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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, 1998
 
                                       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)
 
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<S>                                              <C>
                   DELAWARE                                        77-0309686
        (STATE OR OTHER JURISDICTION OF                         (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                         IDENTIFICATION NO.)
</TABLE>
 
           297 NORTH BERNARDO AVENUE, MOUNTAIN VIEW, CALIFORNIA 94043
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
 
                                 (650) 919-6500
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
                                      NONE
 
           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
                         COMMON STOCK, $.001 PAR VALUE
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
 
     Based on the closing sale price of $20.4375 on March 17, 1999, the
aggregate market value of the voting stock held by non-affiliates of the
Registrant was $256,162,196.
 
     On March 17, 1999, there were outstanding 15,763,300 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 3, 1999, which will
be filed with the Securities and Exchange Commission, are incorporated by
reference to the extent stated here.
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<PAGE>   2
 
                               TABLE OF CONTENTS
 
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PART I..................................................................    1
  Item 1.   Business....................................................    1
  Item 2.   Properties..................................................   35
  Item 3.   Legal Proceedings...........................................   35
  Item 4.   Submission of Matters to a Vote of Security Holders.........   36
 
PART II.................................................................   37
  Item 5.   Market for the Registrant's Common Stock and Related Stock
            Matters.....................................................   37
  Item 6.   Selected Financial Data.....................................   38
  Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................   38
  Item 7A.  Quantitative and Qualitative Disclosures About Market
            Risk........................................................   43
  Item 8.   Financial Statements and Supplementary Data.................   44
  Item 9.   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure....................................   44
 
PART III................................................................   45
  Item 10.  Directors and Executive Officers of the Registrant..........   45
  Item 11.  Executive Compensation......................................   45
  Item 12.  Security Ownership of Certain Beneficial Owners and
            Management..................................................   45
  Item 13.  Certain Relationships and Related Transactions..............   45
 
PART IV.................................................................   46
  Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form
            8-K.........................................................   46
 
INDEX TO FINANCIAL STATEMENTS...........................................   46
 
SIGNATURES..............................................................   49
 
POWER OF ATTORNEY.......................................................   49
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                                    PART I.
 
ITEM 1. BUSINESS
 
     The following section contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Business Risks" and elsewhere
in this Form 10-K.
 
OVERVIEW
 
     Aviron is a biopharmaceutical company whose focus is the prevention of
disease through innovative vaccine technology. The Company's goal is to become a
leader in the discovery, development, manufacture and marketing of vaccines
which are sufficiently cost effective to justify their use in immunization
programs targeting the general population. Aviron's vaccine programs are based
on both classical live virus vaccine attenuation techniques and the Company's
proprietary genetic engineering technologies. Live virus vaccines, such as those
for smallpox, polio, measles, mumps, rubella and chicken pox, have had a long
record of success in preventing, and in some cases eliminating, disease.
 
     FLUMIST(TM), the Company's lead product candidate, is an investigational
cold adapted influenza vaccine delivered as an intranasal spray which has been
tested in over 11,000 children and adults. It has been shown to provide a high
protection rate against influenza with minimal adverse effects in a pivotal
Phase 3 clinical trial in children. Aviron is developing this live virus vaccine
for widespread annual use in children, healthy adults and high-risk adults and
expects to submit a marketing application to the U.S. Food and Drug
Administration ("FDA") in 1999.
 
     The Company has completed Phase 2 clinical trials for a live intranasal
vaccine for Parainfluenza Virus Type 3 ("PIV-3") to protect against croup and
intends to continue preparation for further clinical trials for PIV-3 in 1999.
The Company also is developing a subunit vaccine for Epstein-Barr Virus ("EBV")
to protect against infectious mononucleosis in collaboration with SmithKline
Beecham Biologicals, S.A. ("SmithKline Beecham"). A Phase 1 clinical trial of
this vaccine is being completed. In addition, Aviron expects to begin clinical
trials in 1999 for a vaccine candidate for Cytomegalovirus ("CMV") with the
National Institute of Allergy and Infectious Diseases ("NIAID") of the National
Institute of Health ("NIH"). Aviron is also using its proprietary Rational
Vaccine Design technologies to discover new live virus vaccines. Rational
Vaccine Design involves the addition of antigenic information to enhance the
virus' stimulation of the immune system, the deletion or modification of
virulence proteins, or the alteration of the virus' genetic control signals to
slow down its replication. The Company is applying these technologies to develop
vaccine candidates for diseases caused by Herpes Simplex Virus Type 2 ("HSV-2")
and Respiratory Syncytial Virus ("RSV").
 
BACKGROUND
 
  Prevention Technology in the Era of Managed Care and Cost Containment
 
     Market-based changes already underway in the United States health care
system are dramatically altering prospects for technologies which can be used to
manage disease or lower the cost of health care for patients in managed health
plans. Medical cost-containment efforts and the reorganization of United States
health care delivery into managed care systems are changing the basis of
competition for producers of health care products. Health maintenance
organization ("HMO") enrollment was approximately 67 million in the United
States in 1997 and is growing rapidly. Decision-makers in the United States,
such as HMO medical directors, clinical practice committees, and government
health authorities, are increasingly evaluating whether preventive technologies
are more cost effective than treating disease once it is present. For example,
vaccinations are widely used by managed care organizations and in government
programs. In determining whether to use a vaccine approved by the FDA, decision
makers consider whether it has been recommended by the Advisory Committee on
Immunization Practices ("ACIP") and by medical specialty societies and whether
it is cost effective.
 
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     Health care cost containment efforts are also evident in many of the
developed economies outside the United States. These efforts include physician
budgets in Germany and general practice schemes in the United Kingdom, where
doctors are given responsibility for the cost of their patients' overall care.
 
  The Immune System and Vaccines
 
     Infections occur when a pathogenic microorganism, such as a virus or
bacterium, invades body tissues and begins to replicate. The human immune system
responds with a battery of resources to contain and eliminate this threat. The
process begins when specialized cells recognize that molecules on the surface of
invading pathogens are foreign (antigens). Immune responses to contain and
eliminate the threat include:
 
     - Antibodies: Antigens stimulate the immune system to produce specific
       molecules (antibodies) which bind to and neutralize the virus or
       bacterium.
 
     - Cell-mediated response: An effective immune response typically also leads
       to the multiplication of specific types of white blood cells (a
       cell-mediated response) which have the ability to inactivate the pathogen
       or to destroy infected cells, thereby limiting replication of the virus
       or bacterium.
 
     - Mucosal immunity: In addition to circulating antibodies and the
       cell-mediated response, antibodies are produced in the mucous membranes,
       such as those which line the nose and throat. Mucosal immunity is
       important in protecting against pathogens which cause disease in the
       respiratory, gastrointestinal and genitourinary systems, or which enter
       the body through these portals.
 
     Vaccines are designed to stimulate a person's immune system through one or
more of the above mechanisms to induce memory of specific antigens prior to the
invasion of a pathogen. This memory primes the immune system so that it can
inactivate the specific pathogen if encountered again. This memory may be
achieved through one of several techniques, including introduction of a live
attenuated (weakened) virus or bacterium, administration of an antigen fragment
(a subunit), or administration of an inactivated (killed) virus or bacterium.
 
  History of Vaccines
 
     The first successful vaccine against an infectious disease was created by
Edward Jenner who, in 1796, demonstrated that introduction of infected material
from a diseased cow could be used to protect humans from the deadly smallpox
virus. Smallpox vaccination programs based on this live virus vaccine were
gradually adopted by industrialized countries, and a concerted global effort by
public health authorities in this century succeeded in eradicating smallpox from
the human population in the 1970s.
 
     Vaccines against two life-threatening bacterial diseases, diphtheria and
tetanus, came into use early in this century. These vaccines consist of
bacterial toxins which have been chemically inactivated. These are often
administered in combination with an inactivated pertussis bacterium vaccine to
prevent whooping cough. This combination is known as the "DTP" vaccine. Just
prior to World War II, a live attenuated virus vaccine was developed against
yellow fever, used primarily in protecting military personnel and those
traveling to areas where this disease is endemic. In the years after the war
following several widespread polio epidemics, Jonas Salk created the first
successful polio vaccine by growing the wild-type virus and inactivating it
before injection. Salk's vaccine was introduced into widespread use in the early
1950s, but was supplanted in the United States and many other countries by the
orally administered live attenuated polio virus vaccine developed by Albert
Sabin and first introduced in 1961. In the 1960s and 1970s, live attenuated
virus vaccines against measles, mumps and rubella (German measles) were
successfully developed and these vaccines are now recommended by the ACIP to be
included in childhood immunization programs.
 
     After a period of almost two decades during which no new vaccines came into
widespread use, genetically-engineered subunit vaccines for hepatitis B were
introduced in the mid-1980s and are now part of the ACIP-recommended childhood
immunization program. In 1990, a vaccine for bacterial meningitis was also added
to this program. Two inactivated vaccines against the hepatitis A virus were
approved in the United States in 1995 and 1996. In 1995, the ACIP also
recommended that children be vaccinated against chicken pox, a virus belonging
to the herpes virus family, using an FDA-approved live virus vaccine.
 
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     Current challenges for vaccine innovation include providing effective
protection against the major infectious diseases for which no vaccines are
currently available and improving on current vaccines to achieve higher efficacy
or greater ease of administration.
 
TYPES OF VACCINES
 
  Live Virus Vaccines
 
     Live virus vaccines expose the immune system to an attenuated form of the
virus which is sufficiently infectious to stimulate a lasting immune response to
the wild-type virus. All of the live virus vaccines in use today are strains
derived from natural infections of humans. Attenuation of live viruses,
including polio, yellow fever, measles, mumps and rubella, and chicken pox
vaccines was accomplished by "passaging," or propagating, these viruses
repeatedly in non-human cells. As a result of this process, these viruses may
acquire mutations that decrease the ability of the virus to cause disease in
humans. After an arbitrary number of passages, the mutated strain is tested for
attenuation in animal models, if available, or directly in human subjects.
Following assessment of safety and immunogenicity (stimulation of an immune
response) in a limited number of human subjects, larger-scale trials are used to
demonstrate efficacy in preventing naturally acquired infections.
 
     The principal advantage of live virus vaccines is their ability to mimic
the natural disease-causing infection and therefore activate the same protective
mechanisms of the human immune system as the disease itself. This process
results in a balanced immune response activating all parts of the immune system,
including systemic and local antibodies as well as cell-mediated immunity. As a
result, live viruses are often considered to be more effective than other types
of vaccines in providing immunity to natural variations in the wild-type viruses
which cause disease. For example, the live polio vaccine is believed to be more
effective in eliminating wild-type polio virus than inactivated polio vaccines.
The basis of these advantages is that live vaccines typically present all of the
surface and internal antigens associated with the natural pathogen. Live virus
vaccines may also be easier to administer through their natural route of
infection, intranasally or orally, as in the case of the oral polio vaccine.
 
     However, an attenuated live vaccine could cause disease resembling natural
infection, as might occur in people with an immune system impaired by a
congenital disease, HIV infection or drug treatment for cancer or organ
transplantation. To date, the live virus vaccines in widespread use rarely have
been associated with significant adverse events. For example, the 19 million
doses of live attenuated polio vaccine administered annually in the United
States are thought to be responsible for only eight to 10 cases of clinical
polio per year. To further reduce the number of these cases, the ACIP is
recommending a return to using the inactivated polio vaccine now that wild-type
polio has been virtually eradicated in the United States.
 
     Live virus strains can change as they replicate in human hosts, and it is
possible that a vaccine virus could revert to the wild-type characteristics.
This reversion potential is a small but recognized problem for some of the
current live vaccines, including polio. Finally, there are two theoretical
concerns regarding live attenuated viruses. First, an attenuated vaccine virus
may exchange genetic information with wild-type strains after immunization, with
the resulting strain being more dangerous than either alone. Second, the DNA of
a live virus vaccine could integrate into the genome of the host and cause
cancer or other problems in the future.
 
  Inactivated and Subunit Virus Vaccines
 
     Inactivated virus vaccines are produced by killing a virus using chemicals.
Some vaccines, such as the hepatitis A vaccine, are based on the whole,
inactivated virus. Other vaccines are the result of various degrees of
purification to concentrate certain surface glycoproteins (subunits) most
responsible for producing immunity. A different approach is used to make the
current hepatitis B vaccine, the first successful recombinant subunit vaccine.
For this vaccine, the tools of molecular biology were applied to clone and
express the dominant hepatitis surface glycoprotein in a yeast production
system. Inactivated and subunit vaccines offer the advantage of little or no
risk of infection from the vaccine itself, assuming the virus has been
 
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adequately inactivated. Good manufacturing techniques also minimize the
possibility of contamination with other viruses or fragments of DNA which could
integrate into the recipient's genes.
 
     The principal disadvantage of inactivated and subunit vaccines for many
viruses has been a lack of success in creating protective immunity. A successful
subunit vaccine requires knowledge of which specific antigens are responsible
for providing protection. Subunit and inactivated vaccines may produce
reasonable levels of circulating antibodies, but are less able to stimulate
antibodies in the mucosal sites of viral entry, such as the lining of the
respiratory, gastrointestinal or genitourinary tracts. To improve stimulation of
the cellular components of the immune system, adjuvants (non-specific immune
stimulants) are typically added to inactivated or subunit vaccines. Only alum
(an aluminum salt preparation) is approved for use as an adjuvant in the United
States. Several new adjuvants are in clinical testing and show promise for
boosting the immune response to subunit antigens. The mechanism by which
adjuvants work is still poorly understood, so each vaccine-adjuvant combination
must be evaluated in a trial and error process in animal models and clinical
trials. Finally, certain inactivated vaccines in clinical trials left recipients
more vulnerable to disease after vaccination, due to an unbalanced immune
response. For example, in trials of experimental inactivated vaccines against
RSV and measles, some children were shown to experience more severe, atypical
disease when they acquired the natural viral infection following vaccination.
 
  Emerging Vaccine Technologies
 
     Several companies and academic scientists have reported that direct
injection of DNA encoding viral antigens can be used to stimulate an immune
response. Although at an early stage, this approach shows promise. However, it
is not clear whether the sustained expression of viral antigens obtainable by
this approach is advantageous in eliciting a better immune response. In
addition, it is possible that the administered DNA may integrate into the genes
of the recipient and cause potential unwanted effects.
 
     Another new technology for vaccination is based on genetic engineering to
modify one virus so that it carries antigens which may stimulate an immune
response to protect against other pathogens. For example, pox virus vector
strains, related to the virus used successfully to eradicate smallpox, have
shown usefulness in protecting dogs and cats against rabies. Other pox virus
vectors are being evaluated in experimental models of human malaria and, in a
hybrid regimen combining doses of a modified live virus, with a subunit HIV
vaccine to protect high-risk individuals.
 
BUSINESS STRATEGY
 
     Aviron's objective is to become a leader in the discovery, development,
manufacture and marketing of vaccines which are sufficiently cost effective to
justify their use in immunization programs targeting the general population. The
Company's strategy is to:
 
     Develop Vaccines to Prevent Diseases That Merit Widespread
Immunization. The concept of universal immunization is well established for
certain infectious diseases where safe and effective vaccines are already
available, including immunization against pathogens such as polio, measles,
mumps, rubella and hepatitis B. For each of its potential products, the
Company's objective is to produce vaccine strains which are sufficiently safe
and cost effective to obtain official recommendations for universal use in
childhood vaccine regimens or, in the case of influenza, annual use in the
general population.
 
     Apply Rational Vaccine Design Technologies to a Range of Viral
Targets. Aviron believes that its proprietary genetic engineering technologies
may be used to create live attenuated vaccines for a wide range of viral
targets, such as respiratory viruses related to influenza and chronic virus
infections related to herpes simplex virus, and potentially to the creation of
vectors used in gene therapy and the treatment of cancer. One potential
advantage of Rational Vaccine Design technology is that the design of engineered
viruses makes them less likely to revert to naturally occurring ("wild-type")
characteristics than classically derived vaccines.
 
     Acquire Promising Products and Technologies. Aviron evaluates opportunities
to in-license or otherwise acquire rights to promising products and technologies
and intends to add programs that complement the Company's core technologies and
capabilities. For example, the Company obtained exclusive rights to the cold
 
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adapted influenza vaccine technology from the University of Michigan and the
NIH, and to the PIV-3 vaccine from the NIH.
 
     Select Programs and Market Vaccines Based on Pharmacoeconomic Data. Public
health agencies and managed care systems are increasingly concerned with the
economic impact of potential new mandates for vaccines. In setting its internal
product development priorities, the Company considers the costs of implementing
widespread vaccine programs based on its products in relation to potential cost
savings to governments and managed health care systems and intends to collect
data on effectiveness endpoints which allows rigorous cost-effectiveness
analyses on its products.
 
     Establish Collaborative Arrangements to Enhance Product Development
Efforts. Aviron intends to continue to enter into collaborative arrangements to
gain access to specific technologies and skills which may accelerate product
development and provide additional financial resources to support its research
and development and commercialization efforts, particularly outside of the
United States. The Company has entered into a worldwide collaboration for the
marketing of FLUMIST(TM) with Wyeth Lederle Vaccines, a business unit of
Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products
Corporation ("Wyeth Lederle"). The collaboration excludes Australia, New Zealand
and certain South Pacific countries, where FLUMIST(TM) is licensed to CSL
Limited of Victoria, Australia ("CSL Limited'), and Korea, where it is licensed
to Sang-A Pharm. Co. Ltd. ("Sang-A"). Aviron also has an agreement with
SmithKline Beecham for development of an EBV vaccine. See "Collaborative
Agreements."
 
     Establish Commercialization Capabilities. The Company has established
worldwide marketing collaborations for FLUMIST(TM) and will co-promote the
vaccine in the United States with its own dedicated sales force. Additionally,
the Company has retained the right to co-market a monovalent formulation of EBV
vaccine in the United States in its collaboration with SmithKline Beecham. See
"Collaborative Agreements."
 
AVIRON'S TECHNOLOGY
 
     Aviron's vaccine programs are based on both classical live virus vaccine
attenuation techniques and the Company's proprietary genetic engineering
technologies.
 
  Cold Adapted Influenza Technology
 
     The Company is applying its expertise in the molecular biology of influenza
to develop a live virus vaccine discovered using classical cold-adaptation
techniques. This cold adapted influenza vaccine technology was first developed
by Dr. H. F. Maassab at the University of Michigan in 1967. Dr. Maassab created
weakened influenza strains by propagating the virus in progressively colder
conditions until these strains had lost the ability to grow well at human body
temperature. The Company has obtained worldwide exclusive rights to this cold
adapted influenza vaccine technology.
 
     The cold adapted influenza vaccine technology includes the master donor
strains for influenza A and B, as well as techniques useful for updating the
vaccine each year according to recommendations of the United States Centers for
Disease Control and Prevention ("CDC") and the FDA. Updated strains are made by
mating the master donor strains with recent strains to obtain viruses with the
attenuated properties of the cold adapted master donor strain and the antigenic
properties of the current wild-type strain. This process is called reassortment.
After cultured cells are infected with two different strains of virus, the eight
RNA genes of influenza mix at random in the cells and it is possible to select
the two genes for the antigens of the expected epidemic strain and the six
remaining genes from the cold adapted master donor strain. The Company has
received the technology for updating the cold adapted master strains from the
University of Michigan and has extended this approach by the introduction of
Aviron's proprietary techniques. One such technique is reverse genetics, which
allows the direct introduction of genes from the expected epidemic strain into
the cold adapted master donor strains.
 
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  Rational Vaccine Design
 
     Since the Company's founding, its core vaccine discovery strategy has been
to apply genetic engineering techniques to create live attenuated virus vaccine
candidates for targets where traditional discovery techniques have been
inadequate. The Company believes that this Rational Vaccine Design approach is
more flexible and systematic than traditional methods of live vaccine discovery
and is a platform that can be applied to many viral targets and, potentially, to
the creation of vectors used in gene therapy and the treatment of cancer.
Furthermore, Aviron believes that a particular advantage of Rational Vaccine
Design is that engineered viruses can be designed so that they are less likely
to revert to wild-type characteristics than classically derived vaccines. Three
ways of implementing this approach are:
 
     - Adding antigenic information displayed by the vaccine virus. An example
       of this strategy is the Company's approach to the creation of a live
       attenuated CMV vaccine, which begins with a vaccine candidate thought to
       be over-attenuated and thus insufficiently immunogenic. Aviron discovered
       genes for certain antigen structures present in wild-type CMV viruses.
       These genes are being engineered into an over-attenuated vaccine
       candidate to create a potentially more immunogenic vaccine. The Company
       has identified several vaccine candidates using this approach. The
       Company believes this technique of adding antigen structures may enable
       the Company to create combination vaccines expressing antigens of more
       than one virus in a single vaccine strain. The Company plans to file an
       Investigational New Drug application ("IND") for the testing of its
       vaccine candidates.
 
     - Deleting or modifying specific viral genes which encode virulence
       proteins. Virulence proteins are viral components thought to be
       particularly important in the mechanism of disease, but which are not
       required for the virus to replicate and stimulate a strong immune
       response. An example of this strategy is the Company's program to create
       a live attenuated vaccine against the HSV-2 virus which causes genital
       herpes. One of the Company's founders, Dr. Bernard Roizman, discovered a
       particular protein important in the ability of HSV-2 to grow in nerve
       cells. Since nerve ganglia are the reservoir from which HSV-2 reseeds
       itself to cause painful skin lesions, deletion of the gene encoding this
       protein is the basis of the Company's Rational Vaccine Design program for
       development of a vaccine for this target.
 
     - Altering the genetic information used by the virus in controlling its
       replication. An example of this strategy is work by Company scientists to
       create live attenuated vaccine candidates for RSV, and a
       second-generation vaccine for influenza in the elderly. Until recently,
       it was impossible to genetically engineer vaccine strains of influenza
       because influenza genes are composed of negative strand RNA rather than
       DNA or positive strand RNA. Dr. Peter Palese, one of the Company's
       founders, discovered how to create recombinant negative strand RNA
       viruses using reverse genetics. Company scientists have employed this
       reverse genetics technology to engineer mutations into a gene used by the
       influenza virus to make copies of itself. The resulting strains are
       attenuated in animal models and at least one strain has been identified
       as a potential candidate for clinical trials.
 
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VACCINE PRODUCTS UNDER DEVELOPMENT
 
     The following table summarizes Aviron's most advanced potential products
under research and development. This table is qualified in its entirety by
reference to the more detailed descriptions appearing elsewhere in this Form
10-K.
 
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 PROGRAM                  VACCINE TYPE              STATUS(1)                 COMMERCIAL RIGHTS
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 Influenza
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   Children               Cold adapted live virus   Pivotal Phase 3 clinical  Wyeth Lederle/Aviron(2)
                                                    trial completed, BLA
                                                    planned
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   Adults                 Cold adapted live virus   Challenge efficacy study  Wyeth Lederle/Aviron(2)
                                                    completed
                                                    Phase 3 safety and
                                                    effectiveness trial
                                                    completed, BLA planned
------------------------------------------------------------------------------------------------------
   Elderly and High-risk  Cold adapted live virus   Clinical trials in        Wyeth Lederle/Aviron(2)
   Adults                 (co-administered with     progress
                          inactivated vaccine)
------------------------------------------------------------------------------------------------------
 Parainfluenza Virus      Bovine live virus         Phase 2 clinical trial    Aviron
 Type 3                                             in progress
------------------------------------------------------------------------------------------------------
 Epstein-Barr Virus       Recombinant subunit       Phase 1 clinical trial    SmithKline Beecham(3)
                          Glycoprotein              in progress
------------------------------------------------------------------------------------------------------
 Cytomegalovirus          Genetically engineered    Clinical trials planned   Aviron
                          live virus
------------------------------------------------------------------------------------------------------
 Herpes Simplex Virus     Genetically engineered    Preclinical               Aviron
 Type 2                   live virus
------------------------------------------------------------------------------------------------------
 Respiratory Syncytial    Genetically engineered    Preclinical               Aviron
 Virus                    live virus
------------------------------------------------------------------------------------------------------
</TABLE>
 
---------------
(1) "Pivotal Phase 3 clinical trial completed, BLA planned" means Aviron has
    completed a multi-center, double-blind, placebo-controlled clinical trial
    for safety and efficacy. The Company's goal is to submit a Biologic License
    Application ("BLA") in the summer or fall of 1999.
 
     "Challenge efficacy study completed" means Aviron completed vaccination of
    patients in a multi-center, double-blind, placebo-controlled clinical trial
    for safety, immunogenicity and efficacy.
 
     "Phase 3 safety and effectiveness trial completed, BLA Planned" means
    Aviron has completed a multi-center, double-blind, placebo-controlled
    clinical trial in healthy working adults for effectiveness endpoints such as
    days of respiratory illness, absence from work and medication use.
 
     "Clinical trials in progress" indicates that clinical trials are currently
    being conducted.
 
     "Phase 2 clinical trial in progress" means that Aviron is analyzing data
    from a double-blind placebo-controlled clinical trial for safety and
    efficacy in infants.
 
     "Phase 1 clinical trial in progress" indicates that a Phase 1 clinical
    trial in healthy adults is being completed by SmithKline Beecham.
 
     "Clinical trials planned" indicates that the Company has or is preparing
    final regulatory filings prior to initiation of clinical trials.
 
    "Preclinical" includes assessment of specific vaccine candidates for growth
    properties in cell culture and for attenuation or immunogenicity in animal
    models.
 
(2) Global commercial rights are licensed to Wyeth Lederle except for rights in
    Australia, New Zealand and certain South Pacific countries, which are
    licensed to CSL Limited, and rights in Korea, which are
 
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    licensed to Sang-A. Aviron retains certain United States co-promotion
    rights. See "-- Collaborative Agreements."
 
(3) Worldwide rights (except Korea) are licensed to SmithKline Beecham; Aviron
    retains certain United States co-promotion rights. See "-- Collaborative
    Agreements."
 
  Influenza
 
     Every year in mid- to late-winter, influenza spreads across the globe,
infecting an average of approximately 10 percent to 20 percent of the United
States population. In the United States, 35 to 50 million cases of influenza
occur annually. Influenza cases are associated with symptoms lasting for at
least three to five days, an average of approximately three days of lost work or
missed school, and approximately 20,000 deaths each year. Field studies indicate
the attack rate ranges from a low of 10 percent in persons over age 65 to a high
of 36 percent in children aged one to 18. Children are also a major factor in
spreading influenza to other population segments, including those at high risk
of developing serious complications from the disease. At the peak of a typical
epidemic, reportedly 9 percent to 22 percent of all physician office visits are
for flu-like symptoms. Over 90 percent of influenza-related deaths occur in
people over age 65, but children under age five and women in the third trimester
of pregnancy are also at higher risk for serious complications. Several times
during this century, influenza has appeared as a much more serious pandemic.
These major pandemics occur when the influenza virus undergoes "antigenic shift"
in which one influenza subtype is replaced by a different strain for which the
population has not developed antibodies and, therefore, for which it is
extremely susceptible to infection. The appearance of an avian influenza strain
in Hong Kong during the 1997-1998 flu season represents such a potential threat.
 
     The variability of certain components of the influenza virus requires that
the influenza vaccine be modified annually. The CDC and the World Health
Organization ("WHO") maintain a global network which generates data required to
select strains for the coming influenza season's vaccine and monitor the
occurrence of especially severe epidemics. Based on these data, the FDA and the
CDC discuss circulating influenza strains which are candidates for inclusion in
the following season's influenza vaccine in the United States. A similar process
is undertaken in Europe by the WHO and various national authorities. Currently
available inactivated influenza vaccines contain three strains of influenza
virus (two strains of influenza A and one strain of influenza B) and are
therefore called trivalent vaccines. Typically one or sometimes two of the
strains in these trivalent vaccines are recommended for updating annually.
Current vaccines have been variously reported to be 60 percent to 90 percent
effective in preventing illness, pneumonia, hospitalization and death due to
complications from influenza.
 
     The ACIP has identified the principal target groups for the current
influenza vaccine as those at increased risk for influenza-related
complications, including persons age 65 or older, residents of chronic-care
facilities, adults and children with chronic disorders of the pulmonary or
cardiovascular system, adults and children who have required regular medical
follow-up or hospitalization during the preceding year because of chronic
metabolic diseases or immunosuppression, children and teenagers receiving
long-term aspirin therapy and therefore at risk of developing Reye's syndrome,
and pregnant women. The next level of priority for vaccination identified by the
ACIP includes certain groups, such as health care personnel and household
members (including children), that may transmit influenza to high-risk persons.
Furthermore, the ACIP recommends that physicians administer influenza vaccine to
any person who wishes to reduce the chance of becoming ill with influenza.
 
     The FDA estimates that approximately 80 million influenza vaccine doses
were manufactured for use in the United States in 1997. According to the CDC, 65
percent of the 34 million Americans over age 65 received the annual influenza
vaccine during the 1997 calendar year, up from less than approximately 25
percent a few years earlier. The Company believes that a lower percentage of
high-risk individuals under age 65 are vaccinated annually, and that the
majority of influenza doses used in the United States are being administered to
healthy adults under age 65, many of whom participate in voluntary work place
immunization programs. Experts suggest that very few of the 70 million children
in the United States under age 18 receive the annual influenza vaccine.
 
                                        8
<PAGE>   11
 
     In addition to the currently available vaccines, two oral drugs are
currently approved for use in the prevention and treatment of influenza A:
amantadine, which has been on the market for many years, and rimantidine, a
closely related compound which produces fewer side effects. Both drugs have been
shown to be effective in reducing the severity of influenza A disease and the
number of days of disability, but are not effective against influenza B. Both
drugs are also recommended for daily use during the influenza season by certain
high-risk persons for whom the influenza vaccine is contra-indicated. However,
there is a concern that widespread prophylactic use could lead to emergence of
drug-resistant strains.
 
     Aviron's Cold Adapted Influenza Vaccine. The Company's most advanced
program is based on the live cold adapted influenza vaccine technology
discovered by Dr. H. F. Maassab, licensed from the University of Michigan and
subject to a Cooperative Research and Development Agreement ("CRADA") with the
NIH. This cold adapted influenza vaccine, FLUMIST(TM), has undergone and is
currently undergoing extensive clinical trials by Aviron, many of which are
coordinated with NIH-sponsored investigators. Prior to Company-initiated trials,
at least 90 clinical trials of the cold adapted influenza vaccine technology
were performed since 1977, involving more than 15,000 volunteers, of whom over
7,000 received the cold adapted influenza vaccine. See "-- Influenza Clinical
Trials."
 
     The Company is developing FLUMIST(TM) for widespread annual use in children
and adults and for co-administration with the inactivated vaccine for improved
protection in high-risk adults, including the elderly. The quality of the immune
response induced by cold adapted influenza vaccine differs from that induced by
inactivated influenza vaccines. FLUMIST(TM) elicits an immune response to
multiple viral proteins mimicking the natural immunobiology of influenza,
whereas the response to the classical inactivated vaccine is directed primarily
to two components of the virus. Because FLUMIST(TM) is delivered as a nasal
spray, rather than an injection, the Company believes it would provide a more
attractive way to immunize children on an annual basis. Children are an
important target because, while the elderly experience the greatest mortality
from the annual influenza epidemic, much of the illness occurs in young
children. Children are also thought to be an important factor in the spread of
influenza in the population. Aviron expects that initially FLUMIST(TM) will be
delivered in physicians' offices and other locations where the current
injectable influenza vaccine is given.
 
     Aviron is also targeting healthy adults, many of whom are being offered
influenza prophylaxis by their employer and who may prefer Aviron's intranasal
administration to injection. The Company believes that many adults who regularly
receive the inactivated influenza vaccine will select the intranasal vaccine if
given the choice, and that people who have avoided "flu shots" in the past may
receive a vaccination if the intranasal alternative is available. The Company
believes that immunization programs based on its intranasal cold adapted
influenza vaccine may also decrease the health professional's time per
vaccination compared to the current influenza injection and therefore allow
improved flexibility and efficiency in the operation of workplace programs. In
addition, the Company is developing its vaccine for co-administration by nasal
spray with the inactivated influenza vaccine injection for high-risk adults,
including the elderly. While efficacy in the elderly has not been conclusively
demonstrated, nursing home studies suggest that simultaneous administration of
the intranasal cold adapted influenza vaccine with an injection of the
inactivated vaccine offers added protection compared to administration of the
inactivated vaccine alone. Aviron intends to seek recommendations from the ACIP
and the American Association of Pediatrics ("AAP") and other medical advisory
bodies for use of the cold adapted influenza vaccine in the appropriate
population.
 
  Parainfluenza Virus Type 3
 
     PIV-3 is a common respiratory virus of childhood which causes 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. These cases are associated with symptoms lasting
from three to eight days and result in approximately 17,000 hospitalizations per
year. Children are also a major factor in introducing PIV-3 infection into the
family setting. PIV-3 frequently reoccurs 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.
 
                                        9
<PAGE>   12
 
     Both serum and nasal antibodies directed to PIV-3 surface proteins 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 serum
antibody levels, whereas resistance to infection and protection against disease
in the upper respiratory tract requires mucosal antibodies in the nose. There is
currently no available vaccine to protect against PIV-3 infection, and no drug
for treatment of PIV-3 disease.
 
     Aviron's Live Parainfluenza Virus Type 3 Vaccine. The Company's live
intranasal vaccine program for PIV-3 utilizes bovine PIV-3 ("bPIV-3") vaccine
technology licensed from the NIH. Use of bPIV-3 as a vaccine to protect humans
against human PIV-3 strains is based on the successful strategy first used by
Jenner for smallpox vaccination, in which an animal virus is used to protect
humans from the analogous human virus. It is thought that the attenuation of
bPIV-3 seen in primates is due to mutations sustained throughout its genome
during its long evolutionary adaptation to the bovine host.
 
     Prior to the Company's in-licensing of the bPIV-3 vaccine, it had been
tested in Phase 1 clinical trials in almost 100 adults, children and infants. In
all age groups, the bPIV-3 vaccine appeared satisfactorily attenuated, safe and
genetically stable. Eighty-five percent of seronegative infants and children
(six to 60 months of age) were infected by the tested dose, and 61 percent of
bPIV-3 recipients developed a rise in antibody to the human PIV-3 virus. The
vaccine strain infected 92 percent of infants younger than six months of age,
even in the presence of maternal PIV-3 antibodies. Infection with the bPIV-3
vaccine stimulated an immune response to human PIV-3 in 42 percent of these
young infants. A preliminary review of a Phase 2 clinical trial announced in
December 1998 found that after three doses, 79 percent of the vaccine recipients
showed evidence of immunization compared to seven percent of placebo recipients.
The trial met Aviron's pre-determined objectives for safety and immunogenicity.
Aviron intends to move forward with additional clinical development.
 
  Epstein-Barr Virus
 
     Epstein-Barr virus, a herpes virus that causes infectious mononucleosis,
infects most people at some point in their lifetime. Infection at a young age
may cause mild symptoms, but the debilitating syndrome of infectious
mononucleosis is most common when infection first occurs in adolescence or young
adulthood via exchange of saliva. Sore throat and swollen neck glands are
followed by a period of fatigue and lethargy which can last for weeks or even
months. Approximately 10 percent of high school and college students become
infected with EBV each year in the United States, of which half or more may
develop infectious mononucleosis. The disease usually runs its course without
significant medical intervention; however, the long duration of infectious
mononucleosis can be a serious problem for high school and college students and
workers.
 
     Enlargement of the liver and spleen are also common, so doctors typically
prohibit participation in athletic activities to prevent serious injuries. EBV
is one of the viruses implicated as a contributing cause of cancer in humans,
including Hodgkin's disease, post-transplant and other lymphomas, nasopharyngeal
carcinoma (the most common head and neck cancer in large regions of Asia) and
Burkitt's lymphoma (a significant disease in Africa).
 
     The Company is developing a subunit vaccine for EBV based on the single
surface antigen responsible for most of the neutralizing antibodies stimulated
by EBV infection. Quantities of this antigen have been expressed, purified and
evaluated in a rabbit model, where preliminary results indicate that the antigen
is immunogenic when combined with an adjuvant. In 1995, the Company entered into
a worldwide collaboration with SmithKline Beecham, excluding Korea, whereby
SmithKline Beecham will fund the development of Aviron's EBV vaccine in exchange
for certain marketing rights. SmithKline Beecham is completing a Phase 1
clinical trial in Europe of the subunit vaccine in healthy adults to evaluate
safety and immunogenicity. There can be no assurance that this trial will not
need to be repeated in the United States or that FDA approval will be obtained
for any future clinical trial or vaccine candidate. See "-- Collaborative
Agreements."
 
                                       10
<PAGE>   13
 
  Cytomegalovirus
 
     Most people become infected with CMV, another member of the herpes virus
family, at some time in their life, and in the United States 40 percent to 60
percent of infections occur in childhood. 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 also often 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 early in life or a primary infection. In addition,
if a woman is first exposed to this virus early in pregnancy, the resulting
infection can cause serious fetal abnormalities. Approximately 40,000 infants in
the United States are infected each year, resulting in varying levels of brain
damage or deafness in over 10 percent of these infants. Congenital CMV syndrome
results in significant expenditures for neonatal intensive care and potentially
lifelong custodial care.
 
     No vaccine currently is available for CMV. 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. The Company believes that widespread vaccination of children
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 by reducing the risk that mothers are exposed to
infected children.
 
     A live attenuated CMV vaccine candidate, 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 congenital CMV, or in transplant
recipients at risk of acquiring CMV from the donor organs. Aviron scientists
have discovered differences between the genome of the Towne strain and that of
wild-type CMV. Based on this knowledge, the Company has used its Rational
Vaccine Design approach to create new recombinant CMV vaccine candidates in an
attempt to strike the appropriate balance between attenuation and protection.
The NIAID filed an IND for a Phase 1 clinical trial of several of Aviron's CMV
vaccine candidates in December 1998. The proposed trial under this IND has been
placed on clinical hold by the FDA, and the Company and the NIAID believe that
the questions raised by the FDA can be resolved in order to begin a Phase 1
clinical trial in 1999. The Company expects to enter clinical trials in 1999 for
a CMV vaccine in conjunction with NIAID. However, no assurance can be given that
clinical trials will be commenced or, if commenced, will be successful, or that
the Company will develop successfully and receive FDA approval of its CMV
vaccine candidate.
 
  Herpes Simplex Virus Type 2
 
     It is estimated that HSV-2, the cause of genital herpes, infects one out of
five persons in the United States. Only one-third of those infected experience
symptoms, but a significant portion of new infections are caused by transmission
from asymptomatic individuals. Genital herpes is a non-lethal but incurable
disease that invades the body once and settles in for a lifetime, often
manifesting its presence several times a year with painful sores in the genital
area. It is estimated that there are over 700,000 new cases of genital herpes
per year in the United States, and that the disease is responsible for over
500,000 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. Even with therapy,
over 20 percent of the 1,500 infants infected each year in the United States
die, and many of the survivors are seriously impaired. In addition, efforts to
prevent neonatal herpes contribute significantly to the cost of the disease.
Thousands of women in the United States with a history of genital herpes are
advised to undergo a Cesarean section when prenatal cultures or examinations
suggest a recurrence near the time of delivery. HSV-2 infection can also lead to
serious and fatal complications in adults with impaired immune systems due to
AIDS or drug therapy for organ transplants.
 
     The most widely used drug therapy for HSV-2 disease is acyclovir, which has
been shown to reduce the severity and duration of herpetic lesions, although
most patients treated still experience symptoms for several days. When taken
several times a day as a prophylaxis for HSV-2, acyclovir also has been shown to
reduce the
 
                                       11
<PAGE>   14
 
frequency of recurrences. Several additional therapeutics are available or are
in the late stages of clinical trials, and several prophylactic vaccines are in
clinical trials; however, no vaccine currently is available to prevent genital
herpes. One company recently reported a lack of efficacy in Phase 3 clinical
trials of a subunit vaccine. A second company is conducting a Phase 3 clinical
trial of a different subunit vaccine, and a third company has announced
completion of a Phase 1 clinical trial of a disabled virus which can undergo
only a single cycle of replication after injection.
 
     Aviron has used its Rational Vaccine Design approach to create injectable
live attenuated vaccine candidates intended to prevent HSV-2 disease in
uninfected children and young adults. Two of the Company's 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
(HSV-1) backbone. After extensive preclinical testing, the virus was tested in
humans; however, the immune response following vaccination was deemed
insufficient. This insufficiency was attributed to the use of the HSV-1 backbone
from which too many important genes had been deleted, thus rendering the virus
over-attenuated. Aviron has licensed this technology, along with patents
covering strategies for more specific deletions, from ARCH Development
Corporation. Aviron has used this technology to create proprietary live vaccine
candidates using an HSV-2 backbone, which it has 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. The Company is developing additional vaccine
candidates and intends to use the results of further animal studies to select
one or more candidates for evaluation in clinical trials. There can be no
assurance, however, that the Company will commence or successfully complete
clinical trials on a timely basis, if at all.
 
     In July 1996, Aviron licensed certain of its patent rights covering or
related to the use of HSV-2 for treatment of cancer and for gene therapy, but
excluding use for vaccines, to NeuroVir Research, Inc., a private Canadian
corporation ("NeuroVir"). In exchange, Aviron 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. Aviron is under no obligation to fund development of this technology by
NeuroVir.
 
  Respiratory Syncytial Virus
 
     RSV is the major cause of lower respiratory tract illness in the very
young, responsible for over 90,000 hospitalizations and more than 4,000 deaths a
year in the United States. 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 only prevention for RSV
currently available is passive administration of antibodies, although one
company is testing a cold adapted live attenuated RSV vaccine in infants.
Available drug therapy is reserved for the most serious cases as it has
significant side effects. Aviron is developing a genetically engineered live
attenuated virus vaccine for RSV using its proprietary reverse genetics
technology. Aviron's 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 the Company will be successful in identifying a vaccine candidate.
 
INFLUENZA CLINICAL TRIALS
 
     The Company has conducted and continues to conduct clinical trials to
evaluate safety and efficacy of its live cold adapted influenza vaccine,
FLUMIST(TM), a trivalent vaccine. To date, the Company has tested FLUMIST(TM) in
over 11,000 children and adults. While the Company believes that it can use
previous trial data from others, including NIH and Wyeth-Ayerst Laboratories, a
division of American Home Products ("Wyeth"), to support its regulatory filings,
the Company's use of the previous data to establish safety and efficacy of its
proposed vaccine is limited because very few of the clinical trials involved a
trivalent vaccine delivered through a nasal spray device. The Company's clinical
trials relate to the safety and efficacy of the trivalent formulation as well as
the safety of its intranasal spray delivery method. The Company enrolled a
 
                                       12
<PAGE>   15
 
total of 647 patients in Phase 1/2 clinical trials, 92 patients in a challenge
efficacy study in adults, in collaboration with the NIH, and 1,602 children in
year 1 of the Phase 3 pediatric protective efficacy trial, approximately 85
percent of whom have returned for year 2 of the trial, and 5,758 adults and
children in five additional safety and in the healthy working adult
effectiveness trial. The Company has received limited data on the efficacy of
FLUMIST(TM) against culture-confirmed influenza from clinical trials in healthy
adults. There can be no assurance that data from such trials, in addition to
prior trials, will be sufficient to support the FDA approval in healthy adults.
The Company's clinical trials are being designed to support a planned Biologic
License Application ("BLA") submission in the summer or fall of 1999 seeking
approval of FLUMIST(TM) in several target populations. The estimated timing of
submission of this BLA and potential commercialization of FLUMIST(TM) are
forward-looking statements subject to risks and uncertainties, and there can be
no assurance that such filing or such approval will not be delayed materially or
that such commercialization will occur as a result of certain factors, including
those set forth in "Business Risks -- Uncertainties Related to Clinical Trials,"
"-- Uncertainties Related to Early Stage of Development; Technological
Uncertainty."
 
  Phase 1 and 2 Clinical Trials and Challenge Efficacy Trial
 
     Aviron conducted a safety and immunogenicity study in 1996 involving 239
healthy adults at three university research centers. Patients were randomly
assigned to receive either FLUMIST(TM) by nasal spray or nose drops, or placebo
by nasal spray or nose drops. No serious adverse events attributable to
FLUMIST(TM) were seen in any subjects, and there were no statistically
significant differences in the occurrence of fever, sore throat, runny nose,
cough, headache or any other potential reaction assessed in the study between
the vaccine or placebo or between the different types of administration.
Statistically significant serum antibody responses to all three strains in the
vaccine were observed in the subjects receiving FLUMIST(TM) compared to placebo.
The magnitude of these antibody responses was within the range of responses seen
in previous trials by others of the live cold adapted influenza vaccine, which
are lower than the serum responses typically observed following immunizations
with the inactivated influenza vaccine.
 
     In 1996, 238 children between the ages of 18 months and five years were
enrolled at four Vaccine Treatment Evaluation Units ("VTEUs") and 118 children
were enrolled at the Center for Vaccine Development in Santiago, Chile, in a
Phase 1/2 double-blind, placebo-controlled safety, immunogenicity and
dose-escalation study. The study design and endpoints were similar to the adult
study, except that the initial phases used a dose lower than that given to
adults. No serious adverse events were seen in any subjects in any of the three
phases of the dose escalation, and there were no statistically significant
differences in the occurrences of fever, sore throat, runny nose, cough,
wheezing, or irritability assessed in the study between the vaccine or placebo
or between the different types of administration. Statistically significant
serum antibody responses to all of the three strains were observed in the
subjects receiving the higher dose of FLUMIST(TM) compared to placebo. The
magnitude of these antibody responses was within the range of responses seen in
previous trials by others of the trivalent cold adapted influenza vaccine, which
are lower than the serum responses typically observed following immunizations
with the inactivated influenza vaccine.
 
     FLUMIST(TM) has also been tested in a double-blind, placebo-controlled
challenge efficacy study at two VTEUs involving 92 healthy young adults.
Subjects were randomized to receive either FLUMIST(TM), the inactivated
injectable vaccine or placebo. There were no serious adverse events attributable
to FLUMIST(TM) seen in any subjects, and there were no statistically significant
differences in the occurrence of any potential reactions assessed in the study
between either vaccine or placebo. Following vaccination and subsequent
intranasal administration of the wild-type challenge virus, the incidence of
laboratory-documented influenza, a prospectively defined primary endpoint of the
trial, was 7 percent in subjects vaccinated with FLUMIST(TM), 13 percent in
subjects vaccinated with the inactivated injectable influenza vaccine and 45
percent in subjects who received placebo. The reduction in laboratory-documented
influenza compared to placebo was statistically significant for FLUMIST(TM) and
the inactivated vaccine. The other prospectively defined primary endpoint of the
study was the proportion of subjects shedding the challenge virus after its
administration. No significant differences were seen between the two vaccines
and placebo in viral shedding.
 
     Of the recipients of FLUMIST(TM), 10 percent experienced moderate or severe
respiratory symptoms following administration of the wild-type influenza
challenge virus, a statistically significant reduction
 
                                       13
<PAGE>   16
 
compared to 39 percent of placebo recipients. The rate of moderate or severe
respiratory symptoms observed following challenge virus in the inactivated
injectable vaccine was 22 percent which was not statistically significant
compared to placebo. While the rate of respiratory illness seen in the placebo
group was consistent with previous influenza challenge efficacy trials by
others, the rate of febrile or systemic illness following challenge was lower
than in previous trials. These data have not been peer reviewed, however, no
assurance can be given that the conclusions drawn from this analysis will not
change as a result of further study by the Company or during the peer review
process.
 
  Phase 3 Clinical Trials in 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, the Company
initiated a two-year pivotal Phase 3 clinical trial to evaluate one-and two-dose
regimens in children. The Company's clinical trial data suggest that a repeat or
booster dose may be required in young children without previous exposure to
influenza or influenza vaccines. Two doses of the inactivated injectable
influenza vaccine are recommended annually for young children receiving
influenza prophylaxis for the first time. The Company enrolled 1,602 children at
10 clinical sites in the pivotal Phase 3 clinical trial, of which 1,314 were
vaccinated with a second dose 46 to 74 days after initial vaccination. The
primary endpoint of the first stage of the study was defined as protection of
children from culture-confirmed influenza during naturally occurring epidemics
of influenza.
 
     The data were unblinded in July 1997 following a single year of patient
accrual due to the adequate incidence of influenza in the study population. The
Company and NIAID announced that, based on an initial analysis of the first
stage of the Phase 3 trial, FLUMIST(TM) demonstrated a 93 percent protection
rate against culture confirmed influenza in those children receiving two doses,
the primary endpoint of the study. Only 1 percent of children receiving two
doses experienced culture-confirmed influenza, compared to 18 percent of those
receiving the placebo. These results were statistically significant. No serious
adverse events attributable to FLUMIST(TM) were seen in any subjects to whom
FLUMIST(TM) was administered. There were no statistically significant
differences in other side effects between FLUMIST(TM) and placebo recipients,
except for a somewhat increased incidence of transient runny nose, mild fever
and decreased activity following immunization in children receiving FLUMIST(TM).
The investigators described these transient side effects as comparable to or
milder than those observed following many other childhood immunizations.
 
     The clinical investigators presented the initial findings of this trial at
a scientific conference in the fall of 1997 and, in May 1998, data from the
first year of a Phase 3 clinical trial of FLUMIST(TM) were published in The New
England Journal of Medicine. In the randomized, placebo-controlled study,
results show that only 14 of the 1,070 children vaccinated with FLUMIST(TM)
experienced culture-confirmed influenza, while 95 of the 532 placebo recipients
experienced culture-confirmed influenza. Of the children who received
FLUMIST(TM), only one child developed influenza-associated ear infection, while
20 of the placebo recipients developed influenza-associated ear infections.
Throughout the entire cough, cold and flu season, 1,070 children vaccinated with
FLUMIST(TM) experienced 30 percent fewer ear infections with fever than children
who received placebo, and 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 flu season in the 1997-98 follow-on trial and
they were either vaccinated with a single dose of FLUMIST(TM), or a placebo
spray. In September 1998, the results of year 2 of the Phase 3 efficacy trial of
FLUMIST(TM) in children, conducted in collaboration with NIAID, were presented
at the Interscience Conference on Antimicrobial Agents and Chemotherapy (ICAAC).
The study showed that FLUMIST(TM) provided 100 percent protection against
culture-confirmed influenza strains included in the 1997 - 98 flu vaccine, and
86 percent protection against A/Sydney, an unexpected variant which was the
predominant strain of influenza circulating during the 1997-98 flu season.
Overall, FLUMIST(TM) provided 87 percent protection against all
culture-confirmed influenza. In the 1,358 participants, there were five cases of
influenza due to influenza strains included in the vaccine and 66 cases caused
by A/Sydney. Only two percent of children vaccinated with FLUMIST(TM) (15 out of
917) experienced culture-confirmed influenza, all of which was attributable to
the A/Sydney strain, while
 
                                       14
<PAGE>   17
 
13 percent of the placebo recipients (56 out of 441) experienced
culture-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(TM), 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(TM) experienced lower respiratory complications.
In the 15 of the 917 children in the FLUMIST(TM) group who did contract
influenza, the illness appeared to be milder than in the control group, based on
frequency of complications and duration of fever.
 
     The Company began a large scale clinical trial in August 1998 to access the
impact of community-wide influenza immunization. The three-year trial, taking
place in Temple, Texas, is expected to enroll up to 15,000 children and is
funded by a $3 million grant from the NIAID awarded to the Baylor College of
Medicine. The trial will evaluate the impact of vaccinating pre-school and
school-age children with FLUMIST(TM) on the incidence of doctor visits for
flu-related illness.
 
     On December 10, 1998, the Company reported on a meeting with the U.S. Food
and Drug Administration Center for Biologics Evaluation and Research (CBER)
regarding plans for submission of the Company's license applications for
FLUMIST(TM). Requirements for completion of the submission include data on
manufacturing, validation and stability. In addition, The Company is conducting
a bridging study in children designed to evaluate clinical comparability of
vaccine blended and filled at the Company's new Pennsylvania facility as
compared to vaccine used in earlier clinical trials. This 225-person trial is
fully enrolled and underway in Australia in collaboration with CSL Limited, the
Company's Australian marketing partner for FLUMIST(TM). The Company will include
safety and immunogenicity data from this clinical study in its licensing
applications for FLUMIST(TM). The Company's goal is to submit its application in
the summer or fall of 1999.
 
  Clinical Trials 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(TM) experienced
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. These data are intended to support models of the
cost-effectiveness of immunization programs based on FLUMIST(TM).
 
     Data from this trial were presented at the International Symposium on
Influenza and Other Respiratory Viruses. Those receiving FLUMIST(TM) missed 28.8
percent fewer days of work due to febrile upper respiratory illness and had 40.9
percent fewer days of health care provider visits. Participants also experienced
a 45.5 percent reduction in days of prescription antibiotic use, a 17.0 percent
reduction in days of non-antibiotic prescription drug use and 28 percent fewer
days of OTC medicine use.
 
     Study results show FLUMIST(TM) recipients had reductions in the occurrence
of illness by multiple definitions measured in the study including severe
influenza-like illness (18 percent less) and febrile upper respiratory tract
illness (23 percent less). The number of days of illness was also reduced in
FLUMIST(TM) recipients by 23 to 28 percent, depending on the specific illness
definitions. The prospectively determined primary endpoint was occurrence of
illness using the broadest definition, which was reduced in FLUMIST(TM)
recipients by 9.8 percent, a trend which did not reach statistical significance.
 
     The trial was a double-blind, placebo-controlled study conducted in 13
clinical sites nationwide during the 1997 - 98 flu season. Most study subjects
self-administered FLUMIST(TM) 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 febrile upper respiratory tract illness (upper
respiratory illness with fever).
 
                                       15
<PAGE>   18
 
  Clinical Trials in High-risk Adults
 
     The Company has completed a clinical trial for safety in 200 elderly
high-risk adults for the use of FLUMIST(TM) for co-administration with the
currently available injectable vaccine. Many of the participants in this trial
self-administered FLUMIST(TM). The Company intends to use this data to support a
label claim for safety for such co-administration in high-risk adults, including
the elderly. As this trial is not designed to generate efficacy data on use of
FLUMIST(TM) in high-risk adults, there can be no assurance that data from this
trial, combined with data from the Company's other clinical trials and prior
trials, will be sufficient to support FDA approval of an indication for use of
FLUMIST(TM) in high-risk adults even if the FDA were satisfied with the safety
data submitted. Early in the fourth quarter of 1998, the Cooperative Studies
program of the Department of Veterans Affairs Office of Research and Development
began a one-year trial to evaluate the potential additional benefit of
co-administration of FLUMIST(TM) with the flu shot, compared to the flu shot
alone, in high-risk patients with chronic lung disease, or chronic obstructive
pulmonary disease and emphysema. This study involves over 2,000 volunteers at 20
participating VA Medical Centers in the United States.
 
  Clinical Trials for Manufacturing Consistency and Process
 
     In February 1998, the Company reported positive results from a
manufacturing consistency lot trial of bulk vaccine manufactured, blended, and
filled into sprayers at Medeva Pharma Limited ("Medeva Pharma"), formerly Evans
Medical Limited, a subsidiary of Medeva PLC. The Company conducted a randomized,
double-blind, placebo-controlled trial in 500 children, designed to evaluate the
safety and immunogenicity of three new manufacturing lots of FLUMIST(TM). The
children were vaccinated between April and September 1997. Analysis of patient
diary cards and antibody responses following two doses of FLUMIST(TM) showed
consistent safety and immunogenicity for the different lots according to the
pre-defined endpoints. Evidence that different lots of vaccine can be
manufactured at a consistent quality level is generally required by the FDA
prior to approval of such products for commercial sale.
 
     On June 30, 1998, the Company submitted a Product License
Application/Establishment License Application (PLA/ELA) for FLUMIST(TM) to the
FDA. On August 31, 1998, Aviron reported that it had received notice that its
license applications were not accepted for filing. Requirements for resubmission
include additional data in the areas of manufacturing, validation and stability.
The Company is conducting a bridging study designed to evaluate clinical
equivalence of vaccine blended and filled at the Company's facility at Packaging
Coordinators, Inc., a division of Cardinal Health, Inc. ("PCI") compared to
vaccine used in earlier clinical trials. This 225-person trial has been
initiated in Australia in collaboration with CSL Limited, the Company's
Australian marketing partner for FLUMIST(TM). The Company will include safety
and immunogenicity data from this clinical study in its licensing applications
for FLUMIST(TM). The Company intends to resubmit its application in the summer
or fall of 1999. The resubmission will be in the form of a BLA, rather than a
PLA/ELA, in keeping with current FDA requirements. There can be no assurance
that the FDA will find these data sufficient to demonstrate consistency of
manufacture.
 
ADDITIONAL RESEARCH PROGRAM -- LIVE VIRUSES AS VECTORS
 
     Aviron believes that its virus engineering technology may be used to create
strains which carry "foreign" genes and are able to deliver genetic or antigenic
information to specific tissues in the host. For example, it is possible to
engineer antigens from other viruses into influenza, as has already been
demonstrated for small antigenic regions from agents such as HIV and malaria.
RSV and PIV-3 are two other important causes of childhood infections which may
be targeted by using the influenza virus as a vector to deliver antigens.
 
PRODUCTION AND MANUFACTURING
 
  Cold Adapted Influenza Vaccine
 
     Production of the cold adapted influenza vaccine requires the following
steps:
 
     Master Virus Seed Production. After the FDA and the CDC select the
influenza strains to be included in the vaccine, Aviron creates the respective
master virus seeds for use in large-scale production. These
 
                                       16
<PAGE>   19
 
contain the hemagglutinin (HA) and neuraminidase (NA) genes of the expected
epidemic strain and six genes conferring the cold adapted, attenuated properties
of the master donor strain. Two processes are available for Aviron to make the
master virus seeds: classical reassortment and reverse genetics. In the
classical reassortment process, laboratory virus cells are simultaneously
infected with the expected epidemic strain and the cold adapted master donor
strain, which results in random genetic reassortments between the two strains.
The specific reassortment desired is isolated using monoclonal antibodies. This
process takes approximately four to six weeks and has been used by scientists at
the University of Michigan and Aviron to create over 20 different vaccine
strains that have been tested in human clinical trials. In the reverse genetics
approach, HA and NA genes are isolated from the expected epidemic strain and
introduced into the cold adapted master donor strain using Aviron's proprietary
reverse genetics technology. Potential advantages of this process are that it
may be somewhat faster and may offer lower risk of contamination than classical
reassortment. Aviron has conducted a clinical trial to evaluate safety of the
reverse genetics process compared to the classical reassortment process. There
can be no assurance that the FDA will find this data sufficient to demonstrate
the acceptability of a particular approach to master virus seed production.
 
     Bulk Monovalent Formulation Production. Under the Company's current
arrangement with Medeva Pharma, the master virus seeds for each vaccine strain
are transferred to Medeva Pharma in the United Kingdom for large scale
production of the bulk monovalent formulations of the three vaccine strains,
which involves infection, incubation and harvesting from hen's eggs. The eggs
used in this process are supplied by a third party that maintains flocks
certified to be free of specific pathogenic agents.
 
     Trivalent Formulation Production. The bulk formulation is frozen and
transferred to PCI in Pennsylvania where the monovalent vaccine material is
blended into the trivalent formulation for filling into nasal spray devices,
packaged and labeled. In 1998, the Company opened a 34,000-square-foot
manufacturing suite in PCI's site. If regulatory approval is received, the PCI
facility will be used for blending, filling, packaging, labeling and storage of
FLUMIST(TM).
 
     The Company currently does not have licensed facilities to manufacture
FLUMIST(TM) and has no direct experience with large scale manufacture of this
potential product. All of the cold adapted vaccine material used in the
Company's early stage clinical trials has been supplied solely by Medeva Pharma
pursuant to an agreement between the Company and Medeva Pharma entered into in
November 1995 (the "Medeva Pharma Clinical Agreement"). Pursuant to this
agreement, the Company has received timely and sufficient supplies for its
clinical trials of FLUMIST(TM) through four influenza seasons. Medeva Pharma is
one of four companies licensed by the FDA to produce influenza vaccine for sale
in the United States and produces its own injectable inactivated influenza
vaccine. Under the Medeva Pharma Clinical Agreement, Medeva Pharma is producing
and supplying the Company with sufficient quantities of FLUMIST(TM) to conduct
its current clinical trials, subject to certain limitations. Under the Medeva
Pharma Clinical Agreement, Medeva Pharma has been performing work for Aviron
intended to result in a liquid formulation of FLUMIST(TM) requiring only
refrigeration rather than frozen storage. The Company believes that a liquid
formulation will be required to address markets outside the United States and
Canada. The Company is also conducting development work on the liquid
formulation at its facilities in California.
 
     The Company initially plans to obtain commercial quantities of bulk vaccine
of FLUMIST(TM) from Medeva Pharma. Under an agreement between the Company and
Medeva Pharma entered into in April 1997 (the "Medeva Pharma Commercial
Agreement"), Medeva Pharma has agreed to manufacture FLUMIST(TM) in bulk until
December 31, 2001, so as to meet the Company's needs for bulk product through
the 2001 - 2002 influenza season. In October 1997, the Company entered into a
nonexclusive arrangement with PCI for the blending, filling, packaging, and
labeling of FLUMIST(TM) for commercial sale in the United States until October
2004 (the "PCI Agreement"). In the event of a better than expected market
acceptance, the Company may be capacity constrained on its supply of vaccine
through at least the 2000 - 2001 influenza season. In order to secure future
production capacity, the Company may extend and expand its existing
arrangements, collaborate with other third parties, or establish its own
manufacturing facilities. Using an alternative supplier or building a
proprietary facility would require a substantial amount of funds and additional
clinical trials and testing. There can be no assurance that an alternative
source of supply will be established on a timely basis, or that the Company will
have or be able to obtain funds sufficient for building or equipping a new
facility. In early 1999, the Company entered into a lease
 
                                       17
<PAGE>   20
 
agreement for approximately 69,000 square feet of office, laboratory and
manufacturing space in Santa Clara, California. The Company has leased this
facility through January 2019, with an option to renew for seven years. The
Santa Clara facility, as well as the subsequent establishment of alternative or
proprietary sources for supply or manufacturing, would require FDA approval for
each such facility.
 
     The production of FLUMIST(TM) is subject to the availability of a large
number of specific pathogen-free hen eggs, for which there are currently a
limited number of suppliers. The Company has been purchasing its egg
requirements from a single supplier on a purchase order basis, rather than
pursuant to any long term contractual arrangement. Contamination or disruption
of this source of supply would adversely affect the ability to manufacture
FLUMIST(TM). The production FLUMIST(TM) is also subject to the availability of
the device for delivery of the vaccine intranasally. In August 1998, the Company
and Becton Dickinson and Company ("Becton Dickinson") entered into a worldwide
exclusive supply agreement under which Becton Dickinson will supply the Company
with its AccuSpray(TM) non-invasive nasal spray delivery system for the
administration of FLUMIST(TM) through the 2001 - 2002 flu season. There can be
no assurance that these suppliers will provide timely and adequate supply of
these product components and raw materials. In addition, the Company depends on
the submission by the delivery device manufacturer of a Device Master File
application ("DMF") for separate review by regulatory authorities; the Company
will reference the DMF as part of the BLA submission for FLUMIST(TM).
 
     The Company's current frozen formulation of FLUMIST(TM) is being designed
to meet an acceptable level of stability for the U.S. market initially targeted
by the Company. There can be no assurances that the Company will succeed in
achieving adequate product stability for FLUMIST(TM). In addition to its current
frozen formulation, the Company is exploring alternative formulations and
presentations for FLUMIST(TM) which may enable improved distribution and longer
shelf life. There can be no assurance that the Company will succeed in achieving
adequate product stability for the current frozen formulation of FLUMIST(TM),
that the Company's efforts to produce such alternative formulations will be
successful, or that such alternative formulations will actually enable improved
distribution and longer shelf life.
 
     The production and marketing of influenza vaccine is highly seasonal.
Because most cases of influenza occur in winter, the majority of influenza
vaccinations in the Northern Hemisphere occur between September and December of
a given year. Influenza viruses have a high mutation rate and the surface
antigens of influenza viruses that induce protective immunity are variable from
year to year. Each spring, the FDA and the CDC determine circulating influenza
strains that will be included in the season's influenza vaccines. As a result,
manufacturers of vaccines must modify their influenza vaccines each year to
include the selected strains in a form that meets FDA guidelines, within an
approximately six-month period, in order to make it available before the
influenza season. As such, the Company must establish a dependable process by
which FLUMIST(TM) may be modified and manufactured on a timely basis to include
different strains each year. If the Company were unable to develop an influenza
vaccine for a particular year that meets FDA and CDC guidelines, the Company
would receive no revenues from an influenza vaccine for that influenza season,
which would materially adversely affect the Company's business, financial
condition and results of operation, given the relatively fixed nature of its
operating expenses over the short term. Failure of one of the Company's
suppliers to deliver timely and sufficient supplies to the Company, if it caused
the Company to be unable to deliver vaccines during the peak demand period for
the influenza season, would have a disproportionately adverse effect on the
Company's financial results.
 
  Other Products
 
     In 1996, the Company completed construction of a pilot manufacturing
facility for its potential vaccine products other than FLUMIST(TM). The Company
currently does not have facilities to manufacture any of its other potential
products in commercial quantities and has no experience with commercial
manufacture of vaccine products. To manufacture its other potential products for
large-scale clinical trials or on a commercial scale, the Company may be
required to build a large-scale manufacturing facility, which would require a
significant amount of funds. The scale-up of manufacturing for commercial
production would require the Company to develop advanced manufacturing
techniques and rigorous process controls. No assurance can be given as to the
ability of the Company to produce commercial quantities of its potential
products in compliance with applicable regulations or at an acceptable cost, or
at all.
 
                                       18
<PAGE>   21
 
     The Company is alternatively considering the use of contract manufacturers
for the commercial production of its other potential products. The Company is
aware of only a limited number of manufacturers which it believes have the
ability and capacity to manufacture its other potential products in a timely
manner. There can be no assurance that the Company would be able to contract
with any of these companies for the manufacture of its products on acceptable
terms, if at all. If the Company enters into an agreement with a third-party
manufacturer, it may be required to relinquish control of the manufacturing
process, which could adversely affect the Company's results of operations.
Furthermore, a third-party manufacturer also would be required to manufacture
the Company's products in compliance with state and federal regulations. Failure
of any such third-party manufacturer to comply with state and federal
regulations and to deliver the required quantities on a timely basis and at
commercially reasonable prices would materially adversely affect the Company's
business, financial condition and results of operations. No assurance can be
given that the Company, alone or with a third party, will be able to make the
transition to commercial production of its potential products successfully, if
at all, or that if successful, the Company will be able to maintain such
production.
 
MARKETING AND SALES
 
     The current purchasers of vaccines are principally physicians, large HMOs
and state and federal government agencies. However, the United States health
care system is undergoing significant changes and the relative proportion of
purchasers that each group will represent in the future will depend on factors
such as legislative changes and the economy. The Company intends to participate
in the selling of its products to HMOs, large employers and state and federal
health care agencies, either directly or through a collaboration with another
company. Outside the United States, the Company plans to sell its products
through collaborative agreements with strategic partners. Aviron intends to use
rigorous cost-effectiveness analysis as a guide for its pricing strategy and in
support of its marketing plans.
 
     Clinical trials of FLUMIST(TM) have been conducted to provide information
regarding its use in three market segments: children, healthy adults, and adults
at high-risk of influenza complications due to age or to the presence of chronic
medical conditions such as heart or lung disease or diabetes. Use of influenza
vaccines in these three segments is subject to somewhat different market forces,
and customers are accessed by different channels of distribution.
 
  Children
 
     The current injectable influenza vaccine is often 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. There are approximately 70 million children
under age 18 in the United States. The current injectable vaccine is rarely used
in healthy children, although children have the highest attack rate of influenza
and play a major role in the spread of the influenza epidemic. The Company's
objective is to develop a new market for influenza prophylaxis in healthy and
high-risk children by offering an alternative to the injectable vaccine. Because
FLUMIST(TM) is delivered as a nasal spray, rather than an injection, the Company
believes it would provide a more attractive way to immunize children on an
annual basis.
 
  Healthy Adults
 
     Aviron believes that a large proportion of the current injectable influenza
vaccine used in the United States is being administered to healthy adults,
either via workplace-sponsored immunization programs or in programs offered
through clinics, pharmacies or other retail outlets. The Company estimates that
there are approximately 120 million adults in the United States who are not at
high-risk for influenza complications. Aviron's objective is to expand the
current market for influenza prophylaxis by offering an alternative for
individuals who are deterred by the injectable route of delivery of the current
product. The Company believes that immunization programs using FLUMIST(TM) may
also decrease the health professional time per vaccination compared to the
current influenza injection and therefore allow improved flexibility and
efficiency in the operation of such programs. A majority of the participants in
the Company's clinical trials for adults self-administered FLUMIST(TM).
 
                                       19
<PAGE>   22
 
  High-risk Adults
 
     The Company is currently conducting a clinical trial in elderly high-risk
adults to evaluate the effectiveness of FLUMIST(TM) when co-administered with
the injectable influenza vaccine, compared to the injectable influenza vaccine
alone. See "Influenza Clinical Trials" section. If this trial is successful, and
regulatory approval is received, the Company intends to market FLUMIST(TM) to be
used in conjunction with the injectable influenza vaccine for adults over age 65
(approximately 34 million Americans) and for adults under age 65 with conditions
which put them at higher risk of influenza complications (approximately 20
million Americans).
 
COLLABORATIVE AGREEMENTS
 
     The Company's strategy for the development, clinical trials, manufacturing
and commercialization of certain of its products includes maintaining and
entering into various collaborations with corporate partners, licensors,
licensees and others. There can be no assurance that the Company will be able to
maintain existing collaborative agreements, negotiate collaborative arrangements
in the future on acceptable terms, if at all, or that any such collaborative
arrangements will be successful. To date the Company has entered into the
following collaborative agreements.
 
  Wyeth Lederle Vaccines
 
     On January 12, 1999, Wyeth Lederle Vaccines, a business unit of
Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products
Corporation ("Wyeth Lederle"), and Aviron announced a worldwide collaboration
for the marketing of FLUMIST(TM). This agreement became effective in March 1999
following the termination of Hart-Scott-Rodino review.
 
     Under this agreement, the Company granted Wyeth Lederle exclusive worldwide
rights to market FLUMIST(TM), excluding Korea, Australia, New Zealand and
certain South Pacific countries. Aviron and Wyeth Lederle will co-promote
FLUMIST(TM) in the United States, while Wyeth Lederle will have the exclusive
right to market the product outside the United States. In each case, Wyeth
Lederle will hold the marketing rights for up to 11 years. Aviron and Wyeth
Lederle will also collaborate on the regulatory, clinical, and marketing
programs for FLUMIST(TM).
 
     The Company received a cash payment of $15 million upon execution of the
collaboration, and will receive $15 million upon acceptance by the FDA of a BLA
filing and $20 million upon FDA marketing approval for FLUMIST(TM). Compensation
for achieving additional development and regulatory milestones is included in
the agreement terms. The granting of certain other rights under the license
would trigger additional payments by Wyeth Lederle in excess of $140 million to
Aviron.
 
     Wyeth Lederle is committed to provide up to $40 million in future financing
to Aviron, a portion of which is contingent upon FDA approval of FLUMIST(TM),
with the remaining amount to come from participation in future Aviron securities
offerings. The total potential value for the license fees, milestones and
financing support that Aviron could receive exceeds $400 million. No assurance
can be given, however, that the Company will receive any future payments from
Wyeth Lederle. Sales of FLUMIST(TM) and future payments to the Company are
dependent on the successful development, manufacturing, supply, sale and
distribution of FLUMIST(TM) by the Company, its third party suppliers and Wyeth
Lederle.
 
     Wyeth Lederle will distribute FLUMIST(TM) and record all revenues. In
addition to the payments mentioned above, Aviron anticipates that it will
receive in the range of 40 percent of FLUMIST(TM) revenues from Wyeth Lederle,
in the form of product transfer payments and royalties, which increase at higher
sales levels. Aviron will incur expenses to supply and co-promote FLUMIST(TM).
 
  CSL Limited
 
     On June 22, 1998, the Company and CSL Limited of Victoria, Australia ("CSL
Limited"), announced that they will collaborate on the development, sale and
distribution of FLUMIST(TM), in Australia, New Zealand and certain countries in
the South Pacific (the "Territory"). CSL Limited and the Company will jointly
carry
 
                                       20
<PAGE>   23
 
out additional clinical trials in Australia for FLUMIST(TM). Under the
agreement, CSL Limited will sponsor the marketing application with the
Therapeutic Goods Administration, Australia's equivalent to the FDA. CSL Limited
will have exclusive rights to sell and distribute FLUMIST(TM) in the Territory.
Aviron and CSL Limited will share profits of FLUMIST(TM) in the Territory. The
Company will also benefit from expansion of CSL Limited's current flu vaccine in
pediatric and healthy adult market segments following the approval to market
FLUMIST(TM) in the Territory. In addition, CSL Limited has agreed, under an
option agreement, to grant warrants to the Company to purchase CSL Limited
common stock upon CSL Limited's attainment of certain milestones.
 
  National Institute of Allergy and Infectious Diseases -- Parainfluenza Virus
Type 3
 
     In May 1996, the Company obtained exclusive rights from the NIAID of the
NIH to certain biological materials and clinical trial data for its PIV-3
program. The NIH granted to the Company exclusive rights in specific strains of
bovine parainfluenza virus (the "Licensed Materials") to develop, test,
manufacture, use and sell products for vaccination against human parainfluenza
virus and other human and animal diseases ("Licensed Products"). In addition,
the Company obtained from the NIAID the right to reference an existing IND and
certain data relating to the Licensed Materials. The NIH retained certain 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, the Company 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 the Company
or its sublicensee. The Company has 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, the Company signed an agreement with SmithKline Beecham
Biologicals, S.A. ("SmithKline Beecham") defining a collaboration on the
Company's EBV vaccine technology (the "SB Agreement"). Under the terms of the SB
Agreement, the Company granted SmithKline Beecham an exclusive license to
produce, use and sell non-live EBV vaccines incorporating the Company's
technology for prophylactic and therapeutic uses on a worldwide basis, except in
Korea. In addition, SmithKline Beecham obtained a right of first refusal to an
exclusive, worldwide (except Korea) license under any intellectual property
rights relating to any live EBV vaccine technology developed or controlled by
the Company during the term of the SB Agreement. The Company has retained the
right to co-market a monovalent formulation of the EBV vaccine in the United
States and to have SmithKline Beecham supply such vaccine.
 
     SmithKline Beecham agreed to fund research and development at the Company
related to the EBV vaccine, in specified minimum amounts, during the first two
years of the SB Agreement. SmithKline Beecham made an initial up-front payment
to the Company and agreed to make additional payments upon the achievement of
certain product development milestones; the first such milestone payment was
made in 1997. The Company is entitled to royalties from SmithKline Beecham based
on net sales of the vaccine. Unless otherwise terminated, the SmithKline Beecham
Agreement will expire on a country-by-country basis upon the expiration or
invalidation of the last remaining patent covered by the SB Agreement or 10
years from the date of first commercial sale of the vaccine, whichever is later.
The SB Agreement may be terminated by SmithKline Beecham with respect to any
country at any time.
 
  Sang-A Pharm. Co., Ltd.
 
     In May 1995, the Company entered into a Development and License Agreement
with Sang-A Pharm. Co., Ltd. ("Sang-A"). The Company granted to Sang-A exclusive
clinical development, manufacturing and marketing rights in Korea for specified
products developed by Aviron, including vaccines for influenza (cold adapted and
recombinant), EBV, CMV, HSV-2 and RSV. However, the Company is under no
obligation to develop any product. Sang-A also will make payments to the Company
upon Sang-A's meeting certain regulatory milestones for each product in Korea
and will pay a royalty to the Company on net sales of such products in South and
North Korea ("Korea").
 
                                       21
<PAGE>   24
 
     Sang-A also is obligated to establish a manufacturing facility with at
least enough capacity to meet demand for all Korean product requirements for
each product that reaches commercialization, if any. In the event that Sang-A's
manufacturing capabilities satisfy certain objective criteria and, subject to an
obligation to cooperate with the Company's future corporate partners for any
given products, Sang-A has a right of first refusal to manufacture a portion of
the total requirements of the Company, its affiliates and sublicensees for the
specified products, with the exception of the EBV vaccine, in specified
countries, including the United States, provided that it can do so at a
competitive price, quality and timeline. Sang-A's right of first refusal has
expired with respect to FLUMIST(TM) and PIV.
 
     The term of this agreement extends, on a product-by-product basis, until 10
years from the date of first commercial sale of each product in Korea. At the
conclusion of the term, Sang-A has an option to extend the agreement on a
product-by-product basis, for the longer of an additional 10 years or the
expiration of the patents covering such product. During any such extension,
Sang-A will have either no royalty obligation to the Company or a reduced
royalty obligation, depending on the product.
 
     In return for the rights granted to Sang-A, Sang-A made an equity
investment in the Company in May 1995 of approximately $4.0 million. Sang-A
subsequently made additional equity investments of approximately $1.6 million in
the Company's private placement of Series C Preferred Stock and $1.9 million in
connection with the Company's initial public offering of Common Stock.
 
     In January 1997, Sang-A declared bankruptcy. In March 1998, the Company
entered into a Stock Repurchase Agreement with Sang-A under which the Company
repurchased 530,831 shares from Sang-A at a price of $25.13 per share. The
Company is unable to predict what, if any, long-term effect the bankruptcy will
have on Sang-A and on the Company's agreement with Sang-A.
 
  National Institute of Allergy and Infectious Diseases -- Cold Adapted
Influenza Vaccine
 
     Following a competitive application process, the Company entered into a
CRADA in March 1995 with the NIAID of the NIH to conduct clinical trials of the
Company's 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. Aviron has
obtained from the NIH and the University of Michigan exclusive rights to trial
results and data from the work at the VTEUs and Wyeth-Ayerst. The NIH has agreed
to support the trials by enrolling subjects in its network of VTEUs. In
addition, the Company acquired exclusive commercial rights to data generated
from all previous clinical trials conducted by the NIH and Wyeth-Ayerst using
the vaccine. The term of the CRADA will not exceed five years without a written
amendment by the parties. The Company and NIAID are discussing a possible
extension of the CRADA. Either party may terminate the CRADA for material
breach.
 
  University of Michigan
 
     In February 1995, the Company entered into a materials transfer and
intellectual property agreement (the "Michigan Agreement") with the University
of Michigan. Pursuant to the Michigan Agreement, the University of Michigan
granted the Company exclusive worldwide rights to certain intellectual property
and technology relating to the cold adapted influenza vaccine and proprietary
master donor strains of influenza viruses useful in the production of products
for vaccination against influenza and potentially for gene therapy and other
uses. Specifically, the Company obtained the exclusive right to develop,
manufacture, use, market and sell products incorporating any such intellectual
property or utilizing the master strains worldwide. In consideration for the
rights granted to the Company, the Company: (i) made an initial cash payment to
the University of Michigan; (ii) agreed to pay a royalty to the University of
Michigan on net sales of products subject to the license; (iii) entered into a
sponsored research agreement with the University of Michigan for a period of at
least two years; and (iv) issued to the University of Michigan 1,323,734 shares
of Series B Preferred Stock, which automatically converted into 264,746 shares
of the Company's Common Stock at the time of the Company's initial public
offering. In addition, in the event that Aviron receives approval to
commercially market a product based on the University of Michigan technology,
the Company has agreed to issue a warrant to the University of Michigan to
purchase shares of the Company's Common Stock at a price
 
                                       22
<PAGE>   25
 
of $10.00 per share, for a number of shares to be based on 1.25 percent of the
Common Stock outstanding on the date of the first commercial sale of the product
incorporating the University of Michigan technology.
 
     Pursuant to the Michigan Agreement, the Company is required to grant to the
University of Michigan an irrevocable, royalty-free license for research
purposes, or for transfer to a subsequent licensee should the Michigan Agreement
be terminated, to (i) all improvements developed by the Company, its 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 (ii)
all new technical information acquired by the Company, its affiliates or
sublicensees relating to the Master Strains and products.
 
     The term of the Michigan Agreement is until the later of the last to expire
of the University of Michigan patents licensed to the Company or 20 years from
the date of first commercial sale of a product incorporating the Michigan
technology. The Company has the further right to terminate for any reason upon
12 months notice to the University of Michigan.
 
  The Mount Sinai School of Medicine
 
     In February 1993, the Company entered into a technology transfer agreement
with The Mount Sinai School of Medicine ("Mount Sinai"). Under this agreement,
Mount Sinai assigned to the Company all of its rights, title and interest in and
to certain patents and patent applications, as well as all associated know-how
and other technical information relating to recombinant negative strand RNA
virus expression systems and vaccines, attenuated influenza viruses and certain
other technology. Mount Sinai also granted the Company (i) an option to acquire
any improvements to the inventions disclosed in the assigned patents and patent
applications thereafter developed by Mount Sinai and (ii) a right of first
negotiation for a license or assignment to certain additional related
technology. In consideration for the rights granted to the Company, the Company
issued to Mount Sinai 35,000 shares of the Company's Common Stock. The Company
also issued to Mount Sinai four warrants to purchase up to a total of 45,000
shares of the Company's Common Stock, each exercisable for a term of five years
commencing upon the occurrence of certain milestone events. As of December 31,
1998, warrants to purchase 6,224 shares were exercisable at a per share exercise
price of $4.50. Warrants to purchase 29,750 shares became exercisable at the
effective date of the Company's initial public offering at a per share exercise
price of $10.00. Warrants to purchase the remaining 6,250 shares were terminated
on the effective date of the Company's initial public offering according to
their terms. In 1996, warrants to purchase 3,124 shares were distributed by
Mount Sinai to certain inventors of the relevant technology, of which 1,874 were
exercised in 1997 and 902 were exercised in 1998.
 
  ARCH Development Corporation
 
     In July 1992, the Company entered into a license agreement with ARCH
Development Corporation ("ARCH"), pursuant to which the Company obtained an
exclusive, worldwide commercialization license, with the right to sublicense, to
certain 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 the Company under this agreement,
the Company 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 the Company
certain 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. In connection with this agreement, ARCH purchased
40,000 shares of the Company's Common Stock. Subsequent to this agreement,
affiliates of ARCH made equity investments in Aviron, purchasing shares of the
Company's Series A, B and C Preferred Stock, which automatically converted into
a total of 222,799 shares of the Company's Common Stock upon the closing of the
Company's initial public offering. ARCH has asserted an interpretation of the
financial terms of this agreement with the Company, relating to the license by
Aviron of its EBV technology to SmithKline Beecham, which would require the
Company to pay ARCH one-half of any future or past payments (including
sub-license fees and milestone payments) received by Aviron under the SB
Agreement. The Company disputes ARCH's interpretation of the financial terms of
the agreement. No assurance can be given, however, that the
 
                                       23
<PAGE>   26
 
Company's interpretation will prevail. Failure of the Company to prevail could
have a material adverse effect on the Company's business, financial condition
and results of operations.
 
                                 BUSINESS RISKS
 
     This Form 10-K contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. When used
herein, the words "expects," "anticipates," "estimates," "intends," "plans" and
similar expressions are intended to identify such forward-looking statements.
The Company's actual results could differ materially from the results discussed
in the forward-looking statements. Factors that could cause or contribute to
such differences include those discussed below, as well as those discussed
elsewhere in this Form 10-K.
 
UNCERTAINTIES RELATED TO CLINICAL TRIALS
 
     In order to commercialize any of its products under development, the
Company must demonstrate with substantial evidence through clinical trials and
to the FDA's satisfaction that the product is safe and effective for use in the
indications for which approval is requested. The results from preclinical
testing and early clinical trials may not be predictive of results obtained in
large clinical trials. Companies in the pharmaceutical, biopharmaceutical and
biotechnology industries have suffered significant setbacks in various stages of
clinical trials, even in advanced clinical trials after promising results had
been obtained in earlier trials. The Company's vaccines are intended for use
primarily in healthy individuals. To obtain regulatory approval, the Company
must demonstrate safety and efficacy in healthy people, which likely will
require a lengthier process and involve a larger number of trials and people
than would be customary for clinical trials of therapeutics for disease
management. There can be no assurance that the Company's clinical trials will
demonstrate sufficient safety and efficacy to obtain the requisite regulatory
approvals or will result in marketable products. If FLUMIST(TM) is not shown to
be safe and effective in Aviron's future clinical trials, the resulting delays
in obtaining regulatory approvals for FLUMIST(TM), as well as the need for
additional financing, would have a material adverse effect on the Company's
business, financial condition and results of operations. A material incidence of
adverse side effects during Aviron's clinical trials could have a negative
impact on the marketing of the product.
 
     FLUMIST(TM) is a trivalent vaccine delivered as a nasal spray that is based
on technology licensed from the NIH and the University of Michigan. Wyeth-Ayerst
licensed certain rights to the vaccine in 1991 and was developing it for sale in
collaboration with the NIH until relinquishing its rights in 1993. Formulations
of the vaccine have been the subject of a number of clinical trials performed by
the NIAID and others. The Company has reviewed the data from these trials and
believes that it can submit such data in partial support of its application for
regulatory approval of FLUMIST(TM) from the FDA. The Company did not participate
in these trials and cannot be confident in the accuracy of the data collected.
Very few of the trials involved a trivalent vaccine delivered as a nasal spray,
but instead typically used formulations of monovalent or bivalent vaccine
delivered as nasal drops. The Company has performed and is in the process of
performing additional trials of FLUMIST(TM) to support its application to the
FDA. There can be no assurance that the data from these third-party trials are
accurate, that the Company will be able to obtain favorable results from its own
trials, or that the Company can complete these trials on a timely basis, or at
all.
 
     In the case of FLUMIST(TM), the Company is seeking FDA approval for
indications in children, healthy adults, and for co-administration with the
inactivated injectable vaccine in high-risk adults, including the elderly. As a
result, the Company's clinical trials will need to demonstrate to the FDA's
satisfaction safety and efficacy of the vaccine in each of these target
populations. In addition, the Company currently plans to submit safety data to
support labeling claims for use of the vaccine in healthy adults; however, the
Company plans to submit efficacy data on only a limited number of people for
these populations in its BLA filing. There can be no assurance that the FDA will
consider this data to be sufficient to support indications for use of the
vaccine in healthy or high-risk adults. To the extent that the FDA does not find
such data submitted by the Company sufficient to support product approval for
one or more indications, the Company's commercialization of the vaccine may be
substantially delayed for one or more of its target populations. In this
connection, the
 
                                       24
<PAGE>   27
 
Company could be required to commence and complete additional clinical trials to
generate additional safety and efficacy data to support product approval for one
or more of its target populations. See "Business -- Influenza Clinical Trials."
 
     The completion of the Company's clinical trials may be delayed by many
factors. For example, delays may be encountered in enrolling a sufficient number
of people fitting the appropriate trial profile, preparing the modified vaccine
strain for certain influenza seasons, or manufacturing clinical trial materials.
The Company's late-stage clinical trials FLUMIST(TM) must be conducted during
the influenza season and must be commenced early enough in the approximately
five-month season so that subjects may be vaccinated well in advance of a
challenge by the wild-type virus. Were the influenza season to commence earlier
than anticipated, the number of subjects that could participate in a particular
study might be reduced in that season due to the subjects' possible exposure to
wild-type influenza virus. Additionally, there is a risk that there will not be
enough natural influenza in the community in a given influenza season to achieve
statistically significant results from clinical trials. There can be no
assurance that delays in, or termination of, clinical trials will not occur. Any
delays in, or termination of, the Company's clinical trial efforts could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
     There can be no assurance that the Company's development efforts will be
successful, that required regulatory approvals, including those with respect to
IND or BLA applications, will be obtained or that any products, if introduced,
will be successfully marketed. See "Business -- Vaccine Products Under
Development."
 
NEED FOR ANNUAL REASSORTMENT; LACK OF MANUFACTURING EXPERIENCE; RELIANCE ON
CONTRACT MANUFACTURERS
 
     Influenza viruses have a high mutation rate and the surface antigens of
influenza viruses that induce protective immunity are variable from year to
year. Each spring, the FDA and CDC determine circulating influenza strains that
will be included in the following season's influenza vaccines. As a result,
manufacturers of vaccines, including Aviron, must modify their influenza
vaccines each year to include the selected strains in a form that meets FDA
guidelines, within an approximately six-month period, in order to make them
available before the influenza season. If the Company were unable to develop an
influenza vaccine for a particular year that meets FDA and CDC guidelines and
establish a manufacturing process for the vaccine, its business, financial
condition and results of operations would be materially adversely affected. No
assurance can be given that delays in preparing vaccines for use in clinical
trials for commercial sales will not be encountered.
 
     The Company currently does not have licensed facilities to manufacture
FLUMIST(TM) and has no direct experience with large scale manufacture of this
potential product. All of the cold adapted vaccine material used in the
Company's early stage clinical trials has been supplied solely by Medeva Pharma
pursuant to the Medeva Pharma Clinical Agreement. Medeva Pharma is one of four
companies licensed by the FDA to produce influenza vaccine for sale in the
United States, and produces its own injectable inactivated influenza vaccine
that could compete with FLUMIST(TM). Under the Medeva Pharma Clinical Agreement,
Medeva Pharma has been performing work for Aviron intended to result in a liquid
formulation of FLUMIST(TM) requiring only refrigeration rather than frozen
storage. The Company believes that a liquid formulation will be required to
address markets outside the United States and Canada. The Company is also
conducting development work on the liquid formulation at its facilities in
California.
 
     The Company initially plans to obtain any commercial quantities of bulk
vaccine of FLUMIST(TM) from Medeva Pharma. Pursuant to the Medeva Pharma
Commercial Agreement, Medeva has agreed to manufacture the Company's needs for
bulk product through the 2001 - 2002 influenza season. The Company and Medeva
Pharma are discussing a potential agreement that would provide for commercial
supplies of bulk vaccine beyond 2001; however, there can be no assurance that
such an agreement will be reached. In October 1997, the Company entered into a
nonexclusive arrangement with PCI for blending, filling, packaging and labeling
of FLUMIST(TM) in the United States until October 2004. In the event of better
than expected market acceptance, the Company may be capacity-constrained on its
supply of vaccine through at least the 2001 - 2002 influenza season. In order to
secure future production capacity, Aviron may extend and expand its existing
arrangements, collaborate with other third parties, or establish its own
manufacturing facilities. Using
 
                                       25
<PAGE>   28
 
an alternative supplier or building a proprietary facility would require a
substantial amount of funds and additional clinical trials and testing. There
can be no assurance that an alternative source of supply will be established on
a timely basis, or that the Company will have or be able to obtain funds
sufficient for building or equipping a new facility. In early 1999, the Company
entered into a lease agreement for approximately 69,000 square feet of office,
laboratory and manufacturing space in Santa Clara, California. The Company has
leased this facility through January 2019, with an option to renew for seven
years. In addition, as part of the regulatory approval process, before
commercial launch of FLUMIST(TM), the Company will need to obtain FDA approval
of its own facility, the PCI facility, and Medeva Pharma. Subsequent
establishment of alternative sources of supply or manufacturing would require
FDA approval for each such facility.
 
     The production of FLUMIST(TM) is subject to the availability of a large
number of specific pathogen-free hen eggs, for which there are currently a
limited number of suppliers. The Company has been purchasing its egg requirement
from a single supplier. Contamination or disruption of this source of supply
would adversely affect the ability to manufacture FLUMIST(TM). The production of
FLUMIST(TM) is also subject to the availability of the device for delivery of
the vaccine intranasally. In August 1998, the Company and Becton Dickinson
entered into a worldwide exclusive supply agreement under which Becton Dickinson
will supply the Company with its AccuSpray(TM) non-invasive nasal spray delivery
system for the administration of FLUMIST(TM) through the 2001 - 2002 flu season.
There can be no assurance that these suppliers will provide timely and adequate
supplies of these product components and raw materials. In addition, the Company
depends on the submission by the delivery device manufacturer of a DMF for
separate review by regulatory authorities. The Company will reference the DMF as
part of the BLA submission for FLUMIST(TM).
 
     The production and marketing of influenza vaccine is highly seasonal.
Because most cases of influenza occur in winter, the majority of influenza
vaccinations in the Northern Hemisphere occur between September and December of
a given year. If the Company were unable to develop an influenza vaccine for a
particular year that meets FDA and CDC guidelines, the Company would receive no
revenues from an influenza vaccine for that influenza season, which would
materially adversely affect the Company's business, financial condition and
results of operation, given the relatively fixed nature of its operating
expenses over the short term. Failure of one of the Company's suppliers to
deliver timely and sufficient supplies to the Company, if it caused the Company
to be unable to deliver vaccines during the peak demand period for the influenza
season, would have a disproportionately adverse effect on the Company's
financial results.
 
     The Company currently does not have facilities to manufacture any of its
other potential products in commercial quantities and has no experience with
large-scale commercial manufacture of vaccine products. To manufacture its other
potential products for large-scale clinical trials or on a commercial scale, the
Company may be required to build a large-scale manufacturing facility, which
would require a significant amount of funds. The scale-up of manufacturing for
commercial production would require the Company to develop advanced
manufacturing techniques and rigorous process controls. However, no assurance
can be given as to the ability of the Company to produce commercial quantities
of its potential products in compliance with applicable regulations or at an
acceptable cost, or at all.
 
     The Company is alternatively considering the use of contract manufacturers
for the commercial production of its other potential products. The Company is
aware of only a limited number of manufacturers which it believes have the
ability and capacity to manufacture its other potential products in a timely
manner. There can be no assurance that the Company would be able to contract
with any of these companies for the manufacture of its products on acceptable
terms, if at all. If the Company enters into an agreement with a third-party
manufacturer, it may be required to relinquish control of the manufacturing
process, which could adversely affect the Company's results of operations.
Furthermore, a third-party manufacturer also will be required to manufacture the
Company's products in compliance with state and federal regulations. Failure of
any such third-party manufacturer to comply with state and federal regulations
and to deliver the required quantities on a timely basis and at commercially
reasonable prices would materially adversely affect the Company's business,
financial condition and results of operations. No assurance can be given that
the Company, alone or with a third party, will be able to make the transition to
commercial production of its potential products successfully, if at all, or that
if successful, the Company will be able to maintain such production. See
"Business -- Production and Manufacturing."
 
                                       26
<PAGE>   29
 
STABILITY OF FLUMIST(TM)
 
     The Company's current frozen formulation of FLUMIST(TM) is being designed
to meet an acceptable level of stability for the U.S. market initially targeted
by the Company. In addition to its current frozen formulation, the Company is
exploring alternative formulations and presentations for the vaccine which may
enable improved distribution and longer shelf life. There can be no assurance
that the Company will succeed in achieving adequate product stability for the
current frozen formulation FLUMIST(TM), that the Company's efforts to produce
such alternative formulations will be successful, or that such alternative
formulations will actually enable improved distribution and longer shelf life.
 
UNCERTAINTY OF MARKET ACCEPTANCE
 
     Even if the requisite regulatory approvals are obtained for the Company's
potential products, uncertainty exists as to whether such products will be
accepted in United States or foreign markets. The Company believes, for example,
that widespread use of the Company's proposed vaccines in the United States is
unlikely without positive recommendations from the ACIP, the AAP or the American
College of Physicians. There can be no assurance that such authorities will
recommend the use of the Company's proposed products. The lack of such
recommendations would have a material adverse effect on the Company's business,
financial condition and results of operations.
 
     A number of additional factors may affect the rate and overall market
acceptance of FLUMIST(TM) and any other products which may be developed by the
Company, including the safety and efficacy results in the Company's clinical
trials, the rate of adoption of Aviron's vaccines by health care practitioners,
the rate of vaccine acceptance by the target population, the success of the CDC
in selecting proper strains to be included in each season's vaccine and the
perceived effectiveness of influenza vaccines generally, the timing of market
entry relative to competitive products, the availability of alternative
technologies, the price of the Company's products relative to alternative
technologies, the means and frequency of administration of such products, the
availability of third-party reimbursement and the extent of marketing and sales
efforts by the Company, collaborative partners and third-party distributors or
agents retained by the Company. Side effects, such as the runny nose, sore
throat or fever seen in a minority of clinical trial participants, or
unfavorable publicity concerning Aviron's products or any product incorporating
live virus vaccines could have an adverse effect on the Company's ability to
obtain physician, patient or third-party payor acceptance and efforts to sell
the Company's products. The Company's current formulation of FLUMIST(TM)
requires frozen storage, which may adversely affect market acceptance in certain
foreign countries where adequate freezer capacity is not commonly available.
There can be no assurance that physicians, patients or third-party payors will
accept new live virus vaccine products or any of the Company's products as
readily as other types of vaccines, or at all. See "Business -- Vaccine Products
Under Development."
 
LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES
 
     Primary care physicians, including pediatricians, family practitioners,
general practitioners, and internists, are expected to play a major role in
influencing decisions by individuals to obtain influenza prophylaxis for
themselves or their children and the choice of type of immunization. For
FLUMIST(TM) to be widely adopted, it will likely be necessary to engage the
efforts of an experienced pharmaceutical sales force, in addition to obtaining
recommendations for FLUMIST(TM)'s use from advisory bodies such as the ACIP and
AAP. Aviron currently has no direct sales or distribution capability nor does it
intend to build a large pharmaceutical sales force itself. Rather, the Company
intends to obtain these services through collaboration with major pharmaceutical
companies in the United States and elsewhere and currently has such agreements
covering FLUMIST(TM) with Wyeth Lederle and CSL Limited. See "Business
Collaborations."
 
     The successful commercialization of the Company's products is dependent in
part upon the ability of the Company to maintain existing and enter into
additional collaborative agreements with corporate partners for the development,
testing and marketing of certain of its vaccines and upon the ability of these
third parties to perform their responsibilities. The amount and timing of
resources devoted to these activities is not within the control of the Company.
There can be no assurance that any such agreements or arrangements will be
 
                                       27
<PAGE>   30
 
available on terms acceptable to the Company, if at all, that such third parties
would perform their obligations as expected, or that any revenue would be
derived from such arrangements. If Aviron is not able to enter into such
agreements or arrangements, it could encounter delays in introducing its
products into the market or be forced to limit the scope of its
commercialization activities. If the Company were to market products directly,
significantly additional expenditures, management resources and time would be
required to develop a sales and marketing staff within the Company. In addition,
the Company would also be competing with other companies that currently have
experienced and well funded marketing and sales operations. There can be no
assurance that the Company will be able to establish its own sales and marketing
force or that any such force, if established, would be successful in gaining
market acceptance for any products that may be developed by the Company. See
"Business -- Marketing and Sales" and "-- Collaborative Agreements."
 
NEED FOR FUTURE FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL
 
     The Company's operations to date have consumed substantial and increasing
amounts of cash. The negative cash flow from operations is expected to continue
and to accelerate in the foreseeable future. The development of the Company's
technology and proposed products will require a commitment of substantial funds
to conduct the costly and time-consuming research, preclinical testing and
clinical trials necessary to develop and optimize such technology and proposed
products, to establish manufacturing, marketing and sales capabilities and to
bring any such products to market. The Company's future capital requirements
will depend upon many factors, including continued scientific progress in the
research and development of the Company's technology and vaccine programs, the
size and complexity of these programs, the ability of the Company to establish
and maintain collaborative arrangements, progress with preclinical testing and
clinical trials, the time and costs involved in obtaining regulatory approvals,
the cost involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims or trade secrets and product commercialization activities.
 
     The Company anticipates that revenues from existing collaborations and
current balances of cash, cash equivalents and marketable securities, will
enable it to maintain its current and planned operations into 2000. The estimate
of the time period in which these capital resources will be sufficient to meet
the Company's capital requirements is a forward-looking statement that is
subject to risks and uncertainties and the amounts and timing of the
expenditures by the Company may vary materially depending on numerous factors,
such as the status of the Company's research and development efforts, the
regulatory approval process, technological advances, determinations as to
commercial potential, the terms of collaborative agreements entered into by the
Company, the status of competitive products and the possibility of the Company's
construction of a commercial manufacturing facility for its potential products..
If additional funds are raised by issuing equity securities, further dilution to
stockholders may result. If adequate funds are not available, the Company may be
required to delay, reduce the scope of, or eliminate one or more of its research
or development programs or to obtain funds through collaborative arrangements
with others that may require the Company to relinquish rights to certain of its
technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize itself, which could materially adversely affect
the Company's business, financial condition and results of operations.
 
UNCERTAINTIES RELATED TO EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY
 
     Aviron commenced its operations in April 1992 and is in an early stage of
development. Three Company products are in clinical trials. To date, the Company
has had no revenue from product sales and all of its resources have been
dedicated to the development of vaccines. There can be no assurance that product
revenues will be realized on a timely basis, if ever.
 
     The development of safe and effective live vaccines for the prevention of
viral diseases such as influenza, parainfluenza and other target diseases is
highly uncertain and subject to numerous risks. Potential products that appear
to be promising at early stages of development may not reach the market for a
number of reasons. Potential products may be found ineffective or cause harmful
side effects during preclinical testing or clinical trials, fail to receive
necessary regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. Aviron has not yet
requested or received the regulatory approvals that are required to market
 
                                       28
<PAGE>   31
 
its products. The Company's estimate of the potential timing of
commercialization of its proposed products is a forward-looking statement that
is subject to risks and uncertainties and actual results may vary materially as
a result of a number of factors. Such factors include those described under
"-- Uncertainties Related to Clinical Trials," "-- Lack of Manufacturing
Experience; Reliance on Contract Manufacturers," and "-- Stability of
FLUMIST(TM)." To achieve profitability, the Company, alone or with others, must
successfully identify, develop, test, manufacture and market its products. There
can be no assurance that Aviron will succeed in the development and marketing of
any product. Any potential product requires significant additional investment,
development, preclinical testing and clinical trials prior to potential
regulatory approval and commercialization.
 
UNCERTAINTY OF FUTURE PROFITABILITY; ACCUMULATED DEFICIT
 
     The Company has experienced significant and increasing operating losses
since its inception in April 1992. As of December 31, 1998, the Company had an
accumulated deficit of approximately $121.3 million. Aviron has not received any
product revenue to date and does not expect to generate revenues from the sale
of products until 2000 at the earliest, if at all. The Company expects to incur
significant and increasing operating losses over at least the next several years
as the Company's research and development efforts, preclinical testing and
clinical trial activities expand. The Company's ability to achieve
profitability, or to refinance its obligations with respect to its indebtedness,
depends in part upon its ability, alone or with others, to complete development
of its proposed products, to obtain required regulatory approvals and to
successfully manufacture and market such products. To the extent that the
Company is unable to obtain third-party funding for expenses, the Company
expects that its increased expenses will result in increased losses from
operations. There can be no assurance that Aviron will obtain required
regulatory approvals or successfully identify, develop, test, manufacture and
market any product candidates, or that the Company will ever achieve product
revenues or profitability. There can be no assurance that the Company's
revenues, operating results, cash flow and capital resources if and once
generated will be sufficient for payment of its indebtedness in the future. In
the absence of such revenues, operating results, cash flow and capital resources
or in the event of any such delays or other problems, the Company could face
substantial liquidity problems and might be required to dispose of material
assets or operations to meet its debt service and other obligations, and there
can be no assurance as to the timing of such sales or the proceeds that the
Company could realize therefrom. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
 
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS; DEPENDENCE ON TRADE
SECRETS
 
     The Company's success will depend in part on its ability to maintain its
technology licenses, maintain trade secrets, obtain patents and operate without
infringing the proprietary rights of others, both in the United States and in
other countries. Since patent applications in the United States are maintained
in secrecy until patents issue and since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, the Company
cannot be certain that it was the first to make the inventions covered by each
of its pending patent applications or that it was the first to file patent
applications for such inventions. The patent positions of biotechnology and
pharmaceutical companies can be highly uncertain and involve complex legal and
factual questions, and therefore the breadth of claims allowed in biotechnology
and pharmaceutical patents, or their enforceability, cannot be predicted. There
can be no assurance that any of the Company's or its licensors' patents or
patent applications will issue or, if issued, will not be reexamined, reissued,
opposed, challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection or competitive advantages to the
Company.
 
     In May 1996, American Cyanamid Company filed an opposition to the grant of
the Company's European patent with claims directed to chimeric negative strand
RNA viruses and to methods of engineering these viruses to express foreign
proteins and antigens. American Cyanamid Company primarily challenges the
breadth of the claims that the Company was granted. Although the Company is
responding to the opposition, no assurance can be given as to the scope of the
claims, if any, which the European Patent Office ultimately
 
                                       29
<PAGE>   32
 
will find patentable. Failure of the Company to prevail in the opposition would
impede the Company's ability to prevent competitors from using this technology
in Europe.
 
     The commercial success of Aviron additionally will depend, in part, upon
the Company 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 the Company's
programs. Some of these patent applications or patents may limit the scope of
claims issuing from the Company's patent applications, prevent certain claims
from being issued, or conflict in certain respects with claims made under the
Company's applications.
 
     The Company is aware of patent applications that have been filed by others
that may pertain to certain aspects of the Company's programs or to its patents
or patent applications, including the patents related to the Company's RSV
vaccine under development. The Company is aware of a claim by a third party,
regarding inventorship of subject matter claimed in a United States patent
which, along with its related foreign counterpart patents and applications, is
licensed to the Company and which is directed to certain aspects of technology
relating to herpes viruses. This claim may also relate to a pending United
States patent application which is a continuation of the licensed patent. It is
presently unclear whether this claim of inventorship is valid, and, if valid, it
could affect ownership of the subject United States patent and patent
application as well as their foreign counterparts.
 
     If patents have been or are issued to others containing preclusive or
conflicting claims and such claims are ultimately determined to be valid, the
Company may be required to obtain licenses to these patents or to develop or
obtain alternative technology. No assurance can be given that patents have not
been issued, or will not be issued, to third parties that contain preclusive or
conflicting claims with respect to the cold adapted influenza vaccine or any of
the Company's other programs. The Company's breach of an existing license or
failure to obtain a license to technology required to commercialize its products
may have a material adverse effect on the Company's business, financial
condition and results of operations. Litigation, which could result in
substantial costs to the Company, may also be necessary to enforce any patents
issued to the Company or to determine the scope and validity of third-party
proprietary rights. If competitors of the Company prepare and file patent
applications in the United States that claim technology also claimed by the
Company, the Company may have to participate in interference proceedings
declared by the United States Patent and Trademark Office to determine priority
of invention, which could result in substantial cost to the Company, even if the
eventual outcome is favorable to the Company. An adverse outcome could subject
the Company to significant liabilities to third parties and require the Company
to license disputed rights from third parties or to cease using such technology.
 
     The patent laws of European and certain other foreign countries generally
do not allow for the issuance of patents for methods of treatment of the human
body. To the extent the Company's patent portfolio includes claims for methods
of treating humans, these methods may not be protectable in Europe and certain
other foreign countries.
 
     The Company also relies on trade secrets to protect its technology,
especially where patent protection is not believed to be appropriate or
obtainable. Certain of the Company's licensors also rely on trade secrets to
protect technology which has been licensed to Aviron, and as a result, the
Company is dependent on the efforts of such licensors to protect such trade
secrets. For example, the University of Michigan relies, in part, on trade
secrets to protect the master strains of the cold adapted influenza virus used
by the Company and the NIH relies in part on trade secrets to protect the master
strains of the bPIV-3 virus. Aviron protects its proprietary technology and
processes, in part, by confidentiality agreements or material transfer
agreements with its employees, consultants, collaborators and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets or those of its licensors will not otherwise become
known or be independently discovered by competitors. To the extent that Aviron
or its consultants or research collaborators use intellectual property owned by
others in their work for the Company, disputes may also arise as to the rights
in related or resulting know-how and inventions. See "-- Lack of Patent
Protection of Cold Adapted Influenza Master Donor Strains."
 
                                       30
<PAGE>   33
 
LACK OF PATENT PROTECTION OF COLD ADAPTED INFLUENZA MASTER DONOR STRAINS
 
     The Company has no issued patents covering the cold adapted influenza
master donor strains. The Company's rights to the master donor strains are
substantially based on an exclusive worldwide license of materials and know-how
from the University of Michigan, which owns the master donor strains from which
the Company's vaccine is derived, and on an exclusive license of know-how and
clinical trial data from the NIH. Neither the University of Michigan nor the NIH
has been issued any patents covering the cold adapted influenza vaccine. There
can be no assurance that a third party will not gain access by some means to
University of Michigan master donor strains, reproduce the Company's cold
adapted influenza vaccine or develop another live virus influenza vaccine which
might be comparable to Aviron's in terms of safety and effectiveness. See
"-- Uncertainty of Protection of Patents and Proprietary Rights; Dependence on
Trade Secrets."
 
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS
 
     The production and marketing of the Company's products and its ongoing
research and development activities are subject to extensive regulation by
numerous government authorities in the United States and other countries. Prior
to marketing in the United States, any product developed by the Company must
undergo rigorous preclinical testing and clinical trials and an extensive
regulatory approval process implemented by the FDA under the Food, Drug and
Cosmetic Act. Satisfaction of such regulatory requirements, which includes
demonstrating that the product is both safe and effective, typically takes
several years or more depending upon the type, complexity and novelty of the
product and requires the expenditure of substantial resources. This process may
be more demanding for vaccines intended for use in healthy people compared to
therapeutics used for treatment of people with diseases. Preclinical studies
must be conducted in compliance with the FDA's Good Laboratory Practice
regulations. Clinical testing must meet requirements for Institutional Review
Board oversight and informed consent, as well as FDA prior review, oversight and
Good Clinical Practice regulations. The Company has limited experience in
conducting and managing the clinical trials necessary to obtain regulatory
approval. Furthermore, the Company or the FDA may suspend clinical trials at any
time if either believes that the subjects participating in such trials are being
exposed to unacceptable health risks.
 
     The Company understands that its vaccine products will be classified by the
FDA as "biologic products," as opposed to "drug products." The steps ordinarily
required before a biologic product may be marketed in the United States include
(a) preclinical testing and clinical trials; (b) the submission to the FDA of an
IND, which must become effective before clinical trials may commence; (c)
adequate and well-controlled clinical trials to establish the safety and
efficacy of the drug; (d) the submission to the FDA of a BLA; and (e) FDA
approval of the applications, including approval of all product labeling.
 
     Preclinical testing includes laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. The results of the preclinical tests are
submitted to the FDA as part of an IND and are reviewed by the FDA before the
commencement of clinical trials. Unless the FDA objects to an IND, the IND will
become effective 30 days following its receipt by the FDA. There can be no
assurance that submission of an IND will result in FDA authorization to commence
clinical trials or that the lack of an objection means that the FDA will
ultimately approve an application for marketing approval.
 
     Before receiving FDA approval to market a product in accordance with the
above procedures, the Company will have to demonstrate that the product is safe
and effective. Data obtained from preclinical testing and clinical trials are
susceptible to varying interpretations which could delay, limit or prevent
regulatory approvals. In addition, delays or rejections may be encountered based
upon additional government regulation from future legislation or administrative
action or changes in FDA policy during the period of product development,
clinical trials and FDA regulatory review. Similar delays may also be
encountered in foreign countries. There can be no assurance that even after such
time and expenditures, regulatory approval will be obtained for any products
developed by the Company. If regulatory approval of a product is granted, such
approval and related labeling claims will be limited to those specific segments
of the population for which
 
                                       31
<PAGE>   34
 
the product is safe and effective, as demonstrated through clinical trials.
Furthermore, approval may entail ongoing requirements for post-marketing
studies. Even if such regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections. The regulatory standards for manufacturing are
currently being applied stringently by the FDA. Discovery of previously unknown
problems with a product, manufacturer or facility may result in restrictions on
such product or manufacturer, including costly recalls or even withdrawal of the
product from the market. There can be no assurance that any product developed by
the Company alone or in conjunction with others will prove to be safe and
efficacious in clinical trials and will meet all of the applicable regulatory
requirements needed to receive or maintain marketing approval.
 
     The Company believes that the approval process for vaccines may be longer
than for therapeutic products, since vaccines are administered to healthy
individuals. In addition, regulatory scrutiny may be particularly intense for
products, such as FLUMIST(TM), which are designed to be given to healthy
children.
 
     Outside the United States, the Company's ability to market a product is
contingent upon receiving marketing authorization from the appropriate
regulatory authorities. The requirements governing the conduct of clinical
trials, marketing authorization, pricing and reimbursement vary widely from
country to country. At present, foreign marketing authorizations are applied for
at a national level, although within the European Union (the "EU"), procedures
are available to companies wishing to market a product in more than one EU
member state. If the regulatory authorities are satisfied that adequate evidence
of safety, quality and efficacy has been presented, a marketing authorization
will be granted. This foreign regulatory approval process includes all of the
risks associated with FDA approval set forth above.
 
COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE
 
     The Company operates in a rapidly evolving field. Any product developed by
the Company would compete with existing and new drugs and vaccines being created
by pharmaceutical, biopharmaceutical and biotechnology companies. If the Company
were able to successfully develop its vaccines, it would be competing with
larger companies that have already introduced vaccines and have significantly
greater marketing, sales, manufacturing, financial and managerial resources. For
example, with respect to FLUMIST(TM), the Company will be competing against
larger companies which sell the injectable inactivated influenza vaccine in the
United States, have significantly greater financial and market resources than
Aviron and have established marketing and distribution channels for such
products. In addition, the Company is aware of efforts to develop improved
inactivated injectable influenza vaccines. Further, the Company is aware of
several large pharmaceutical companies that alone or with partners are
developing new drug therapies designed to relieve the symptoms of influenza. The
Company is also aware of several companies that are marketing or are in
late-stage development of products to prevent CMV or HSV disease.
 
     New developments are expected to continue in the pharmaceutical,
biopharmaceutical and biotechnology industries and in academia, government
agencies and other research organizations. Other companies may succeed in
developing products that are safer, more effective or less costly than any that
may be developed by the Company. Such companies may also be more effective than
the Company in the production and marketing of their products. Furthermore,
rapid technological development by competitors may result in the Company's
products becoming obsolete before the Company is able to recover its research,
development or commercialization expenses incurred in connection with any such
product. Many potential competitors have substantially greater financial,
technical, marketing and sales resources than the Company. Some of these
companies also have considerable experience in preclinical testing, clinical
trials and other regulatory approval procedures. Moreover, certain academic
institutions, government agencies and other research organizations are
conducting research in areas in which the Company is working. These institutions
are becoming increasingly aware of the commercial value of their findings and
are becoming more active in seeking patent protection and licensing arrangements
to collect royalties for the use of technology that they have developed. These
institutions may also market competitive commercial products on their own or
through joint ventures.
 
     Aviron believes that competition in the markets it is addressing will
continue to be intense. The vaccine industry is characterized by intense price
competition, and the Company anticipates that it will face this and
 
                                       32
<PAGE>   35
 
other forms of competition. There can be no assurance that pharmaceutical,
biopharmaceutical and biotechnology companies will not develop more effective
products than those of the Company or will not market and sell their products
more effectively than the Company, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
 
DEPENDENCE ON COLLABORATIVE AGREEMENTS
 
     The Company's strategy for the development, clinical trials, manufacturing
and commercialization of certain of its products includes maintaining and
entering into various collaborations with corporate partners, licensors,
licensees and others. The Company in-licensed its cold adapted influenza vaccine
from the NIAID and the University of Michigan. It has obtained rights to certain
recombinant negative strand RNA technology from Mount Sinai, and rights to the
herpes simplex viruses, EBV and various recombinant methods and materials from
ARCH. The Company has entered into agreements with Wyeth Lederle and CSL Limited
for FLUMIST(TM), and SmithKline Beecham for the development of its EBV vaccine,
with Sang-A for clinical development, manufacturing and development rights for
certain products in Korea and certain Asian countries (not including Japan), and
has licensed from the NIAID rights covering its PIV-3 vaccine. There can be no
assurance that the Company will be able to maintain existing collaborative
agreements, negotiate collaborative arrangements in the future on acceptable
terms, if at all, or that any such collaborative arrangements will be
successful. To the extent that the Company is not able to maintain or establish
such arrangements, the Company would be required to undertake product
development and commercialization activities at its own expense, which would
increase the Company's capital requirements or require the Company to limit the
scope of its development and commercialization activities. In addition, the
Company may encounter significant delays in introducing its products into
certain markets or find that the development, manufacture or sale of its
products in such markets is adversely affected by the absence of such
collaborative agreements. ARCH has recently asserted an interpretation of the
financial terms of this agreement with the Company, relating to the license by
Aviron of its EBV technology to SmithKline Beecham, which would require the
Company to pay ARCH one-half of any future or past payments (including
sub-license fees and milestone payments) received by Aviron under the SB
Agreement. The Company disputes ARCH's interpretation of the financial terms of
the agreement. No assurance can be given, however, that the Company's
interpretation will prevail. Failure of the Company to prevail in this matter
could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
     The Company cannot control the amount and timing of resources that its
collaborative partners devote to the Company's programs or potential products,
which may vary, because of factors unrelated to the potential products. If any
of the Company's collaborative partners breach or terminate their agreements
with the Company or otherwise fail to conduct their collaborative activities in
a timely manner, the preclinical or clinical development or commercialization of
product candidates or research programs will be delayed and the Company would be
required to devote additional resources to product development and
commercialization, or terminate certain development programs. These
relationships generally may be terminated at the discretion of the Company's
collaborative partners, in some cases with only limited notice to the Company.
The termination of collaborative arrangements could have a material adverse
effect on the Company's business, financial condition and results of operations.
There also can be no assurance that disputes will not arise in the future with
respect to the ownership of rights to any technology developed with third
parties. These and other possible disagreements between collaborators and the
Company could lead to delays in the collaborative research, development or
commercialization of certain product candidates, or could result in litigation
or arbitration, which would be time consuming and expensive, and would have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
     In addition, Aviron's collaborative partners may develop, either alone or
with others, products that compete with the development and marketing of the
Company's products. Competing products of the Company's collaborative partners
may result in their withdrawal of support with respect to all or a portion of
the Company's technology, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
 
                                       33
<PAGE>   36
 
EXECUTIVE OFFICERS, SENIOR MANAGEMENT AND CONSULTANTS
 
     The executive officers and senior management of the Company are set forth
below:
 
<TABLE>
<CAPTION>
                                     AGE                       POSITION
                                     ---                       --------
<S>                                  <C>   <C>
EXECUTIVE OFFICERS
  J. Leighton Read, M.D. ..........  48    Chairman and Chief Executive Officer
  Fred Kurland.....................  49    Senior Vice President and Chief Financial Officer
  Carol A. Olson...................  41    Senior Vice President, Commercial Development
 
SENIOR MANAGEMENT
  Victor Jegede, Ph.D. ............  54    Vice President, Technical Affairs
  Paul M. Mendelman, M.D. .........  51    Vice President, Clinical Research
  Louis F. Mocca...................  48    Vice President, Regulatory Affairs
  Eric J. Patzer, Ph.D. ...........  49    Vice President, Development
  Kurt Vorheis.....................  48    Vice President, Operations
 
CONSULTANTS
  Ann M. Arvin, M.D. ..............  52    Principal Research Consultant
</TABLE>
 
     J. Leighton Read, M.D., a founder of the Company, has been Chairman and
Chief Executive Officer of the Company since 1992 and was Chief Financial
Officer of the Company from 1992 until 1996. In 1989, he co-founded Affymax N.V.
with Dr. Alejandro Zaffaroni, serving initially as its Executive Vice President
and Chief Operating Officer and later, from 1990 to 1991, as President of the
Pharma Division and as a Managing Director of the parent company. From 1991 to
1993, Dr. Read was a principal with Interhealth Limited, an investment
partnership. He has served on the boards of a number of private biotechnology
companies and is currently on the board of CV Therapeutics, Inc. and AxyS
Pharmaceuticals, Inc., both of which are biotechnology companies, and is a
member of the Biotechnology Industry Organization (BIO) Board of Directors and
Emerging Companies Section Governing Body. Dr. Read holds a B.S. in Biology and
Psychology from Rice University and an M.D. from the University of Texas Health
Science Center at San Antonio.
 
     Fred Kurland has been Senior Vice President and Chief Financial Officer of
the Company since 1998. Prior to joining the Company, 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 Senior Vice President, Commercial Development of
the Company since 1998. Prior to joining the Company, Ms. Olson served as
managing director of the Churchill Madison Group, a management-consulting group
she founded to develop and expand new businesses in medical and high technology
industries. From 1984 to 1993, Ms. Olson was with Hewlett-Packard Company's
Commercial Systems Division. Ms. Olson holds a B.A. in Economics from Yale
University and an M.B.A. from Stanford University.
 
     Victor Jegede, Ph.D., has been Vice President, Technical Affairs of the
Company since 1995. From 1992 to 1994, Dr. Jegede was Vice President, Regulatory
Affairs and Quality for Creative BioMolecules, Inc., a biopharmaceuticals
company, and from 1989 to 1992, he was Director, Regulatory Affairs and Quality
for WelGen Manufacturing Partnership (BW Manufacturing, Inc.), a division of
Burroughs Wellcome Manufacturing, Inc., a pharmaceutical manufacturer. Dr.
Jegede holds a B.S. and an M.S. in Biology and a Ph.D. in Bacteriology from
Boston College.
 
     Paul M. Mendelman, M.D., has been Vice President, Clinical Research of the
Company since 1996. Dr. Mendelman also is currently consulting professor in the
Department of Pediatrics at the Stanford University School of Medicine. Prior to
joining the Company, Dr. Mendelman was Director, Clinical
 
                                       34
<PAGE>   37
 
Research, Infectious Diseases for Merck Research Laboratories, a pharmaceutical
company, since 1991. From 1983 to 1991, Dr. Mendelman was Clinical Instructor,
Assistant Professor and then Associate Professor of Pediatrics at the University
of Washington. Dr. Mendelman holds a B.S. and an M.D. from Ohio State University
and is a fellow of the American Academy of Pediatrics.
 
     Louis F. Mocca has been Vice President, Regulatory Affairs of the Company
since March 1999. Mr. Mocca joined the Company from North American Vaccine,
Inc., where he served as Senior Director, Regulatory Affairs since March 1998.
From 1996 to 1998, Mr. Mocca was Director, Worldwide Regulatory Affairs at
Bristol-Myers Squibb. Prior to joining Bristol-Myers Squibb, he served for
twenty years as a researcher and reviewer at the FDA Center for Biologics
Evaluation and Research. Mr. Mocca holds a B.S. in Epidemiology and
Environmental Health and an M.S. in Medical Mycology (microbiology), both from
George Washington University.
 
     Eric J. Patzer, Ph.D., has been Vice President, Development of the Company
since 1996. Prior to joining the Company, Dr. Patzer held various positions with
Genentech, Inc, a pharmaceutical company, since 1981, most recently as Vice
President, Development. Dr. Patzer holds a B.S. in Mechanical Engineering from
The Pennsylvania State University and a Ph.D. in Microbiology from the
University of Virginia.
 
     Kurt Vorheis has been Vice President, Operations of the Company since 1998.
Mr. Vorheis joined the Company from Chiron Corporation, a biotechnology company,
where he served as Senior Director, global manufacturing -- information and
planning since 1996. He also served as Senior Director of Chiron Biocine with
responsibility for worldwide vaccine production planning and logistics. Mr.
Vorheis joined Chiron Corporation in 1992 as Director of Corporate Engineering.
Mr. Vorheis attended the University of California, Berkeley and Purdue
University, and has a lifetime California Community College teaching credential.
 
     Ann M. Arvin, Ph.D., is a member of Aviron's Scientific Advisory Board. Dr.
Arvin is leading the Company's early-stage research programs as Principal
Research Consultant during 1999 while on sabbatical from Stanford University
School of Medicine, where Dr. Arvin is the Lucile Salter Packard Professor of
Pediatrics, Microbiology and Immunology. Dr. Arvin joined the faculty in 1978 as
Assistant Professor of Pediatrics, Infectious Diseases, and was appointed to her
current position in 1989. Dr. Arvin served her residency at the University of
California-San Francisco ("UCSF") and performed postdoctoral work in pediatric
infectious diseases at UCSF and Stanford University.
 
ITEM 2. PROPERTIES
 
     The Company leases approximately 52,800 square feet of office and
laboratory space in Mountain View, California. The Company has leased this
facility through October 2005 and has two options to extend the lease for
successive five-year periods. In addition, the Company is leasing space pursuant
to the PCI Agreement. In February 1999, the Company entered into a lease
agreement for approximately 69,000 square feet of office, laboratory and
manufacturing space in Santa Clara, California. The Company has leased this
facility through January 2019, with an option to renew for seven years. The
Company also has a right of first notice to lease an additional 80,000 square
feet of space in buildings adjacent to its current Mountain View facility
beginning in 1999. The Company expects that, assuming it is able to lease all or
a significant portion of this space, it will be able to meet its facility needs
for the foreseeable future.
 
ITEM 3. LEGAL PROCEEDINGS
 
     In May 1996, American Cyanamid Company filed an opposition to the grant of
the Company's European patent with claims directed to chimeric negative strand
RNA viruses and to methods of engineering these viruses to express foreign
proteins and antigens. American Cyanamid Company primarily challenges the
breadth of the claims which the Company was granted. Although the Company is
responding to the opposition, no assurance can be given as to the scope of the
claims, if any, which the European Patent Office ultimately will find
patentable. Failure of the Company to prevail in the opposition would impede the
Company's ability to prevent competitors from using this technology in Europe.
 
                                       35
<PAGE>   38
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were submitted to vote of the Company's security holders during
the fourth quarter of the fiscal year ended December 31, 1998.
 
                                       36
<PAGE>   39
 
                                    PART II.
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCK MATTERS
 
     The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "AVIR." Public trading of the Common Stock commenced on November 5,
1996. Prior to that, there was no public market for the Common Stock. The
following table set forth for the periods indicated the high and low price per
share of the common stock on the Nasdaq National Market. These prices represent
quotations among dealers without adjustments for retail mark-ups, mark-downs or
commission, and may not represent actual transactions.
 
<TABLE>
<CAPTION>
                                                              HIGH      LOW
                                                             ------    ------
<S>                                                          <C>       <C>
1997
  First Quarter ended March 31, 1997.......................  $12.75    $ 6.75
  Second Quarter ended June 30, 1997.......................   15.25      8.00
  Third Quarter ended September 30, 1997...................   32.75     11.00
  Fourth Quarter ended December 31, 1997...................   28.50     18.75
 
1998
  First Quarter ended March 31, 1998.......................   28.00     22.88
  Second Quarter ended June 30, 1998.......................   33.00     22.00
  Third Quarter ended September 30, 1998...................   33.00     11.50
  Fourth Quarter ended December 31, 1998...................   26.63     11.50
</TABLE>
 
     On March 17, 1999, there were 439 holders of record of the Company's common
stock.
 
     The Company has never paid cash dividends on its common stock. The Company
presently intends to retain earnings for use in the operation and expansion of
its business and therefore does not anticipate paying any cash dividends in the
foreseeable future.
 
RECENT SALES OF UNREGISTERED SECURITIES
 
     None.
 
                                       37
<PAGE>   40
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operation" and the Financial Statements and Notes thereto included elsewhere in
this Form 10-K.
 
<TABLE>
<CAPTION>
                                            1994       1995       1996       1997       1998
                                           -------   --------   --------   --------   --------
                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                        <C>       <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Total revenues...........................  $    --   $  1,707   $  1,625   $  1,477   $    745
Operating Expenses:
  Research and development...............    4,216     10,220     14,997     24,254     46,583
  General, administrative and
     marketing...........................    2,493      3,252      4,595      5,978     10,085
                                           -------   --------   --------   --------   --------
          Total operating expenses.......    6,709     13,472     19,592     30,232     56,668
                                           -------   --------   --------   --------   --------
Loss from operations.....................   (6,709)   (11,765)   (17,967)   (28,755)   (55,923)
                                           -------   --------   --------   --------   --------
Interest income, net of interest
  expense................................      207        362        466      2,253      1,121
                                           -------   --------   --------   --------   --------
Net loss.................................  $(6,502)  $(11,403)   (17,501)  $(26,502)  $(54,802)
                                           =======   ========   ========   ========   ========
Basic and diluted net loss per share.....            $ (20.79)  $  (7.27)  $  (1.94)  $  (3.49)
                                                     ========   ========   ========   ========
Shares used in computing basic and
  diluted net loss per share.............                 546      2,406     13,684     15,724
                                                     ========   ========   ========   ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                           ---------------------------------------------------
                                            1994       1995       1996       1997       1998
                                           -------   --------   --------   --------   --------
                                                             (IN THOUSANDS)
<S>                                        <C>       <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments...  $ 6,449   $ 17,819   $ 17,872   $ 75,111   $ 94,858
Working capital..........................    5,877     16,775     16,411     54,580     79,369
Total assets.............................    7,789     19,878     21,592     85,325    120,985
Capital lease obligations, non-current...      750        618        871        521        113
Convertible debt.........................       --         --         --         --    100,000
Deferred compensation....................       --        180      1,099        588        237
Accumulated deficit......................  (11,060)   (22,444)   (39,935)   (66,411)  (121,254)
Total stockholders' equity...............    6,362     17,537     17,947     75,742      8,966
</TABLE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Business -- Business Risks" elsewhere
in this Form 10-K.
 
OVERVIEW
 
     Since its inception in April 1992, Aviron has devoted substantially all of
its resources to its research and development programs. To date, Aviron has not
generated any revenues from the sale of products and does not expect to generate
any such revenues until 2000 at the earliest. Aviron has incurred cumulative net
losses of approximately $121.3 million as of December 31, 1998, and it expects
to incur substantial operating losses over at least the next several years.
Aviron has financed its operations through proceeds from private placements of
preferred stock, two public offerings and a private placement of Common Stock, a
private placement of convertible subordinated notes ("Notes"), revenue from its
collaborative agreements, equipment lease financings and investment income
earned on cash, cash equivalent balances and marketable securities.
 
     On June 30, 1998 Aviron submitted its first PLA/ELA to the FDA for
FLUMIST(TM). On August 31, 1998 Aviron announced that it had received notice
from the FDA that its submission was not accepted for filing due
 
                                       38
<PAGE>   41
 
to lack of data on manufacturing, validation and stability. Aviron intends to
resubmit applications for U.S. licensure for FLUMIST(TM) to prevent influenza
and its complications in children and adults in the summer or fall of 1999.
 
     The Company expects its research and development expenditures to increase
substantially over the next several years as the Company expands its research
and development efforts, preclinical testing and clinical trials with respect to
certain of its programs, and early-stage manufacturing activities principally in
regard to FLUMIST(TM). In addition, general, administrative and marketing
expenses are expected to continue to increase as the Company expands its
operations and prepares for the potential commercial launch of FLUMIST(TM).
 
  Partnering Agreements
 
     The Company has entered into several development and marketing agreements
with respect to its products. In June 1998, the Company announced the signing of
an agreement with CSL Limited to develop, sell and distribute FLUMIST(TM) in
Australia, New Zealand and certain countries in the south Pacific region. Under
the agreement, CSL Limited and Aviron will jointly carry out additional trials
in Australia for FLUMIST(TM). In January 1999, the Company announced a worldwide
collaboration for the marketing of FLUMIST(TM) with Wyeth Lederle, under which
Wyeth Lederle and the Company will co-promote FLUMIST(TM) in the United States,
while Wyeth Lederle will have the exclusive right to market the product outside
the United States, except for Korea, Australia, New Zealand and certain
countries in the South Pacific region. Wyeth Lederle and the Company will
collaborate on the regulatory, clinical and marketing programs for FLUMIST(TM).
Expenses associated with these agreements are expected to increase as the
Company continues preclinical testing and clinical trials and prepares for the
potential commercial launch of FLUMIST(TM). No assurance can be given, however,
that the Company will receive any future payments from CSL Limited or Wyeth
Lederle.
 
     In October 1995, the Company signed an agreement with SmithKline Beecham
defining a collaboration on the Company's EBV vaccine technology. Under the
terms of this agreement, the Company granted SmithKline Beecham an exclusive
license to produce, use and sell non-live EBV vaccines incorporating the
Company's technology for prophylactic and therapeutic uses on a worldwide basis,
except in Korea. The Company retained the right to co-market a monovalent
formulation of the EBV vaccine in the United States and to have SmithKline
Beecham supply such vaccine. SmithKline Beecham agreed to fund research and
development at the Company related to the EBV vaccine, in specified minimum
amounts, during the first two years of the agreement. SmithKline Beecham made an
initial upfront payment to the Company and agreed to make additional payments
upon the achievement of certain product development milestones; the first such
milestone payment was made in 1997. The Company is entitled to royalties from
SmithKline Beecham based on net sales of the vaccine. No assurance can be given,
however, that the Company will receive any future payments from SmithKline
Beecham or that SmithKline Beecham will not terminate this agreement.
 
     In May 1995, the Company entered into a Development and License Agreement
with Sang-A. The Company granted to Sang-A exclusive clinical development,
manufacturing and marketing rights in Korea for specified products developed by
Aviron, including vaccines for influenza (cold adapted and recombinant), EBV,
CMV, HSV-2 and RSV. However, the Company is under no obligation to develop any
product. Sang-A also will make payments to the Company upon Sang-A's meeting
certain regulatory milestones for each product in Korea and will pay a royalty
to the Company on net sales of such products in South and North Korea. No
assurance can be given, however, that the Company will receive any future
payments from Sang-A or that Sang-A will not terminate its agreement with the
Company.
 
     In January 1997, Sang-A declared bankruptcy. The Company is unable to
predict what, if any, long-term effect the bankruptcy will have on Sang-A and on
the Company's agreement with Sang-A. In March 1998, the Company entered into a
Stock Repurchase Agreement with Sang-A under which the Company repurchased
530,831 shares of its Common Stock from Sang-A at a price of $25.13 per share.
 
  Manufacturing Facilities
 
     In April 1997, the Company entered into an agreement with Medeva Pharma for
the commercial manufacture of FLUMIST(TM) through December 2001. The Company and
Medeva Pharma are discussing a
 
                                       39
<PAGE>   42
 
potential agreement that would provide for commercial supplies of bulk vaccine
beyond 2001; however, there can be no assurance that such an agreement will be
reached. In October 1997, the Company entered into an agreement with PCI for the
blending, filling, packaging and labeling of FLUMIST(TM) in the United States
until October 2004. In 1998, Aviron and PCI opened a 34,000-square-foot
manufacturing suite in Philadelphia, Pennsylvania at PCI's site, in which PCI
has blended, filled and packaged doses of FLUMIST(TM) for use in 1998 - 99
clinical trials. If regulatory approval is received, the PCI facility is
expected to be used for blending, filling, packaging, labeling and storage of
FLUMIST(TM). The agreements with Medeva Pharma and PCI have required the Company
to fund the construction of facilities, improvements, and equipment and will
continue to require the Company to incur expenses for the duration of the
agreements for facility space, utilities and insurance. In the event of a better
than expected market acceptance, the Company may be capacity constrained in its
supply of vaccine through at least the 2000 - 2001 influenza season. In order to
secure future production capacity, the Company may extend and expand its
existing arrangements, collaborate with other third parties, or establish its
own manufacturing facilities. Using an alternative supplier or building a
proprietary facility would require a substantial amount of funds and additional
clinical trials and testing. There can be no assurance that an alternative
source of supply will be established on a timely basis, or that the Company will
have or be able to obtain funds sufficient for building or equipping a new
facility.
 
     In addition, in February 1999, the Company announced that it has leased a
69,000 square-foot building in Santa Clara, California. The facility will
provide additional manufacturing, laboratory, pilot plant and office space to
accommodate growth. This additional space will require the commitment of
significant additional funds during 1999 and 2000 for renovation, equipment and
furnishings.
 
     The Company is currently evaluating the costs and benefits of developing
internal manufacturing capabilities or contracting for expanded or alternative
sources of supply from third-party manufacturers for products other than
FLUMIST(TM).
 
  Research Grants
 
     In July 1998, the Company received notice from the NIAID of a Small
Business Innovation Research ("SBIR") grant to support development of its live
attenuated vaccine for the prevention of disease caused by CMV. The $750,000
grant is the second that Aviron has received for research on CMV. In September
1998, the total grant amount was increased by an additional $200,000 to
$950,000. A portion of the award has been used to produce recombinant CMV
vaccine candidates for human testing. The remainder of the award will be used to
determine the safety and immunogenicity of these vaccine candidates in a Phase 1
clinical trial in collaboration with the NIAID Vaccine Treatment and Evaluation
Unit network. No assurance can be given, however, that the Company will receive
any future grants to support its research or that such research will result in
commercially viable products.
 
     In July 1998, the Company received notice from the NIAID of an SBIR grant
in the amount of $99,700 for the rational design of a live, attenuated vaccine
for the prevention of disease caused by HSV-2.
 
  Business Risks
 
     The Company's business is subject to significant risks, including but not
limited to the risks inherent in its research and development efforts, including
preclinical testing and clinical trials; uncertainties associated both with
obtaining and enforcing its patents and with the patent rights of others; the
lengthy, expensive and uncertain process of seeking regulatory approvals;
uncertainties regarding government reforms and product pricing and reimbursement
levels; technological change and competition; manufacturing uncertainties and
dependence on third parties. Even if the Company's product candidates appear
promising at an early stage of development, they may not reach the market for
numerous reasons. Such reasons include the possibilities that the products will
be found unsafe or ineffective during clinical trials, will fail to receive
necessary regulatory approvals, will be difficult to manufacture on a large
scale, will be uneconomical to market or will be precluded from
commercialization by proprietary rights of third parties. See "Business Risks"
in Part I of this Form 10-K.
 
                                       40
<PAGE>   43
 
RESULTS OF OPERATIONS
 
  Years Ended December 31, 1998 and 1997
 
     Revenues. Total revenues for the year ended December 31, 1998 were $0.7
million, compared to $1.5 million for the year ended December 31, 1997. Revenues
for 1998 comprised of payments under governmental research grants and contract
revenue for services provided for others by the Company's animal research
facility. Revenues for 1997 were principally payments for research support and
milestones due to the Company under its license and development agreement with
SmithKline Beecham for Aviron's Epstein-Barr virus vaccine.
 
     Operating Expenses. Research and development costs rose to $46.6 million in
1998 from $24.3 million in 1997. These increases were primarily due to increases
in research and development activities and clinical trials of FLUMIST(TM) and
the Company's Parainfluenza Virus Type 3 (PIV-3) vaccine, preclinical testing
associated with other programs, and depreciation and other expenses associated
with the documentation, validation, and test production at manufacturing
facilities. The Company expects these expenses to increase in 1999 as clinical
trials continue, and as development and pre-manufacturing activities expand in
preparation for potential commercialization.
 
     General, administrative and marketing costs rose to $10.1 million in 1998
from $6.0 million in 1997. This increase was due to increase in staffing and
infrastructure costs and market research activities principally associated with
the proposed commercial launch of FLUMIST(TM). The Company expects these
expenses to increase in 1999 due to pre-marketing and other
pre-commercialization activities and growth of the Company's administrative
infrastructure.
 
     Net Interest Income. The Company's net interest income decreased to $1.1
million in the year ended December 31, 1998, from $2.3 million in the year ended
December 31, 1997. Net interest income is the result of increased interest
income on the Company's increase in average cash, cash equivalent and investment
balances, due to the Company's public offering of Common Stock in August 1997
and the private offering of Notes in March 1998, offset by the increase in
interest expense related to the Notes.
 
  Years Ended December 31, 1997 and 1996
 
     Revenues. Total revenues for the year ended December 31, 1997 were $1.5
million, compared to $1.6 million for the year ended December 31, 1996. Revenues
resulted from reimbursement for contract research from SmithKline Beecham in
1996 and 1997, and a milestone payment of $1.0 million from SmithKline Beecham
in 1997 for commencement of clinical trials for the EBV vaccine.
 
     Operating Expenses. Research and development expenses increased to $24.3
million in the year ended December 31, 1997 from $15.0 million for the year
ended December 31, 1996. This increase was primarily due to increases in
research and development staffing, expenses associated with clinical trials of
FLUMIST(TM) and the Company's PIV-3 vaccines and preclinical testing associated
with other programs.
 
     General, administrative and marketing expenses increased to $6.0 million in
the year ended December 31, 1997 from $4.6 million for the year ended December
31, 1996. These increases were incurred to support the Company's expanded
research and development functions, patent and legal expenses, activities
associated with becoming a public company and corporate development activities.
 
     Net Interest Income. The Company's net interest income increased to $2.3
million in the year ended December 31, 1997, from $0.5 million in the year ended
December 31, 1996. Net interest income is the result of increased interest
income on the Company's increase in average cash, cash equivalent and investment
balances, due to the Company's public offering of Common Stock in August 1997.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Aviron had cash, cash equivalents and marketable securities at December 31,
1998 of approximately $94.9 million. In order to preserve principal and maintain
liquidity, the Company's funds are invested
 
                                       41
<PAGE>   44
 
primarily in United States Treasury obligations, highly rated corporate
obligations and other liquid investments.
 
     The Company has financed its operations since inception primarily through
private placements of Preferred Stock from 1992 to 1995, an initial public
offering of its Common Stock in November 1996, a private sale of Common Stock in
March 1997, a second public offering of Common Stock in August 1997, and a
private placement of convertible subordinated notes in March 1998. Through
December 31, 1998, the Company had raised approximately $236.3 million from such
sales, net of offering expenses. Cash used in operations was $49.5 million and
$19.8 million for 1998 and 1997, respectively. Net cash used in operating
activities increased primarily due to increased research and development
expenditures. The Company expects expenditures for research and development,
clinical trials and marketing, general and administrative expenses to continue
to increase in 1999 as the Company develops its products, expands its clinical
trials and prepares for the potential commercial launch of FLUMIST(TM). Cash
expended for capital additions and to repay lease financing arrangements
amounted to approximately $14.4 million and $6.4 million for 1998 and 1997,
respectively. Capital expenditures increased in 1998 primarily due to
expenditures for facilities and equipment at the Medeva Pharma and PCI
manufacturing plants.
 
     The Company anticipates that its existing cash, cash equivalents and
short-term investments, and revenues from existing collaborations will enable it
to maintain its current and planned operations into 2000. The Company's future
cash requirements will depend on numerous factors, including continued
scientific progress in the research and development of the Company's technology
and vaccine programs; the size and complexity of these programs; the ability of
the Company to establish and maintain collaborative arrangements; progress with
preclinical testing and clinical trials; the time and costs involved in
obtaining regulatory approvals; the cost involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims; the cost of constructing
manufacturing facilities, should they be deemed necessary; and product
commercialization activities. In particular, if the Company were to construct
and equip such a manufacturing facility during this period, the Company
anticipates that it would likely begin to make substantial additional capital
expenditures in 1999 and beyond, which may require the Company to seek
additional funding. In addition, there can be no assurance that, should the
Company require outside funding through additional debt or equity financings,
such funds will be available on favorable terms, if at all. If adequate funds
are not available, the Company may be required to delay, reduce the scope of, or
eliminate one or more of its research or development programs or to obtain funds
through collaborative agreements with others that may require the Company to
relinquish rights to certain of its technologies, product candidates or products
that the Company would otherwise seek to develop or commercialize itself, which
could materially adversely affect the Company's business, financial condition
and results of operations.
 
INCOME TAXES
 
     At December 31, 1998, the Company had a federal net operating loss
carryforward of approximately $118.9 million and research tax credits of
approximately $3.3 million that will expire at various dates between 2007 and
2018 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 10 of Notes to
Financial Statements.
 
IMPACT OF "YEAR 2000"
 
     Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead, the so-called "Year 2000" problem ("Y2K"). If not corrected,
those programs could cause date-related transaction failures.
 
     The Company has begun a process of assessing exposure for Y2K related
problems focusing on four potentials areas of exposure -- internal information
systems, facility support systems, scientific equipment, and the readiness of
significant third parties with whom we have material business relationships.
 
                                       42
<PAGE>   45
 
     INTERNAL INFORMATION SYSTEMS
 
     The Company is using a number of computers and computer programs across its
entire operations. An inventory has been performed of computer equipment and
computer programs. During 1998, the Company began the process of upgrading its
older financial and accounting programs to Y2K compliant systems and to improve
functionality. To date, no other significant internal information systems have
been identified as non-Y2K compliant and procedures have been enacted to assure
that all purchases of new systems are believed to be Y2K compliant.
 
     SCIENTIFIC EQUIPMENT
 
     An inventory has been taken of the major pieces of scientific equipment.
The Company is currently making inquiries of its internal staff and third-party
vendors, including its suppliers of scientific equipment, to determine if Y2K
problems exist which may affect the Company's research and development
operations
 
     FACILITY SUPPORT SYSTEMS
 
     The Company is currently making inquiries of its internal staff and
third-party vendors of utilities, communication and other facility support
systems, to determine if Y2K problems exist which may affect communications,
administrative or support functions.
 
     THIRD PARTIES WITH MAJOR BUSINESS RELATIONSHIPS
 
     The Company currently has no products available for commercial sale, and
does not anticipate FDA clearance for its lead product, FLUMIST(TM), until
mid-2000 at the earliest. In preparation for the potential commercial launch of
FLUMIST(TM), the Company has contacted its third party manufacturers and its
marketing and distribution partners to determine their level of Y2K readiness.
These parties are in the process of conducting their own evaluations of the
potential impact of Y2K issues on their businesses. The failure of any of these
parties to successfully identify and remedy the impact of Y2K upon their
businesses could have a material adverse effect on the Company's business,
including delaying or adversely affecting the potential commercial launch of
FLUMIST(TM).
 
     The Company's assessment of Y2K exposure areas is expected to be completed
during the second quarter of 1999.
 
     External and internal costs specifically associated with modifying internal
use software for Y2K compliance are expensed as incurred. To this point, these
costs have not been material, and the Company does not expect such costs to be
material in the future. There can be no assurance, however, that our assessment
of Y2K's potential impact on the Company will not change as we complete our
assessment, or that Y2K will not ultimately cause a material disruption in the
business of the Company.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     The Company is exposed to market risk, including changes to interest rates
and foreign currency exchange rates.
 
     INTEREST RATES -- The Company's 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 the Company's cash equivalents and investments. To mitigate the impact of
fluctuations in U.S. interest rates, the Company places its investments that
meet high credit standards, as specified in the Company's 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. As a result, the Company does not
expect any material loss with respect to its investment portfolio.
 
     FOREIGN CURRENCY EXCHANGE RATES -- The Company pays for the costs of
manufacturing and development activities, equipment, and facilities
modifications at Medeva Pharma, which is located in the United Kingdom (U.K.) in
British Pounds Sterling. As a result, the Company's financial results could be
affected by
 
                                       43
<PAGE>   46
 
factors such as changes in foreign currency exchange rates or weak economic
conditions in the U.K. The Company is exposed to changes in exchange rates in
the United Kingdom. When the U.S. dollar strengthens against the British Pounds
Sterling, the U.S. dollar value of British Pounds Sterling-based expenses
decreases; when the U.S. dollar weakens, the U.S. dollar value of British Pounds
Sterling-based expenses increases. Accordingly, changes in exchange rates, and
in particular a weakening of the U.S. dollar, may adversely affect the Company's
financial position as expressed in U.S. dollars.
 
     The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For investment
securities, the table presents principal cash flows and related weighted-average
interest rates by expected maturity dates.
 
<TABLE>
<CAPTION>
                                                                                            FAIR VALUE AT
                                1999    2000    2001   2002   2003   THEREAFTER   TOTAL   DECEMBER 31, 1998
                                -----   -----   ----   ----   ----   ----------   -----   -----------------
                                                               (IN MILLIONS)
<S>                             <C>     <C>     <C>    <C>    <C>    <C>          <C>     <C>
ASSETS
Cash and Cash Equivalent......  $28.2      --    --     --     --        --       $28.2         $28.2
Weighted average interest
  rate........................   5.35%     --    --     --     --        --
Investments...................  $60.9   $ 6.0    --     --     --        --       $66.9         $66.7
Weighted average interest
  rate........................   5.65%   5.70%   --     --     --        --
</TABLE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The Company's financial statements and notes thereto appear on pages 50
through 66 in this Form 10-K.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                       44
<PAGE>   47
 
                                   PART III.
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information required by this item will be contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be held on June 3, 1999, under the captions "Election of
Directions -- Nominees," and "Security Ownership of Certain Beneficial Owners
and Management -- Compliance with the Reporting Requirement of Section 16(a),"
and is hereby incorporated by reference herein. The information relating to
executive officers of the Company is contained in Part I, Item 1 of this report.
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The information required by this item will be contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be held June 3, 1999, under the caption "Executive
Compensation," and is hereby incorporated by reference herein.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this item will be contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be held June 3, 1999, under the captain "Security Ownership of
Certain Beneficial Owners and Management," and is hereby incorporated by
reference herein.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by this item will be contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be held June 3, 1999, under the caption "Certain Transactions,"
and is hereby incorporated by reference herein.
 
                                       45
<PAGE>   48
 
                                    PART IV.
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
 
(a) (1) INDEX TO FINANCIAL STATEMENTS
 
     The Financial Statements required by this item are submitted in a separate
section beginning on page 50 of this report.
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Ernst & Young LLP, Independent Auditors...........   50
Balance Sheets at December 31, 1997 and 1998................   51
Statements of Operations for each of the three years in the
  period ended December 31, 1998............................   52
Statement of Stockholders' Equity for the three years in the
  period ended December 31, 1998............................   53
Statements of Cash Flows for each of the three years in the
  period ended December 31, 1998............................   54
Notes to Financial Statements...............................   55
</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
 
<TABLE>
<CAPTION>
     ITEM                             DESCRIPTION
    -------                           -----------
    <C>       <S>
       3.1    Bylaws of the Registrant(2).
       3.2    Restated Certificate of Incorporation of the Registrant.(2)
       4.1    Reference is made to Exhibits 3.1 and 3.2.
       4.2    Specimen Stock Certificate(1).
       4.3    Warrant for Series A Preferred Stock, issued to The Mount
              Sinai School of Medicine of the City of New York(1).
       4.4    Warrant for Series A Preferred Stock, issued to The Mount
              Sinai School of Medicine of the City of New York(1).
       4.5    Warrant for Series A Preferred Stock, issued to The Mount
              Sinai School of Medicine of the City of New York(1).
       4.6    Warrant or Series A Preferred Stock, issued to The Mount
              Sinai School of Medicine of the City of New York(1).
       4.7    Warrant for Series C Preferred Stock, issued to Raymond,
              James & Associates(1).
       4.8    Investors Rights Agreement, dated July 18, 1995, among the
              Registrant and the investors named therein(1).
       4.9    Common Stock Purchase Agreement between the Registrant and
              Biotech Target, S.A., dated as of March 27, 1997(3).
       4.10   Rights Agreement between the Registrant and BankBoston,
              N.A., dated as of October 8, 1997(5).
     +10.1    License Agreement between the Registrant and ARCH
              Development Corporation, dated July 1, 1992(1).
     +10.2    Technology Transfer Agreement between the Registrant and The
              Mount Sinai School of Medicine of the City University of New
              York, dated February 9, 1993(1).
</TABLE>
 
                                       46
<PAGE>   49
 
<TABLE>
<CAPTION>
     ITEM                             DESCRIPTION
    -------                           -----------
    <C>       <S>
     +10.3    Materials Transfer and Intellectual Property Agreement
              between the Registrant and the Regents of the University of
              Michigan, dated February 24, 1995(1).
      10.4    Stock Transfer Agreement between the Registrant and the
              Regents of the University of Michigan, dated February 24,
              1995(1).
     +10.5    Development and License Agreement between the Registrant and
              Sang-A Pharm. Co., Ltd., dated May 3, 1995(1).
     +10.6    Cooperative Research and Development Agreement between the
              Registrant and the National Institutes of Health, dated May
              30, 1995(1).
     +10.7    Heads of Agreement between the Registrant and SmithKline
              Beecham Biologicals S.A., dated October 8, 1995(1).
     +10.8    Manufacturing and Development Agreement between the
              Registrant and Evans Medical Limited, dated November 7,
              1995(1).
     *10.9    1996 Equity Incentive Plan(1).
     *10.10   1996 Non-Employee Directors' Stock Option Plan(1).
     *10.11   1996 Employee Stock Purchase Plan(1).
      10.12   Industrial lease between the Registrant and the Vanni
              Business Park General Partnership, dated August 29, 1995(1).
     +10.13   First Amendment to License Agreement between the Registrant
              and ARCH Development Corporation dated March 15, 1996(1).
     +10.14   Biological Materials License Agreement between the
              Registrant and the National Institutes of Health, dated May
              31, 1996(1).
     +10.15   Contract Manufacture Agreement between the Registrant and
              Evans Medical Limited, dated as of April 16, 1997(4).
     +10.16   Production Agreement between the Registrant and Packaging
              Coordinators, Inc., dated as of October 31, 1997(6).
      10.17   Facility Reservation Agreement between the Registrant and
              Packaging Coordinators, Inc., dated as of October 31,
              1997(6).
     +10.18   Influenza Vaccine Collaboration and License Distributor
              Agreement between the Registrant and CSL Limited, dated June
              19, 1998(7).
     +10.19   Supply Agreement between the Registrant and Becton Dickinson
              and the 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.
    ++10.21   International FLUMIST(TM) License Agreement between the
              Registrant and Wyeth Lederle Vaccines dated January 11,
              1999.
    ++10.22   FLUMIST(TM) Supply Agreement between the Registrant and
              Wyeth Lederle Vaccines dated January 11, 1999.
    ++10.23   Credit Agreement between the Registrant and American Home
              Products Corporation dated January 11, 1999.
      23.1    Consent of Ernst & Young LLP, Independent Auditors.
      24.1    Power of Attorney. See Signature Page.
      27.1    Financial Data Schedule.
</TABLE>
 
---------------
 +  Confidential treatment has been granted for portions of this exhibit.
 
++  Confidential treatment has been requested for portions of this exhibit.
 
                                       47
<PAGE>   50
 
 *  Compensatory Plan or Agreement
 
(1) Incorporated by reference to the correspondingly numbered exhibit to the
    Company's 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 the
    Company's 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 the
    Company's 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 the
    Company's Current Report on Form 8-K, File No. 0-20815, dated April 16, 1997
    and filed July 21, 1997.
 
(5) Incorporated by reference to the correspondingly numbered exhibit to the
    Company's 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 the
    Company's Registration Statement on Form S-3, File No. 333-41649, filed
    December 10, 1997.
 
(7) Incorporated by reference to the correspondingly numbered exhibit to the
    Company's 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 the
    Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
    1998, File No. 0-20815, filed November 16, 1998.
 
(b) REPORTS ON FORM 8-K
 
     The Company filed no reports on Form 8-K during the quarter ended December
31, 1998.
 
                                       48
<PAGE>   51
 
                                   SIGNATURES
 
     In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Amendment
to its Form 10-K to be signed on its behalf by the undersigned, thereunto duly
organized, on the 31st day March 1999.
 
                                          AVIRON
 
                                          By   /s/ J. LEIGHTON READ, M.D.
 
                                            ------------------------------------
                                                   J. Leighton Read, M.D.
                                            Chairman and Chief Executive Officer
                                               (Principal Executive Officer)
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints J. Leighton Read, M.D. and Fred Kurland,
or either of them, his or her attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report, and to file the same, with exhibits thereto and other documents
in connections therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his or her
substitute or substitutes, may do or cause to be done by virtue hereof.
 
     In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates stated.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<C>                                                    <S>                              <C>
             /s/ J. LEIGHTON READ, M.D.                Chairman and Chief Executive     March 31, 1999
-----------------------------------------------------  Officer (Principal Executive
               J. Leighton Read, M.D.                  Officer)
 
                  /s/ FRED KURLAND                     Senior Vice President and Chief  March 31, 1999
-----------------------------------------------------  Financial Officer (Principal
                    Fred Kurland                       Financial and Accounting
                                                       Officer)
 
                 /s/ REID W. DENNIS                    Director                         March 31, 1999
-----------------------------------------------------
                   Reid W. Dennis
 
              /s/ PAUL H. KLINGENSTEIN                 Director                         March 31, 1999
-----------------------------------------------------
                Paul H. Klingenstein
 
             /s/ BERNARD ROIZMAN, SC.D.                Director                         March 31, 1999
-----------------------------------------------------
                Bernard Roizman, Sc.D
 
               /s/ JANE E. SHAW, PH.D.                 Director                         March 31, 1999
-----------------------------------------------------
                 Jane E. Shaw, Ph.D.
</TABLE>
 
                                       49
<PAGE>   52
 
               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
Aviron
 
     We have audited the accompanying balance sheets of Aviron as of December
31, 1997 and 1998, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aviron at December 31, 1997
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
 
                                          ERNST & YOUNG LLP
 
Palo Alto, California
February 17, 1999
 
                                       50
<PAGE>   53
 
                                     AVIRON
 
                                 BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                1997        1998
                                                              --------    ---------
<S>                                                           <C>         <C>
CURRENT ASSETS:
  Cash and cash equivalents.................................  $ 15,239    $  28,164
  Short-term investments....................................    47,285       60,692
  Accounts receivable.......................................        29           --
  Prepaid expenses and other current assets.................     1,001        1,303
                                                              --------    ---------
          Total current assets..............................    63,554       90,159
  Long-term investments.....................................    12,587        6,002
  Property and equipment, net...............................     7,582       18,521
  Deposits and other assets.................................     1,602        6,303
                                                              --------    ---------
TOTAL ASSETS................................................  $ 85,325    $ 120,985
                                                              ========    =========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
CURRENT LIABILITIES:
  Accounts payable..........................................  $  3,636    $   2,792
  Accrued compensation......................................       756          804
  Accrued clinical trial costs..............................     3,592          757
  Accrued expenses and other liabilities....................       513        6,029
  Current portion of capital lease obligations..............       477          408
                                                              --------    ---------
          Total current liabilities.........................     8,974       10,790
  Deferred rent.............................................        88        1,116
  Capital lease obligations, noncurrent.....................       521          113
  Convertible debt..........................................        --      100,000
COMMITMENTS AND CONTINGENCIES
 
STOCKHOLDERS' EQUITY:
  Preferred stock, $0.001 par value; 5,000,000 shares
     authorized; issuable in series; none outstanding at
     December 31, 1997 and 1998.............................        --           --
  Common stock, $0.001 par value; 30,000,000 shares
     authorized; 16,082,476 and 15,723,343 shares issued and
     outstanding at December 31, 1997 and 1998,
     respectively...........................................        16           16
  Additional paid-in capital................................   142,840      130,524
  Notes receivable from stockholders........................      (115)         (83)
  Deferred compensation.....................................      (588)        (237)
  Accumulated deficit.......................................   (66,411)    (121,254)
                                                              --------    ---------
TOTAL STOCKHOLDERS' EQUITY..................................    75,742        8,966
                                                              --------    ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................  $ 85,325    $ 120,985
                                                              ========    =========
</TABLE>
 
                            See accompanying notes.
 
                                       51
<PAGE>   54
 
                                     AVIRON
 
                            STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1996        1997        1998
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
REVENUES:
  Contract revenue and grants..............................  $  1,625    $  1,477    $    745
                                                             --------    --------    --------
OPERATING EXPENSES:
  Research and development.................................    14,997      24,254      46,583
  General, administrative and marketing....................     4,595       5,978      10,085
                                                             --------    --------    --------
TOTAL OPERATING EXPENSES...................................    19,592      30,232      56,668
                                                             --------    --------    --------
LOSS FROM OPERATIONS.......................................   (17,967)    (28,755)    (55,923)
OTHER INCOME/EXPENSE:
  Interest income..........................................       658       2,433       6,003
  Interest expense.........................................      (192)       (180)     (4,882)
                                                             --------    --------    --------
TOTAL OTHER INCOME, NET....................................       466       2,253       1,121
                                                             --------    --------    --------
NET LOSS...................................................  $(17,501)   $(26,502)   $(54,802)
                                                             ========    ========    ========
BASIC AND DILUTED NET LOSS PER SHARE.......................  $  (7.27)   $  (1.94)   $  (3.49)
                                                             ========    ========    ========
Shares used in computing basic and diluted net loss per
  share....................................................     2,406      13,684      15,724
                                                             ========    ========    ========
</TABLE>
 
                            See accompanying notes.
 
                                       52
<PAGE>   55
 
                                     AVIRON
 
                       STATEMENT OF STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                             ADDITIONAL                                                 TOTAL
                                        PREFERRED   COMMON    PAID-IN       NOTES        DEFERRED     ACCUMULATED   STOCKHOLDERS'
                                          STOCK     STOCK     CAPITAL     RECEIVABLE   COMPENSATION     DEFICIT        EQUITY
                                        ---------   ------   ----------   ----------   ------------   -----------   -------------
<S>                                     <C>         <C>      <C>          <C>          <C>            <C>           <C>
BALANCE AT DECEMBER 31, 1995..........  $ 39,844    $ 317           --         --           (180)      $ (22,444)     $ 17,537
                                        --------    -----     --------      -----        -------       ---------      --------
Issuance of 136,326 Series C
  convertible preferred stock at $1.35
  per share...........................       184       --           --         --             --              --           184
Conversion of 39,168,297 shares of
  preferred stock to 7,833,633 shares
  of common stock in conjunction with
  Initial Public Offering and
  reincorporation in Delaware.........   (40,028)    (309)      40,337         --             --              --            --
Issuance of 2,152,800 shares of common
  stock in initial public offering net
  of offering costs of $2,319.........        --        2       14,902         --             --              --        14,904
Issuance of 239,200 shares of common
  stock in private placement..........        --       --        1,914         --             --              --         1,914
Issuance of 468,094 shares of common
  stock upon exercise of stock options
  and warrants, net of
  cancellations.......................        --        1          335       (262)            48              --           122
Forgiveness of notes receivable from
  stockholders........................        --       --           --        105             --              --           105
Deferred compensation related to the
  grant of certain stock options......        --       --        1,639         --         (1,639)             --            --
Amortization of deferred
  compensation........................        --       --           --         --            672              --           672
Change in net unrealized loss on
  available-for-sale investments......        --       --           --         --             --              10            10
Net loss..............................        --       --           --         --             --         (17,501)      (17,501)
                                        --------    -----     --------      -----        -------       ---------      --------
BALANCE AT DECEMBER 31, 1996..........        --    $  11     $ 59,127      $(157)       $(1,099)      $ (39,935)     $ 17,947
                                        --------    -----     --------      -----        -------       ---------      --------
Issuance of 1,714,286 shares of common
  stock in private placement, net of
  offering costs of $59...............        --        2       14,939         --             --              --        14,941
Issuance of 2,690,000 shares of common
  stock in secondary public offering
  net of offering costs of $4,766.....        --        3       67,979         --             --              --        67,982
Issuance of 226,157 shares of common
  stock upon exercise of stock
  options, warrants and purchase of
  shares through employee stock
  purchase plan, net of repurchases...        --       --          477         --             --              --           477
Deferred compensation recorded
  relating to grant of certain stock
  options.............................        --       --          218         --           (218)             --            --
Issuance of warrants in lieu of a cash
  payment for services rendered.......        --       --          100         --             --              --           100
Amortization of deferred
  compensation........................        --       --           --         --            729              --           729
Change in net unrealized loss on
  available-for-sale investments......        --       --           --         --             --              26            26
Payment of notes receivable...........        --       --           --         42             --              --            42
Net loss..............................        --       --           --         --             --         (26,502)      (26,502)
                                        --------    -----     --------      -----        -------       ---------      --------
BALANCE AT DECEMBER 31, 1997..........  $     --    $  16     $142,840      $(115)       $  (588)      $ (66,411)     $ 75,742
                                        --------    -----     --------      -----        -------       ---------      --------
Issuance of 181,578 shares of common
  stock upon exercise of stock
  options, warrants and purchase of
  shares through employee stock
  purchase plan, net of repurchase....        --       --        1,019         --             --              --         1,019
Deferred compensation recorded
  relating to grant of certain stock
  options.............................        --       --           14         --            (14)             --            --
Amortization of deferred
  compensation........................        --       --           --         --            365              --           365
Repurchase of 540,711 shares of common
  stock...............................        --       --      (13,349)        --             --              --       (13,349)
Change in net unrealized loss on
  available-for-sale investments......        --       --           --         --             --             (41)          (41)
Payment of notes receivable...........        --       --           --         32             --              --            32
Net loss..............................        --       --           --         --             --         (54,802)      (54,802)
                                        --------    -----     --------      -----        -------       ---------      --------
BALANCE AT DECEMBER 31, 1998..........  $     --    $  16     $130,524      $ (83)       $  (237)      $(121,254)     $  8,966
                                        ========    =====     ========      =====        =======       =========      ========
</TABLE>
 
                             See accompanying notes
 
                                       53
<PAGE>   56
 
                                     AVIRON
 
                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              1996        1997        1998
                                                            --------    --------    ---------
<S>                                                         <C>         <C>         <C>
Cash flows from operating activities:
Net loss..................................................  $(17,501)   $(26,502)   $ (54,802)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization...........................       541         657        3,019
  Amortization of convertible debt offering costs.........        --          --          423
  Amortization of deferred compensation...................       672         729          365
  Changes in assets and liabilities:
     Accounts receivable..................................      (500)        471           29
     Prepaid expenses and other current assets............      (134)       (188)        (302)
     Deposits and other assets............................        17      (1,514)      (1,179)
     Accounts payable.....................................       383       2,963         (844)
     Accrued expenses and other liabilities...............       724       3,542        3,757
     Deferred revenue.....................................      (208)         --           --
                                                            --------    --------    ---------
Net cash used in operating activities.....................   (16,006)    (19,842)     (49,534)
Cash flows from investing activities:
  Purchases of investments................................   (10,342)    (74,028)    (105,990)
  Maturities of investments...............................    10,933      19,888       99,127
  Expenditures for property and equipment.................      (651)     (5,767)     (13,958)
Net cash used in investing activities.....................       (60)    (59,907)     (20,821)
Cash flow from financing activities:
  Principal payments on capital lease obligation and
     other................................................      (528)       (578)        (445)
  Proceeds from issuance of:
     Convertible debt.....................................        --          --       96,055
     Series C convertible preferred stock.................       184          --           --
     Common stock.........................................    17,044      83,400        1,019
  Repurchase of common stock..............................        --          --      (13,349)
                                                            --------    --------    ---------
Net cash provided by financing activities.................    16,700      82,822       83,280
Net increase in cash and cash equivalents.................       634       3,073       12,925
Cash and cash equivalents at beginning of year............    11,532      12,166       15,239
                                                            --------    --------    ---------
Cash and cash equivalents at end of year..................  $ 12,166    $ 15,239    $  28,164
                                                            ========    ========    =========
Supplemental schedule of non-cash financing and investing
  activities:
     Equipment acquired under lease line of credit........       933         153           --
     Deferred compensation related to grant of certain
       stock options, less cancellations..................     1,591         218           14
     Common stock issued in exchange for notes receivable,
       less cancellations.................................       262          --           --
     Warrant issued in lieu of payment of legal fees......        --         100           --
Supplemental disclosures of cash flow information:
     Cash paid for interest...............................       192         179        2,999
</TABLE>
 
                            See accompanying notes.
 
                                       54
<PAGE>   57
 
                                     AVIRON
 
                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 1998
 
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Organization and Business
 
     Aviron (the "Company") was incorporated in the State of California in April
1992 and was reincorporated in the State of Delaware in November 1996. The
Company was organized to develop and commercialize cost-effective forms of
disease prevention and treatment based on live virus vaccines.
 
     The Company anticipates working on a number of long-term development
projects which involve experimental and unproven technology. The projects may
require many years and substantial expenditures to complete, and may ultimately
be unsuccessful. Therefore, the Company will need to obtain additional funds
from outside sources to continue its research and development activities, fund
operating expenses, pursue regulatory approvals and build production, sales and
marketing capabilities, as necessary.
 
  Use of Estimates
 
     The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
  Concentration of Credit Risk
 
     Cash, cash equivalents and investments are financial instruments that
potentially subject the Company to concentrations of credit risk. The Company
primarily invests in U.S. government obligations, notes of U.S. corporations,
certificates of deposit, commercial paper and foreign government securities. By
policy, the Company limits the amount of credit exposure to any one entity or
financial institution and to any one type of investment other than securities
issued by the U.S. government.
 
  Cash and Cash Equivalents
 
     The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. Cash equivalents include
approximately $4,642,000 and $4,295,000 in money market funds at December 31,
1997 and 1998, respectively.
 
  Investments
 
     The Company's entire investment portfolio is currently classified as
available-for-sale and is carried at fair value based on quoted market prices
with the unrealized gains and losses included in stockholders' equity. The
amortized cost of debt securities classified as available-for-sale is adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains or losses and
declines in value judged to be other-than-temporary, if any, are included in
other income. The cost of securities sold is based on the specific
identification method. The Company has not experienced any significant realized
gains or losses on its investments.
 
  Property and Equipment
 
     Property and equipment is stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the respective assets
which range from three to seven years. Property and equipment at December 31,
1998 includes approximately $1,334,000 of construction in progress. No
depreciation has been charged for these assets during 1998 because such assets
have not been placed in service. Leasehold improvements are amortized on a
straight-line basis over the shorter of their useful lives or the term of the
lease.
 
                                       55
<PAGE>   58
                                     AVIRON
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
  Revenue Recognition
 
     Collaborative research revenue and grant revenue are earned based on
research expenses incurred. Amounts received in advance of services to be
performed are recorded as deferred revenue until the related expenses are
incurred. Milestone payments are recognized as revenue in the period earned.
Contract revenue for services provided by the Company's animal research facility
is earned when services are provided per the contract.
 
  Stock Compensation
 
     The Company accounts for stock options granted to employees using the
intrinsic-value method and thus recognizes no compensation expense for options
granted with exercise prices equal to the fair value of the Company's common
stock on the date of the grant.
 
  Net Loss per Share
 
     Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128
requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented. In
accordance with SFAS 128, basic net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period.
Diluted net loss per share has not been presented separately as, given the
Company's net loss position, the result would be anti-dilutive.
 
     Had the convertible preferred stock that automatically converted upon
completion of the Company's initial public offering (using the as-if converted
method) been included in the calculation of net loss per share from the original
date of issuance, net loss per share in 1996 would have been ($1.94).
 
     A reconciliation of shares used in the calculation of basic and pro forma
basic net loss per share follows:
 
<TABLE>
<CAPTION>
                                                    YEARS ENDED DECEMBER 31,
                                             --------------------------------------
                                                1996          1997          1998
                                             ----------    ----------    ----------
                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                          <C>           <C>           <C>
Net loss...................................   $(17,501)     $(26,502)     $(54,802)
                                              ========      ========      ========
Basic
Weighted average shares of common stock
  outstanding..............................      2,406        13,684        15,724
                                              --------      --------      --------
Basic net loss per share...................   $  (7.27)     $  (1.94)     $  (3.49)
                                              ========      ========      ========
Pro Forma Basic
Weighted average shares of common stock
  outstanding..............................      2,406
Adjusted to reflect the effect of the
  conversion of Preferred Stock............      6,637
                                              --------
Shares used in computing pro forma basic
  net loss per share.......................      9,043
                                              --------
Pro forma basic net loss per share.........   $  (1.94)
                                              ========
</TABLE>
 
     Had the Company been in a net income position, diluted earnings per share
would have been presented and would have included, the shares used in the
computation of basic net loss per share, as well as the effect of an additional
503,986, 427,613 and 3,159,451 shares for the years ended December 31, 1996,
1997 and 1998, respectively, related to the exercise of outstanding options and
warrants and the conversion of the Notes into
 
                                       56
<PAGE>   59
                                     AVIRON
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
common stock, which shares are not included above. The number of additional
shares has been determined using the treasury stock method.
 
  Reporting Comprehensive Income (Loss)
 
     As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, ("SFAS 130"). SFAS 130 establishes rules for
reporting and display of comprehensive income (loss) and its components. SFAS
130 requires unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were 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 loss
in available-for-sale investments for the years ended December 31, 1996, 1997
and 1998 approximate $10,000, $26,000, and ($41,000), respectively. There was no
impact from the adoption on the Company's financial position or results of
operations.
 
  Segment Reporting
 
     As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. As the Company has only one segment and
operates solely within the United States, the adoption of SFAS 131 had no impact
on the Company.
 
  New Accounting Pronouncements
 
     In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which is required to be adopted for the year ending December 31, 2000.
Management does not anticipate that the adoption of SFAS 133 will have a
significant effect on the results of operations or the financial position of the
Company.
 
 2. LICENSE AGREEMENTS
 
  ARCH Development Corporation
 
     In July 1992, the Company entered into an exclusive license agreement with
ARCH Development Corporation ("ARCH") to acquire the rights to use or sublicense
certain technology and make, use or sell certain licensed products. The
agreement calls for the Company to make certain payments to ARCH totaling as
much as $2.6 million as certain milestones are met. No benchmark payments were
made or were due through 1998. If commercialization is achieved, the Company
will be required to pay ARCH royalties based on net sales of the licensed
products. Further, if the Company were to sublicense the technology, it would be
required to pay ARCH royalties on net sales of the sublicensee and, under
certain circumstances, up to 50% of the license fee paid by the sublicensee.
During 1997, ARCH asserted an interpretation of the financial terms of the
agreement with the Company relating to the license for Epstein-Barr virus
technology. The assertion would require the Company to pay ARCH one-half of any
future or past payments (including sublicense fees and milestone payments)
received by the Company under its agreement with SmithKline Beecham (see Note
3). As of December 31, 1998, the Company had received $3,352,000 from SmithKline
Beecham. The Company disputes ARCH's interpretation of the financial terms of
the agreement. No assurance can be given, however, that the Company's
interpretation will prevail. Failure of the Company to prevail could have a
material adverse effect on the Company's business, financial condition or
results of operations.
 
                                       57
<PAGE>   60
                                     AVIRON
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
  The Mount Sinai School of Medicine
 
     In 1993, the Company entered into a technology transfer agreement with The
Mount Sinai School of Medicine of the City University of New York ("Mount
Sinai") to acquire certain patent rights and technical information. Pursuant to
the agreement, the Company issued to Mount Sinai 35,000 shares of common stock
which resulted in a charge to research and development expense of approximately
$8,750, and warrants to purchase, in the aggregate, 225,000 shares of Series A
preferred stock. Upon the closing of the Company's initial public offering,
warrants previously exercisable for 45,000 shares of Series A preferred stock
became exercisable for 9,000 shares of common stock at $4.50 per share; warrants
covering an additional 148,750 shares of Series A preferred stock became
exercisable for 29,750 shares of common stock at $10.00 per share; and the
remaining warrants were canceled. Warrants expire in 1999, 2000 and 2001,
respectively. As of December 31, 1998 warrants covering 2,776 shares at $4.50 a
share had been exercised. The Company is also required to reimburse Mount Sinai
for costs incurred in connection with the maintenance and protection of certain
patents.
 
  University of Michigan
 
     In February 1995, the Company signed a license agreement with the
University of Michigan which gives the Company a worldwide license to the
University of Michigan's inventions and discoveries related to a cold adapted
influenza vaccine, including the ability to develop, use, sublicense,
manufacture and sell products and processes claimed in the patent rights. Under
the arrangement, the Company paid the University of Michigan and expensed a
$100,000 fee and issued shares of Series B preferred stock (which converted into
264,746 shares of common stock upon the closing of the Company's initial public
offering), resulting in a charge to research and development expense of
approximately $1,588,000. Upon commercialization of the vaccine product, the
license agreement provides that the Company will pay royalties based on net
revenues and will issue a warrant to purchase 1.25% of the Company's then total
outstanding common stock at an exercise price equal to $10.00 per share. The
warrant will be exercisable for five years after its issuance date. As of
December 31, 1998, the Company had funded $779,000 of research at the University
of Michigan related to this agreement and has no further obligations to fund
research.
 
  NeuroVir Research, Inc.
 
     In July 1996, the Company licensed certain of its patent rights covering or
relating to the use of HSV-2 for treatment of cancer and for gene therapy, but
excluding use in vaccines, to NeuroVir Research Inc. ("NeuroVir"), a private
Canadian corporation. In exchange, the Company received 458,334 shares of common
stock, 3,208,332 shares of preferred stock and a warrant to purchase 1,000,000
shares of common stock. At December 31, 1998, the Company owned approximately
15% of NeuroVir's outstanding capital stock. The Company's investment has a
carrying value of zero and Aviron is under no obligation to provide any funding
to NeuroVir. As no market exists for NeuroVir's capital stock, it is not
practicable to determine the fair value of shares held by the Company.
 
 3. DEVELOPMENT AGREEMENTS
 
  SmithKline Beecham Biologicals S.A.
 
     In October 1995, the Company signed an agreement with SmithKline Beecham
Biologicals S.A. ("SmithKline Beecham") which grants SmithKline Beecham
exclusive worldwide (excluding Korea) rights to produce and market any
prophylactic and therapeutic Epstein-Barr Virus ("EBV") vaccines under the
Company's patents. Under the Agreement, SmithKline Beecham paid the Company a
$1,500,000 nonrefundable licensing fee and is required to make additional
benchmark payments as certain milestones are met. Upon
 
                                       58
<PAGE>   61
                                     AVIRON
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
commercialization, SmithKline Beecham will pay the Company a royalty based on
net sales (by country). In conjunction with the licensing rights, SmithKline
Beecham funded the Company's development of the EBV vaccine through the third
quarter of 1997. For the years ended December 31, 1996 and 1997, the Company
recognized approximately $1,625,000 and $1,477,000 respectively of development
revenue pursuant to the agreement. No additional expense was incurred for the
year ended December 31, 1998. The revenue received and recognized in 1997
includes a $1,000,000 milestone payment related to the initiation of clinical
trials by SmithKline Beecham. Development costs incurred in 1996 and 1997 under
this arrangement approximated development revenue recognized.
 
  Sang-A Pharm. Co., Ltd.
 
     In May 1995, the Company signed a development and licensing agreement with
Sang-A Pharm. Co., Ltd. ("Sang-A"), a Korean pharmaceutical company. The
agreement covers a wide range of vaccine products and grants Sang-A the
exclusive rights and licenses to such products in South and North Korea
("Korea"). Under the terms of the agreement, Sang-A will conduct all clinical
development work necessary for approval in Korea at its expense, and is required
to make payments based on certain milestones and, upon commercialization of each
product, to pay royalties based on net revenues. The agreement also gives Sang-A
the first right of refusal to supply a percentage of Aviron's products in
selected countries. In January 1997, Sang-A declared bankruptcy. In March 1998,
the Company repurchased 530,831 shares of common stock from Sang-A for
$13,337,000. The Company is unable to predict what, if any, long-term effect the
bankruptcy will have on Sang-A and on the Company's agreement with Sang-A.
 
 4. 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, 1997:
  Certificates of deposit.................  $ 8,129       $  1         $  (1)      $ 8,129
  Corporate commercial paper..............   11,586         --            (5)       11,581
  U.S. Corporate obligations..............   42,471         38           (10)       42,499
  U.S. government agency obligations......    2,050         --            --         2,050
  Municipal bonds.........................    2,018          2            --         2,020
  Foreign government securities...........    4,190          1            (1)        4,190
                                            -------       ----         -----       -------
                                            $70,444       $ 42         $ (17)      $70,469
                                            =======       ====         =====       =======
As of December 31, 1998:
  Certificates of deposit.................  $ 5,663       $ 30         $  --       $ 5,693
  Corporate commercial paper..............   28,415         --           (12)       28,403
  U.S. Corporate obligations..............   36,688        125          (175)       36,638
  U.S. government agency obligations......   11,960         21            (8)       11,973
  Municipal bonds.........................    2,153          1            --         2,154
  Foreign government securities...........    5,702          4            (4)        5,702
                                            -------       ----         -----       -------
                                            $90,581       $181         $(199)      $90,563
                                            =======       ====         =====       =======
</TABLE>
 
     Included in the above table as of December 31, 1998 are U.S. corporate
obligations, commercial paper and U.S. government agency obligations with fair
values of $10,597,000 and $23,869,000 at December 31, 1997 and 1998,
respectively, which have been classified as cash equivalents in the accompanying
balance
 
                                       59
<PAGE>   62
                                     AVIRON
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
sheet. All securities had maturities of one year or less except for $12,587,000
and $6,002,000 in 1997 and 1998, respectively, which had maturities no greater
than two years.
 
 5. PROPERTY AND EQUIPMENT
 
     Property and equipment consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1997       1998
                                                              -------    -------
<S>                                                           <C>        <C>
Manufacturing equipment.....................................  $    91    $ 4,288
Laboratory equipment........................................    2,315      2,790
Computer equipment..........................................      631      1,488
Office equipment............................................      330        776
Leasehold improvements......................................    1,085     12,773
Construction in progress....................................    5,039      1,334
                                                              -------    -------
                                                                9,491     23,449
Less accumulated depreciation and amortization..............   (1,909)    (4,928)
                                                              -------    -------
                                                              $ 7,582    $18,521
                                                              =======    =======
</TABLE>
 
     Included in property and equipment at December 31, 1997 and 1998, are
assets with costs of $2,874,000 and accumulated depreciation of approximately
$1,679,000 and $2,253,800, respectively, which have been financed pursuant to
the lease line of credit
 
 6. ACCRUED EXPENSES AND OTHER LIABILITIES
 
     Accrued expenses and other liabilities consisted of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              --------------
                                                              1997     1998
                                                              ----    ------
<S>                                                           <C>     <C>
Accrued interest............................................  $ --    $1,445
Accrued manufacturing.......................................   309     3,219
Accrued legal expenses......................................    94       477
Accrued testing services....................................    --       433
Accrued expense other.......................................   110       455
                                                              ----    ------
          Total.............................................  $513    $6,029
                                                              ====    ======
</TABLE>
 
 7. LEASE ARRANGEMENTS
 
     The Company has a lease line of credit that bears interest based on an
average of the three-year and five-year indices of U.S. Treasury notes (13.9 %
at December 31, 1998). Outstanding balances under the line are secured by the
related equipment purchased.
 
     The Company has entered into an operating lease agreement for office and
research facilities which expires in 2005 and includes an option allowing the
Company to extend the lease for two additional five-year terms. The agreement
requires the Company to pay operating costs, including property taxes,
utilities, insurance and maintenance. Rent expense for the years ended December
31, 1996, 1997 and 1998 was $728,000, $904,000 and $919,000 respectively.
 
     The Company entered into an operating lease agreement for a portion of
facilities owned by the Company's contract manufacturer for cold adapted
influenza vaccine. The agreement expires upon the earlier
 
                                       60
<PAGE>   63
                                     AVIRON
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
of December 31, 2001 or three years following initial product commercial sales.
Net expense for the years ended December 31, 1997 and 1998 was $830,000 and
$1,248,000 respectively.
 
     In October 1997, the Company entered into a 7 year operating lease
agreement for a facility to be used in the manufacturing, packaging and storage
of its products. The facility is owned by a contract manufacturer who will
provide services to the Company. The lease includes an option allowing the
Company to extend the lease beyond the initial term. The agreement requires the
Company to pay certain operating costs including a portion of utilities and
insurance. The agreement provides for the deferral of 40% of the base monthly
rental for a 2-year period. The Company is required to deposit and maintain the
deferred amount in an escrow account. The agreement also requires the lessor to
provide a $1,000,000 improvement allowance for construction and improvements to
the facility. The Company will repay $500,000 of the improvement allowance to
the lessor through an additional charge per unit of production. The $500,000 is
presently deposited in an escrow account. Rent expense for the years ended
December 31, 1997 and 1998, was $220,000 and $1,160,000 respectively. Included
in the rent expense at December 31, 1997 and 1998 are deferred rents in the
amount of $88,000 and $528,000 respectively.
 
     At December 31, 1998, the Company's aggregate commitments under such
arrangements are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                       CAPITAL LEASE    OPERATING
                                                        OBLIGATIONS       LEASE
                                                       -------------    ---------
<S>                                                    <C>              <C>
Years ending December 31,
  1999...............................................      $ 456         $ 2,929
  2000...............................................        111           2,987
  2001...............................................          9           4,054
  2002...............................................         --           2,334
  2003...............................................         --           2,339
  Thereafter.........................................         --           3,017
                                                           -----         -------
                                                             576         $17,660
                                                                         =======
Less amounts representing interest...................        (55)
                                                           -----
                                                             521
Less current portion.................................       (408)
                                                           -----
                                                           $ 113
                                                           =====
</TABLE>
 
 8. CONVERTIBLE DEBT
 
     On March 30, 1998, the Company sold unsecured convertible subordinated
notes in the aggregate principal amount of $100,000,000 at an interest rate of
5 3/4% due 2005 (the "Notes"). Net proceeds to the Company, after deducting
legal and other expenses, were approximately $96,055,000.
 
     The Notes are convertible into common stock at any time after 90 days
following the original issuance through maturity, unless previously redeemed at
a conversion price of $30.904 per share (equivalent to a conversion rate of
approximately 32.3583 shares per $1,000 principal amount of Notes), which is
subject to adjustment in certain events. Interest on the notes is paid
semi-annually on April 1 and October 1.
 
     The fair market value of the Notes as of December 31, 1998 approximated
$100,250,000, based on quoted market prices.
 
                                       61
<PAGE>   64
                                     AVIRON
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
 9. STOCKHOLDERS' EQUITY
 
  Common Stock
 
     Certain shares of common stock issued to members of management in 1996
through exercises of stock options are subject to repurchase by the Company at
$0.50 - $2.50 per share. The above shares vest over periods specified by the
Board of Directors. At December 31, 1997 and 1998, 92,100 and 37,920 shares
remain subject to the Company's right of repurchase, respectively.
 
  Warrants
 
     Outstanding warrants to purchase common stock are as follows at December
31, 1998:
 
<TABLE>
<CAPTION>
NUMBER OF SHARES   EXERCISE PRICE    EXPIRATION
----------------   --------------    ----------
<S>                <C>              <C>
16,666.....            $ 2.00       January 2000
3,458......            $ 4.50         June 1999
2,766......            $ 4.50         May 2000
29,750.....            $10.00       November 2001
</TABLE>
 
  Employee Stock Purchase Plan
 
     The Company has adopted an Employee Stock Purchase Plan under which
employees can purchase shares of the Company's common stock based on a
percentage of their compensation but not greater than 15 percent of their
earnings. The purchase price per share must be equal to the lower of 85% of the
market value at the beginning or end of the applicable offering period. A total
of 350,000 shares of common stock are reserved for issuance under the plan. As
of December 31, 1998, 71,513 shares had been issued under the Plan.
 
  Stock Options
 
     On September 15, 1992, the Board of Directors adopted the 1992 Stock Option
Plan (the "1992 Plan"). In March 1996, the Company amended and restated the 1992
Plan as the 1996 Equity Incentive Plan (the "1996 Plan"). Total shares of common
stock reserved for future issuance under the 1996 Plan were increased to
3,250,000. The 1996 Plan provides for the grant of incentive and nonstatutory
stock options to employees and consultants of the Company and became effective
in November 1996 upon the closing of the initial public offering.
 
     In March 1996, the Company adopted the 1996 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") under which 200,000 shares of common stock
are reserved for issuance pursuant to nonstatutory stock options. The Directors'
Plan became effective upon the closing of the initial public offering.
 
     The Company's Plans had 1,248,793 shares available to grant options to
employees and directors at December 31, 1998. Most of the options granted have
10 year terms and vest ratably over 50 months of continued employment.
 
     In addition, the Company has issued non-qualified stock options outside of
the 1992 Plan.
 
                                       62
<PAGE>   65
                                     AVIRON
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
     A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
 
<TABLE>
<CAPTION>
                                            1996                   1997                   1998
                                    --------------------   --------------------   ---------------------
                                                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............................    613,038    $0.50       611,936    $ 1.60       885,819    $ 8.87
Granted...........................    640,080    $2.73       441,780    $16.08     1,068,717    $24.69
Exercised.........................   (452,781)   $1.13      (141,032)   $ 0.70      (155,553)   $ 2.80
Forfeited.........................   (188,401)   $2.97       (26,865)   $ 2.70       (84,448)   $13.25
                                    ---------              ---------              ----------
Outstanding -- end of year........    611,936    $1.60       885,819    $ 8.86     1,714,535    $19.08
                                    =========              =========              ==========
Weighted-average fair value of
  options granted during year.....  $    1.38              $   11.07              $    19.23
</TABLE>
 
     During 1995, officers of the Company exercised options granted outside the
Plan for 168,000 shares by signing promissory notes amounting to $310,000 which
bear interest at 5.73% subject to the Company's right of repurchase which lapses
over fifty months. As of December 31, 1998, $82,500 of the promissory notes were
still outstanding and 37,920 shares were subject to repurchase.
 
     In August 1996, as a result of uncertainty about the Company's ability to
complete its initial public offering as anticipated, the Board of Directors
agreed to cancel all outstanding options which had been granted previously with
exercise prices of $2.50 per share, and issue new options to these option
holders with exercise prices of $1.25 per share in exchange for a three month
delay in the vesting of such options. As a result of this transaction, the
Company recognized an additional $311,000 of deferred compensation for financial
reporting purposes. For those employees who had early exercised their options at
$2.50 per share in exchange for notes receivable, the Board of Directors agreed
to forgive one-half of the notes receivable amount such that the effective
exercise prices for these options was $1.25 per share, and to reimburse such
employees for any tax resulting from such forgiveness.
 
     The Company has recognized deferred compensation for certain options
granted in 1996, 1997 and 1998. Total deferred compensation of approximately
$2,094,000 recorded through December 31, 1998 is being amortized over the
vesting period of such options on an accelerated basis. A portion of these
options vested immediately upon grant.
 
     The options outstanding at December 31, 1998 have been segregated for
additional disclosure as follows:
 
<TABLE>
<CAPTION>
                                                  OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
                                   --------------------------------------------------   --------------------------
                                                       WEIGHTED-                           OPTIONS       WEIGHTED-
                                      OPTIONS           AVERAGE          WEIGHTED-        CURRENTLY       AVERAGE
                                   OUTSTANDING AT      REMAINING          AVERAGE       EXERCISABLE AT   EXERCISE
    RANGE OF EXERCISE PRICES       DEC. 31, 1998    CONTRACTUAL LIFE   EXERCISE PRICE   DEC. 31, 1998      PRICE
    ------------------------       --------------   ----------------   --------------   --------------   ---------
<S>                                <C>              <C>                <C>              <C>              <C>
$ 0.25 - $1.00...................       70,478            6.0              $ 0.51           65,996        $ 0.50
$ 1.01 - $5.00...................      177,006            7.5              $ 1.25          100,638        $ 1.25
$ 5.01 - $10.00..................      178,905            8.0              $ 8.84           92,945        $ 8.58
$ 8.01 - $20.00..................      224,229            9.4              $14.87           25,034        $11.44
$20.01 - $30.38..................    1,063,917            9.1              $25.84          139,159        $24.65
</TABLE>
 
     The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
requires use of option valuation
 
                                       63
<PAGE>   66
                                     AVIRON
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
models that were not developed for use in valuing employee stock options. Under
APB 25, if the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
 
     Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair market value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996,
1997 and 1998: risk free interest rate of 5.94%, 6.80% and 4.85% respectively;
volatility factors of the expected market price of the Company's common stock of
0.73 for 1996, 0.80 for 1997 and 0.80 for 1998; no expected dividends; and a
weighted-average expected life of the option of 5 years.
 
     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and employee stock
purchase plans have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair market value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options and shares issued pursuant to the employee stock
purchase plan.
 
     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for net loss per share
information):
 
<TABLE>
<CAPTION>
                                       1996        1997        1998
                                     --------    --------    --------
<S>                                  <C>         <C>         <C>
Pro forma net loss.................  $(17,595)   $(27,733)   $(64,883)
Pro forma net loss per share
  (basic)..........................  $  (1.95)   $  (2.03)   $  (4.13)
</TABLE>
 
     Since SFAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until 1999.
 
  Share Purchase Rights
 
     In October 1997, the Company's Board of Directors adopted a Share Purchase
Rights Plan. The Share Purchase Rights Plan provides for the distribution of
certain rights to acquire shares of the Company's Series A Junior Participating
Preferred Stock, par value $0.001 (the "Rights") as a dividend for each share of
Common Stock held of record as of October 23, 1997. The Rights are triggered and
become exercisable upon the occurrence of either the (i) date of a public
announcement of the acquisition of 20% or more beneficial ownership of the
Company's Common Stock by a person or group (an "Acquiring Person"), or (ii) ten
business days (or such later time as may be set by the Board of Directors) after
a public announcement of a tender or exchange offer for 20% or more beneficial
ownership of the Company's Common Stock by an Acquiring Person. If the Rights
are triggered, each Right effectively provides its holder, the right to purchase
shares of Common Stock at a 50% discount from the market price at that time,
upon payment of an exercise price of $150 per Right.
 
                                       64
<PAGE>   67
                                     AVIRON
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
  Reserved Shares
 
     As of December 31, 1998, the Company has reserved shares of common stock
for future issuance as follows:
 
<TABLE>
<S>                                                         <C>
Options:
  Outstanding.............................................  1,714,535
  Available for grant.....................................  1,248,793
Employee Stock Purchase Plan..............................    278,487
Warrants..................................................     52,640
                                                            ---------
                                                            3,294,455
                                                            =========
</TABLE>
 
10. INCOME TAXES
 
     As of December 31, 1998, the Company had a federal net operating loss
carryforward of approximately $118,900,000. The Company also had federal
research and development tax credit carryforwards of approximately $3,300,000.
The net operating loss and credit carryforwards will expire at various dates
beginning in 2007 through 2018, if not utilized.
 
     Utilization of net operating losses and credits may be subject to a
substantial annual limitation due to "ownership change" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
 
     Significant components of the Company's deferred tax assets as of December
31 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                           1997        1998
                                                         --------    --------
<S>                                                      <C>         <C>
Net operating loss carryforwards.......................  $ 23,000    $ 41,200
Capitalized research and development expenses..........     2,700       3,300
Research tax credits (expire 2007-2018)................     2,000       5,500
Other -- Net...........................................       500         600
                                                         --------    --------
Net deferred tax assets................................    28,200      50,600
Valuation allowance....................................   (28,200)    (50,600)
                                                         --------    --------
                                                         $     --    $     --
                                                         ========    ========
</TABLE>
 
     Because of the Company's lack of earnings history, the net deferred tax
asset has been fully offset by a valuation allowance. The valuation allowance
increased by approximately $7,050,000, $12,300,000 and $22,400,000 in 1996, 1997
and 1998 respectively.
 
     Approximately $1,300,000 of the valuation allowance for deferred tax assets
relates to benefits of stock option deductions which, when recognized, will be
allocated directly to contributed capital.
 
11. COMMITMENTS
 
     In August 1998, the Company announced the signing of a worldwide multiyear
supply agreement with Becton Dickinson and Company ("Becton Dickinson"), in
which Becton Dickinson will supply its AccuSpray(TM) non-invasive nasal spray
delivery system for administration of FLUMIST(TM). The agreement requires the
Company to advance a total of $2,000,000 to Becton Dickinson for facility
expansion of plant capacity. As of December 31, 1998, $550,000 of this amount
remained to be paid.
 
                                       65
<PAGE>   68
                                     AVIRON
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
12. RELATED PARTY TRANSACTIONS
 
     In 1995, the Company made unsecured loans to members of senior management
totaling $100,000 which bear interest at 7.75% and are due in April 2000. In
1997, the Company made two additional unsecured loans to members of senior
management totaling $200,000, which bear interest at 7.75% and are due in
February and July 2001, respectively. As of December 31, 1998, the unpaid
balance was $141,000.
 
     A former officer of the Company is a shareholder in an investment advisory
business which was paid a commission by the Company of approximately $115,000
and $11,000 during 1996 and 1997, respectively, all in connection with the
Sang-A transaction. The former officer received no direct compensation from the
transaction.
 
13. SUBSEQUENT EVENTS
 
     On January 12, 1999, the Company announced a worldwide collaboration for
the marketing of FLUMIST(TM) with Wyeth Lederle Vaccines, a business unit of
Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products
Corporation ("Wyeth Lederle"). On March 15, 1999, the Federal Trade Commission
granted early termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvement Act of 1996 regarding this collaboration.
 
     Under the agreement, Aviron is granting Wyeth Lederle exclusive worldwide
rights to market FLUMIST(TM). Wyeth Lederle and Aviron will co-promote
FLUMIST(TM) in the United States, while Wyeth Lederle will have the exclusive
right to market the product outside the United States. In each case, Wyeth
Lederle will hold the marketing rights for up to eleven years. The collaboration
excludes Korea, Australia, New Zealand and certain South Pacific countries. The
companies will collaborate on the regulatory, clinical, and marketing programs
for the product.
 
     As consideration under the agreement, the Company received a cash payment
of $15 million for the initial license, and will receive $15 million upon
acceptance for filing with the U.S. Food and Drug Administration (FDA), and $20
million upon FDA marketing approval for FLUMIST(TM). Compensation for achieving
additional development and regulatory milestones is included in the agreement
terms. The granting of certain rights under the license would trigger additional
payments in excess of $40 million to the Company. Consideration for the license
also includes a commitment to provide up to $40 million in future financing to
the Company from Wyeth-Ayerst Laboratories, a portion of which is contingent
upon regulatory approval of the product, with the remaining amount to come from
participation in the Company's future securities offerings. The potential value
for the license fees, milestones and financing support that the Company could
receive under the collaboration exceeds $400 million. In addition to the
payments mentioned above, the Company anticipates that it will earn product
revenues from Wyeth Lederle, in the form of product transfer payments and
royalties, which increase at higher sales levels. The Company will incur
expenses to supply and co-promote the product.
 
     On February 5, 1999, the Company leased a 69,000 square foot building in
Santa Clara, California. The lease will terminate in the year 2019. Monthly rent
is approximately $161,800. The facility will provide additional manufacturing,
laboratory, pilot plant and office space.
 
                                       66
<PAGE>   69
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 ITEM                             DESCRIPTION
-------                           -----------
<C>       <S>
   3.1    Bylaws of the Registrant(2).
   3.2    Restated Certificate of Incorporation of the Registrant.(2)
   4.1    Reference is made to Exhibits 3.1 and 3.2.
   4.2    Specimen Stock Certificate(1).
   4.3    Warrant for Series A Preferred Stock, issued to The Mount
          Sinai School of Medicine of the City of New York(1).
   4.4    Warrant for Series A Preferred Stock, issued to The Mount
          Sinai School of Medicine of the City of New York(1).
   4.5    Warrant for Series A Preferred Stock, issued to The Mount
          Sinai School of Medicine of the City of New York(1).
   4.6    Warrant or Series A Preferred Stock, issued to The Mount
          Sinai School of Medicine of the City of New York(1).
   4.7    Warrant for Series C Preferred Stock, issued to Raymond,
          James & Associates(1).
   4.8    Investors Rights Agreement, dated July 18, 1995, among the
          Registrant and the investors named therein(1).
   4.9    Common Stock Purchase Agreement between the Registrant and
          Biotech Target, S.A., dated as of March 27, 1997(3).
   4.10   Rights Agreement between the Registrant and BankBoston,
          N.A., dated as of October 8, 1997(5).
 +10.1    License Agreement between the Registrant and ARCH
          Development Corporation, dated July 1, 1992(1).
 +10.2    Technology Transfer Agreement between the Registrant and The
          Mount Sinai School of Medicine of the City University of New
          York, dated February 9, 1993(1).
 +10.3    Materials Transfer and Intellectual Property Agreement
          between the Registrant and the Regents of the University of
          Michigan, dated February 24, 1995(1).
  10.4    Stock Transfer Agreement between the Registrant and the
          Regents of the University of Michigan, dated February 24,
          1995(1).
 +10.5    Development and License Agreement between the Registrant and
          Sang-A Pharm. Co., Ltd., dated May 3, 1995(1).
 +10.6    Cooperative Research and Development Agreement between the
          Registrant and the National Institutes of Health, dated May
          30, 1995(1).
 +10.7    Heads of Agreement between the Registrant and SmithKline
          Beecham Biologicals S.A., dated October 8, 1995(1).
 +10.8    Manufacturing and Development Agreement between the
          Registrant and Evans Medical Limited, dated November 7,
          1995(1).
 *10.9    1996 Equity Incentive Plan(1).
 *10.10   1996 Non-Employee Directors' Stock Option Plan(1).
 *10.11   1996 Employee Stock Purchase Plan(1).
  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).
</TABLE>
 
                                       67
<PAGE>   70
 
<TABLE>
<CAPTION>
 ITEM                             DESCRIPTION
-------                           -----------
<C>       <S>
 +10.14   Biological Materials License Agreement between the
          Registrant and the National Institutes of Health, dated May
          31, 1996(1).
 +10.15   Contract Manufacture Agreement between the Registrant and
          Evans Medical Limited, dated as of April 16, 1997(4).
 +10.16   Production Agreement between the Registrant and Packaging
          Coordinators, Inc., dated as of October 31, 1997(6).
  10.17   Facility Reservation Agreement between the Registrant and
          Packaging Coordinators, Inc., dated as of October 31,
          1997(6).
 +10.18   Influenza Vaccine Collaboration and License Distributor
          Agreement between the Registrant and CSL Limited, dated June
          19, 1998(7).
 +10.19   Supply Agreement between the Registrant and Becton Dickinson
          and Company dated July 1, 1998(8).
++10.20   United States License and Co-Promotion Agreement between the
          Registrant and Wyeth Lederle Vaccines dated January 11,
          1999.
++10.21   International FLUMIST(TM) License Agreement between the
          Registrant and Wyeth Lederle Vaccines dated January 11,
          1999.
++10.22   FLUMIST(TM) Supply Agreement between the Registrant and
          Wyeth Lederle Vaccines dated January 11, 1999.
++10.23   Credit Agreement between the Registrant and American Home
          Products Corporation dated January 11, 1999.
  23.1    Consent of Ernst & Young LLP, Independent Auditors.
  24.1    Power of Attorney. See Signature Page.
  27.1    Financial Data Schedule.
</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 the
    Company's 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 the
    Company's 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 the
    Company's 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 the
    Company's Current Report on Form 8-K, File No. 0-20815, dated April 16, 1997
    and filed July 21, 1997.
 
(5) Incorporated by reference to the correspondingly numbered exhibit to the
    Company's 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 the
    Company's Registration Statement on Form S-3, File No. 333-41649, filed
    December 10, 1997.
 
(7) Incorporated by reference to the correspondingly numbered exhibit to the
    Company's 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 the
    Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
    1998, File No. 0-20815, filed November 16, 1998.
 
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