our facilities
in California and Pennsylvania and in Wyeth's facilities in Pennsylvania. As
part of our agreement with Wyeth, both companies have the right to manufacture
the liquid formulation.

MARKETING AND SALES

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

    Clinical trials of FluMist have been conducted to provide information
regarding its use in three market segments: healthy 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.

    Currently we are seeking indications for use of FluMist for the prevention
of influenza in healthy children and healthy adults.


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<PAGE>   18
    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 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 an influenza epidemic. The current injectable influenza vaccine is
occasionally 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 children by
offering an innovative vaccine to prevent influenza. Because FluMist is
delivered as a nasal mist, 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. We believe that pediatricians will recognize the
potential advantages of FluMist for children.

    ADULTS

    A significant number of the current injectable influenza vaccine doses in
the United States are being administered to healthy adults, either via workplace
immunization programs or in programs offered through clinics, pharmacies or
other retail outlets. There are approximately 100 million adults in the United
States between 19 and 49 years of age who the CDC or the ACIP does not classify
as being at high risk for influenza complications, but who still could be
susceptible to influenza. In addition, there are approximately 42 million
persons age 50 to 64 who the ACIP and the AAFP consider at high risk for
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
increase the convenience of vaccination compared to the current influenza
injection.

COLLABORATIVE AGREEMENTS

    Our strategy for the development, clinical trials, manufacturing and
commercialization of some 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

    We signed a worldwide collaboration agreement with Wyeth in January 1999 for
the marketing, promotion, sales, distribution and development of FluMist, which
became effective in March 1999.

    Under this agreement, we granted Wyeth exclusive worldwide rights to market
FluMist, excluding Korea, Australia, New Zealand and some South Pacific
countries. We and Wyeth will co-promote FluMist in the United States, while
Wyeth will have the exclusive right to market the product outside the United
States. Wyeth will hold the marketing rights for an initial term of seven years
from the first commercial sale of FluMist in the United States and an initial
term of eight years from the first commercial sale of FluMist outside the United
States, with an option to extend its rights both in the United States and
internationally to up to 11 years. Extending both U.S. and international rights
for the full 11 years would trigger payments to us by Wyeth in excess of $140.0
million. We and Wyeth also will collaborate on the regulatory, clinical and
marketing programs for FluMist.

    In March 1999, we received a cash payment of $15.0 million from Wyeth under
the collaboration agreement. On January 2, 2001, we received an additional $15.5
million upon acceptance by the FDA for filing of our BLA on December 28, 2000,
and we will receive an additional $20.0 million upon FDA marketing approval for
FluMist. We also can earn an additional $20.0 million in milestone payments for
advisory body recommendations and expanded label claims. In addition, we are
entitled to receive a $10.0 million payment for the submission of a license
application in Europe, a $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, supply and
regulatory milestones is included in the agreement terms and may total up to
$67.5 million.

    Wyeth committed to provide up to $40.0 million in financing to us, $20.0
million of which has been provided to date. The remaining $20.0 million is
available upon FDA marketing approval for FluMist. The total potential value for
the license fees, milestones, financing support and term extension options that
we could receive exceeds $400.0 million. In addition, to support


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<PAGE>   19
inventory buildup for 2001, Wyeth paid us $10.0 million in January 2001 as an
advance against future amounts that Wyeth will owe us under our agreement.

    Wyeth 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 in the form of product transfer
payments and royalties. These payments are higher in the United States than
internationally. We will incur expenses to supply and co-promote FluMist. Wyeth
will share in the clinical development expenses for FluMist. In addition, Wyeth
has agreed to spend up to $100.0 million for advertising and promotion of
FluMist over the first three years of commercialization in the United States.

    CSL Limited

    In June 1998, we and CSL Limited , or CSL, of Victoria, Australia jointly
announced that we will collaborate on the development, sale and distribution of
FluMist in Australia, New Zealand and some countries in the South Pacific. We
and CSL will jointly carry out additional clinical trials in Australia for
FluMist. Under the agreement, CSL will sponsor the marketing application with
the Therapeutic Goods Administration, Australia's equivalent to the FDA. CSL
will have exclusive rights to sell and distribute FluMist in these countries,
and we will share profits from these sales. We also will benefit from expansion
of CSL's current flu vaccine in pediatric and healthy adult market segments
following the approval to market FluMist in the territory. In addition, CSL has
agreed, under an option agreement, to grant warrants to us to purchase CSL
common stock upon CSL'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 five-year
Collaborative Research and Development Agreement 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 Vaccine
Treatment Evaluation Units, or 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. In June
2000, we extended the Collaborative Research and Development Agreement through
June 2003.

    In September 2000, we were awarded a $2.7 million Challenge Grant from the
NIAID to develop a vaccine to protect against possible pandemic influenza virus
strains. We also will commit $2.7 million over the three-year duration of the
grant. Challenge Grants are milestone-driven awards, meaning we must achieve
pre-determined product goals during the development process in order to receive
the funds. Under the grant, we will develop vaccine candidates against potential
pandemic strains of influenza. The vaccine candidates will utilize the
intranasal delivery technology currently used for FluMist.

    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 vaccines 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 using 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

    -   issued to the university 1,323,734 shares of Series B Preferred Stock,
        which automatically converted into 264,746 shares of our 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 would issue a warrant to the university to purchase shares of our common
stock at a price of $10.00


                                       19
<PAGE>   20
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, 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 fully-vested, non-forfeitable 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 we have more than 27.2 million shares
outstanding, we will issue an additional warrant allowing the university to
purchase 1.25 percent of 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 agreement terminates upon the later of (1) the last to expire of the
university's patents licensed to Aviron or (2) 20 years from the date of first
commercial sale of a product incorporating the university's technology. We have
the right to terminate for any reason upon 12 months notice to the university.

    OTHER COLLABORATIVE AGREEMENTS

    National Institute of Allergy and Infectious Diseases -- Cytomegalovirus, or
    CMV

    In June 2000, we entered into a clinical trial agreement with the NIAID of
the NIH which allows the NIAID to conduct clinical trials at various locations
with our CMV vaccine candidates.

    National Institute of Allergy and Infectious Diseases -- Parainfluenza Virus
    Type 3,or PIV-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 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 incorporate by 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 our
sublicensee or us. 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., or SBB, a division GlaxoSmithKline, to collaborate on our Epstein-Barr
virus, or EBV, vaccine technology. Under the terms of our agreement, we granted
SBB 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, SBB obtained a right of first
refusal to an exclusive, worldwide license, excluding Korea, 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-distribute a monovalent formulation of the EBV vaccine
in the United States and to have SBB supply vaccine.

    SBB 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. SBB 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. The initiation of
a Phase 2 clinical trial in October 2000 triggered a $1.5 million milestone
payment to us. Under an agreement between us and ARCH, ARCH receives 25 percent
of this and all future milestone payments and royalties that we receive from
SBB. We also are entitled to royalties from SBB based on net sales of the
vaccine. Unless otherwise terminated, the agreement will expire on a
country-by-country basis


                                       20
<PAGE>   21
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. SBB may terminate the agreement 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., or Sang-A. 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.

    In January 1997, Sang-A declared bankruptcy and continues to operate while
in receivership. In November 2000, we terminated the portion of the contract
relating to FluMist. We are unable to predict what further long-term effect the
bankruptcy may have on Sang-A and on our remaining 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, or Mount Sinai. Under this agreement, Mount
Sinai assigned to us all of its right, 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, or 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 had asserted an interpretation of the financial terms of this
agreement, relating to the license by us of its EBV technology to SBB and to our
sublicense of certain HSV technology to NeuroVir, both of which would have
required us to pay ARCH a portion of any future or past payments, including
sublicense fees and milestone payments that we received under the SBB and
NeuroVir agreements.

    On May 8, 2000, we executed a Settlement Agreement and Release with ARCH
whereby, among other provisions, we made a settlement payment to ARCH in the
form of a cash payment of $312,500 and a warrant to purchase 14,077 shares of
our common stock. We also agreed to pay ARCH 25 percent of future milestone and
royalty payments received from SBB and 50 percent of future royalty payments and
all milestone payments received from NeuroVir. In addition, the settlement
agreement provides for the termination of our option rights to obtain future
improvements and later developments from ARCH. A separate agreement with
NeuroVir sets the amount of the royalty to be paid pursuant to the NeuroVir
license agreement. The settlement agreement also provides for ARCH to receive
one-half of our ownership interest in Series A preferred shares of NeuroVir
stock and one-half of our ownership interest in a warrant to acquire shares of
NeuroVir common stock, which was issued to us as part of the original NeuroVir
license agreement.

EMPLOYEES

    As of December 31, 2000, we had 462 employees.


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<PAGE>   22
    BUSINESS RISKS

    You should carefully consider the risks described below before making a
decision to invest in our company. Our business, financial condition or results
of operations could be materially adversely affected by any of these risks. The
risks described below are not the only ones facing our company. Additional risks
not presently known to us or that we currently deem immaterial may also impair
our business operations.

RISKS RELATED TO FLUMIST

    The most significant risks we currently face are 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 for sale 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, manufacturing and ongoing fixed costs. In addition, we
may incur significant losses as a result of our decision to begin manufacturing
FluMist at commercial scale for use in the 2001 -- 2002 influenza season before
receipt of marketing approval from the FDA.

IF THE FDA FINDS THAT OUR BLA FOR FLUMIST DOES NOT SUPPORT APPROVAL FOR
MARKETING, COMMERCIALIZATION OF FLUMIST MAY BE DELAYED BY ONE OR MORE INFLUENZA
SEASONS.

    On December 28, 2000, the FDA accepted our BLA for FluMist for filing. If
the FDA finds that the validation, clinical or other required data in our BLA is
insufficient, the FDA could require corrective action or additional data, which
could delay or prevent approval. In November 1999, we announced that we would
not submit a BLA for FluMist in 1999 due to inconsistent test results observed
during the manufacturing process validation exercises. We concluded after
investigation that the inconsistencies were only associated with certain assays,
or tests, and not associated with FluMist or the manufacturing process. Although
we believe we have addressed these issues to ensure consistent assay performance
at commercial scale, the FDA may find our BLA for FluMist does not support
approval for marketing for other reasons.

    We are initially seeking FDA approval for use of FluMist in healthy 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 or efficacy of
FluMist in some or all of those population segments. 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, which may
lead to substantial delay in FluMist approval or prevent it from being approved
for any of those population segments. Moreover, although FluMist has been
generally well tolerated in clinical trials to date, we are continuing to
conduct clinical trials and cannot exclude the possibility that the clinical
profile of the product will change in the future.

IF THE FDA DETERMINES THAT OUR MANUFACTURING FACILITIES ARE NOT ADEQUATE, EITHER
BEFORE OR AFTER RECEIPT OF FDA MARKETING APPROVAL, WE MAY LOSE THE ABILITY TO
MANUFACTURE AND SELL FLUMIST FOR ONE OR MORE INFLUENZA SEASONS.

    As part of the BLA approval process and on an ongoing basis thereafter, the
FDA is likely to inspect each of the facilities involved in manufacturing
FluMist. The FDA may find deficiencies in the facilities or processes that may
delay or prevent FluMist marketing approval. Even if the FDA approves FluMist
for marketing, the FDA could find deficiencies during future inspections, and we
may lose the ability to manufacture and sell FluMist for one or more influenza
seasons.

    Several key stages of the FluMist manufacturing process take place in a
facility located in the U.K. This facility was formerly owned by Celltech
Medeva, or Medeva, the international marketing arm of Celltech Group Plc, but
has since been acquired by Evans Vaccines Ltd., or Evans, a division of
PowderJect Pharmaceuticals Plc. In October 2000, we leased from Evans the
section of the facility where the manufacture of FluMist takes place so that we
can have direct control over the FluMist manufacturing operations. In November
1999, Medeva notified us that it received a warning letter from the FDA
regarding the entire facility. Some of the comments in the letter referred to
the general utility systems in the facility, such as water and clean steam,
which are shared by us and are used to prepare supplies used in the manufacture
of FluMist. We have been assured by Evans that it has taken or is taking the
necessary steps to bring its systems and facility into compliance, and it is
working with the FDA to fulfill that objective. We believe that Evans has taken
the necessary steps to bring the relevant general utility systems into
compliance. However, we have also begun to implement plans to minimize our
dependence on these utilities. Those plans, some of which will require FDA
approval, involve the use of supplies which will reduce our reliance on the
shared utility systems at Evans.


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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 influenza strains will be included
in the upcoming season's vaccines. After the FDA selects the strains, we will
have approximately six months to include the selected strains and manufacture
FluMist for use in the upcoming influenza season. 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 confirm the safety and/or activity (immune response) of the vaccine
        including the new strains selected for that particular year; and

    -   as with other vaccine manufacturers, the FDA will conduct tests on each
        lot of vaccine to enter the market. If for some reason these tests are
        delayed, it could have a material adverse effect on supplies of FluMist
        to the market.

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

    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. Following inoculation with our updated influenza strains, bulk
vaccine is harvested from special hens' eggs. 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. We depend upon a single
supplier for our nasal spray device. We also depend upon our packaging
contractor for packaging of the vaccine.

    The FluMist manufacturing process is labor intensive and must be conducted
under strict controls and tight timelines. The vaccine is subject to strict
quality control testing during all phases of production and prior to release.
Any quality control testing failures could lead to a reduction in the available
supply of FluMist.

WE DO NOT HAVE EXPERIENCE IN MANUFACTURING FLUMIST AT A SUSTAINED COMMERCIAL
SCALE AND MAY ENCOUNTER UNANTICIPATED DIFFICULTIES IN ITS MANUFACTURE.

    As anticipated with any business scale-up, our costs associated with the
manufacture of FluMist at a sustained commercial scale initially will be high.
We may not be able to manufacture FluMist as planned and benefit as anticipated
from economies of scale. Prior to our October 2000 lease of the U.K. facility,
we had arrangements with an experienced vaccine manufacturer to produce FluMist
on a contract basis. Although we leased the U.K. manufacturing facility in order
to have direct control over the FluMist manufacturing and regulatory approval
process, and although we hired the approximately 100 Evans employees who have
been responsible for FluMist manufacturing, we have not manufactured FluMist, or
any product, at a sustained commercial scale.

IT IS TIME-CONSUMING AND EXPENSIVE TO INCREASE MANUFACTURING CAPACITY, WHICH MAY
LEAD TO UNEVEN REVENUE GROWTH.

    We initially may be capacity-constrained in our supply of vaccine. It is
time-consuming and expensive to increase manufacturing capacity. 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 at all. If we are unable to increase our
manufacturing capacity, any annual revenue growth may be uneven.

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

We have entered into an exclusive agreement with Wyeth to co-promote, sell and
distribute FluMist in the United States. We believe that for FluMist to be
widely adopted, the efforts of an experienced pharmaceutical sales force are
needed. If Wyeth fails to


                                       23
<PAGE>   24
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 under recommended storage conditions prior to use. Although Wyeth
has a distribution system that supports frozen vaccines, if it does not manage
these distribution challenges, our revenues could be reduced. Furthermore, if we
do not achieve timely licensure for the sale of frozen FluMist in the United
States, Wyeth has the option to terminate our agreement.

    Wyeth currently participates in the development of a liquid formula of
FluMist, which will be important if FluMist is to be accepted outside of the
United States. Wyeth will also participate in the manufacturing, promotion,
sales and distribution of the liquid formulation. If Wyeth does not devote
sufficient resources to the development and commercialization of this
formulation, its commercial availability will be delayed.

    The aggregate amount of license fees, milestone payments and financing
support due from Wyeth to us under this agreement could exceed $400.0 million,
$50.5 million of which we have received to date. If Wyeth breaches or terminates
its agreement with us or otherwise fails to conduct its FluMist-related
activities in a timely manner or if there is a dispute about its obligations, we
may lose some or all of the remaining payments and may need to seek another
partner. Additionally, the manufacturing and sale of FluMist could be delayed,
reduced or become 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 ACIP of the CDC
and the American Academy of Pediatrics will be important to encourage doctors
and other health care 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 health care 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 OR 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 clinical benefit of competing influenza vaccines, including
        the flu shot, and other influenza-related products;

    -   unfavorable publicity concerning other vaccines;

    -   pricing of FluMist;

    -   difficulties in establishing consumer access to FluMist;

    -   reimbursement policies 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 established
pharmaceutical companies, including Wyeth, Evans and Aventis-Pasteur, Inc.


                                       24
<PAGE>   25
    We also operate in a rapidly evolving field. Other companies are working to
improve the clinical profile 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 Biologicals, S.A.;

    -   a nasally administered inactivated vaccine has been developed by Swiss
        Serum Berna and licensed for sale in Switzerland; 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 sold by Glaxo
Wellcome Plc, and oseltamivir is marketed as Tamiflu and sold by Roche Holdings
AG, or Roche. 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. When administered within two days
of contracting influenza, zanamivir and oseltamivir may reduce the duration of
influenza by approximately one day. Clinical data also has shown that taking
zanamivir or oseltamivir twice daily for a period of time during the influenza
season can have a preventative effect. Recently, Roche received approval to
market and sell oseltamivir for the prevention of influenza in individuals 13
years and over.

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 intellectual property 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.

WE MAY INCUR SIGNIFICANT LOSSES AS THE RESULT OF OUR DECISION TO MANUFACTURE
FLUMIST FOR COMMERCIAL USE BEFORE RECEIVING LICENSURE.

    The manufacturing of FluMist is a complex process, containing multiple steps
over a period of many months. Therefore, in anticipation of licensure in time to
participate in the 2001 -- 2002 influenza season, we already have begun
manufacturing FluMist for commercial use. The costs associated with our decision
to manufacture will increase at an increasing rate as the year progresses.
However, there is no guaranty that FluMist will be licensed for sale during any
portion of the 2001 -- 2002 influenza season, if at all. If the product is not
approved for marketing in time to allow a launch during the 2001 -- 2002
influenza season, we will not receive any revenue from FluMist sales during the
same influenza season. Furthermore, because one or more viral strains used in
all influenza vaccines may change annually, we may not be able to utilize,
during a subsequent influenza season, any components of FluMist that we are
currently manufacturing.

WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE. FAILURE TO RAISE
ADDITIONAL CAPITAL COULD DELAY DEVELOPMENT OF FURTHER IMPROVEMENTS OF FLUMIST
AND OF OUR OTHER POTENTIAL PRODUCTS.

    Our operations to date have consumed substantial and increasing amounts of
cash. As of December 31, 2000, we have an accumulated deficit of approximately
$273.4 million. The negative cash flow from operations is expected to continue
and to accelerate for at least the next year. The commercialization of FluMist
requires substantial funds for manufacturing, continued clinical trial efforts
and other commercialization activities. During 2000, our research and
development expenses were $80.5 million and our general, administrative and
marketing expenses were $13.8 million. Our research and development expenses for
the two preceding years ended December 31, 1998 and 1999 were approximately
$46.6 million and $68.2 million, respectively. We expect to continue to incur
significant operating expenses. We also expect to spend a substantial amount to
develop a liquid formulation of FluMist, as well as other changes in the
product. In addition, we expect to continue funding the research, preclinical
testing and clinical trials necessary to develop our early-stage products.

    As of December 31, 2000, we have raised $446.1 million, net of underwriters
discounts and expenses, since inception through financing activities, such as
sales of equity, convertible debt securities, and other debt financing, which
includes $183.1 million raised


                                       25
<PAGE>   26
from debt and equity financing during 2000. During the first quarter of 2001, we
raised $392.2 million from the sale of equity and debt, net of underwriters
discounts and estimated expenses.

    Our current revenues are comprised primarily of amounts earned as milestone
payments and expense reimbursements under our FluMist collaboration agreement
with Wyeth, and other revenues from other contracts and research grants, as was
the case in 2000, during which revenues were $32.2 million. Our future revenues
will depend largely on the success of these collaboration arrangements,
contracts and research grants. With respect to our collaboration agreement with
Wyeth, our rights to receive milestone payments are all "event-driven." These
payments are earned only upon our successful completion of specific activities.
We cannot be certain whether these milestone payments will be realized. Under
our agreement with Wyeth, we received a milestone payment in the amount of $15.5
million, which became due upon the acceptance by the FDA for filing of our BLA
on December 28, 2000. Another milestone payment of $20.0 million is due upon
obtaining FDA marketing approval for FluMist. The timing of receipt of this
payment will depend on the progress of the regulatory review of the BLA.
Additional milestone payments related to the application submission and approval
of FluMist for marketing in international markets, for expansions in labeling
claims, for policy recommendations and for the liquid formulation are dependent
upon future governmental approvals or recommendations by medical advisory
bodies, and we will not receive these payments until these activities are
successfully completed at some time after 2001.

    Additionally, due to the seasonal nature of FluMist, cash will not be
generated from product sales until late each year or early the following year.
Accordingly, a significant amount of working capital will be required each year
to provide for the payment of expenditures associated with the manufacturing of
inventory and other operating and capital needs in advance of any product sales.

    Currently, we expect our existing cash, cash equivalents, short term
investments and proceeds generated from our collaborative arrangements and
financing commitments will enable us to maintain our current and planned
operations at least through 2002. Our future capital requirements will depend
upon many factors, including:

    -   the ability to successfully complete activities necessary to earn
        milestones under our collaborative agreements and the timing of receipt
        of these milestones;

    -   the time and costs involved in obtaining regulatory approvals;

    -   the ability to successfully launch FluMist in the United States;

    -   continued 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 cost involved in preparing, filing, prosecuting, maintaining and
        enforcing patent claims;

    -   the cost of constructing additional manufacturing and product
        development facilities; and

    -   product commercialization activities.

    If adequate funds are not available, whether through additional funding or
our current capital sources, such as our collaboration arrangements, the
commercialization of FluMist and the development of a liquid formulation of
FluMist may be delayed, and we may be required to delay, reduce the scope of or
eliminate one or more of our research or development programs for our other
products. We may also be required to obtain funds through collaborative
agreements with others that may require us to relinquish rights to certain of
our technologies, product candidates or products we would otherwise seek to
develop or commercialize ourselves. If additional funds are raised by issuing
equity or convertible securities, the percentage ownership in Aviron held by
existing stockholders will be reduced.


                                       26
<PAGE>   27
IF WE ARE UNABLE TO ATTRACT, RETAIN AND MAINTAIN GOOD RELATIONS WITH QUALIFIED
PERSONNEL IN EACH OF OUR THREE LOCATIONS, 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 at
appropriate locations, 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.

    Also, some Aviron employees are members of labor unions. Labor actions by
these unions and/or these employees could require us to cease or curtail
operations at affected locations.

SOME OF OUR CRITICAL MANUFACTURING FACILITIES FOR FLUMIST ARE LOCATED NEAR KNOWN
EARTHQUAKE FAULT ZONES, AND THE OCCURRENCE OF AN EARTHQUAKE, OR OTHER
CATASTROPHIC DISASTER, COULD CAUSE DAMAGE TO OUR FACILITIES AND EQUIPMENT, WHICH
COULD REQUIRE US TO CEASE OR CURTAIL OPERATIONS.

    The first of three steps in the FluMist manufacturing process takes place at
our facility in Mountain View, California. This manufacturing facility is
located in a known earthquake fault zone. The second step in the FluMist
manufacturing process takes place at our facility in the U.K. and the third step
in the process takes place at our facility in Philadelphia, Pennsylvania. Should
an earthquake or other type of disaster, including fire, flood, power loss,
communication failure or similar event, disable any of these facilities, there
are no readily available alternative facilities which meet the current good
manufacturing practice standards required by the FDA. Therefore, should any of
these facilities be disabled, the ability to manufacture and sell FluMist could
be lost for one or more influenza seasons.

FAILURE TO INTEGRATE EFFECTIVELY THE ACTIVITIES OF OUR NEW U.K. OPERATIONS WITH
OUR EXISTING OPERATIONS IN PENNSYLVANIA AND CALIFORNIA COULD SIGNIFICANTLY
HINDER OUR ABILITY TO EFFECTIVELY DEVELOP, MANUFACTURE AND COMMERCIALIZE FLUMIST
AND ULTIMATELY GENERATE REVENUE.

    In October 2000, we restructured the agreement previously in place with
Evans for bulk manufacture of FluMist in the Speke, U.K. facility. The new
agreement, which runs through June 2006, transferred responsibility for bulk
manufacture of FluMist and approximately 100 Evans employees to Aviron UK
Limited, our wholly-owned U.K. subsidiary. The coordination of operations at our
three sites is critical to manufacturing FluMist. Our management must expend
significant effort in order to integrate the people, processes, technology and
activities of this new site into our existing operations. However, our
management, as a team, has limited experience in coordinating the operations of
a substantial foreign subsidiary with domestic operations. If our California,
Pennsylvania and U.K. locations do not integrate effectively, the development,
manufacture and commercialization of FluMist could be negatively impacted.

OTHER RISKS RELATED TO OUR COMPANY

SAFETY OF VACCINES CAN ONLY BE DETERMINED AFTER WIDESPREAD USE IN THE POPULATION
OVER A PERIOD OF YEARS.

    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 virus, and re-combining
to form a new strain which may cause disease. In addition, a live virus vaccine
retains the potential to spread from a vaccinated individual to an unvaccinated
individual. 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, e.g., because of a
pre-existing disease, HIV infection or drug treatment for cancer or organ
transplantation. The potential for serious adverse events after introduction to
the market is an issue for all vaccines, including FluMist.


                                       27
<PAGE>   28
OTHER THAN FLUMIST, OUR PRODUCT CANDIDATES ARE AT EARLY STAGES OF DEVELOPMENT,
AND IF WE ARE UNABLE TO DEVELOP AND COMMERCIALIZE THESE PRODUCTS SUCCESSFULLY,
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. Currently, we do not have facilities to
manufacture these vaccine product candidates for use in late-stage clinical
trials. Moreover, we must demonstrate safety and efficacy and gain regulatory
approval for these products. In addition, several companies are developing
products that would compete with our early-stage products.

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. We seek to protect our technology and potential products,
when possible, with patents and trade secrets. Since patent applications in the
United States are maintained in secrecy for at least 18 months after filing and
since publication of discoveries in the scientific or patent literature often
lags 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.

    We own or have exclusive licenses to various issued patents and pending
patent applications both in the United States Patent and Trademark Office and in
several foreign patent offices. We attempt, when possible, to obtain exclusive
patent protection covering each potential product we are developing. There can
be no assurance that each product we are developing will be protected by or
protectable by issued patents in any or all countries in which we intend to
market the product if approved for sale by regulatory authorities. 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 intellectual property 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 NIH. We have no
issued patents covering the bovine parainfluenza strain we are developing. Our
rights to the bovine parainfluenza strain are substantially based on an
exclusive, worldwide Biological Materials License of materials, clinical data
and research information from the United States Public Health Service. We do
have issued patents and/or pending patent applications in the United States and
abroad which we believe will provide patent protection for our cytomegalovirus,
herpes simplex virus, respiratory syncytial virus, or RSV, and recombinant
parainfluenza virus type-3, or PIV-3, program technologies.

    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-3.

OUR PRODUCTS COULD INFRINGE ON 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


                                       28
<PAGE>   29
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 CONTINUES TO EXPERIENCE LARGE SHORT-TERM FLUCTUATIONS AND YOU
MAY LOSE PART OR ALL OF YOUR INVESTMENT.

    The market price of our common stock has fluctuated significantly to date.
These price fluctuations have been rapid and severe. 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;

    -   future sales of notes and common stock;

    -   announcements by us or our competitors of technological innovations of
        new therapeutic products, clinical trial results, and developments in
        patent or other proprietary rights;

    -   announcements regarding government regulations, public concern as to the
        safety of drugs developed by us or others or changes in reimbursement
        policies; 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 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 PROVISIONS IN OUR CHARTER DOCUMENTS THAT MAY ULTIMATELY
DELAY, DISCOURAGE OR PREVENT A CHANGE IN MANAGEMENT OR CONTROL OF AVIRON.

    Provisions of our amended and restated certificate of incorporation and
bylaws could make it more difficult for our stockholders to replace or remove
our directors, or to effect any corporate action. These provisions include those
which:

    -   establish a classified board of directors requiring that members of only
        one of the three classes of directors be elected at one time;


                                       29
<PAGE>   30
    -   prohibit cumulative voting in the election of directors, which would
        otherwise allow less than a majority of stockholders to elect director
        candidates;

    -   prohibit holders of less than ten percent of our outstanding capital
        stock from calling special meetings of stockholders;

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

    -   establish 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.

    Some of the above provisions may also have possible anti-takeover effects,
which may make an acquisition of Aviron by a third party more difficult, even if
such an acquisition could be beneficial to our stockholders. Additionally, our
share purchase rights plan, commonly referred to as a "poison pill," and the
terms of our stock option plans, may discourage or delay a change in control of
Aviron.

ITEM 2. PROPERTIES

    We lease approximately 52,800 square feet of office and laboratory space in
Mountain View, California. We have leased this space through October 2005 and
have two options to extend the lease for successive five-year periods. In
addition, we are leasing approximately 41,000 square feet of space in
Philadelphia pursuant to our agreement with PCI. We have leased this space
through December 2004, with options to extend for up to two additional terms of
three years. 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 our current 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. In December 1999, we entered into a five-year lease for
an additional 22,500 square feet of office space in Santa Clara, which has been
subleased under an arrangement that expired in February 2001.

    In October 2000, we entered into subleases expiring in June 2006 of the
FluMist manufacturing areas in Speke, U.K. and agreed to acquire the remaining
24 years of a 25-year lease of approximately eight acres of land adjacent to the
existing site. We intend to utilize an existing 45,000 square foot structure on
the property to build a new FluMist manufacturing facility.

    We expect that we may need to obtain additional space for manufacturing,
research and development activities and offices in the future.


                                       30
<PAGE>   31
ITEM 3. LEGAL PROCEEDINGS

    On June 30, 1999, the European Patent Office held oral proceedings in an
Opposition filed by American Cyanamid against our 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 that upholds claims
limited to recombinant influenza and denies claims generically encompassing
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
encompassing recombinant negative-strand RNA viruses. There can be no assurance
that we will be successful in obtaining claims as originally granted as a result
of the appeal. If we do not succeed in the appeal of the claims which encompass
negative-strand RNA viruses, in particular non-segmented RNA viruses, it could
negatively impact our ability to exclude others from commercializing an RSV or
PIV-3 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 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
September 30, 1999, this individual filed an amended complaint against the same
defendants. This amended complaint appeared to purport to assert claims of
inventorship relating to United States Patent Nos. 5,328,688, 5,795,713 and
5,922,328, their foreign counterparts, and potentially other patents and
applications, unjust enrichment, fraud, conversion, breach of fiduciary duty,
breach of contract and breach of implied contract. The amended complaint seeks,
among other things, money damages, an order correcting the inventorship and
ownership of the patents referenced above, disgorgement, a constructive trust,
possible injunctive and equitable relief, punitive damages, attorneys' fees,
costs and interest. All of the claims appear to relate to patents and patent
applications for HSV, and none appear to relate to Aviron's cold-adapted
influenza product or technology or any other pipeline products in research or
development. On February 18, 2000, the Court granted Aviron's motion to dismiss,
thereby dismissing all pending claims made by the plaintiff against Aviron. On
April 19, 2000, the plaintiff appealed the Court's ruling. We cannot be sure
that we will prevail in the defense of this lawsuit in the event that the
plaintiff is able to replead her claims against Aviron, or her appeal 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 a vote of the Aviron's security holders during
the fourth quarter of the fiscal year ended December 31, 2000.


                                       31
<PAGE>   32
                                    PART II.

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

    Our common stock is quoted on the Nasdaq National Market under the symbol
"AVIR." We commenced quotation 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 quoted in the Nasdaq National Market for each period
indicated.

<TABLE>
<CAPTION>
                                                         COMMON STOCK PRICE
                                                         ------------------
                                                          HIGH         LOW
                                                         ------      ------
<S>                                                      <C>         <C>
       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............................   $54.38      $15.00
             Second Quarter...........................    35.00       21.00
             Third Quarter............................    59.00       27.56
             Fourth Quarter...........................    70.61       46.00
</TABLE>

    As of March 22, 2001, there were 317 record holders of our common stock.

    We have never paid any cash dividends on our common stock and do not expect
to pay cash dividends for the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

    On October 12, 2000, we sold and issued to Biotech Invest, S.A. 450,000
shares of our common stock, for the total aggregate price of $21.6 million, or
$48.00 per share, in a private placement. We agreed to register the shares for
resale in approximately six months from the issuance 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.

    On October 11, 2000, we granted Evans Vaccines Limited, a division of
PowderJect Pharmaceuticals Plc, or Evans Vaccines, warrants to purchase a total
of 63,162 shares of our common stock at an exercise price of $47.50 per share.
These warrants expire annually at the rate of 10,527 shares per year on October
10, 2001 through 2006. This grant was made as part of the restructuring of our
contract manufacturing agreement with Evans Vaccines. No underwriter or
placement agent was involved in the transaction. The issuance of warrants was
made in reliance on Section 4(2) of the Securities Act of 1933, as amended.



                                       32
<PAGE>   33
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

    The following consolidated statement of operations and consolidated balance
sheet data are derived from our audited consolidated financial statements. Our
audited consolidated financial statements at December 31, 1999 and 2000 and for
each of the three years in the period ended December 31, 2000, are included
elsewhere in this Form 10-K. You should read our selected consolidated financial
data set forth below in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated financial
statements and related notes thereto contained elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                         -------------------------------------------------------------
                                                           1996         1997         1998         1999          2000
                                                         --------     --------     --------     --------     ---------
                                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                      <C>          <C>          <C>          <C>          <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues(2) ...................................    $  1,625     $  1,477     $    745     $ 22,232     $  32,242
Operating expenses:
  Research and development ..........................      14,997       24,254       46,583       68,212        80,521
  Acquisition of in-process research
     and development ................................          --           --           --           --        10,904
  General, administrative and marketing .............       4,595        5,978       10,085       13,159        13,849
                                                         --------     --------     --------     --------     ---------
          Total operating expenses ..................      19,592       30,232       56,668       81,371       105,274
                                                         --------     --------     --------     --------     ---------
Loss from operations ................................     (17,967)     (28,755)     (55,923)     (59,139)      (73,032)
Interest income, net of interest expense ............         466        2,253        1,121       (2,731)       (4,479)
                                                         --------     --------     --------     --------     ---------
Net loss, before cumulative effect of change in
  accounting principle ..............................     (17,501)     (26,502)     (54,802)     (61,870)      (77,511)
Cumulative effect of change in accounting
  principle(2) ......................................          --           --           --           --       (12,750)
                                                         --------     --------     --------     --------     ---------
Net loss, after cumulative effect of change in
  accounting principle ..............................    $(17,501)    $(26,502)    $(54,802)    $(61,870)    $ (90,261)
                                                         ========     ========     ========     ========     =========
Basic and diluted net loss per share:
  Net loss, before cumulative effect of
    change in accounting principle ..................    $  (7.27)    $  (1.94)    $  (3.49)    $  (3.90)    $   (3.74)
  Cumulative effect of change in accounting
    principle(2) ....................................          --           --           --           --     $   (0.62)
                                                         --------     --------     --------     --------     ---------
  Net loss, after cumulative effect of
    change in accounting principle ..................    $  (7.27)    $  (1.94)    $  (3.49)    $  (3.90)    $   (4.36)
                                                         ========     ========     ========     ========     =========

Shares used in computing basic and
  diluted net loss per share(1) .....................       2,406       13,684       15,724       15,848        20,715
                                                         ========     ========     ========     ========     =========

PRO FORMA AMOUNTS, assuming the accounting
  change is applied retroactively:
   Net Loss .........................................    $(17,501)    $(26,502)    $(54,802)    $(74,620)    $ (77,511)
                                                         ========     ========     ========     ========     =========
   Basic and Diluted net loss per share .............    $  (7.27)    $  (1.94)    $  (3.49)    $  (4.71)    $   (3.74)
                                                         ========     ========     ========     ========     =========
</TABLE>

<TABLE>
<CAPTION>
                                                                              AS OF DECEMBER 31,
                                                         ---------------------------------------------------------------
                                                           1996         1997          1998          1999          2000
                                                         --------     --------     ---------     ---------     ---------
                                                                                  (IN THOUSANDS)
<S>                                                      <C>          <C>          <C>           <C>           <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and  short-term
  investments .......................................    $ 17,872     $ 62,524     $  88,856     $  52,316     $ 132,313
Working capital .....................................      16,411       54,580        79,369        42,215       136,195
Total assets ........................................      21,592       85,325       120,985        91,694       248,739
Long-term obligations, excluding current
  portions ..........................................          --           --       100,000       112,666        89,947
Accumulated deficit .................................     (39,935)     (66,411)     (121,254)     (183,279)     (273,401)
Total stockholders' equity (deficit) ................      17,947       75,742         8,966       (39,619)      120,586
</TABLE>
----------

(1) See note 1 of Notes to Consolidated Financial Statements for an explanation
    of the methods used to determine the number of shares used to compute per
    share amounts.

(2) See note 1 of Notes to Consolidated Financial Statements for an explanation
    of the change in accounting principle for revenue recognition.


                                       33
<PAGE>   34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

    Some of the statements in the sections entitled "Business," "Business
Risks," "Management's Discussions and Analysis of Financial Condition and
Results of Operations," and elsewhere in this Form 10-K constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's results,
levels of activity or achievements to be materially different from any future
results, levels of activity or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Business Risk" and elsewhere in this Form 10-K.

    In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "intend," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential," or "continue," or the negative of
such terms or other comparable terminology.

    Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, and
levels of activity, performance or achievements. Except as may be required by
law, we undertake no obligation to publicly update any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.

GENERAL

    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 the third quarter of 2001 at the
earliest. We have incurred cumulative net losses of approximately $273.4 million
as of December 31, 2000. We expect to incur substantial operating losses through
2001 and may incur losses after 2001.

FLUMIST

    We submitted a BLA for FluMist our investigational cold-adapted influenza
vaccine on October 31, 2000 and it is currently under review by the FDA.
Following review of the BLA, the FDA will advise us in writing as to what action
has been taken and request additional information if needed. Prior to approval
for marketing by the FDA, we expect the FDA will inspect each of our
manufacturing facilities and convene a meeting of the Vaccines and Related
Biological Products Advisory Committee to evaluate the data submitted in our
BLA.

    During October 2000, we restructured our agreement with Evans in order to
gain direct control over FluMist manufacturing operations. We obtained
responsibility for bulk manufacture of FluMist in Evans' Speke, U.K. facility,
hired approximately 100 Evans employees who had been working on FluMist, and
entered into subleases through June 2006 for the FluMist manufacturing areas on
the existing site. In connection with the restructuring of our manufacturing
agreement, we made an initial payment of $15.0 million and will make additional
annual payments of $3.9 million over each of the next five years. As further
consideration for the amendment to the agreement, we agreed to make payments
totaling $19.0 million, which will be paid over the term of the agreement based
on net sales of FluMist. We also gave Evans warrants to purchase 63,162 shares
of our common stock at an exercise price of $47.50 per share, which we valued at
$1.2 million. We have valued the aggregate consideration, including the net
present value of the annual payments, at approximately $50.2 million, which we
recorded as an intangible asset and will amortize over the remaining term of the
Evans agreement, which extends through June 2006. We have also recorded $34.0
million of obligations to Evans consisting of the net present value of the
annual payments of $3.9 million and the $19.0 million obligation. The $19.0
million obligation has not been discounted because the timing of the related
payment is not fixed, but rather is based on net sales of FluMist. In addition,
we agreed to make payments during the term of the agreement of $225,000 per year
for the use of the Aviron unit in the Evans manufacturing plant, payments up to
an aggregate of $3.0 million for attaining specific milestones, and payments for
other support services based on the costs of these services incurred. We will
expense rent and other support services as the costs are incurred and expense
milestones as they become due.

    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 fully-vested non-forfeitable warrant to
purchase 340,000 shares


                                       34
<PAGE>   35
of our common stock at an exercise price of $10.00 per share. Also, as a result
of this amendment, we recorded a one-time charge of approximately $10.9 million
in the first quarter of 2000 representing the fair value of the warrant. Upon
the date of the first commercial sale of FluMist, if we have more than 27.2
million shares outstanding, we will issue an additional warrant allowing the
university to purchase 1.25 percent of the excess shares on the same terms. If
we issue such a warrant, its value will be capitalized and amortized to expense
over the expected life of FluMist.

    During 2000, in order to motivate our employees and align their interests
with our stockholders, we granted options for the purchase of a total of
approximately 1.7 million shares of common stock at exercise prices ranging from
$24.00 to $51.50, the vesting for which is linked to performance goals for
FluMist. Of this amount, options for approximately 1.5 million shares remained
outstanding at December 31, 2000. Options for approximately 380,000 shares
became exercisable upon the acceptance for review by the FDA of our BLA
submission on December 28, 2000. Options for approximately 647,000 shares will
become exercisable at the earlier of the approval of FluMist for marketing in
the United States, or five years from the date of grant. Options for
approximately 493,000 shares will become exercisable when FluMist is approved
for marketing in the United States, but only if this event occurs in 2001;
otherwise these options will be canceled. If the 493,000 options become
exercisable in 2001, we will incur compensation expense on the date that 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.

    RECENT ACCOUNTING PRONOUNCEMENTS

    Aviron implemented Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, or SAB 101, in the fourth quarter of 2000. SAB 101
includes new guidelines from the Securities and Exchange Commission, or SEC,
regarding revenue recognition of non-refundable up-front license fees, such as
the $15.0 million up-front payment Aviron received from Wyeth in 1999. In
accordance with SAB 101, this $15.0 million up-front license fee, which was
previously recognized as revenue in full in the first quarter of 1999, has been
deferred and is now being recognized as revenue over the development period of
FluMist, including a liquid formulation of the vaccine. As a result, we recorded
a charge for the cumulative effect of the change of $12.8 million as of January
1, 2000, adjusted previously reported contract revenues for the first three
quarters of 2000 to reflect revenue of $750,000 per quarter and also recognized
$750,000 of revenue in the fourth quarter of 2000. Fiscal 1999 results will not
be restated.

    In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133,
which is required to be adopted in the first quarter of 2001. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires companies to recognize all derivatives as either
assets or liabilities on the balance sheet and measure these instruments at fair
value. Management does not anticipate that the adoption of SFAS 133 will have a
significant adverse effect on the results of our operations or our financial
position.

    BUSINESS OUTLOOK

    We anticipate an increase in operating expense in 2001 due primarily to an
increase in the size of our operations in the U.K. and expenses we expect to
incur as we make preparations for a potential commercial launch of FluMist in
the U.S. for the 2001 -- 2002 influenza season. Assuming that we continue these
preparations, we expect to record operating expenses (including cash and
non-cash) between $130 and $145 million in 2001, although the actual amount may
be higher depending on the amount of finished product ultimately manufactured
for the 2001-2002 influenza season. This amount includes amortization expense
associated with the restructuring of our contract manufacturing agreement with
Evans. The portion of 2001 operating expenses that is depreciation and
amortization is expected to be approximately $17 million, compared to $8.1
million for 2000.

    Our outlook for operating expenses in 2001 also does not include a one-time
non-cash charge associated with the vesting of employee stock options in the
event of a 2001 approval by the FDA for marketing of FluMist. For a discussion
of the terms of the options, see "--General."


                                       35
<PAGE>   36
    As part of preparing for a potential FluMist commercial launch for the 2001
-- 2002 influenza season, we have begun the initial stages of commercial-scale
manufacturing of FluMist. We intend to record the majority of our manufacturing
spending as research and development expense, rather than capitalize into
inventory, until FluMist is approved for marketing by the FDA. Thus, a
significant portion of anticipated 2001 operating expense will include
manufacturing activities. If we receive marketing approval for FluMist, initial
reported cost of goods sold may be lower than in future periods when
manufacturing expenses will be charged to cost of goods sold. To support
inventory buildup for 2001, Wyeth paid us $10.0 million in January 2001 as an
advance against future amounts that Wyeth will owe us under our agreement.

    We expect capital expenditures to increase substantially as we commence
building additional manufacturing facilities and commercialization systems and
facilities. During 2001, we forecast that capital expenditures will be between
$30 and $40 million.

RESULTS OF OPERATIONS

     YEARS ENDED DECEMBER 31, 2000 AND 1999

    Revenues. We earned $32.2 million in revenues for the year ended December
31, 2000, compared to $22.2 million for the year ended December 31, 1999. The
2000 revenues are comprised primarily of amounts earned from Wyeth under the
FluMist collaboration agreement, which included a $15.5 million milestone due
from Wyeth on the acceptance of our BLA for filing with the FDA, $11.7 million
in expense reimbursement from Wyeth for clinical and commercialization expenses,
and revenues from other contracts and research grants. The 1999 revenues
included a $15.0 million non-refundable license fee from Wyeth, $6.0 million in
expense reimbursements from Wyeth for clinical and commercialization expenses
and revenues from other contracts and research grants.

    We implemented SAB 101 in the fourth quarter of 2000. SAB 101 includes new
guidelines from the SEC regarding revenue recognition of non-refundable up-front
license fees, such as the $15.0 million up-front payment Aviron received from
Wyeth in 1999. In accordance with SAB 101, this $15.0 million up-front license
fee, which was previously recognized as revenue in full in the first quarter of
1999, has been deferred and is now being recognized as revenue over the five
year estimated development period of FluMist. As a result, we recorded a charge
for the cumulative effect of the change of $12.8 million as of January 1, 2000,
and recognized $3.0 million of this amount during 2000. Results for the year
ended December 31, 1999 are not restated.

    Operating Expenses. Research and development costs totaled $80.5 million for
the year ended December 31, 2000, as compared with $68.2 million for the year
ended December 31, 1999. The increase in research and development costs was due
primarily to increases in development activities, clinical trials and commercial
scale-up expenses associated with FluMist. In addition, we recognized a
one-time, non-cash charge for the acquisition of in-process research and
development in the amount of $10.9 million due to the amendment of our agreement
with the University of Michigan to accelerate the issuance of a warrant to the
university.

    General, administrative and marketing costs increased to $13.8 million for
the year ended December 31, 2000, as compared to $13.2 million for the year
ended December 31, 1999. The increase was due to growth in infrastructure and
other costs to support preparations for a potential commercial launch of FluMist
in 2001.

    Net Interest Income (Expense). Net interest expense increased to $4.5
million for the year ended December 31, 2000, as compared to $2.7 million for
the year ended December 31, 1999. Interest expense for the year ended December
31, 2000 was $11.0 million, as compared to $6.4 million for the year ended
December 31, 1999. The increase in interest expense is due to additional
interest costs associated with approximately $15.4 million of debt financing,
which was obtained in December 1999, and a one-time non-cash interest charge of
approximately $2.7 million related to exchanges of approximately $51.7 million
aggregate principal amount of our 5-3/4% convertible subordinated notes for
approximately 1.7 million shares of our common stock in a number of privately
negotiated transactions. Interest income increased to $6.5 million for the year
ended December 31, 2000, as compared to $3.6 million for the year ended December
31, 1999, due to the increase in the average balances of cash, cash equivalents
and investments as funds were received from debt and equity financings during
late 1999 and 2000 and higher average yields on invested funds.

     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 under the
FluMist collaboration agreement, which included a non-refundable initial payment
in the amount of $15.0 million, $6.0 million in expense


                                       36
<PAGE>   37
reimbursement from Wyeth 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.

    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.

    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.

    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.

LIQUIDITY AND CAPITAL RESOURCES

    We had cash, cash equivalents and short and long-term investments at
December 31, 2000 of approximately $136.8 million. In order to preserve
principal and maintain liquidity, our funds are invested primarily in United
States Treasury and agency obligations, highly rated corporate obligations and
other liquid investments. Through December 31, 2000, we raised approximately
$446.1 million from sales of equity, convertible debt securities and debt
financing, net of underwriters discounts and estimated expenses, which includes
$183.1 million raised during 2000.

    On February 7, 2001, we completed a public offering of 4,000,000 shares of
our common stock at $50.00 per share and a concurrent public offering of $200.0
million of 5-1/4 percent convertible subordinated notes due 2008, or the 2008
Notes. The 2008 Notes are convertible into common stock at any time after the
original issuance through maturity, unless previously redeemed or repurchased,
at a conversion price of $62.50 per share. The sale of the securities under the
concurrent common stock and debt offerings resulted in net proceeds to the
company of approximately $382.0 million, after the deduction of commissions and
offering costs. Since December 31, 2000, we have also generated $8.0 million
through the sale of 161,060 shares of stock for $49.67 per share, $2.2 million
through debt financing, $15.5 million in payment of an outstanding receivable
balance from Wyeth and $10.0 million as an advance from Wyeth to support
inventory build-up for 2001.

    Cash used in operations was $49.5 million, $58.4 million and $73.2 million
for the years ended December 31, 1998, 1999 and 2000, respectively. Net cash
used in operating activities between 1998 and 1999 increased primarily due to
the increased net loss. The increase in cash used in operating activities
between 1999 and 2000 was primarily due to the fact that the $15.5 million
milestone in connection with the acceptance of our BLA for review by the FDA was
earned on December 28, 2000, but was not collected until early in January 2001.
As indicated in "Business Outlook" above, we anticipate that the amount of cash
used in operating activities will increase in 2001 over that used in 2000 due to
the scale-up of our operating expenditures in connection with the preparations
for the potential commercialization of FluMist.

    Our near-term revenues will depend largely on the success of our products,
collaboration arrangements, contracts and research grants. With respect to our
collaboration agreement with Wyeth, our rights to receive milestone payments are
"event-driven." These payments are earned only upon our successful completion of
specific activities. We cannot be certain as to when, and if, these milestone
payments will be realized. Under the agreement, we earned a milestone payment in
the amount of $15.5 million upon acceptance for review by the FDA of our BLA on
December 28, 2000. Another milestone payment of $20.0 million is due upon
obtaining FDA marketing approval for FluMist. The timing of receipt of this
payment will depend on the outcome of the regulatory review of the BLA.
Additional milestone payments related to the submission and approval of FluMist
for marketing in international markets, for expansions in labeling claims, for
meeting supply targets and for future formulations are dependent upon future
governmental approvals or recommendations by medical advisory bodies and will
not be received until these activities are successfully completed.


                                       37
<PAGE>   38
    Our revised agreements with Evans required the payment of $15.0 million on
inception in October 2000 and will require the payment of $3.9 million annually
through September 15, 2005. These agreements will also require additional
payments totaling $19.0 million between now and June 30, 2006, with the timing
of payment based on the sales of FluMist.

    Cash expended for capital additions was approximately $14.0 million, $11.9
million, and $7.9 million for the years ended December 31, 1998, 1999 and 2000,
respectively. Capital expenditures decreased in 2000 primarily due to a decrease
in the level of expenditures for our facilities and equipment at our Santa Clara
and U.K. facilities, which is partially offset by increases in expenditures for
our Pennsylvania and Mountain View facilities. Capital expenditures are likely
to increase substantially in the future in connection with building
manufacturing capacity and commercialization systems additions. Principal
payments under lease arrangements and long-term debt were $445,000, $411,000,
and $3.0 million for the years ended December 31, 1998, 1999 and 2000,
respectively.

    During 2000 and early 2001, we exchanged approximately $85.2 million
aggregate principal amount of our 5-3/4% convertible notes due in 2005, or the
2005 Notes, for approximately 2.8 million shares of our common stock in a number
of privately negotiated transactions. Exchanges in the aggregate amounts of
$51.7 million of principal for approximately 1.7 million shares occurred during
2000, with the remainder occurring early in 2001. Additional non-cash expense
related to the exchanges was approximately $2.7 million in 2000, with an
additional $1.6 million to be recorded in 2001. The $2.0 million of unamortized
debt issue costs related to the 5-3/4% convertible notes exchanged have been
charged to additional paid-in capital, $1.2 million of which was recorded in
2000. As of January 31, 2001, approximately $14.8 million aggregate principal
amount of the 2005 Notes remained outstanding.

    We anticipate that our existing cash, cash equivalents and short-term
investments, and proceeds from existing collaborations and recent financings
will enable us to maintain our current and planned operations through at least
2002. We anticipate using our cash resources for commercialization activities
related to FluMist and capital expenditures related to FluMist manufacturing.
However, our future cash requirements will depend on numerous factors, including
the factors set forth under "Business Risks -- Risks Related to FluMist."

    Additionally, if FluMist is approved for marketing, due to its seasonal
nature, cash will not be generated from product sales until later in each
calendar year or early in the following calendar year. A significant amount of
working capital will be required each year to provide for the payment of
expenditures associated with the manufacturing of inventory and other operating
and capital needs in advance of any product sales. There can be no assurance
that, should we require outside funding through additional debt or equity
financing, such funds would be available on favorable terms, if at all. If
adequate funds are not available, we may be required to delay, reduce the scope
of, or eliminate one or more of our research or development programs or obtain
funds through collaborative agreements with others that may require us to
relinquish rights to our technologies, product candidates or products we would
otherwise seek to develop or commercialize ourselves.

INCOME TAXES

    As of December 31, 2000, we had federal and state net operating loss
carryforwards of approximately $262.0 million and $12.9 million, respectively.
We also had federal and California research and other tax credit carryforwards
of approximately $4.9 million, and $2.5 million, respectively. The federal net
operating loss and credit carryforwards will expire at various dates beginning
in the year 2007 through 2020, if not utilized. The state of California net
operating loss carryforwards will expire at various dates beginning in 2003
through 2005, if not utilized. Utilization of the net operating losses and
credits may be subject to a substantial annual limitation due to the "ownership
change" provisions of the Internal Revenue Code of 1986. See Note 12 of Notes to
Consolidated Financial Statements for additional information on income taxes.

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 funds in 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 our portfolio is less
than one year. As result, we do not expect any material loss with respect to our
investment portfolio.


                                       38
<PAGE>   39
    The following table provides information about our financial instruments
that are sensitive to changes in interest rates. For investment securities, the
table presents cash flows and related weighted-average interest rates by
expected maturity dates. Dollar amounts are in millions.

<TABLE>
<CAPTION>
                                                                                                        Fair Value
                                                                                                      at December 31,
                                         2001     2002    2003  2004  2005    Thereafter     Total         2000
                                        ------   ------   ----  ----  ----    ----------     ------   ---------------
<S>                                     <C>      <C>      <C>   <C>   <C>     <C>            <C>      <C>
ASSETS
Cash and Cash Equivalents ............. $ 64.7       --     --    --    --         --        $ 64.7       $ 64.7
Weighted average interest rate ........   6.75%      --     --    --    --         --
Investments ........................... $ 67.7   $  4.5     --    --    --         --        $ 72.2       $ 72.2
Weighted average interest rate ........   6.79%    7.04%    --    --    --         --
</TABLE>

Foreign Currency Exchange Rates. We pay for the costs of manufacturing and
development activities, equipment and facilities modifications at our facility
located in the U.K. 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 U.K. We are exposed to changes
in exchange rates in the U.K. 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.


                                       39
<PAGE>   40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    Financial Statements

    Our financial statements and notes thereto appear on pages F-1 through F-21
in this Form 10-K.

    Selected Quarterly Financial Data (unaudited)

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31, 1999                YEAR ENDED DECEMBER 31, 2000
                                          -------------------------------------------  --------------------------------------------
                                                                                        FIRST (1)   SECOND(1)   THIRD(1)
                                            FIRST     SECOND      THIRD       FOURTH   (RESTATED)  (RESTATED)  (RESTATED)   FOURTH
                                          --------   --------    --------    --------  ----------  ----------   --------   --------
                                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                       <C>        <C>         <C>         <C>        <C>         <C>         <C>        <C>
Total revenues .......................... $ 15,531   $  2,944    $  1,363    $  2,394   $  3,407    $  3,128    $  3,619   $ 22,089
Net loss, before cumulative
  effect of change in accounting
  principle .............................   (1,519)   (15,120)    (22,618)    (22,613)   (29,025)    (18,125)    (18,786)   (11,574)
Cumulative effect of change in
  accounting principle ..................       --         --          --          --    (12,750)         --          --         --
                                          --------   --------    --------    --------   --------    --------    --------   --------
Net loss, after cumulative effect
  of change in accounting principle ..... $ (1,519)  $(15,120)   $(22,618)   $(22,613)  $(41,775)   $(18,125)   $(18,786)  $(11,574)
                                          ========   ========    ========    ========   ========    ========    ========   ========
Basic and diluted net loss per
  share:
  Net loss, before cumulative
    effect of change in accounting
    principle ........................... $  (0.10)  $  (0.96)   $  (1.43)   $  (1.40)  $  (1.70)   $  (0.86)   $  (0.87)  $  (0.50)
  Cumulative effect of change in
    accounting principle ................       --         --          --          --      (0.74)         --          --         --
                                          --------   --------    --------    --------   --------    --------    --------   --------
  Net loss, after cumulative effect
    of change in accounting principle ... $  (0.10)  $  (0.96)   $  (1.43)   $  (1.40)  $  (2.44)   $  (0.86)   $  (0.87)  $  (0.50)
                                          ========   ========    ========    ========   ========    ========    ========   ========

Shares used in computing basic and
  diluted net loss per share ............   15,703     15,749      15,814      16,126     17,095      21,039      21,625     23,100
                                          ========   ========    ========    ========   ========    ========    ========   ========
</TABLE>

(1) Total revenues, net loss and net loss per share have been restated as
    compared to our previously reported results, as a result of the adoption of
    SAB 101, effective January 1, 2000. The impact of the restatement was as
    follows:

<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31, 2000
                                              --------------------------------
                                                FIRST        SECOND      THIRD
                                              --------       ------      -----
                                                   (IN THOUSANDS, EXCEPT
                                                      PER SHARE DATA)
<S>                                           <C>            <C>         <C>
Increase in total revenue ..................  $    750       $  750      $ 750
                                              ========       ======      =====
Decrease (increase) in net loss ............  $(12,000)      $  750      $ 750
                                              ========       ======      =====
Decrease (increase) in net loss per share ..  $  (0.70)      $ 0.04      $0.03
                                              ========       ======      =====
</TABLE>

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

    Not applicable.


                                       40
<PAGE>   41
                                    PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information regarding directors required by this item will be contained
in our definitive Proxy Statement with respect to our Annual Meeting of
Stockholders to be held on June 14, 2001, 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.

EXECUTIVE OFFICERS

    The names of our executive officers as of March 22, 2001 and information
about them is presented below.


<TABLE>
<CAPTION>
       NAME                             AGE                                  POSITION
       ----                             ---                                  --------
<S>                                     <C>   <C>
       EXECUTIVE OFFICERS

       C. Boyd Clarke.................  52    Chief Executive Officer, President and Chairman
       Edward J. Arcuri, Ph.D.........  50    Senior Vice President, Operations
       Charlene A. Friedman...........  43    Vice President, General Counsel and Secretary
       Harry B. Greenberg, M.D........  56    Senior Vice President, Research and Development and Chief Scientific Officer
       Fred Kurland...................  51    Senior Vice President and Chief Financial Officer
       Carol A. Olson.................  43    Senior Vice President, Commercial Development
       Rayasam S. Prasad..............  48    Senior Vice President, Technical Affairs
</TABLE>

    C. Boyd Clarke has been our President and Chief Executive Officer since
December 1999. He has been a director since December 1999 and our Chairman since
January 2001. 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 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.

    Edward J. Arcuri, Ph.D., has been our Senior Vice President, Operations
since May 2000. He joined Aviron as Vice President, Manufacturing in 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 & Co., Inc. 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.

    Charlene A. Friedman has been our Vice President, General Counsel and
Secretary since April 2000. From 1999 until joining us, Ms. Friedman was a
consultant to Inamed Corporation, a medical device company. From 1996 to 1999,
Ms. Friedman held various positions at Collagen Aesthetics, Inc., a
biotechnology company, most recently as Vice President, Legal and Regulatory
Affairs, General Counsel and Assistant Secretary. From 1995 to 1996, Ms.
Friedman was an attorney with Lillick & Charles in San Francisco, California.
From 1993 to 1995, she practiced law in Boston, Massachusetts at Warner &
Stackpole. She is a member of the Massachusetts and California bars. Ms.
Friedman holds a B.A. in Ancient Greek and Latin from Tufts University and a
J.D. from Northeastern University.

    Harry B. Greenberg, M.D., has been our Senior Vice President, Research and
Development and Chief Scientific Officer since November 2000. Dr. Greenberg
joined us from the Stanford University School of Medicine, where he spent 17
years as a faculty member. He was most recently the Senior Associate Dean for
Research and the Joseph D. Grant Endowed Professor of Medicine. He also was
serving as Associate Chief of Staff for Research at the Veterans Administration
Palo Alto Health Care System. Dr. Greenberg served as chair of the Vaccines and
Related Biological Products Advisory Committee of the U.S. Food and Drug
Administration from February 1999 until beginning his position with Aviron. Dr.
Greenberg holds a B.A. in History with honors from Dartmouth College and an M.D.
from Columbia College of Physicians and Surgeons.


                                       41
<PAGE>   42
    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
1981 to 1995, he held a 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.

    Rayasam S. Prasad has been our Senior Vice President, Technical Affairs
since January 2001 and prior to that had 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. Mr. Prasad also
served as Director of Quality Assurance for Therapeutics and Vaccines at Chiron.
He was with Chiron from October 1994 to September 1999. Prior to joining Chiron,
Mr. Prasad held positions in quality assurance and biological manufacturing
operations at Genentech, Inc. from 1986 to 1994, and Burroughs Wellcome Co. from
1981 to 1986. Mr. Prasad holds a B.S. in Pharmacy from

ITEM 11. EXECUTIVE COMPENSATION

    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
on June 14, 2001, under the caption "Executive Compensation," and is
incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    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 on
June 14, 2001, under the caption "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
on June 14, 2001, under the caption "Certain Transactions," and is incorporated
by reference.


                                       42
<PAGE>   43
                                    PART IV.

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

(a) (1)  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                                              PAGE
                                                                                              ----
<S>                                                                                          <C>
     Report of Ernst & Young LLP, Independent Auditors.......................................  F-2
     Consolidated Balance Sheets at December 31, 1999 and 2000...............................  F-3
     Consolidated Statements of Operations for each of the three years in the period
       ended December 31, 2000...............................................................  F-4
     Consolidated Statement of Stockholders' Equity (Deficit) for the three years in
       the period ended December 31, 2000....................................................  F-5
     Consolidated Statements of Cash Flows for each of the three years in the period
       ended December 31, 2000...............................................................  F-6
     Notes to Consolidated Financial Statements..............................................  F-7
</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.

(b) REPORTS ON FORM 8-K

     The following Forms 8-K were filed during the last quarter of the period
covered by this report:

    (1)  On October 19, 2000, we filed a Current Report on Form 8-K, reporting
         the following:

         (i)  Our United Kingdom subsidiary had agreed to acquire from Celltech
              Group Plc the remainder of a 25-year lease on approximately eight
              acres of land in Speke, U.K. and had restructured our contract
              manufacturing agreement with Evans Vaccines Ltd., or Evans, and
              other related agreements, providing for the restructuring of
              services provided by Evans to Aviron for the manufacturing of
              FluMist, and

         (ii) We had agreed to issue and sell to Biotech Invest, S.A. four
              hundred fifty thousand (450,000) shares of our common stock for
              the total aggregate price of $21.6 million, or $48.00 per share.
              The sale of the shares occurred on October 12, 2000. We also
              agreed to register these shares for resale in approximately six
              months from the date of issuance.

    (2)  On November 2, 2000, we filed a Current Report on Form 8-K, reporting
         that on October 31, 2000, we submitted to the Food and Drug
         Administration a Biologics License Application for FluMist.


                                       43
<PAGE>   44
                                   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 27, 2001.

                                        AVIRON

                                        By:      /s/   C. BOYD CLARKE
                                            ------------------------------------
                                                       C. Boyd Clarke
                                                  Chairman, 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 attorney-in-fact, each with the power of substitution, for him 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 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
                     ---------                                                  -----                              ----
<S>                                                        <C>                                                <C>
               /s/   C. BOYD CLARKE                        Chairman, President, and Chief Executive Officer   March  27, 2001
----------------------------------------------------                (Principal Executive Officer)
                  C. Boyd Clarke

                /s/   FRED KURLAND                                    Senior Vice President and               March  27, 2001
----------------------------------------------------                  Chief Financial Officer
                   Fred Kurland                              (Principal Financial and Accounting Officer)


           /s/   R. GORDON DOUGLAS, M.D.                                       Director                       March  27, 2001
----------------------------------------------------
           R. Gordon Douglas, Jr., M.D.

           /s/   DENNIS M. FENTON, PH.D.                                       Director                       March  27, 2001
----------------------------------------------------
              Dennis M. Fenton, Ph.D.

          /s/   WAYNE T. HOCKMEYER, PH.D.                                      Director                       March  27, 2001
----------------------------------------------------
             Wayne T. Hockmeyer, Ph.D.

            /s/   PAUL H. KLINGENSTEIN                                         Director                       March  27, 2001
----------------------------------------------------
               Paul H. Klingenstein

              /s/   ALAN C. MENDELSON                                          Director                       March  27, 2001
----------------------------------------------------
                 Alan C. Mendelson

           /s/   J. LEIGHTON READ, M.D.                                        Director                       March  27, 2001
----------------------------------------------------
              J. Leighton Read, M.D.

           /s/   BERNARD ROIZMAN, SC.D.                                        Director                       March  27, 2001
----------------------------------------------------
              Bernard Roizman, Sc.D.
</TABLE>


                                       44
<PAGE>   45
                                     AVIRON

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                                          PAGE
                                                                                                                          ----
<S>                                                                                                                      <C>
Report of Ernst & Young LLP, Independent Auditors.......................................................................   F-2
Consolidated Balance Sheets at December 31, 1999 and 2000...............................................................   F-3
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2000.................   F-4
Consolidated Statement of Stockholders' Equity (Deficit) for the three years in the period ended December 31, 2000......   F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2000.................   F-6
Notes to Consolidated Financial Statements..............................................................................   F-7
</TABLE>

<PAGE>   46
                   REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Aviron

    We have audited the accompanying consolidated balance sheets of Aviron as of
December 31, 1999 and 2000, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 2000. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Aviron at December 31, 1999 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.

    As discussed in Note 1 to the consolidated financial statements, in 2000
Aviron changed its method of accounting for revenue recognition.

                                     /s/ ERNST & YOUNG LLP

Palo Alto, California
January 25, 2001


                                      F-2
<PAGE>   47
                                     AVIRON

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

<TABLE>
<CAPTION>
                                                ASSETS

                                                                                                  DECEMBER 31,
                                                                                            -----------------------
                                                                                               1999          2000
                                                                                            ---------     ---------
<S>                                                                                         <C>           <C>
CURRENT ASSETS:
   Cash and cash equivalents ...........................................................    $  28,081     $  64,662
   Short-term investments ..............................................................       24,235        67,651
   Accounts receivable .................................................................        3,241        23,288
   Inventory ...........................................................................        2,082         4,264
   Prepaid expenses and other current assets ...........................................        1,009         2,691
                                                                                            ---------     ---------
          Total current assets .........................................................       58,648       162,556
Long-term investments...................................................................           --         4,506
Property and equipment, net ............................................................       25,635        27,707
Intangible assets, net .................................................................           --        48,046
Deposits and other assets ..............................................................        7,411         5,924
                                                                                            ---------     ---------
TOTAL ASSETS ...........................................................................    $  91,694     $ 248,739
                                                                                            =========     =========

                            LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
   Accounts payable ....................................................................    $   3,038     $   5,106
   Accrued compensation ................................................................        1,739         4,978
   Accrued clinical trial costs ........................................................          846         1,974
   Accrued interest ....................................................................        1,438           695
   Accrued expenses and other liabilities ..............................................        6,591         7,654
   Current portion of capital lease obligations ........................................          101             9
   Current portion of long-term obligations ............................................        2,680         5,945
                                                                                            ---------     ---------
          Total current liabilities ....................................................       16,433        26,361
Deferred rent ..........................................................................        2,214         2,095
Deferred revenue .......................................................................           --         9,750
Capital lease obligations, less current portion ........................................            9            --
Long-term obligations, less current portion ............................................      112,657        89,947
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, 1999 and 2000 ....................................           --            --
   Common stock, $0.001 par value;
     30,000,000 shares authorized as of December 31, 1999 and
     100,000,000 shares authorized as of December 31, 2000;
     16,669,018 and 25,181,051 shares outstanding at December 31, 1999
     and 2000, respectively ............................................................           17            25
   Additional paid-in capital ..........................................................      143,822       394,012
   Notes receivable from stockholders ..................................................          (83)          (50)
   Deferred compensation ...............................................................          (96)           --
   Accumulated deficit .................................................................     (183,279)     (273,401)
                                                                                            ---------     ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ...................................................      (39,619)      120,586
                                                                                            ---------     ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ...................................    $  91,694     $ 248,739
                                                                                            =========     =========
</TABLE>

                             See accompanying notes.


                                      F-3
<PAGE>   48
                                     AVIRON

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

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                                      ----------------------------------
                                                                        1998         1999          2000
                                                                      --------     --------     ---------
<S>                                                                   <C>          <C>          <C>
REVENUES:
   Contract revenue and grants ...................................    $    745     $ 22,232     $  32,242
                                                                      --------     --------     ---------
OPERATING EXPENSES:
   Research and development ......................................      46,583       68,212        80,521
   Acquisition of in-process research and development ............          --           --        10,904
   General, administrative and marketing .........................      10,085       13,159        13,849
                                                                      --------     --------     ---------
TOTAL OPERATING EXPENSES .........................................      56,668       81,371       105,274
                                                                      --------     --------     ---------
LOSS FROM OPERATIONS .............................................     (55,923)     (59,139)      (73,032)
OTHER INCOME (EXPENSE):
   Interest income ...............................................       6,003        3,633         6,541
   Interest expense ..............................................      (4,882)      (6,364)      (11,020)
                                                                      --------     --------     ---------
TOTAL OTHER INCOME (EXPENSE), net ................................       1,121       (2,731)       (4,479)
                                                                      --------     --------     ---------
NET LOSS, before cumulative effect of change in
  accounting principle (Note 1) ..................................     (54,802)     (61,870)      (77,511)
Cumulative effect of change in accounting principle ..............          --           --       (12,750)
                                                                      --------     --------     ---------
NET LOSS, after cumulative effect of change in
  accounting principle ...........................................    $(54,802)    $(61,870)    $ (90,261)
                                                                      ========     ========     =========
BASIC AND DILUTED NET LOSS PER SHARE:
   Loss before cumulative effect of change in
      accounting principle .......................................    $  (3.49)    $  (3.90)    $   (3.74)
   Cumulative effect of change in accounting principle ...........          --           --     $   (0.62)
                                                                      --------     --------     ---------
   Loss after cumulative effect of change in
      accounting principle .......................................    $  (3.49)    $  (3.90)    $   (4.36)
                                                                      ========     ========     =========
SHARES USED IN CALCULATION OF BASIC
  AND DILUTED NET LOSS PER SHARE .................................      15,724       15,848        20,715
                                                                      ========     ========     =========

PRO FORMA AMOUNTS, assuming the accounting change
   is applied retroactively:
   Net Loss ......................................................    $(54,802)    $(74,620)    $ (77,511)
                                                                      ========     ========     =========
   Basic and Diluted net loss per share ..........................    $  (3.49)    $  (4.71)    $   (3.74)
                                                                      ========     ========     =========
</TABLE>

                             See accompanying notes.


                                      F-4
<PAGE>   49
                                     AVIRON

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

<TABLE>
<CAPTION>
                                                                                              NOTES
                                                                            ADDITIONAL      RECEIVABLE
                                                                  COMMON      PAID-IN          FROM        DEFERRED
                                                                   STOCK      CAPITAL      STOCKHOLDERS  COMPENSATION
                                                                  -------   ----------     ------------  ------------
<S>                                                               <C>       <C>            <C>           <C>
BALANCE AT DECEMBER 31, 1997 ..................................     $16      $ 142,840         $(115)        $(588)
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            --            --
Deferred compensation recorded relating to grant of
   certain stock options ......................................      --             14            --           (14)
Amortization of deferred compensation .........................      --             --            --           365
Repurchase of 540,711 shares of common stock ..................      --        (13,349)           --            --
Payment of notes receivable ...................................      --             --            32            --
Change in net unrealized loss on available-for-sale
  investments .................................................      --             --            --            --
Net loss ......................................................      --             --            --            --
                                                                    ---      ---------         -----         -----
BALANCE AT DECEMBER 31, 1998 ..................................      16        130,524           (83)         (237)
Issuance of 708,180 shares of common stock in private
   placements, net of offering costs of $73 ...................       1         11,259            --            --
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            --            --
Stock compensation for options granted to consultants .........      --            348            --            --
Amortization of deferred compensation .........................      --             --            --           141
Change in net unrealized loss on available-for-sale
  investments .................................................      --             --            --            --
Net loss ......................................................      --             --            --            --
                                                                    ---      ---------         -----         -----
BALANCE AT DECEMBER 31, 1999 ..................................      17        143,822           (83)          (96)
Issuance of 4,146,549 shares of common stock in private
   placements, net of offering costs of $254 ..................       4        130,009            --            --
Issuance of 2,200,000 shares of common stock in follow-on
   public offering, net of offering costs of $3,272 ...........       2         46,226            --            --
Issuance of 442,811 shares of common stock upon exercise
   of stock options and warrants, and purchase of shares
   through employee stock purchase plan .......................      --          7,434            --            --
Issuance of warrants in connection with in-process research
   and development, legal settlement, acquisition of domain
   name and intangible assets .................................      --         12,766            --            --
Exchange of convertible notes due 2005 into 1,722,673
   shares of common stock .....................................       2         53,628            --            --
Stock compensation for options granted to consultants .........      --            127            --            --
Amortization of deferred compensation .........................      --             --            --            96
Payment of note receivable ....................................      --             --            33            --
Change in net unrealized gain on available-for-sale
  investments .................................................      --             --            --            --
Net loss ......................................................      --             --            --            --
                                                                    ---      ---------         -----         -----
BALANCE AT DECEMBER 31, 2000 ..................................     $25      $ 394,012         $ (50)        $  --
                                                                    ===      =========         =====         =====
</TABLE>

<TABLE>
<CAPTION>

                                                                                        TOTAL
                                                                    ACCUMULATED     STOCKHOLDERS'
                                                                      DEFICIT      EQUITY (DEFICIT)
                                                                    ------------   ----------------
<S>                                                                 <C>            <C>
BALANCE AT DECEMBER 31, 1997 ..................................      $ (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
Deferred compensation recorded relating to grant of
   certain stock options ......................................             --                --
Amortization of deferred compensation .........................             --               365
Repurchase of 540,711 shares of common stock ..................             --           (13,349)
Payment of notes receivable ...................................             --                32
Change in net unrealized loss on available-for-sale
  investments .................................................            (41)              (41)
Net loss ......................................................        (54,802)          (54,802)
                                                                     ---------         ---------
BALANCE AT DECEMBER 31, 1998 ..................................       (121,254)            8,966
Issuance of 708,180 shares of common stock in private
   placements, net of offering costs of $73 ...................             --            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
Stock compensation for options granted to consultants .........             --               348
Amortization of deferred compensation .........................             --               141
Change in net unrealized loss on available-for-sale
  investments .................................................           (155)             (155)
Net loss ......................................................        (61,870)          (61,870)
                                                                     ---------         ---------
BALANCE AT DECEMBER 31, 1999 ..................................       (183,279)          (39,619)
Issuance of 4,146,549 shares of common stock in private
   placements, net of offering costs of $254 ..................             --           130,013
Issuance of 2,200,000 shares of common stock in follow-on
   public offering, net of offering costs of $3,272 ...........             --            46,228
Issuance of 442,811 shares of common stock upon exercise
   of stock options and warrants, and purchase of shares
   through employee stock purchase plan .......................             --             7,434
Issuance of warrants in connection with in-process research
   and development, legal settlement, acquisition of domain
   name and intangible assets .................................             --            12,766
Exchange of convertible notes due 2005 into 1,722,673
   shares of common stock .....................................             --            53,630
Stock compensation for options granted to consultants .........             --               127
Amortization of deferred compensation .........................             --                96
Payment of note receivable ....................................             --                33
Change in net unrealized gain on available-for-sale
  investments .................................................            139               139
Net loss ......................................................        (90,261)          (90,261)
                                                                     ---------         ---------
BALANCE AT DECEMBER 31, 2000 ..................................      $(273,401)        $ 120,586
                                                                     =========         =========
</TABLE>


                             See accompanying notes


                                      F-5
<PAGE>   50
                                     AVIRON

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                                      ------------------------------------
                                                                         1998         1999          2000
                                                                      ---------     --------     ---------
<S>                                                                   <C>           <C>          <C>
Cash flows from operating activities:
Net loss .........................................................    $ (54,802)    $(61,870)    $ (90,261)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization ..................................        3,807        5,511         9,102
  Issuance of warrant for acquisition of in-process
   research and Development ......................................           --           --        10,904
  Cumulative effect of change in accounting principle ............           --           --        12,750
  Charge on exchange of convertible debt into common
     stock .......................................................           --           --         2,662
  Stock compensation for options granted to consultants ..........           --          348           127
  Changes in assets and liabilities:
    Accounts receivable ..........................................           29       (3,241)      (20,047)
    Inventory ....................................................           --       (2,082)       (2,182)
    Prepaid expenses and other current assets ....................         (302)         294        (1,582)
    Deposits and other assets ....................................       (1,179)      (1,678)          735
    Accounts payable .............................................         (844)         246         2,068
    Accrued expenses and other liabilities .......................        3,757        3,024         5,589
    Deferred revenue .............................................           --           --        (3,000)
    Deferred rent ................................................           --        1,098          (119)
                                                                      ---------     --------     ---------
 Net cash used in operating activities ...........................      (49,534)     (58,350)      (73,254)

Cash flows from investing activities:
  Cash expended for intangible assets ............................           --           --       (15,350)
  Purchases of investments .......................................     (105,990)     (43,980)     (516,765)
  Maturities of investments ......................................       99,127       86,284       468,982
  Loan to officer ................................................           --           --          (500)
  Expenditures for property and equipment ........................      (13,958)     (11,914)       (7,949)
                                                                      ---------     --------     ---------
Net cash provided by (used in) investing activities ..............      (20,821)      30,390       (71,582)

Cash flow from financing activities:
  Principal payments on capital lease obligations ................         (445)        (411)         (101)
  Principal payments on debt obligation ..........................           --           --        (2,878)
  Proceeds from issuance of:
    Convertible subordinated debt ................................       96,055           --            --
    Notes payable ................................................           --       15,337           740
    Common stock, net ............................................        1,019       12,951       183,660
  Repurchase of common stock .....................................      (13,349)          --            (4)
                                                                      ---------     --------     ---------
Net cash provided by financing activities ........................       83,280       27,877       181,417
                                                                      ---------     --------     ---------
Net increase (decrease) in cash and cash equivalents .............       12,925          (83)       36,581
Cash and cash equivalents, at beginning of year ..................       15,239       28,164        28,081
                                                                      ---------     --------     ---------
Cash and cash equivalents, at end of year ........................    $  28,164     $ 28,081     $  64,662
                                                                      =========     ========     =========
Supplemental schedule of non-cash financing and
  Investing activities:
  Warrant issued in connection with:
        Intangible and other assets ..............................    $      --     $     --     $   1,550
        Legal settlement .........................................    $      --     $     --     $     313
  Exchange of convertible notes due 2005 into common
    stock ........................................................    $      --     $     --     $  53,630
  Acquisition of intangible assets, net of cash paid
    and warrants issued ..........................................    $      --     $     --     $  34,353
Supplemental disclosures of cash flow information:
  Cash paid for interest .........................................    $   2,999     $  6,364     $   7,600
</TABLE>

                             See accompanying notes.


                                      F-6
<PAGE>   51
                                     AVIRON

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2000

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

    We were incorporated in the State of California in April 1992 and were
reincorporated in the State of Delaware in November 1996. The consolidated
financial statements include the accounts of Aviron and our wholly-owned
subsidiary, Aviron UK Limited. All significant intercompany accounts and
transactions have been eliminated.

    We are a biopharmaceutical company focused on the prevention of disease
through innovative vaccine technology. We have one operating segment and are
currently concentrating our product development and commercialization efforts on
our lead product candidate, FluMist, an investigational live virus vaccine
delivered as a nasal mist for the prevention of influenza. On December 28, 2000,
the United States Food and Drug Administration, or FDA, accepted for review our
Biologics License Application, or BLA, for FluMist to prevent influenza in
healthy children and healthy adults.

    We anticipate 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, we will need to obtain additional funds from outside
sources to continue our 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 accounting
principles generally accepted in the United States 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 us to concentrations of credit risk. We primarily invest in
money market funds, U.S. government obligations, notes of U.S. corporations,
certificates of deposit, commercial paper and foreign government securities. By
policy, we limit 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

    We consider all highly liquid investments with an original maturity of 90
days or less to be cash equivalents. Cash equivalents include approximately
$26.7 million and $38.8 million in money market funds at December 31, 1999 and
2000, respectively.

Investments

    Our 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. We have not experienced any significant realized gains or
losses on our investments.

Accounts Receivable

    Accounts receivable is comprised principally of amounts receivable from
Wyeth in connection with reimbursement of certain expenses associated with the
development and commercialization of FluMist, our live cold-adapted virus
vaccine. (See Note 3.)


                                      F-7
<PAGE>   52
Inventory

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

Intangible Assets

    Intangible assets are comprised principally of the costs related to the
restructuring of our manufacturing agreement for the manufacturing operation in
the United Kingdom, which are being amortized on a straight-line basis over the
life of the amended contract manufacturing agreement of approximately 6 years
(See Note 4.)

    Accumulated amortization on intangible assets as of December 31, 2000 was
$2.2 million.

Property and Equipment

    Property and equipment is stated at cost. Depreciation, which commences once
assets are placed in service, is provided on a straight-line basis over the
estimated useful lives of the respective assets, which range from three to seven
years. Leasehold improvements are amortized on a straight-line basis over the
shorter of their useful lives or the term of the leases, which range from 18
months to 20 years.

Revenue Recognition

    Research payments under collaborative arrangements and grants are recognized
as revenue based on research expenses incurred as provided for under the terms
of the arrangements.

    We previously recognized non-refundable up-front license fees as revenue
when received and when all of our significant contractual obligations relating
to the fees had been met. Effective January 1, 2000, we changed our method of
accounting for non-refundable up-front license fees to recognize such fees over
the research and development period of the agreement. We believe the change in
accounting principle is preferable based on guidance provided in SEC Staff
Accounting Bulletin No. 101 -- Revenue Recognition in Financial Statements. The
$12.8 million cumulative effect of the change in accounting principle,
calculated as of January 1, 2000, was reported as a charge in the year ended
December 31, 2000. The cumulative effect was initially recorded as deferred
revenue and is being recognized as revenue over the five-year estimated research
and development period of the agreement. During the year ended December 31,
2000, the impact of the change in accounting was to increase net loss by $9.8
million, or $0.47 per share, comprised of the $12.8 million cumulative effect of
the change as described above ($0.62 per share), net of $3.0 million of the
related deferred revenue which was recognized as revenue during 2000 ($0.15 per
share). The remainder of the related deferred revenue will be recognized in
revenue approximately as follows: $3.0 million per year in 2001 through 2003,
inclusive, and $750,000 in 2004. The pro forma amounts presented in the income
statement were calculated assuming the accounting change was made retroactive to
prior periods.

    Incentive milestone payments received during the research and development
phase of collaborative arrangements are recognized as revenue upon achievement
of the incentive milestone events, which represent the culmination of the
earnings process because we have no future performance obligations related to
the payment. Incentive milestone payments are triggered either by the results of
our research efforts or by events external to Aviron, such as regulatory
approval to market a product or the achievement of specified sales levels by a
marketing partner.

    Contract revenue for services provided by our animal research facility is
recognized when services are provided pursuant to the contract.

    Amounts received in advance are recorded as deferred revenue until the
related revenue is recognized.

Stock Compensation

    We account for stock options granted to employees using the intrinsic-value
method and thus recognize no compensation expense for options granted with
exercise prices equal to the fair value of our common stock on the date of the
grant.


                                      F-8
<PAGE>   53
Net Loss per Share

    We compute net loss per share in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share, or 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 our net loss position, the
result would be anti-dilutive.

    Had we 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
3,159,451, 3,485,233 and 2,995,448 shares for the years ended December 31, 1998,
1999 and 2000, 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)

    Statement of Financial Accounting Standard No. 130, Reporting Comprehensive
Income, or SFAS 130, establishes rules for reporting and display of
comprehensive income (loss) and its components. SFAS 130 requires unrealized
gains or losses on our 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 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, 1998, 1999 and 2000 approximate ($41,000), ($155,000) and 139,000,
respectively.

New Accounting Pronouncements

    In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133,
which is required to be adopted in the first quarter of 2001. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires companies to recognize all derivatives as either
assets or liabilities on the balance sheet and measure these instruments at fair
value. Management does not anticipate that the adoption of SFAS 133 will have a
significant adverse effect on the results of our operations or our financial
position.

2. LICENSE AGREEMENTS

ARCH Development Corporation

    In July 1992, we entered into a license agreement with ARCH Development
Corporation, or 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. The
term of this agreement extends until the expiration of the last-to-expire patent
rights covered under the license.

    ARCH had asserted an interpretation of the financial terms of this
agreement, relating to the license by us of its EBV technology to SmithKline
Beecham Biologicals S.A., or SBB, a division of GlaxoSmithKline, and to our
sublicense of certain HSV technology to NeuroVir Therapeutics, Inc., or
NeuroVir, formerly known as NeuroVir Research, Inc., both of which would have
required us to pay ARCH a portion of any future or past payments, including
sublicense fees and milestone payments that we received under the SBB and
NeuroVir agreements.

    On May 8, 2000, we entered into a settlement agreement with or ARCH pursuant
to which we transferred to ARCH one-half of our ownership interest in Series A
preferred shares of NeuroVir, transferred one-half of our ownership interest in
a warrant to acquire shares of common stock of NeuroVir at a price of $5.00
Canadian per share that expires on the earlier of May 31, 2003 or the closing of
an initial offering of NeuroVir, paid cash of $312,500 and issued a warrant to
purchase 14,077 shares of our common stock at an


                                      F-9
<PAGE>   54
exercise price of $23.00 per share that expires on June 23, 2005. The value of
the warrant of our common stock at the date of issuance was determined to be
$312,500 using the Black-Scholes option valuation model. The total cost of the
settlement was valued at $625,000, which was recognized as an expense in the
year ended December 31, 1999 since the settlement was judged to be probable and
estimable at that time. In addition, as part of this settlement, we agreed to
pay ARCH 25% of milestones earned under our agreement with SBB. During November
2000, we received a milestone of $1.5 million from SBB of which $375,000 was
paid to ARCH.

The Mount Sinai School of Medicine

    In 1993, we entered into a technology transfer agreement with The Mount
Sinai School of Medicine of the City University of New York, or Mount Sinai, to
acquire certain patent rights and technical information in exchange for warrants
to purchase common stock. Warrants for the exercise of 26,079 shares at an
exercise price of $10 per share remain outstanding at December 31, 2000. These
warrants expire in November 2001, if unexercised.

University of Michigan

    In February 1995, we signed a license agreement with the University of
Michigan which gives us 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, we 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 our 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 we will pay royalties based
on net revenues and will issue a warrant to purchase 1.25% of our 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, 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 of Michigan a warrant to purchase
340,000 shares of Aviron common stock at an exercise price of $10.00 per share.
The warrant was valued using the Black-Scholes option valuation model and, as
the related technology is under development, we recorded a one-time non-cash
charge of approximately $10.9 million in the first quarter of 2000. Upon the
date of the first commercial sale of FluMist, if we have more than 27.2 million
shares of common stock then outstanding, we will issue additional warrants
allowing the University of Michigan to purchase 1.25 percent of the excess
shares on the same terms. Should we be required to issue additional warrants
upon the date of the first commercial sale of FluMist, the warrants would be
valued at that time using the Black-Scholes option valuation model, capitalized
as a developed technology asset and amortized to expense over the estimated
useful life of the FluMist product.

NeuroVir Therapeutics, Inc.

    In July 1996, we licensed certain of our 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, or NeuroVir, formerly NeuroVir Research, Inc. in
exchange, we received 114,584 shares of common stock, 802,083 shares of
preferred stock and a warrant to purchase 250,000 shares of common stock. This
warrant may be exercised at $5.00 (Canadian dollars, or Cdn.) and expires on the
earlier of (1) May 31, 2003, or (2) the closing date of the public offering of
NeuroVir's common stock with net proceeds of at least an aggregate of $10.0
million (Cdn.) and an issue price of at least $3.50 (Cdn.) per share. As part of
our settlement with ARCH, see discussion above, we agreed to transfer to ARCH
one-half of our ownership interest in the preferred stock and the warrant to
acquire common stock of NeuroVir. Our investment has a carrying value of zero,
and we are 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 us.

3. COLLABORATION AGREEMENTS

    Wyeth Lederle Vaccines

    On January 12, 1999, we announced a worldwide collaboration for the
marketing of FluMist with Wyeth Lederle Vaccines, or Wyeth, a business unit of
Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products
Corporation, or AHP. This agreement became effective in March 1999.


                                      F-10
<PAGE>   55
    Under the agreement, we granted Wyeth exclusive worldwide rights to market
FluMist. Wyeth and Aviron will co-promote FluMist 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, we 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. In connection with the adoption of SAB 101, we
changed our method of accounting for this license fee as of January 1, 2000.
(See Note 1-Revenue Recognition.) During the period from March 15 through
December 31, 1999, we recorded $6.0 million of revenue in expense reimbursements
from Wyeth for a portion of our clinical development and commercialization
costs. During 2000, we recorded $30.2 million of revenue under our agreement
with Wyeth which is comprised of a $15.5 million milestone related to the
acceptance for review by the FDA of our BLA for FluMist on December 28, 2000,
the recognition of $3.0 million of revenue under SAB 101, which was included in
the cumulative effect adjustment made as of January 1, 2001, and $11.7 million
of revenue in expense reimbursements from Wyeth for a portion of our clinical
development and commercialization costs.

    In addition, we will receive $20.0 million upon FDA marketing approval for
FluMist, and we can also earn an additional $20.0 million in milestone payments
for advisory body recommendations and expanded label claims. In addition, we are
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, and up to $50.0 million upon licensure in international
regions. Compensation for achieving supply targets, FDA-approved expansions into
additional population groups and other improvements to the product is included
in the agreement terms and may total up to $67.5 million. The granting of
certain rights under the license would trigger additional payments in excess of
$140.0 million to us. Consideration for the license also includes a commitment
to provide us with up to $40.0 million in financing. As of December 31, 2000,
AHP had purchased shares of our common stock valued at $20.0 million. The
availability of the remaining $20.0 million is contingent upon regulatory
approval of the product. The potential value for the license fees, milestones
and financing support that we could receive under the collaboration exceeds
$400.0 million.

    Wyeth will distribute FluMist and record all product sales. In addition to
the payments mentioned above, if FluMist is approved for marketing, we
anticipate that we will earn approximately 40 percent of FluMist product
revenues from Wyeth in the form of product transfer payments and royalties.
These payments are higher in the United States than internationally. We will
incur expenses to supply and co-promote the product. Wyeth will share in the
clinical development and commercialization expenses for FluMist. In addition, if
Aviron meets joint supply forecasts, Wyeth has agreed to spend $100.0 million
for advertising and promotion of FluMist over the first three years of
commercialization in the United States. In January 2001, Wyeth paid us $10
million as an advance against future amounts that Wyeth will owe us under our
agreement with them to support inventory buildup for 2001.

    CSL Limited

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

4. MANUFACTURING AGREEMENT

    On July 2, 1999, we extended our collaboration with Celltech Medeva, or
Medeva, the international marketing arm of Celltech Group Plc, or Celltech,
covering the manufacture of key components of FluMist through December 2005. We
paid Medeva $1.0 million as an up-front fee upon execution of the agreement and
accrued an additional $1.0 million of such fees as of December 31, 1999. Under
the terms of this agreement, we were required to make specified payments to
Medeva for reaching certain technological, regulatory and employment milestones,
supplying the vaccine components of FluMist, and providing the use of facilities
with minimum amounts stipulated for each contract year. These minimum payments
include all of the milestone, supply, and facility use payments described above.
We recorded expense associated with the Medeva contracts during 1998, 1999, and
2000 in the amounts of $6.6 million, $7.0 million and $5.9 million,
respectively.


                                      F-11
<PAGE>   56
    During October 2000, Celltech sold its vaccines business, which included our
existing FluMist contract manufacturing agreement, to PowderJect Pharmaceuticals
Plc, or PowderJect. Also in October 2000, we restructured our contract
manufacturing agreement with Evans Vaccines Limited, or Evans, a division of
PowderJect. Under the new agreement, which expires in June 2006, responsibility
for bulk manufacture of FluMist in the Speke, U.K. facility transferred to
Aviron and Evans employees working on FluMist became our employees. We also
entered into subleases of the FluMist manufacturing areas on the existing site.

    As consideration for the restructuring of our agreement, we made an initial
payment of $15.0 million and will make additional annual payments of $3.9
million over each of the next five years to Evans. As further consideration for
the amendment to the agreement, we agreed to make payments totaling $19.0
million, which will be paid over the term of the agreement based on net sales of
FluMist. Evans also received warrants to purchase 63,162 shares of our common
stock at an exercise price of $47.50 per share. The warrants, which expire
annually at the rate of 10,527 shares per year on October 10, 2001 through 2006,
were valued at approximately $1.2 million. We have valued the aggregate
consideration, including the net present value of the annual payments, at
approximately $50.2 million, which we recorded as an intangible asset and will
amortize over the approximate 6-year term of the agreement with Evans. We have
also recorded $34.0 million of obligations to Evans consisting of the net
present value of the annual payments of $3.9 million and the $19.0 million
obligation. The $19.0 million obligation has not been discounted because the
timing of the related payments is not fixed, but is based on net sales of
FluMist.

    In addition, we agreed to make payments during the term of the agreement of
$225,000 per year for the use of the Aviron unit in the Evans manufacturing
plant, payments up to an aggregate total of $3.0 million for the attainment by
Evans of specific milestones and payments for other support services based on
the costs of these services incurred. Rent and other support services will be
expensed as the costs are incurred, and milestones will be expensed as they
become due.

    In October 2000, we agreed to acquire a 25-year lease from Celltech on
approximately eight acres of land in Speke, U.K. We intend to utilize an
existing 45,000 square foot structure on the property to build a new FluMist
manufacturing facility. Under the terms of the Celltech agreement, we will pay
Celltech Pound Sterling1.5 million (British Pounds Sterling) and will assume the
obligations for the remaining 24 years of the 25-year land lease. The minimum
annual lease payments are Pound Sterling333,000 (British Pounds Sterling) per
year during the term of the lease.

5. DEVELOPMENT AGREEMENTS

SmithKline Beecham Biologicals S.A.

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

    We recorded revenue under this agreement during 1997 of $1,477,000. No
revenue was recorded under this agreement in 1998 or 1999. In October 2000, we
announced that SBB has initiated a Phase 2 clinical trial of our investigational
vaccine against Epstein-Barr virus. The initiation of this trial triggered the
payment of a milestone by SBB to us in the amount $1.5 million, which was
received in November 2000. Under our agreement with ARCH (see Note 2), $375,000
of these funds was forwarded to ARCH. The net amount of this milestone was
recognized as revenue during the fourth quarter of 2000.

Sang-A Pharm. Co., Ltd.

In May 1995, we entered into a Development and License Agreement with Sang-A
Pharm. Co., Ltd., or Sang-A. We granted to Sang-A certain exclusive clinical
development, manufacturing and marketing rights in Korea for specified products
developed by us, including vaccines for influenza, cold-adapted and recombinant,
EBV, CMV, HSV-2 and RSV on meeting certain conditions. 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.
No assurance can be given, however, that we will receive any future payments
from Sang-A or that Sang-A will not terminate our agreement with us. In January
1997, Sang-A declared bankruptcy and continues to operate in receivership. In
November 2000, we


                                      F-12
<PAGE>   57
terminated the portion of the contract relating to FluMist. We are unable to
predict what further long-term effect, if any, the bankruptcy will have on
Sang-A and on our remaining 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, 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
                                                     =======    =====         =====      =======
      As of December 31, 2000:
        Corporate commercial paper ..............     72,894       26           (65)      72,855
        U.S. corporate bonds ....................     23,189       45           (52)      23,182
        U.S. government agency obligations ......      2,000       12            --        2,012
                                                     -------    -----         -----      -------
                                                     $98,083    $  83         $(117)     $98,049
                                                     =======    =====         =====      =======
</TABLE>

    Included in the above table are U.S. corporate bonds and commercial paper
and U.S. government agency obligations with fair values of $1,428,000 and
$25,892,000 at December 31, 1999 and 2000, 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
$4,506,000 at December 31, 2000, 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,
                                                                ------------------
                                                                  1999      2000
                                                                -------   --------
<S>                                                             <C>       <C>
      Manufacturing equipment.................................  $ 5,978   $  6,551
      Laboratory equipment....................................    5,992      7,780
      Computer equipment......................................    3,113      4,219
      Office equipment........................................    1,070      1,202
      Leasehold improvements..................................   18,930     19,856
      Construction in progress................................      280      3,704
                                                                -------   --------
                                                                 35,363     43,312
      Less accumulated depreciation and amortization..........   (9,728)   (15,605)
                                                                -------   --------
                                                                $25,635   $ 27,707
                                                                =======   ========
</TABLE>

    Construction in progress is principally comprised of deposits to initiate
the construction of equipment and for work completed on construction projects.

    Depreciation expense on property, plant and equipment for the years ended
December 31, 1998, 1999 and 2000 amounted to $3.0 million, $4.8 million, and
$5.9 million, respectively.

    As of December 31, 2000, total assets in the amount of $6.2 million with
accumulated depreciation of $2.8 million had been pledged as collateral under
the terms of a credit facility, with an additional $2.2 million of assets having
been pledged in early 2001. (See Note 10.)


                                      F-13
<PAGE>   58
8. ACCRUED EXPENSES AND OTHER LIABILITIES

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

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                          -----------------
                                                           1999       2000
                                                          -------   -------
<S>                                                       <C>       <C>
     Accrued manufacturing............................    $ 3,394   $ 4,394
     Accrued legal expenses...........................        965       502
     Accrued testing services.........................        775       340
     Accrued expense other............................      1,457     2,418
                                                          -------   -------
               Total..................................    $ 6,591   $ 7,654
                                                          =======   =======
</TABLE>

9. LEASE ARRANGEMENTS

    We lease certain office, equipment, warehouse, laboratory 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. The
lease that governs our Mountain View, California facilities, which house our
administrative offices and a portion of our laboratory facilities, extends until
2005 and provides the option for renewal for two additional five-year periods.
Our Santa Clara, California facility, which contains additional office and
laboratory space, is leased for an initial term that expires in 2019 and
provides an option to extend for one additional term of seven years. We have
also leased additional office space in a second facility in Santa Clara under a
lease that expires in 2004 with an option to extend for one additional term of 5
years. Lease terms for our manufacturing facilities in the U.K. and Pennsylvania
are described in Note 4. We also sublease a portion of our leased facilities.

    Rent expense for all operating leases charged against earnings for the years
ended December 31, 1998, 1999 and 2000 was approximately $3.8 million, $6.0
million and $6.5 million, respectively, which is net of sublease income in the
amount of approximately $58,000, $885,000 and $1.9 million for the respective
years.

    At December 31, 2000, our aggregate commitments under such arrangements, net
of sublease income, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                          CAPITAL
                                                           LEASE      OPERATING
                                                        OBLIGATIONS     LEASE
                                                        -----------   ---------
<S>                                                     <C>           <C>
        Years ending December 31,
          2001.....................................         $ 10       $ 5,552
          2002.....................................           --         5,787
          2003.....................................           --         5,860
          2004.....................................           --         5,885
          2005.....................................           --         3,671
          Thereafter...............................           --        28,084
                                                            ----       -------
                                                              10       $54,839
                                                                       =======
        Less amounts representing interest.........           (1)
                                                            ----
                                                               9
        Less current portion.......................            9
                                                            ----
                                                            $ --
                                                            ====
</TABLE>

    In October 1997, we entered into a 7-year operating lease agreement for a
facility in Pennsylvania to be used in the manufacturing, packaging and storage
of our products. The facility is owned by a contract manufacturer who will
provide services to us. The lease includes an option allowing us to extend the
lease beyond the initial term. The agreement requires us to pay certain
operating costs including a portion of utilities and insurance. The agreement
provided for the deferral of 40 percent of the base monthly rental for a 2-year
period, which allowed us to defer the payment of an aggregate rental amount of
approximately $1.1 million. One-half of this amount was repaid in January 2000,
and the remainder is to be repaid in the first quarter of 2001. We are required
to deposit and maintain the deferred amount in an escrow account. The agreement
also requires the lessor to provide a $1.0 million improvement allowance for
construction and improvements to the facility. We 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. These
amounts have been accounted for as deferred rent in the accompanying balance
sheet. As of December 31, 1999 and 2000, deferred rent related to this facility
amounted to approximately $1.6 million and $1.1 million, respectively.


                                      F-14
<PAGE>   59
    In February 1999, we entered into a 20-year lease in Santa Clara, which
provides for a stipulated rate of increase in the lease payment. Under Financial
Accounting Standard Board Technical Bulletin No. 85-3, Accounting for Operating
Leases with Scheduled Rent Increases, we are accounting for the full lease
payments under this lease on a straight-line basis with the differential between
the current lease payment and the straight-line rent expense being accounted for
as deferred rent in the accompanying balance sheet. As of December 31, 1999 and
2000, deferred rent related to this lease amounted to approximately $570,000 and
$1.0 million, respectively.

    In October 2000, we agreed to lease additional space in the United Kingdom
for manufacturing operations. (See Note 4.) Since this lease was not fully
executed as of December 31, 2000, the table above does not include annual lease
payments of 333,000 British Pounds Sterling for the remaining 24-year term of
this lease.

10. LONG-TERM OBLIGATIONS

Convertible Debt

    On March 30, 1998, we sold unsecured convertible subordinated notes in the
aggregate principal amount of $100.0 million at an interest rate of 5 3/4% due
2005, or the 2005 Notes. Net proceeds to us, after deducting legal and other
expenses, were approximately $96.1 million.

    The 2005 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 2005 Notes), which
is subject to adjustment in certain events. Interest on the 2005 Notes is paid
semi-annually on April 1 and October 1. We can redeem the 2005 Notes on or after
April 6, 2001.

    During the fourth quarter of 2000, we exchanged approximately $51.7 million
aggregate principal amount of our 2005 Notes for approximately 1.7 million
shares of our common stock in a number of privately negotiated transactions.
Additional non-cash interest expense related to the exchanges was approximately
$2.7 million. The $1.2 million of unamortized debt issue costs related to the
2005 Notes exchanged have been charged to additional paid-in capital. (See
Subsequent Events, Note 16.)

    The principal amount of the 2005 Notes outstanding as of December 31, 1999
and 2000 were $100.0 million and $48.3 million, respectively, and their fair
market values based on quoted market prices approximated $70.5 million and
$106.8 million, respectively.

Credit Facilities

    During 1999, we entered into two new credit facilities that are secured by
various assets and require the maintenance of a minimum balance of cash and
investments in the amount of $20.0 million. On December 29, 1999, $15.4 million
was drawn under these credit facilities and $740,000 was drawn in December 2000.
An additional loan of approximately $1.2 million was drawn in January 2001. The
loans are being 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 principal amounts of loans outstanding at December 31, 2000, was
approximately $13.2 million, which approximates the fair value of these
obligations. These loans bear interest at rates ranging from 11.63% to 13.76%
with a weighted-average rate of 12.44%.

    Principal payments during each of the years from 2001 through 2005 are
approximately $3.1 million, $3.5 million, $3.7 million, $1.2 million, and $1.5
million, respectively.

Obligations to Evans

    In conjunction with the restructuring of our agreement with Evans (see Note
4), we recorded $34.0 million of obligations to Evans, consisting of the net
present value of a stream of annual payments of $3.9 million in each of the next
five years and a total obligation of $19 million, which will be paid over the
term of the agreement based on net sales of FluMist. The $19.0 million
obligation has not been discounted because the timing of the related payments is
not fixed, but is based on net sales of FluMist. No payments had been made
against these obligations as of December 31, 2000.


                                      F-15
<PAGE>   60
11. STOCKHOLDERS' EQUITY

Common Stock

    The number of authorized shares was increased from 30.0 million to 100.0
million shares based on a vote of stockholders at our Annual Meeting on June 1,
2000.

    Certain shares of common stock issued to members of management in 1996
through exercises of stock options are subject to repurchase by us at $0.50 -
$2.50 per share. The repurchase rights lapse over time based on the continued
employment of the individuals in accordance with vesting provisions specified by
the Board of Directors. At December 31, 1999, there were 10,540 shares remaining
subject to our right of repurchase. Our repurchase rights expired as of June 30,
2000.

    On January 11, 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. On June 9, 2000, Acqua Wellington increased its equity
financing commitment to $8.0 million per month and increased its total
commitment from $48.0 million to $84.0 million through February 2001. The
commitment is reduced by the monthly allocation whether we draw on the
commitment or not. These funds are available at our discretion at a small
discount to the market price of our common stock with the market price to be
determined based on the volume weighted average market price for the 18 trading
days ending two business days prior to sale. During 2000, we sold a total of
2,475,850 of our common stock to Acqua Wellington for total proceeds of $84.0
million, resulting in an average price per share of $33.93. Of this amount, $8.0
million was outside of the Acqua Wellington financing commitment under the
agreement.

    On January 25, 2001, we sold an additional 161,060 shares to Acqua
Wellington for total proceeds of $8.0 million, resulting in an average price per
share of $49.67. With this purchase, Acqua Wellington has completed their
commitment under this agreement.

    During the year ended December 31, 2000, we sold 309,995 shares of common
stock to Ridgeway Investment Ltd. for total proceeds of $6.0 million, or $19.36
per share, we sold 910,704 shares of common stock to American Home Products, for
total proceeds of $18.7 million, or an average price of $20.53 per share, and we
sold 450,000 shares of common stock in a private transaction to Biotech Invest,
S.A., an affiliate of Biotech Target, S.A., at a price of $48.00 per share for
aggregate proceeds of $21.6 million.

    On April 10, 2000, we sold 2,200,000 shares of our common stock in a
follow-on public offering at a price of $22.50 per share. Our aggregate net
proceeds from the public offering, after expenses and underwriters' discounts
and commissions, were approximately $46.2 million.

Warrants

    Outstanding warrants to purchase common stock are as follows at December 31,
2000:

<TABLE>
<CAPTION>
NUMBER OF SHARES                            EXERCISE PRICE       EXPIRATION
----------------                            --------------    ----------------
<S>                                         <C>               <C>
    26,079..............................        $10.00         November 2001
   340,000..............................        $10.00         February 2005
     9,398..............................        $53.00          October 2005
    63,162..............................        $47.50          October 2001
                                                               to October 2006
</TABLE>

Employee Stock Purchase Plan

    We have adopted an Employee Stock Purchase Plan under which employees can
purchase shares of our 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, 2000, 165,633 shares
had been issued under the Plan.


                                      F-16
<PAGE>   61
Stock Options

    On September 15, 1992, the board of directors adopted the 1992 Stock Option
Plan, or the 1992 Plan. In March 1996, we amended and restated the 1992 Plan as
the 1996 Equity Incentive Plan, or the 1996 Plan. On June 1, 2000, an amendment
of the 1996 Plan was approved by the stockholders to increase the total shares
of common stock reserved for future issuance under the 1996 Plan to 4,730,000.
The 1996 Plan provides for the grant of incentive and nonstatutory stock options
to our employees and consultants and became effective in November 1996 upon the
closing of the initial public offering.

    In March 1996, we adopted the 1996 Non-Employee Directors' Stock Option
Plan, or 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 June
1, 2000, an amendment of the Directors' Plan was approved by the stockholders to
increase the total shares of common stock reserved for future issuance under the
Directors' Plan to 350,000.

    In September 1999, the board of directors adopted the 1999 Non-Officer
Equity Incentive Plan, or 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 our consultants and employees
who are not officers or directors. In July 2000, the board of directors approved
an amendment to the 1999 Plan to increase the total shares of common stock
reserved for future issuance under the 1999 Plan to 3,200,000.

    Our plans had 2,334,210 shares available to grant options to employees,
consultants and directors at December 31, 2000. Most of the options granted have
10-year terms.

    The standard vesting schedule provides for vesting of options ratably over
50 months of continued employment. However, during 2000, in order to motivate
our employees and align their interests with our stockholders, we granted
options for the purchase of a total of approximately 1.7 million shares of
common stock at exercise prices ranging from $24.00 to $51.50, the vesting for
which is linked to performance goals for FluMist. Of this amount, options for
approximately 1.5 million shares remained outstanding at December 31, 2000.
Options for approximately 380,000 shares became exercisable upon the acceptance
for review by the FDA of our BLA submission on December 28, 2000. Options for
approximately 647,000 shares will become exercisable at the earlier of the
approval of FluMist for marketing in the United States, or five years from the
date of grant. Options for approximately 493,000 will become exercisable when
FluMist is approved for marketing in the United States, but only if this event
occurs in 2001; otherwise, these options will be canceled. If these options for
approximately 493,000 shares become exercisable in 2001, we will incur
compensation expense on the date that 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.

    In addition, we have issued non-qualified stock options outside of the above
plans.


                                      F-17
<PAGE>   62
    A summary of our stock option activity, and related information for the
years ended December 31, 1998 through 2000 follows:

<TABLE>
<CAPTION>
                                                           1998                   1999                  2000
                                                 ----------------------   --------------------   ----------------------
                                                              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 ..........         885,819     $ 8.87    1,714,535    $19.08      3,284,776    $20.51
Granted ...................................       1,068,717     $24.69    2,017,200    $20.55      2,974,654    $31.98
Exercised .................................        (155,553)    $ 2.80     (198,577)   $ 5.66       (361,716)   $17.79
Forfeited .................................         (84,448)    $13.25     (248,382)   $22.89       (427,345)   $23.24
                                                 ----------               ----------             -----------
Outstanding -- end of year ................       1,714,535     $19.08     3,284,776   $20.51      5,470,369    $26.74
                                                 ==========               ==========             ===========
Weighted-average fair value of options
  Granted during year .....................      $    19.23               $    16.34             $    25.93
</TABLE>

    During 1995, our officers 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 our right of repurchase which lapses over fifty
months. As of December 31, 2000, $50,000 of the promissory notes was still
outstanding. Our rights to repurchase any shares under these agreements expired
in June 2000.

    We have recognized deferred compensation for certain options granted in 1997
and 1998. Total deferred compensation of approximately $2.1 million has been
amortized over the vesting period of such options on an accelerated basis. A
portion of these options vested immediately upon grant. Compensation expense
related to these options recorded during the year ended December 31, 2000 was
approximately $96,000.

The options outstanding at December 31, 2000 have been segregated for additional
disclosure as follows:

<TABLE>
<CAPTION>
                                                                                              OPTIONS EXERCISABLE
                                                  OPTIONS OUTSTANDING                     ----------------------------
                                -------------------------------------------------------      OPTIONS         WEIGHTED-
                                     OPTIONS        WEIGHTED-AVERAGE        WEIGHTED-       CURRENTLY         AVERAGE
                                 OUTSTANDING AT         REMAINING            AVERAGE      EXERCISABLE AT      EXERCISE
RANGE OF EXERCISE PRICES          DEC. 31, 2000     CONTRACTUAL LIFE     EXERCISE PRICE    DEC. 31, 2000       PRICE
------------------------        ----------------   -----------------     --------------   --------------     ---------
<S>                             <C>                <C>                   <C>               <C>               <C>
    $  0.25 - $10.00                  173,883              5.6               $ 5.54           165,939         $ 5.36
    $ 10.01 - $20.00                  913,406              8.7               $16.64           210,894         $16.77
    $ 20.01 - $30.00                3,021,516              8.5               $24.47         1,054,968         $24.50
    $ 30.01 - $40.00                  633,945              9.1               $31.96           103,565         $31.38
    $ 40.01 - $67.88                  727,619              9.7               $49.35            12,396         $44.47
</TABLE>

    We have elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, or APB 25, and related interpretations
in accounting for our 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, or 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 our
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 we have
accounted for our employee stock options 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 valuation model with the following
weighted-average assumptions: risk free interest rates of 4.85% for 1998, 6.65%
for 1999, and 5.24% for 2000, respectively; volatility factors of the expected
market price of our common stock of 0.80 for 1998, 0.79 for 1999 and 0.82 for
2000; no expected dividends; and a weighted-average expected life of the options
of 7.2 years for 1998, 7.9 years for 1999 and 8.3 years for 2000.

    The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that 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
our 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


                                      F-18
<PAGE>   63
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 our employee stock options and shares issued pursuant to the employee
stock purchase plan.

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

<TABLE>
<CAPTION>
                                                      1998       1999        2000
                                                    ---------  ---------   ---------
<S>                                                 <C>        <C>         <C>
     Pro forma net loss.........................    $(64,883)  $(72,122)   $(128,466)
     Pro forma net loss per share (basic).......    $  (4.13)  $  (4.55)   $   (6.20)
</TABLE>

Share Purchase Rights

    In October 1997, our 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 our Series A Junior Participating Preferred Stock,
par value $0.001, or 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 our common stock by a
person or group, or 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 our 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 $150.00 per Right.

Reserved Shares

    As of December 31, 2000, we have reserved shares of common stock for future
issuance as follows:

<TABLE>
<S>                                                    <C>
        Options:
          Outstanding................................  5,470,369
          Available for grant........................  2,334,210
          Employee Stock Purchase Plan...............    184,367
          Warrants...................................    438,639
          Conversion of debt.........................  1,564,198
                                                       ---------
                                                       9,991,783
                                                       =========
</TABLE>

12. INCOME TAXES

    As of December 31, 2000, we had federal and state net operating loss
carryforwards of approximately $262.0 million and $12.9 million, respectively.
We also had federal and California research and other tax credit carryforwards
of approximately $4.9 million and $2.5 million, respectively. The federal net
operating loss and credit carryforwards will expire at various dates beginning
in the year 2007 through 2020, if not utilized. The state of California net
operating loss and credit carryforwards will expire at various dates beginning
in 2003 through 2005, if not utilized. Utilization of the federal and state net
operating loss 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 our deferred tax assets
for federal and state income taxes as of December 31 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                           1999          2000
                                                         --------     ---------
<S>                                                      <C>          <C>
Net operating loss carryforwards ....................    $ 61,300     $  89,800
Research tax credits ................................       6,400         7,400
Capitalized research and development expenses .......       2,900         7,490
Deferred revenue ....................................         800         3,900
Other -- Net ........................................       3,800         5,870
                                                         --------     ---------
Net deferred tax assets .............................      75,200       114,460
Valuation allowance .................................     (75,200)     (114,460)
                                                         --------     ---------
                                                         $     --     $      --
                                                         ========     =========
</TABLE>


                                      F-19
<PAGE>   64
    Due to our lack of earnings history, the net deferred tax assets have been
fully offset by a valuation allowance. The valuation allowance increased by
$24.6 million and $39.3 million during the years ended December 31, 1999 and
2000, respectively.

    Approximately $5.5 million 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, we announced the signing of a worldwide multi-year supply
agreement with Becton Dickinson and Company, or Becton Dickinson, in which
Becton Dickinson will supply its AccuSpray(TM) non-invasive nasal spray delivery
system for administration of FluMist. Under the agreement, we advanced a total
of $2,000,000 to Becton Dickinson for facility expansion of plant capacity,
which will be recovered against future payments for sprayers supplied under the
agreement. As of December 31, 2000, $1,701,000 of the advance has not been
recovered and is included in other assets in the accompanying balance sheet.

    As a result of the execution of the 25-year land lease in Speke, U.K.
(discussed in Note 4), we are required to pay Celltech $1.5 million British
Pounds Sterling (approximately $2.4 million) for the acquisition of a facility
shell on the site. The lease is expected to be signed by the end of the first
quarter of 2001.

14. RELATED PARTY TRANSACTIONS

    In 1995, we made unsecured loans to members of senior management totaling
$100,000, which bear interest at 7.75% and which were due in April 2000. In
1997, we 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, 2000, the unpaid balance was $50,000.

    In January 2000, we made a non-interest-bearing loan to C. Boyd Clarke, our
Chairman, President and Chief Executive Officer, in the amount of $500,000. The
loan, which is secured by real property, is repayable in equal annual
installments over a five-year period.

15. LITIGATION

    On July 8, 1999, a lawsuit entitled Joany Chou v. The University of Chicago,
ARCH Development Corp., Bernard Roizman and Aviron, 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
September 30, 1999, this individual filed an amended complaint against the same
defendants. This amended complaint appeared to assert claims of inventorship
relating to the United States Patent Nos. 5,328,688, 5,795,713, 5,922,328, their
foreign counterparts, and potentially other patents and applications; unjust
enrichment; fraud; conversion; breach of fiduciary duty; breach of contract and
breach of implied contract. The amended complaint seeks, among other things,
money damages, an order correcting the inventorship and ownership of the patents
referenced above, disgorgement, a constructive trust, possible injunctive and
equitable relief, punitive damages, attorneys' fees, costs and interest. All of
the claims appear to relate to patent and patent applications for HSV, and none
appear to relate to our cold-adapted influenza product or technology or any
other pipeline products in research or development. On February 18, 2000, the
Court granted our motion to dismiss, thereby dismissing all pending claims made
by the plaintiff against Aviron. On April 19, 2000, the plaintiff appealed the
Court's ruling. We cannot be sure that we will prevail in the defense of this
lawsuit in the event that the plaintiff is successful in reinstating her claims
or in bringing in new claims against Aviron.

16. SUBSEQUENT EVENTS (UNAUDITED)

    Since December 31, 2000, we have exchanged approximately $33.5 million
aggregate principal amount of our 2005 Notes for approximately 1.1 million
shares of our common stock in a number of privately negotiated transactions.
Additional non-cash interest expense related to the exchanges was approximately
$1.6 million. The $800,000 of unamortized debt issue costs, related to the 2005
Notes exchanged, have been charged to additional paid-in capital. As of February
28, 2001, approximately $14.8 million aggregate principal amount of our 2005
Notes remains outstanding.


                                      F-20
<PAGE>   65
    In February 2001, we completed a public offering of 4,000,000 shares of our
common stock at $50.00 per share and $200.0 million of 5 1/4% convertible
subordinated notes due 2008, or the 2008 Notes. Aggregate net proceeds from this
public offering were approximately $382.0 million, after estimated expenses and
underwriters' discounts and commissions.

    In February 2001, we have taken an additional loan in the amount of
approximately $1.0 million against our available credit facility. As of February
28, 2001, no further amounts are available under that agreement.


                                      F-21
<PAGE>   66

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
ITEM                                  DESCRIPTION
----                                  -----------
<S>       <C>
   3.1    Bylaws of the Registrant(2).

   3.2    Restated Certificate of Incorporation of the Registrant(2).

   3.3    Certificate of Amendment of Amended and Restated Certificate of
          Incorporation(18).

   4.1    Reference is made to Exhibits 3.1 and 3.2.

   4.2    Specimen Stock Certificate.

   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 for 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(13).

   4.12   Common Stock Purchase Agreement between the Registrant and American
          Home Products Corporation, dated as of December 30, 1999(13).

   4.13   Common Stock Purchase Agreement between the Registrant and American
          Home Products Corporation, dated as of February 3, 2000(13).

   4.14   Warrant for Common Stock, issued to University of Michigan(13).

   4.15   Common Stock Purchase Agreement between the Registrant and American
          Home Products Corporation, dated as of April 5, 2000(15).

   4.16   Registration Rights Agreement dated October 10, 2000, by and between
          the Company and Evans Vaccines Limited(27).

   4.17   Common Stock Purchase Agreement between the Registrant and Biotech
          Invest, S.A., dated as of October 10, 2000.

   4.18   Warrant for Common Stock, issued to ARCH Development Corporation(17).

   4.19   Warrant for Common Stock, issued to The Proctor and Gamble
          Company(18).

   4.20   Warrants for Common Stock, issued to Evans Vaccines Limited(14).

   4.21   Indenture entered into between Aviron and Marine Midland Bank, as
          Trustee, dated March 15, 1998(28).
</TABLE>

<PAGE>   67

<TABLE>
<CAPTION>
ITEM                                  DESCRIPTION
----                                  -----------
<S>       <C>
   4.22   Indenture entered into between Aviron and HSBC Bank USA as Trustee,
          dated February 7, 2001.

   4.23   Officer's Certificate pursuant to Section 2.01 of the Subordinated
          Indenture, dated February 7, 2001.

   4.24   Amendment No. 1 to Common Stock Purchase Agreement, dated as of June
          9, 2000, by and between Acqua Wellington North American Equities Fund
          Ltd. and the Company(16).

 +10.1    License Agreement between the Registrant and ARCH Development
          Corporation, dated July 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    First Amendment to Facility Reservation Agreement, dated as of August
          1, 2000, by and between Aviron and Packaging Coordinators, Inc.(21).

 *10.9    1996 Equity Incentive Plan, as amended as of June 1, 2000(23).

 *10.10   1996 Non-Employee Directors' Stock Option Plan, as amended as of
          June 1, 2000(24).

 *10.11   1996 Employee Stock Purchase Plan, as amended as of June 4, 1998(4).

  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   Amended and Restated Production Agreement, dated as of August 1, 2000,
          by and between Aviron and Packaging Coordinators, Inc.(20)(22).

 +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).
</TABLE>

<PAGE>   68

<TABLE>
<CAPTION>
ITEM                                  DESCRIPTION
----                                  -----------
<S>       <C>
 +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   Form of Management Continuity Agreement(19).

  10.30   Real Property Lease by and between the Registrant and MELP VII L.P.,
          dated October 12, 1999(13).

 *10.31   Offer Letter, as amended, by and between the Registrant and C. Boyd
          Clarke, dated November 24, 1999(13).

 *10.32   Employment Agreement by and between the Registrant and J. Leighton
          Read, dated December 6, 1999(13).

  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(13).

 *10.34   Executive Severance Benefits Agreement by and between the Registrant
          and Harry Greenberg, dated October 23, 2000.

 *10.35   1999 Non-Officer Equity Incentive Plan, as amended as of July 26, 2000(25).

 *10.36   Stock Option Agreement for C. Boyd Clarke outside the 1996 Equity
          Incentive Plan(26).

++10.38   Agreement for Lease of AVU Premises at Gaskill Road, Speke, dated
          October 11, 2000.

++10.39   Underlease of AVU Premises at Gaskill Road Speke, dated October 11, 2000.

++10.40   Agreement for Lease of AVU Extension Premises at Gaskill Road Speke,
          dated October 11, 2000.

++10.41   Underlease of AVU Extension Premises at Gaskill Road Speke, dated
          October 11, 2000.

++10.42   Agreement for the Sale and Purchase of Leasehold Property know as Plot 6
          Boulevard Industry Park, Halewood, Merseyside, dated October 10, 2000.

++10.43   Underlease of Plot 6 Boulevard Industry Park Halewood Merseyside,
          dated February 17, 2000.

++10.44   Master Agreement by and between Powderject Pharmaceuticals Limited,
          Evans Vaccines Limited, the Registrant and Aviron UK, dated
          October 11, 2000.

++10.45   Agreement Relating to the Sharing and Provision of Certain Services,
          by and between Evans Vaccines Limited and Aviron UK Limited.
</TABLE>

<PAGE>   69

<TABLE>
<CAPTION>
ITEM                                  DESCRIPTION
----                                  -----------
<S>       <C>
++10.46   Transfer Agreement by and between Evans Vaccines Limited and Aviron UK
          Limited, dated October 11, 2000.

++10.47   Amended and Restated Contract Manufacture Agreement by and between
          Evans Vaccines Limited and the Registrant, dated October 11, 2000.

++10.48   Know How Licence Agreement by and between Evans Vaccines Limited and
          Aviron UK Limited, dated October 11, 2000.

  10.49   FluMist(TM) Supply Agreement Amendment, dated January 1, 2001.

++10.50   Amendment Number One (1) to Cooperative Research and Development
          Agreement AI-000062, by and between NIAID and Aviron, dated as of
          August 3, 1999.

++10.51   Amendment Number Two (2) to Cooperative Research and Development
          Agreement AI-000062, by and between NIAID and Aviron, dated as of June
          12, 2000.

  21.1    Subsidiaries of Aviron.

  23.1    Consent of Ernst & Young LLP, Independent Auditors.

  24.1    Power of Attorney. See Signature Page.
</TABLE>
---------------
+    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
     Registration Statement on Form S-8, File No. 333-58955, filed on July 13,
     1998.

(5)  Incorporated by reference to Exhibit 99.2 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.

<PAGE>   70

(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.

(13) Incorporated by reference to the correspondingly numbered exhibit to our
     Annual Report on Form 10-K for the year ended December 31, 1999, File No.
     0-20815, filed March 8, 2000.

(14) Incorporated by reference to Exhibits 4.19 through 4.24 to our Registration
     Statement on Form S-3, File No. 333-52028, filed December 18, 2000.

(15) Incorporated by reference to the correspondingly numbered exhibit to our
     Quarterly Report on Form 10-Q, File No. 0-20815, for the quarter ended
     March 31, 2000, filed May 15, 2000.

(16) Incorporated by reference to Exhibit 4.1 to our Form 8-K dated June 12,
     2000.

(17) Incorporated by reference to Exhibit 4.17 to our Quarterly Report on Form
     10-Q, File No. 0-20815, for the quarter ended June 30, 2000, filed August
     11, 2000.

(18) 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, 2000, filed November 14, 2000.

(19) Incorporated by reference to Exhibit 10.30 of our Quarterly Report on Form
     10-Q, File No. 0-20815, for the quarter ended June 30, 2000, filed August
     11, 2000.

(20) Incorporated by reference to Exhibit 10.31 of our Quarterly Report on Form
     10-Q, File No. 0-20815, for the quarter ended September 30, 2000, filed
     November 14, 2000.

(21) Incorporated by reference to Exhibit 10.32 of our Quarterly Report on Form
     10-Q, File No. 0-20815, for the quarter ended September 30, 2000, filed
     November 14, 2000.

(22) Appendix 5 of this exhibit is incorporated by reference to Exhibit 10.17 to
     our Registration Statement on Form S-3, File No. 333-41649, filed December
     5, 1997, as amended.

(23) Incorporated by reference to Exhibit 99.1 of our Registration Statement on
     Form S-8, File No. 333-44350, filed August 23, 2000.

(24) Incorporated by reference to Exhibit 99.2 of our Registration Statement on
     Form S-8, File No. 333-44350, filed August 23, 2000.

(25) Incorporated by reference to Exhibit 99.3 of our Registration Statement on
     Form S-8, File No. 333-44350, filed August 23, 2000.

(26) Incorporated by reference to Exhibit 99.4 of our Registration Statement on
     Form S-8, File No. 333-44350, filed August 23, 2000.


<PAGE>   71

(27) Incorporated by reference to Exhibit 4.16 of our Registration Statement on
     Form S-3/A, File No. 333-45072, filed October 24, 2000.

(28) Incorporated by reference to Exhibit 25.2 to our current report on Form
     8-K, File No. 0-20815, filed on February 1, 2001.