UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

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

                   For The Fiscal Year Ended December 31, 1996
                                       OR
            [  ]   TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
                   SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                   For the transition period from ____________ to ____________

                         Commission File Number 1-10451

                          NORTH AMERICAN VACCINE, INC.
             (Exact name of registrant as specified in its charter)
                   

             Canada                                         98-0121241
             ------                                         ----------
  (State or other jurisdiction of                          (IRS Employer
  incorporation or organization)                         Identification No.)

      12103 Indian Creek Court
         Beltsville, Maryland                                 20705
----------------------------------------                   ---------
(Address of principal executive offices)                   (Zip Code)


Registrant's telephone number, including area code: (301) 419-8400
                                                    ---------------
Securities registered pursuant to Section 12(b) of the Act:

       Title of each class          Name of each exchange on which registered

   Common Stock,  No Par Value                American Stock Exchange 
   ---------------------------                -----------------------

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

                                      None
                                ---------------
                                (Title Of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  report(s)),  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. [ ]

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant as of a selected date within 60 days prior to the date of filing.

  Specified Date -- January 31, 1997; Aggregate Market Value -- $425,806,105  

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.

Common Stock, No Par Value, Outstanding As Of February 28, 1997 -- 31,549,425


<PAGE>



                       DOCUMENTS INCORPORATED BY REFERENCE

         Part III of this Annual Report on Form 10-K  incorporates  by reference
certain  sections  of  the  registrant's  Proxy  Statement  to be  furnished  to
shareholders  pursuant to the  Securities  Exchange Act of 1934, as amended,  in
connection  with the 1997 Annual Meeting of  Shareholders of the registrant (the
"1997 Proxy Statement").


                                TABLE OF CONTENTS

ITEM     DESCRIPTION                                                     PAGE
----     -----------                                                     ----

         Part I

1        Business..........................................................  3
2        Properties........................................................ 37
3        Legal Proceedings................................................. 38
4        Submission of Matters to a Vote of Security Holders............... 38

         PART II

5        Market for Registrant's Common Equity and Related 
              Stockholder Matters.......................................... 39
6        Selected Financial Data........................................... 41
7        Management's Discussion and Analysis of Financial 
              Condition and Results of Operation........................... 43
8        Financial Statements and Supplementary Data....................... 55
9        Changes in and Disagreements with Accountants on Accounting 
              and Financial Disclosure..................................... 83

         PART III

10       Directors and Executive Officers of the Registrant................ 83
11       Executive Compensation............................................ 83
12       Security Ownership of Certain Beneficial Owners and 
              Management................................................... 83
13       Certain Relationships and Related Transactions.................... 83

         PART IV

14       Exhibits, Financial Statement Schedules, and Reports 
              on Form 8-K.................................................. 84

         Signatures........................................................ 85


                                     - 2 -


<PAGE>


 

                                     PART I


ITEM 1.  BUSINESS
         --------

INTRODUCTION

         North  American  Vaccine,  Inc.  (the  "Company")  is  engaged  in  the
research,  development,  production and marketing of vaccines for the prevention
of infectious  diseases in children and adults. The Company's first product is a
patented, monocomponent acellular pertussis ("aP") vaccine for the prevention of
whooping cough,  which has been combined with diphtheria and tetanus toxoids for
use in a combined  diphtheria-tetanus-acellular  pertussis  ("DTaP") vaccine for
all primary and booster pediatric doses.  Regulatory approval to market the DTaP
vaccine in Sweden was granted in February 1996. In addition, regulatory approval
for a DTaP-IPV vaccine, which combines the Company's acellular pertussis vaccine
with diphtheria and tetanus toxoids and an enhanced,  inactivated  polio vaccine
("IPV"),  was  granted in Denmark in  September  1996.  The Company has 14 other
vaccines in various stages of development,  including combination vaccines using
its DTaP  vaccine as an  "anchor,"  as well as nine  conjugate  vaccines for the
prevention of various bacterial diseases in children and adults.

         Vaccination  against  infectious  disease  is a  primary  component  of
pediatric,  and an increasingly  important element of adult health-care programs
throughout  the world.  For  example,  in the  United  States,  seven  pediatric
vaccines,  including  vaccines  for  the  prevention  of  diphtheria,   tetanus,
pertussis and polio,  are  generally  required by state  immunization  programs.
According  to data from the  United  States  Centers  for  Disease  Control  and
Prevention ("CDC"), over 22 million doses of combination diphtheria, tetanus and
pertussis  vaccines  were sold in the United  States  during  1993.  The Company
believes  that a market of at least  comparable  size exists  outside the United
States. In the adult market, vaccinations,  particularly of older persons, could
lower the 50,000 to 70,000 deaths  annually in the United States from influenza,
pneumonia and hepatitis B infections. The United States Department of Health and
Human  Services has  estimated  that the costs to society of these  diseases and
other diseases for which vaccines  currently exist exceed $10 billion each year.
As a result, health-care providers,  including managed care organizations,  have
increasingly  recognized that  immunization of adults is a cost effective method
for preventing the incidence of disease and infection.

         DTaP VACCINE. Vaccination against diphtheria,  tetanus and pertussis is
mandated by most states for all children with doses  administered  at two, four,
six and between 15 to 18 months of age and  immediately  prior to entering grade
school. Prior to 1996, the only diphtheria-tetanus-pertussis vaccine approved in


                                     - 3 -
<PAGE>



the United  States for the primary  doses given to infants  included  the entire
BORDETELLA  PERTUSSIS  bacterium ("whole cell") that has been inactivated in the
production  process.  In 1996 and  1997,  three  acellular  pertussis  vaccines,
combined with vaccines against diphtheria and tetanus, have been licensed by the
United States Food and Drug Administration ("FDA") for use in the United States.
The Company  believes  that DTaP  vaccines  will  replace  the "whole  cell" DTP
vaccines.  The "whole cell" pertussis  component is generally believed to be the
leading cause of the adverse reactions  associated with the DTP vaccines,  which
range from minor rashes to fevers to convulsions and collapse.  In the 1970s and
1980s,  negative publicity  regarding the side effects of "whole cell" pertussis
vaccines  led to  decreased  rates of  acceptance  for the  vaccine in Japan and
certain European countries,  and to the suspension of its use in Sweden in 1979.
Unlike  "whole cell" and other acellular  pertussis  vaccines,  the Company's aP
vaccine consists solely of pertussis toxin that has been purified and chemically
inactivated (a "toxoid").  Clinical studies have shown that the Company's toxoid
induces  immunity with fewer  serious  adverse  reactions  than the "whole cell"
pertussis vaccine.  The Company holds exclusive licenses under United States and
foreign patents on the aP toxoid and the method of its manufacture.

         The Company filed an application with the FDA in September 1995 seeking
approval to market its DTaP  vaccine,  Certiva[TRADEMARK],  in the United States
for all primary and booster  doses.  On October 29, 1996, the FDA's Vaccines and
Related  Biological  Products  Advisory  Committee  ("FDA  Advisory  Committee")
reviewed  Certiva[TRADEMARK],  and FDA approval for the vaccine is pending.  See
"Products Under Development - Acellular Pertussis Vaccines."

         COMBINATION VACCINES. The Company is developing combination vaccines by
combining the DTaP vaccine as an "anchor"  with  additional  pediatric  vaccines
that may be administered in a single  injection.  The Company  believes that, in
many instances,  these  combination  vaccines may replace  stand-alone  vaccines
because  combination  vaccines  will reduce the number of  required  injections,
lower  treatment  costs  and  improve   compliance  with  standard   vaccination
schedules.  The Company's first combination vaccine,  DTaP-IPV,  combines an IPV
with the DTaP  vaccine.  On September  30, 1996,  the Danish  National  Board of
Health granted Statens Seruminstitut ("SSI") of Copenhagen,  Denmark approval of
the DTaP-IPV vaccine for all primary and booster doses for infants and children.
This  combination  vaccine,  which  includes the Company's  acellular  pertussis
toxoid, was developed jointly by SSI and the Company,  and SSI holds the product
rights in Denmark and other  Scandinavian  and Baltic  countries.  In the United
States,  the  CDC  has  issued  a  revised   recommendation   related  to  polio
vaccination.  A sequential schedule,  including two doses of IPV followed by two
doses of oral polio  vaccination  ("OPV") is now the  preferred  recommendation,
although a four- dose OPV or four-dose IPV schedule is  acceptable.  The Company
intends to pursue regulatory approval in other European countries and the United
States for the  DTaP-IPV  vaccine.  The Company  also is  developing  a DTaP-HIB
vaccine  that  combines  the  Company's  DTaP  vaccine  with a  vaccine  against
HAEMOPHILUS  INFLUENZAE  type b ("HIB")  infections,  as well as a  DTaP-IPV-HIB
vaccine. See "Products Under Development - Combination Vaccines."


                                     - 4 -
<PAGE>



         CONJUGATE  VACCINES.   The  Company,  using  patented  and  proprietary
technologies,  is  developing  several  conjugate  vaccines  for  prevention  of
diseases in children and adults.  Conjugate  vaccines  are formed by  chemically
linking (i.e., conjugating)  polysaccharides  to a protein.  This procedure has
been  shown  to  enhance  the  immunogenic  properties  of the  polysaccharides,
particularly  in infants.  Conjugate  vaccines are useful in preventing  several
serious diseases, including meningitis, pneumonia and strep throat. Vaccines are
not currently available for the prevention of several of these diseases. A Phase
I/II  clinical  trial  has  been  conducted  for  a  vaccine   against  group  B
streptococcal  infections  utilizing patented  technologies held by the Company,
and the  Company  has  completed  a Phase I  clinical  trial in  adults  for its
meningococcal  C conjugate  vaccine in the United  Kingdom.  See "Products Under
Development - Conjugate Vaccines."

         COLLABORATIONS.  To further  develop  and expand  its  technologies  in
pediatric and adult vaccines, the Company has established several relationships,
including   licenses   and   collaborations   with   pharmaceutical   companies,
universities and government  agencies.  Some of these institutions have provided
funding for  clinical  trials and  research,  and  conducted  joint  development
projects with the Company.  For example, the Company has entered into agreements
with Pasteur  Merieux-Connaught  to jointly  develop the Company's new conjugate
vaccine  against   meningococcus  B  infection,   for  immunization  of  adults,
adolescents and infants.  Additionally,  the Company is  collaborating  with the
National  Institutes of Health in the  development of its Group B  streptococcal
vaccine.

         In October 1996, the Company and Abbott Laboratories  ("Abbott") signed
a definitive agreement under which Abbott would market Certiva[TRADEMARK] in the
United States to the private physician and managed care markets when approved by
the FDA, with the Company marketing Certiva[TRADEMARK] to government purchasers.
The marketing agreement also will allow Abbott to market the Company's DTaP-HIB,
DTaP-IPV  and  DTaP-IPV-HIB  combination  vaccines  which  are  currently  under
development. See "Business Relationships" and "Marketing of Vaccines."

         ORGANIZATION. The Company was incorporated as a Canadian corporation on
August 31, 1989 for the purpose of acquiring  American  Vaccine  Corporation,  a
publicly held Delaware corporation  ("American Vaccine"),  and certain assets of
BioChem Pharma Inc., a publicly traded pharmaceutical company ("BioChem"),  in a
share purchase and merger transaction  (collectively described as the "Merger").
On February 28, 1990,  shareholders of American Vaccine approved the Merger. The
Company  had no  operations  prior to the Merger.  Pursuant  to the Merger,  the




                                     - 5 -
<PAGE>



shareholders  of  American  Vaccine  received  50%  ownership  in  the  Company.
Simultaneously,  BioChem purchased a 50% interest in the Company in exchange for
cash, shares of BioChem common stock, and the license or assignment and transfer
of certain rights and other intangible assets.

BUSINESS STRATEGIES

         The  objective  of the  Company  is to  become  a  leading  researcher,
developer and  manufacturer of  state-of-the-art  vaccines for the prevention of
infectious  diseases in children and adults.  In pursuing  this  objective,  the
Company  focuses on developing  and securing  patented and  proprietary  vaccine
technologies.  In addition,  the Company seeks to minimize the development  time
and costs for its products by: (i) licensing  technologies  that, in preclinical
studies or clinical trials, have demonstrated  prospects for becoming successful
vaccine candidates; (ii) collaborating with government and academic institutions
to jointly develop new vaccines and sponsor clinical trials;  and (iii) pursuing
collaborations with pharmaceutical and vaccine manufacturers, where appropriate,
to maximize the value of the Company's products and technologies.

         The  Company  intends to market  its DTaP  vaccine  directly  to United
States and certain foreign governments through established  purchasing programs.
In the  United  States,  federal  and state  governments  currently  purchase  a
substantial  proportion  of  pediatric  vaccines.  The  Company  also  pursues a
strategy of securing  distribution,  joint venture and similar arrangements with
third  parties to sell its  products  in the  United  States and in areas of the
world where local partners are critical to market penetration.  The Company also
intends to focus on the  development and  commercialization  of vaccines for the
prevention of diseases and infections in adults, for which demand is anticipated
to  increase  in light of the trend  towards  managed  care and the  established
cost-effectiveness of vaccines.

OVERVIEW OF VACCINE MARKET

         PEDIATRIC  VACCINES.  Due to the potential for epidemic  disease,  most
countries consider  vaccinations to be a matter of national  importance.  In the
United  States,  the  seven  vaccines  generally  required  by  state  pediatric
vaccination  programs are intended to prevent  diphtheria,  tetanus,  pertussis,
measles,  mumps,  rubella and polio.  In addition to these seven  vaccines,  the
CDC's Advisory Committee on Immunization Practices ("ACIP") periodically reviews


                                     - 6 -
<PAGE>



current  immunization  practices and issues its  recommendations  for additional
pediatric  vaccinations.  The ACIP  has  issued a  recommendation  for  standard
vaccinations  against HIB,  hepatitis B and varicella  (chickenpox).  In Western
Europe,  vaccination  against  diphtheria,  tetanus and  pertussis  is generally
recommended,  with each country  establishing its own vaccination  schedules and
requirements.

         Children  in  the  United  States  receive  immunizations  from  public
providers,  such as  local  health  departments,  and  from  private  providers.
Immunizations  provided  by public  providers  are  generally  paid for  through
federal  and state  government  funding  under  public  health  programs.  These
programs  are  intended  to  reduce  barriers  to  immunization  and to  improve
immunization  rates by  providing  free  vaccine to  qualifying  low-income  and
uninsured infants and children.  Government purchases  historically have been at
prices  substantially  below those  offered to the private  sector and presently
account for a substantial  proportion of the vaccine  doses  distributed  in the
United States.  In addition,  the  government  promotes the  availability  of an
adequate supply of necessary  pediatric vaccines for United States public health
programs.  In order to achieve this objective,  the National  Childhood  Vaccine
Injury Act of 1986 ("NCVI Act") created a no-fault insurance program designed to
compensate those who suffer specified  vaccine-related  injuries associated with
the  administration of one or more of the vaccines  generally  required by state
pediatric  vaccination  programs.  This insurance  program is funded through the
levy of an excise tax paid by the manufacturers on the sale of certain pediatric
vaccines, including combined diphtheria-tetanus-pertussis vaccines.

         ADULT  VACCINES.  Adults,  especially  older persons who are at greater
risk of contracting and succumbing to disease and infection, can benefit greatly
from immunizations.  In the United States, 50,000 to 70,000 adults die each year
of  influenza,  pneumococcal  infections  and  hepatitis  B. The  United  States
Department of Health and Human  Services has estimated that the costs to society
of these and other  diseases  for which  vaccines  currently  exist  exceed  $10
billion each year. In addition,  vaccines have been widely  recognized as highly
cost-effective  in  preventing  the  incidence  of disease  and  infection.  For
example, a 1995 study published in The New England Journal of Medicine indicates
that annual immunizations with influenza vaccine,  which costs approximately $10
per dose,  reduce the  medical  costs and sick days by more than $46 per patient


                                     - 7 -
<PAGE>


immunized.  Moreover,  it is  becoming  widely  recognized  that many  childhood
vaccine-preventable  infections and diseases, such as pertussis,  are also found
among  younger  adults,  who serve as  reservoirs  for,  and source of pediatric
exposure  to,  these  infections  and  diseases.  While  the size of the  target
populations for adult vaccines may vary and adult  vaccination  rates tend to be
low,  some of these  markets  are much  larger  than the target  population  for
pediatric  vaccines.  With the trend in the United States towards  managed care,
the  Company  believes  that the  market  for  adult  vaccines  will  expand  as
health-care providers increasingly recognize vaccines as a cost-effective method
for preventing the incidence of disease and infection.

PRODUCTS UNDER DEVELOPMENT

         The Company is focusing  its research  and  development  efforts on the
vaccines set forth in Table 1 below. The summary information included in Table 1
is provided solely for convenience of reference and is qualified in its entirety
by the detailed discussion of each of the Company's products that follows. There
can be no assurance that any of these vaccines will be developed successfully by
the  Company  or  licensed  by the FDA or any  other  regulatory  authority  for
commercial  sale. See "Risk  Factors-Need  for  Regulatory  Approvals" and "Risk
Factors-Uncertainties Related to Clinical Trials."



                                     - 8 -
<PAGE>

<TABLE>
<CAPTION>

                                     TABLE 1

                           PRODUCTS UNDER DEVELOPMENT

        PRODUCTS                          DISEASE                                      STATUS (1)
----------------------------       -------------------------------         --------------------------------
<S>                                <C>                                     <C>
ACELLULAR PERTUSSIS VACCINES
  DTaP.....................         Diphtheria, tetanus and                Licensed in Sweden; U.S. product
                                    pertussis (whooping cough)             license application pending

  aP.......................         Pertussis (adult booster)              U.S. safety and immunogenicity
                                                                           clinical trial completed
COMBINATION VACCINES
  DTaP-IPV.................         Diphtheria, tetanus, pertussis         Licensed in Denmark;
                                    and polio                              preclinical in U.S.

  DTaP-HIB.................         Diphtheria, tetanus, pertussis         Preclinical
                                    and meningitis

  DTaP-IPV-HIB.............         Diphtheria, tetanus,                   Preclinical
                                    pertussis, polio and 
                                    meningitis
CONJUGATE VACCINES
  Group B
  Streptococcal............         Neonatal sepsis and                    Phase I/II clinical trial completed
                                    meningitis

  Meningococcal B..........         Meningitis                             Preclinical

  Meningococcal C..........         Meningitis                             Phase I clinical trial completed


  Meningococcal A/C                 Meningitis                             Preclinical
 
 Meningococcal
    A/B/C..................         Meningitis                             Preclinical

  Haemophilus
    Influenzae type b......         Meningitis                             Preclinical

  Group A
    Streptococcal..........         Streptococcal pharyngitis (strep       Preclinical
                                    throat), skin infections, etc.

  Pneumococcal(otitis
     media)................         Otitis media (middle ear               Preclinical
                                    infection)

  Pneumococcal.............         Pneumococcal pneumonia                 Basic Research

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

(1)   Preclinical  development denotes work to refine product performance  characteristics
      and to  conduct  studies  relating  to  product  composition,  stability,  scale-up,
      toxicity and efficacy in order to create a prototype  formulation in preparation for
      the filing of an investigational  new drug application with the FDA for authority to
      commence  testing in humans (clinical  studies).  Phase I-III clinical trials denote
      safety and efficacy  tests in human  patients in accordance  with FDA  guidelines as
      follows:

      Phase I: Safety,  immunogenicity,  and optimal dosage  studies.  
      Phase II:  Detailed  evaluations  of safety,  immunogenicity  and  optimal
      dosage in limited number of subjects in target population.
      Phase  III:   Evaluation  of  safety  and  efficacy  in  expanded   target
      population.

      See "Government Regulation."

</TABLE>

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<PAGE>


ACELLULAR PERTUSSIS VACCINES

         BACKGROUND.  Immunization  against  diphtheria,  tetanus and  pertussis
using a  combined  vaccine  during  infancy  and  childhood  has been a  routine
practice in the United States since the late 1940s.  The vaccination  program is
considered  to be a major  factor in reducing  the  incidence  of, and number of
deaths  associated with, each of these diseases.  Vaccination for the prevention
of  diphtheria,  tetanus and pertussis  currently is required in the majority of
states within the United States and is scheduled to be  administered to children
at the  ages of  two,  four,  six and 15 to 18  months  of age,  with a  booster
immediately  prior to entering grade school. In addition,  immunization  against
diphtheria,  tetanus and pertussis is also required in many countries outside of
the United States.

         Prior to 1996, the only diphtheria-tetanus-pertussis  vaccines approved
for use in the United  States for the doses given to infants at the ages of two,
four and six months included the entire BORDETELLA  PERTUSSIS bacterium that has
been inactivated in the production  process.  It is generally  believed that the
use of the "whole cell" BORDETELLA  PERTUSSIS bacterium has been a leading cause
of the adverse  reactions  associated  with the  existing  DTP  vaccines.  These
adverse reactions  include minor local reactions (such as redness,  swelling and
tenderness), minor temperature elevations,  fretfulness,  drowsiness,  vomiting,
loss  of  appetite,  high  fever,  excessive  screaming,  high  pitched  crying,
convulsions, and collapse  (hypotonic-hyporesponsive  episode). In addition, the
National  Institutes of Health, in recently  concluded clinical trials in Sweden
and Italy,  announced  that  a licensed  "whole-cell" DTP vaccine widely used in
the United  States had  efficacy  rates  significantly  below that of  acellular
pertussis  vaccines.  It is  anticipated  that  the use of  acellular  pertussis
vaccines  will  offer  advantages  over  the  currently  licensed  "whole  cell"
pertussis  vaccines in terms of  efficacy,  as well as with  respect to improved
tolerability  and fewer serious adverse  reactions.  Currently,  three acellular
pertussis vaccines,  combined with vaccines against diphtheria and tetanus, have
been licensed by the FDA for use in the United  States.  In addition,  one other
company  has  filed  for  regulatory  approval  in the  U.S.  for its  acellular
pertussis  vaccine.  See  "Products  Under  Development  -  Acellular  Pertussis
Vaccines - DTaP Vaccine" and "Competition."

         DTaP VACCINE.  The Company has developed an acellular pertussis vaccine
in combination  with  diphtheria and tetanus  toxoids for use as a combined DTaP
vaccine in childhood  immunization  programs.  The Company's acellular pertussis


                                     - 10 -
<PAGE>



vaccine  consists  of  pertussis  toxin that has been  purified  and  chemically
inactivated.  In clinical trials,  this toxoid has been shown to induce immunity
with fewer serious adverse  reactions than the "whole cell"  pertussis  vaccine.
The aP toxoid and the method of its manufacture are the subject of United States
and  foreign  patents  licensed   exclusively  to  the  Company.  See  "Business
Relationships."

         In  September  1995,  the  Company  filed an  application  with the FDA
seeking approval to market its DTaP vaccine,  Certiva[TRADEMARK],  in the United
States for all primary and booster doses.  On October 29, 1996, the FDA Advisory
Committee reviewed Certiva[TRADEMARK]. Representatives from the FDA, the Company
and the clinical investigators presented the clinical data from several studies.
These  studies  involved  over 100,000  doses  administered  to more than 45,000
infants and children  with no serious  adverse  events or deaths  related to the
administration  of the  vaccine  as judged by the  clinical  investigators.  The
incidence of high fever, redness, pain and swelling were all significantly lower
after use of the acellular  pertussis  vaccine than after  immunization with the
"whole cell" pertussis vaccine. The data presented to the FDA Advisory Committee
by the  co-principal  clinical  investigator  in  Sweden  also  established  the
estimates of efficacy of Certiva[TRADEMARK] in preventing pertussis disease.

         The FDA  Advisory  Committee,  after the  presentation  of the data and
discussion,   concluded  that  Certiva[TRADEMARK]  is  safe  and  effective  for
administration  at two, four, six and 15-18 months of age. In addition,  the FDA
Advisory  Committee  concluded  that  Certiva[TRADEMARK]  could be  administered
concurrently with the  administration of polio,  HAEMOPHILUS  INFLUENZAE type b,
hepatitis B and measles- mumps-rubella  vaccines,  which are all recommended for
immunization  during  the first two years of life.  The FDA  Advisory  Committee
raised no  concerns  regarding  the  adequacy of the data  regarding  the use of
Certiva[TRADEMARK]  for the  booster  dose given to children at 4-6 years of age
following  primary  immunization  using  the  "whole  cell"  pertussis  vaccine.
Additional  data is required to support use at 4-6 years of age  following  four
consecutive doses of Certiva[TRADEMARK]. The FDA Advisory Committee commented on
the adequacy of the data  regarding  the use of the vaccine for the booster dose
given to toddlers at 15-18 months of age following  primary  immunization  using
the "whole cell" pertussis vaccine.  In response to those comments,  the Company
intends to supplement the data presented at the FDA Advisory  Committee  meeting
and additional data may be provided in post-marketing  studies. The Company does
not believe that any additional  clinical studies will be required in connection
with its product license application, other than standard post-licensure testing
and  surveillance  for continued  monitoring  of the vaccine.  This is a forward
looking  statement  made  pursuant to the safe harbor  provisions of the Private
Securities  Litigation Reform Act of 1995. Forward looking statements inherently
involve  risks and  uncertainties  which may affect the  Company's  business and
prospects,  including without limitation the requirement for regulatory approval
of  products  by the  FDA,  nature  of  competition,  effective  marketing,  and
uncertainties  relating to clinical  trials,  all as discussed under the heading
"Risk Factors",  below.  The  conclusions of the FDA Advisory  Committee are not
binding on the FDA.


                                     - 11 -
<PAGE>



         In  February  1996,  a license was  granted to the  Company's  European
partner,  SSI, to market the DTaP  vaccine in Sweden for all primary and booster
doses for infants and children.  The Company  intends to prepare the appropriate
regulatory  filings  for the DTaP  vaccine in certain  European  countries,  and
approvals in any of these  European  countries can precede and are not dependent
upon filings with or approval by the FDA. The Company may file these  regulatory
applications alone,  through SSI for countries within its territory,  or through
distributors.   See  "Marketing  of  Vaccines"  and  "Business   Relationships."
Notwithstanding  the  foregoing,  there can be no assurance  that the regulatory
filings for the DTaP vaccine will be accepted, or receive regulatory approval in
a timely fashion or at all, by the FDA or any foreign regulatory authority.  See
"Risk Factors - Dependence Upon Approval and Commercialization of DTaP Vaccine."

         In 1995,  the  Company,  working  together  with the Health and Medical
Services of Goteborg, Sweden, began a mass vaccination project in Goteborg using
the Company's  acellular  pertussis vaccine to vaccinate,  free of charge,  more
than  40,000  infants  and  children,  representing  about  80% of the  eligible
pediatric  population in the Goteborg  metropolitan  area. Under the vaccination
project, newborn infants are receiving the Company's DTaP vaccine at 3, 5 and 12
months  of  age,  which  are  the  recommended   vaccination   ages  in  Sweden.
Additionally, pre-school children ages 1 to 5 years who have previously received
their required  vaccinations for diphtheria and tetanus will receive three doses
of the Company's  acellular  pertussis  vaccine.  This Swedish mass  vaccination
project,  which is providing the Company with  additional data on the widespread
use of the vaccine,  is not required in order to obtain regulatory  approval for
Certiva[TRADEMARK] and has not been requested by any regulatory agency.

         aP  VACCINE.   Adults  are  exposed  to  and  may  contract   pertussis
infections.  They also are considered a significant  reservoir of, and source of
pediatric  exposure  to,  pertussis.   The  Company  believes  that  sale  of  a
stand-alone  acellular  pertussis  vaccine may be appropriate  for adult booster
immunizations.  The Company participated in a safety and immunogenicity clinical
trial at Baylor  College  of  Medicine,  which was  completed  in 1995,  for the
purpose of  establishing  the safety and  immunogenicity  of the aP vaccine as a
booster in adults.  This clinical trial was sponsored by the National  Institute
of Allergy and  Infectious  Diseases  ("NIAID")  of the National  Institutes  of
Health,  and the results of this study  reveal that the  Company's aP vaccine is
highly   immunogenic  in  adults  with  no  vaccine  associated  severe  adverse
reactions.  The  Company  is  presently  considering  sponsoring  further  adult
clinical  trials in the United States using its aP vaccine.  As a next step, the
Company  intends to combine the aP vaccine with an adult  formulation of tetanus
and diphtheria toxoids ("Td") to create a tetanus-diphtheria-acellular pertussis
("TdaP")  vaccine for adults.  The clinical  research and development for a TdaP
vaccine are expected to be done  concurrently  with the clinical  development of
the aP vaccine. In addition, the Company intends to seek regulatory approval for
sale of the stand-alone aP vaccine for use in those jurisdictions outside of the
United  States  where  pertussis   vaccines  are  sold  and  administered  as  a
stand-alone  product,  although there can be no assurance that any such approval
will be granted.


                                     - 12 -
<PAGE>



         COMBINATION VACCINES

         The Company is developing  three  combination  vaccines  using the DTaP
vaccine as an "anchor."  Additional  vaccines would be added to the DTaP vaccine
to form the combination  vaccine. The Company anticipates that these combination
vaccines will become generally  acceptable because the ACIP recommended schedule
for  immunization  against  diphtheria,  tetanus,  pertussis,  polio and HIB are
compatible.  Combination  vaccines  have a number of benefits,  including  fewer
injections,  lower  anxiety  for the  parents  and  reduction  of the  number of
required  visits to the  physician,  thereby  lowering  costs  and  facilitating
compliance with recommended and mandated  immunization  programs.  The Company's
combination vaccines under development are described below.

         DTaP-IPV  VACCINE.  The  Company  believes  that a  single  vaccination
program for  diphtheria,  tetanus,  pertussis  and polio can be  established  by
combining  an  enhanced,  injectable  IPV  with its DTaP  vaccine.  The  Company
anticipates that a DTaP-IPV vaccine can become a generally accepted  multivalent
vaccine  because  the polio  vaccination  schedule is  compatible  with the DTaP
vaccination schedule,  and because a polio vaccination program that includes IPV
has been accepted as both safe and  efficacious.  In the United States,  the CDC
has issued a revised recommendation  related to polio vaccination.  A sequential
schedule,  including  two  doses of IPV  followed  by two  doses  of oral  polio
vaccination  ("OPV") is now the preferred  recommendation,  although a four dose
OPV or four dose IPV schedule is acceptable.

         In September  1996,  the Danish  National  Board of Health  granted SSI
regulatory  approval to market a combined DTaP-IPV vaccine,  which  incorporates
the Company's  acellular  pertussis toxoid, for all primary and booster doses in
infants and children.  Presently,  there is no other acellular pertussis vaccine
licensed for use in Denmark, and this is the first DTaP-IPV vaccine licensed for
use in Europe.

         SSI intends to prepare  regulatory  filings for the DTaP-IPV vaccine in
Sweden and other countries within its territory. The Company intends to file for
regulatory  approval of the DTaP-IPV  vaccine in other  European  countries.  In
addition,  the  Company in  collaboration  with  Abbott  intends to conduct  the


                                     - 13 -
<PAGE>



requisite  clinical  trials  in  order to file for  regulatory  approval  of the
DTaP-IPV  in the United  States.  There can be no  assurance  that data from the
clinical trials will support a regulatory filing or that any regulatory  filings
for the DTaP-IPV will be accepted,  or receive  regulatory  approval in a timely
fashion or at all, by other regulatory agencies. See "Government Regulation" and
"Risk Factors - Need for Regulatory Approvals." See "Business Relationships."

         DTaP-HIB   VACCINE.   The  Company  is  developing  a  combined  single
injectable  DTaP-HIB  vaccine  in  stable  liquid  form  for the  prevention  of
diphtheria,  tetanus,  pertussis and infection caused by HAEMOPHILUS  INFLUENZAE
type b. Preclinical test results of the Company's DTaP-HIB vaccine  demonstrated
high immune  responses for each of the  components  in the combined  vaccine and
showed no  interference  among the  different  components  of the  vaccine.  The
Company believes that the development of a safe and immunogenic DTaP-HIB vaccine
is  technologically  feasible,  and that a program  utilizing  that  vaccine can
become generally accepted for a number of the doses in the vaccination  schedule
because the vaccination schedules for diphtheria,  tetanus,  pertussis,  and HIB
are  compatible.   See  "Products  Under  Development  -  Conjugate  Vaccines - 
HAEMOPHILUS  INFLUENZAE  Type b Vaccine" for a description  of the Company's HIB
vaccine. See also "Competition." The Company is collaborating with Abbott in the
development of this vaccine. See "Business Relationships."

         DTaP-IPV-HIB  VACCINE. The Company is also developing a combined single
injectable  DTaP- IPV-HIB  vaccine in stable  liquid form for the  prevention of
diphtheria,  tetanus,  pertussis, polio and infection caused by HIB. Preclinical
test results of this vaccine  demonstrated high immune responses for each of the
components  in the  combined  vaccine  and  showed  no  interference  among  the
different  components of the vaccine.  The Company believes that the development
of a  DTaP-IPV-HIB  vaccine  is  technologically  feasible,  and that a  program
utilizing that vaccine can become  generally  accepted for a number of the doses
in the vaccination  schedule  because the vaccination  schedules for diphtheria,
tetanus,  pertussis,  polio and HIB are  compatible.  The  Company is planning a
Phase  III  clinical  trial  of  the  DTaP-IPV-HIB  vaccine  to  take  place  in
Scandinavia  in order to test the safety and  immunogenicity  of the  vaccine in
infants.  The Company is  collaborating  with Abbott in the  development of this
vaccine.  See "Business Relationships."  See also "Products Under Development -
Conjugate Vaccines - HAEMOPHILUS INFLUENZAE Type b Vaccine" for a description of
the Company's HIB vaccine.

         CONJUGATE VACCINES

         In recent decades,  vaccines have been developed for certain  bacterial
diseases using  polysaccharides  (long-chained sugars) which are attached to the
bacterium's outer membranes.  While these polysaccharide vaccines have generally
proven  to be safe,  many of them do not  elicit  an  adequate  immune response,


                                     - 14 -
<PAGE>



particularly  in infants whose immature  immune  systems do not recognize  these
polysaccharides. In an attempt to address this problem, the Company is utilizing
proprietary   conjugate   vaccine   technology   to   link   (i.e.,   conjugate)
polysaccharides  to protein  carriers,  which serve to enhance  the  immunogenic
properties of the polysaccharides.  The Company believes that conjugate vaccines
may prove as safe as and more effective than polysaccharide vaccines.

         The Company holds exclusive worldwide rights (excluding Canada) for the
development,   production  and  sale  of  vaccines  against  certain   bacterial
infections under a license granted by the National Research Council of Canada, a
Canadian  federal  government  agency  ("NRC"),  for certain  conjugate  vaccine
technology.  United States and, in some cases,  foreign patents relating to this
technology  have been issued and applied for. The Company also holds,  either as
assignee or licensee,  several  other  patents  related to the  development  and
manufacture of conjugate vaccines.  The Company is developing conjugate vaccines
for the diseases  discussed  below and,  where  appropriate,  intends to combine
certain of its  conjugate  vaccines  with its DTaP and  DTaP-IPV  vaccines.  See
"Products   Under   Development   -   Combination    Vaccines"   and   "Business
Relationships."

         GROUP B STREPTOCOCCAL  VACCINE. Group B streptococcal ("GBS") infection
affects both infants and adults in the United States.  GBS infections in infants
occur  principally  during the first three  months after birth and can result in
serious complications, including death, pneumonia or permanent brain damage from
meningitis.  GBS  disease  is also a  prominent  cause  of  peripartum  maternal
infections.  Since  there is no vaccine  for the  prevention  of GBS  disease in
adults or infants,  the CDC has issued guidelines for detecting and treating GBS
infections in pregnant women.  These guidelines,  which have been adopted by the
American  Academy of Pediatrics and the American  College of  Obstetricians  and
Gynecologists,  include  diagnostic  testing during the third trimester and, for
those infected, a course of intravenous  antibiotics during and after labor. The
initial  target  market for this vaccine will be women of  child-bearing  age. A
principal  benefit to such an  immunization  program is that the vaccine has the
potential to generate protective antibodies for both the mother and the infant.

         A Phase I/II  clinical  trial for a vaccine  against GBS  infection has
been completed  utilizing  patented  technologies  that the Company has licensed
from the NRC, the Brigham and Women's  Hospital,  and Harvard  University.  This
clinical  trial was  conducted  by the Brigham and Women's  Hospital  and Baylor
College of Medicine  under  sponsorship  of the NIAID.  The  clinical  trial was
designed  to examine  the safety and  immunogenicity  of the  vaccine in healthy
nonpregnant  women.  The results of this trial  revealed  that the GBS conjugate
polysaccharide  vaccine was well  tolerated with minimal  reactogenicity  and no
serious  side-effects.  Antibodies  elicited by immunization  with the conjugate
vaccine  displayed  protective  activity  against  GBS IN VITRO and IN VIVO.  In
addition,  the clinical  investigators  reported  that  the delivery  of a  GBS


                                     - 15 -
<PAGE>



polysaccharide   conjugate  vaccine  through  maternal  immunization  may  be  a
realistic  approach  to the  prevention  of  perinatal  GBS  infection  and that
antibodies  transported  through the placenta to the fetus may confer protective
immunity even to infants born prematurely between 34 and 37 weeks of gestation.

         MENINGOCOCCAL VACCINES. Meningitis is a serious infection involving the
fluid  surrounding  the brain and  spinal  cord,  which can lead to  significant
central  nervous system damage in all age groups,  although in the United States
those most often  stricken  are children and young  adults.  A leading  cause of
meningitis  worldwide is  meningococcus  A, B and C bacteria.  The  incidence of
meningitis  caused by  meningococcus  A, B and C varies from country to country.
Currently,  a polysaccharide vaccine for the prevention of meningococcal A and C
infections is administered to United States military personnel. This vaccine has
not been  demonstrated  to be protective in children less than two years of age.
In addition, there is currently no licensed conjugate vaccine for the prevention
of meningococcus B infection.

         Meningococcal  B  bacteria  have  been  responsible  for most  cases of
meningococcal meningitis in developed countries since the late 1940s, and in the
United  States  account for  approximately  one-half of the yearly cases of such
meningitis  (the other half being  attributable  principally to  meningococcal C
bacteria).  Epidemic  outbreaks  occurred in 1994-1995 in Florida and Texas, and
the incidence of meningitis  caused by  meningococcus  B is on the rise in South
America and Europe, particularly in Scandinavia. At the end of 1995, the Company
entered into agreements with Pasteur  Merieux-  Connaught to jointly develop the
Company's new conjugate vaccine against meningococcal B infection. See "Business
Relationships - Pasteur Merieux-Connaught Agreements."

         The Company is also developing conjugate vaccines against group A and C
meningococcal  disease and group A/C and A/B/C meningococcal  disease for adults
and infants.  The Company has completed  preclinical  development and testing of
its group A and group A/C meningococcal conjugate vaccines, as well as a Phase I
clinical trial of its Group C  meningococcal  conjugate  vaccine in adults.  The
results from the Phase I clinical trial revealed that the group C  meningococcal
vaccine  was  well  tolerated  with  minimal   reactogenicity   and  no  serious
side-effects.  Antibodies  elicited by immunization  with the conjugate  vaccine
displayed protective activity against  meningococcal C bacterial infection.  The


                                     - 16 -
<PAGE>



Company is  presently  planning  to  commence a Phase II  clinical  study of the
vaccine in infants to assess the safety and  immunogenicity of the vaccine after
a three-dose primary series. The World Health Organization ("WHO") has indicated
its willingness to sponsor  further  clinical trials in children for the group C
meningococcal vaccine,  although there can be no assurance that such sponsorship
ultimately  will be  provided.  The  clinical  development  and testing of these
vaccines are expected to take several years to complete.

         HAEMOPHILUS INFLUENZAE TYPE B VACCINE. HIB has been a frequent cause of
meningitis  and other serious  infections in infants and children.  The ACIP has
issued a  recommendation  for universal  vaccination  of children for protection
against  diseases  caused by HIB.  Vaccination  against HIB  consists of primary
doses  administrated  at the ages of two, four and six months and a booster dose
administered  at  between  12 to 15 months of age.  Children  infected  with HIB
bacteria can develop meningitis, which can lead to blindness, deafness, acquired
mental  retardation or death.  The peak incidence of HIB infection in the United
States  occurs in  children  between  six and 18 months of age.  The  Company is
pursuing  efforts to develop a conjugate  vaccine against HIB for use in infants
and for possible use in the Company's combination vaccines.  See "Products Under
Development - Combination  Vaccines." The Company has completed its  preclinical
development of this vaccine.  Three  manufacturers are currently licensed by the
FDA to sell HIB conjugate vaccines for use in all primary and booster doses.
See "Competition."

         GROUP A STREPTOCOCCAL  VACCINE. Group A streptococcal disease occurs in
all age groups with a predominance in school-age children. Group A streptococcus
causes  infections  ranging  from  severe  sore  throat and sinus  infection  to
pneumonia and, if not treated,  acute rheumatic  fever.  Currently,  there is no
vaccine  licensed by the FDA to prevent  Group A  streptococcal  infection.  The
Company is engaged in the research  and  development  of a conjugate  vaccine to
prevent this infection. Activities on this vaccine are in the preclinical stage.

         PNEUMOCOCCAL  (OTITIS  MEDIA)  VACCINE.  Otitis  media,  or middle  ear
infection,  is a common illness in the United States  afflicting  children under
five  years  of age.  The  majority  of  bacterial  cases  are  attributable  to
pneumococcal  organisms.  Chronic  otitis media can lead to hearing  defects and
associated learning and language  disabilities.  There is no vaccine licensed by
the FDA that prevents otitis media caused by pneumococcal  bacteria. The Company
is  pursuing  efforts to  develop a  conjugate  vaccine to prevent  pneumococcal
otitis media. This vaccine is currently in the preclinical stage of development.


                                     - 17 -
<PAGE>



         PNEUMOCOCCAL   VACCINE.   There  are  in  excess  of  20  serotypes  of
pneumococcal bacteria that cause pneumonia, a respiratory infection that affects
individuals of all ages, as well as other infections.  The present  pneumococcal
vaccine  is  a  multivalent   polysaccharide  vaccine  recommended  for  adults,
particularly  elderly  and  other  patients  with a  high  risk  of  contracting
pneumonia.  The  Company  is  currently  in  the  basic  research  stage  of the
development of a multivalent conjugate vaccine against pneumococcus.

         OTHER VACCINES

         VIRAL  INFLUENZA.  The  Company  holds  exclusive  rights in the United
States to vaccine products  acquired by BioChem from Institut Armand Frappier of
Quebec,  Canada.  Included  among those vaccines is a viral  influenza  vaccine,
which has been  commercially  marketed and sold by BioChem in Canada for several
years.  The manufacture  and marketing of viral  influenza  vaccine is seasonal.
Historically in the United States, the strains to be used for influenza vaccines
are  provided  to  manufacturers  by the CDC in the  spring  of each  year,  and
manufacturers  introduce  the  vaccine in the fall  through  early  winter.  The
Company may seek to obtain FDA approval for the viral  influenza  vaccine in the
United States.  There are no assurances that the Company will receive regulatory
approval or that,  if received,  the vaccine will be  successfully  marketed and
sold. See "Risk Factors - Need for Regulatory Approval."

         OTHERS. The Company,  utilizing patented and proprietary  technologies,
is performing  research on and  developing  other adult and pediatric  vaccines,
which it selects for development  based on the anticipated need for a particular
product,  the  nature of the  competition,  and the  ability  of the  Company to
develop the  product,  among other  factors.  These  vaccines,  which  currently
include  vaccines to prevent urinary tract infections and typhoid fever, are all
in basic research or preclinical  stage of development.  The Company's  research
and development efforts are being conducted  independently and in conjunction or
in  collaboration  with  governmental  agencies and  universities.  There are no
assurances that any of these vaccines will enter clinical trials or successfully
be  developed  or  licensed  by the FDA or any other  regulatory  authority  for
commercial sale.

MARKETING OF VACCINES

         An objective  of the Company is to become a leader in the  development,
production  and  marketing of  state-of-the-art  vaccines for the  prevention of
infectious  diseases in children and adults.  In pursuing  this  objective,  the
Company,  considers among other things,  collaborations  with pharmaceutical and
other  vaccine  manufacturers  where  appropriate  to maximize  the value of the
Company's  products and  technologies.  To maximize  market  penetration for its
first commercial products within the least amount of time, the Company currently
is implementing a marketing strategy aimed at establishing  marketing  alliances
in the United States, Europe and other territories with  well-established  local
partners  on a country-by-country  basis.  Thereafter,  the Company  intends to
develop,  where  appropriate  and feasible,  an internal  sales force to succeed



                                     - 18 -
<PAGE>



these alliances following expiration of the respective agreements.  Towards this
end, the Company has entered into marketing  alliances for certain products with
Abbott in the United States,  Chiron Behring  ("Behring") in Germany and Austria
("Behring's  Territory") and SSI in the  Scandinavian,  Baltic and certain other
countries ("SSI's  Territory").  The Company will continue to seek distribution,
marketing,  joint venture and similar  arrangements  with third parties in other
territories and for other products where, in the judgement of the Company,  such
arrangements  would be beneficial  to the  successful  commercialization  of its
products.  See "Business  Relationships."  All of the Company's product sales in
1996 were for export from the United States and were stated in U.S. dollars. See
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operation.

         In addition to establishing these commercial alliances,  the Company is
developing an internal marketing and sales organization and is preparing for the
product  launch of  Certiva[TRADEMARK]  in the  United  States  upon  receipt of
regulatory approval. The Company intends to market  Certiva[TRADEMARK]  directly
to federal and state governments through established purchasing programs. In the
United States,  federal and state governments  currently  purchase a substantial
portion of pediatric  vaccines  sold,  and the Company  expects that the federal
government  will continue its  historical  practice of purchasing  pertussis and
other vaccines from multiple  licensed  commercial  manufacturers  through these
established programs, although there are no assurances in this regard. This is a
forward  looking  statement  made pursuant to the safe harbor  provisions of the
Private  Securities  Litigation Reform Act of 1995.  Forward looking  statements
inherently  involve  risks and  uncertainties  which may  affect  the  Company's
business  and  prospects,  including  without  limitation  the  requirement  for
regulatory  approval of products by the FDA,  nature of  competition,  effective
marketing, and uncertainties relating to clinical trials, all as discussed under
the heading  "Risk  Factors",  below.  See "Risk Factors - Changes in Government
Purchasing  Policies," "Risk Factors - No Assurance of Effective  Marketing" and
"Risk Factors - Need for Regulatory Approvals."  Presently,  the U.S. government
is  continuing  with  multiple  contract  awards for the  purchase of its annual
requirements  of  DTaP  vaccine.   Under  these  contracts,   vaccine  suppliers
effectively will not be guaranteed any minimum purchase  requirements,  but they
will be  provided  the  opportunity  to revise  their  contract  proposals  on a
quarterly basis.

         To successfully  introduce and commercialize  Certiva[TRADEMARK] in the
United States, the Company will be required,  among other things, to participate
in  established  purchasing  programs  of  Federal  and  state  governments,  to
establish an identity and reputation for the Company and its products, to create


                                     - 19 -
<PAGE>



an awareness among  pediatricians of the safety and efficacy of the vaccine,  to
distinguish the Company's  products from that of its  competitors,  to establish
the Company as an effective and reliable supplier of vaccines,  and to establish
effective distribution channels. There can be no assurance that the Company will
be able to successfully market its vaccine products,  that its existing business
relationships  will  prove  to be  commercially  successful,  or  that  it  will
successfully  negotiate and execute any additional commercial  arrangements with
third parties. See "Business  Relationships,"  "Competition" and "Risk Factors -
No Assurance of Effective Marketing."

BUSINESS RELATIONSHIPS

         PERTUSSIS  LICENSE  AGREEMENT.  The  process  by  which  the  Company's
pertussis  toxin is inactivated is the subject of a United States patent held by
the  United  States  Government,  which  has been  licensed  exclusively  to the
Company.  The patent is  scheduled  to expire on June 16,  2006.  The  Company's
exclusive  rights will expire seven years from the date of the first  commercial
sale of the product in the United States following licensing of such product for
general  use by the FDA.  The  Company  is  required  to pay the  United  States
Government a royalty  based on net sales of a vaccine that utilizes the patented
technology. Foreign patent applications covering this technology have been filed
and ten unexpired  foreign patents are issued with expiration dates ranging from
2002 to 2007. The Company has acquired a  royalty-bearing  exclusive license for
the use of the patented  technology  in all such foreign  jurisdictions  for the
full term of the patents.  See "Products Under Development - Acellular Pertussis
Vaccines."

         CANADIAN  GOVERNMENT  LICENSE  AGREEMENTS.  The Company is the assignee
under  two  license  agreements  between  BioChem  and the  Canadian  Government
covering the conjugate technology being developed by the Company.  These license
agreements  currently cover a total of twenty-two issued patents with expiration
dates  ranging from 1997 to 2013,  and the Company and the  Canadian  Government
have applied for additional patents,  which, if issued, would be licensed to the
Company  under these  agreements.  The  Company is required to pay the  Canadian
Government royalties on the sale of licensed vaccines.  In the event of a change
in  control  of the  Company,  the  Canadian  Government  retains  the  right to
terminate  both  agreements if it believes such change in control is detrimental
to the Canadian  Government.  The Canadian  Government  also can  terminate  the
license  agreements if all reasonable  efforts are not being used to exploit the
technology  commercially with due diligence.  Under one license  agreement,  the
Company  has  the  exclusive   worldwide  rights  (excluding   Canada)  for  the
development,  production  and sale of vaccines  produced in accordance  with the
conjugate  vaccine  technology  covered by the  license.  The  vaccines  covered
include, among others, those against meningococcal,  HAEMOPHILUS INFLUENZAE type
b, group B streptococcal and pneumococcal infections. The term of the license is
co-extensive with the term of the patents. Currently, the last-to- expire patent
licensed under this  agreement is scheduled to expire in 2013.  Under the second
license  agreement,  the Company has the exclusive  worldwide rights  (excluding
Canada) for the  development,  production and sale of a vaccine  against group B
meningococcal  disease produced in accordance with the licensed technology.  The
term of the license is  co-extensive  with the terms of the patents.  Currently,
the  last-to-expire  patent licensed under this agreement is scheduled to expire
in 2013. See also "Products Under Development - Conjugate Vaccines."


                                     - 20 -
<PAGE>



         STATENS  SERUMINSTITUT SUPPLY AGREEMENTS.  In 1991, the Company and SSI
executed a supply  agreement  under  which SSI is required to supply the Company
with its  requirements  of  diphtheria  and  tetanus  toxoids  to be used by the
Company for developing,  producing and selling the DTaP vaccine, either alone or
as a  combination.  The Company has been using,  and intends to continue to use,
these diphtheria and tetanus toxoids in producing its DTaP vaccine. In the event
SSI fails to continue to supply the Company with these  components,  the Company
has a royalty-bearing license to produce the diphtheria and tetanus toxoids. The
Company's  right to purchase  diphtheria  and  tetanus  toxoids for sale of such
products is exclusive in North America and the United  Kingdom and  nonexclusive
in the rest of the world and excludes SSI's  Territory.  The contract has a term
of 20 years. The Company and SSI also have entered into another supply agreement
pursuant to which the Company has agreed,  on an exclusive  basis, to supply SSI
with the pertussis  toxoid for  combination  with diphtheria and tetanus toxoids
either alone or together with other antigens for sale in SSI's Territory.

         In February 1992, the Company signed two additional  supply  agreements
with SSI.  Under the first  supply  agreement,  SSI has agreed,  on an exclusive
basis,  to provide the Company with  diphtheria  and tetanus  toxoids for use as
carrier  proteins in the development and manufacture of the Company's  conjugate
vaccines.  In the event that SSI fails to continue  to supply the  Company  with
these  components,   the  Company  has  a  royalty-bearing  license  to  produce
diphtheria  and  tetanus  toxoids  for this  purpose.  Under the  second  supply
agreement, the Company has agreed, on an exclusive basis, to supply SSI with its
conjugate vaccines that utilize SSI's diphtheria or tetanus toxoids as a carrier
protein, solely for use by SSI in combination with DTaP and DTaP-IPV vaccines in
SSI's  Territory.  SSI's right to market and sell these products is exclusive in
SSI's Territory. These agreements have a term of 20 years.

         STATENS SERUMINSTITUT RESEARCH AND DEVELOPMENT AGREEMENT.  In 1991, the
Company entered into a research and  development  agreement with SSI under which
the parties agreed to collaborate on the development of a DTaP-IPV vaccine.  See
"Products  Under  Development -  Combination  Vaccines."  The agreement  permits
either  party to add other  antigens to the DTaP-IPV  product.  Once the Company
obtains  regulatory  approval,  and commences sales of the DTaP-IPV product,  it
will be required to make royalty payments to SSI. SSI is required to sell to the
Company all of its requirements of IPV for the purpose of developing,  producing
and selling the DTaP-IPV product,  either alone or together with other antigens.
The contract has a term of 20 years.

         STATENS  SERUMINSTITUT  DISTRIBUTION  AGREEMENTS.  The Company has been
designated the exclusive distributor in North America and the United Kingdom for
SSI's  diphtheria,  tetanus  and IPV  vaccines.  Additionally,  SSI  will be the
exclusive distributor in SSI's Territory for the conjugate vaccines manufactured
using the  components  supplied to the  Company by SSI.  These  agreements  were
executed in February 1992, and each agreement has a term of 10 years.


                                     - 21 -
<PAGE>

 

         TECHNOLOGY TRANSFER AGREEMENT WITH BIOCHEM. In 1990, in addition to the
conjugate  vaccine  technologies  described  above,  BioChem  transferred to the
Company all rights to certain vaccine  technologies and granted to the Company a
paid-up exclusive right (excluding Canada) and license to other technologies for
vaccine  applications,   including  those  relating  to  monoclonal  antibodies,
synthetic  peptides and  adjuvants.  The licenses  granted under this  agreement
generally  will not terminate  until the  expiration of the last valid patent or
copyright anywhere in the world for the licensed  technologies or until the last
portion of the technologies  protected by trade secrecy enters the public domain
everywhere in the world, whichever occurs last. Currently, this agreement covers
seven foreign patents with expiration dates that range from 2007 to 2011.

         PASTEUR  MERIEUX-CONNAUGHT  AGREEMENTS. At the end of 1995, the Company
entered  into a clinical  development  agreement  and a license  agreement  with
Pasteur  Merieux-Connaught  under which both parties  will  jointly  develop the
Company's  new  conjugate  vaccine  against  meningococcus  B for both adult and
pediatric  indications.  Total fees and  payments  to the  Company  under  these
agreements  would  amount to $52 million  upon  achievement  of all clinical and
regulatory   milestones.   In  addition,   Pasteur   Merieux-Connaught  will  be
responsible  for all  costs  associated  with the  clinical  development  of the
vaccine through the completion of Phase II clinical trials.  See "Products Under
Development - Conjugate Vaccines - Meningococcal Vaccines."

         To   date,   the   Company   has   received   payments   from   Pasteur
Merieux-Connaught   in  connection   with  the  execution  of  a  memorandum  of
understanding  and  for  development  funding  under  the  clinical  development
agreement  in the amount of $7 million.  Further  fees and funding  will be made
upon  achievement  of  development,  clinical and regulatory  milestones.  Total
remaining fees and payments to the Company, upon achievement of all clinical and
regulatory  milestones,  amount  to  $45  million.  See  Item  7 -  Management's
Discussion and Analysis of Financial Condition and Results of Operation.

         Under the terms of the  license  agreement,  Pasteur  Merieux-Connaught
will  hold   co-exclusive   world-wide   rights  to  manufacture  and  sell  the
meningococcus  B vaccine both as a stand-alone  product and in combination  with
other  vaccines.  The Company  will  retain  co-exclusive  world-wide  rights to
manufacture and sell the  meningococcus B vaccine both as a stand-alone  product
and in combination with other vaccines.  With limited exceptions,  neither party
may grant  sublicenses  under the technology.  Following first product approval,
the Company will  receive  annual  minimum  royalties  and running  royalties on
product sales by Pasteur Merieux-Connaught. Pasteur Merieux-Connaught is subject
to specific diligence obligations and performance  milestones in the development
and   commercialization   of   the   vaccine.   The   obligations   of   Pasteur
Merieux-Connaught  will be  reduced  in the event of a change of  control of the
Company involving certain specified corporations.  The license agreement must be
ratified by the NRC and will not become  operational until a pre-clinical  study
is successfully  completed.  The license  agreement may be terminated by Pasteur
Merieux-Connaught  in its sole discretion at any time with advance  notice.  The
Company may terminate  the license  agreement  upon Pasteur  Merieux-Connaught's
default or its failure to meet its  obligations  under the clinical  development
agreement.


                                     - 22 -
<PAGE>



         Under the terms of the clinical development agreement, the parties will
jointly  develop the vaccine  through Phase II clinical  trials,  and each party
will have access to and the right to use the  clinical  trial  results.  Pasteur
Merieux-Connaught will be responsible for all costs associated with the clinical
development of the  meningococcus  B vaccine  through the completion of Phase II
clinical trials. Pasteur  Merieux-Connaught's  obligations will terminate upon a
change of control of the Company with certain  specified  corporations.  Pasteur
Merieux-Connaught  is subject to specific diligence  obligations and performance
milestones  in  the  development  and  commercialization  of  the  vaccine.  The
agreement may be terminated by Pasteur  Merieux-Connaught in its sole discretion
at any time with advance notice.

         ABBOTT LABORATORIES  AGREEMENT. In October 1996, the Company and Abbott
signed a definitive agreement under which Abbott would market Certiva[TRADEMARK]
when  approved by the FDA.  The  marketing  agreement  also will allow Abbott to
market the Company's DTaP-HIB,  DTaP-IPV and DTaP-IPV-HIB  combination  vaccines
which are under development.

         Abbott  will  market  Certiva[TRADEMARK]  and  combination  vaccines to
private   physicians   and  managed  care  markets  in  the  United  States  for
immunization of infants and children. The Company will market Certiva[TRADEMARK]
and  the  combination  vaccines  to  government   purchasers,   including  state
governments and the CDC.

         On execution of the  agreement  with Abbott,  the Company  received $13
million of which $6.3  million  represented  payment for  350,000  shares of the
Company's  Common  Stock,  and the balance  represented  a  marketing  fee and a
clinical  development  payment.  The Company and Abbott will  collaborate in the
clinical  development of the combination  vaccines,  and Abbott will provide the
Company with clinical  development  funding.  The Company will receive  payments
upon  achievement  of prescribed  milestones.  The agreement  provides for total
payments  of up to $42  million by Abbott.  The first  milestone  relates to FDA
approval of Certiva[TRADEMARK]  provided certain other conditions are satisfied.
In  addition,  the Company  will  receive  revenues  from Abbott as it purchases
Certiva[TRADEMARK]  and the  combination  vaccine  products  for  resale  to the
private  pediatric  market.  Each  party  is  subject  to  prescribed  diligence
obligations. The agreement will expire on the expiration of the patents covering
the products to be marketed.  In addition,  the  agreement  may be terminated by
Abbott in its sole  discretion  at any time with  advance  notice.  See Item 7 -
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operation.


                                     - 23 -
<PAGE>



         OTHER  RELATIONSHIPS.  The Company  holds  licenses and other rights to
additional  technologies  that the  Company  is  researching  and/or  developing
jointly  with various  research  institutions.  In  addition,  the Company is in
various  stages of  discussions  with  third  parties,  including  multinational
pharmaceutical  companies,  regarding various business  arrangements,  including
acquisitions,  licensing,  research and  development,  distribution,  marketing,
joint  venture and other  business  agreements,  some of which  possibly  may be
concluded  in the near  term.  There are no  assurances  that the  Company  will
successfully  negotiate and sign any such  agreement or that,  if executed,  the
financial terms of any such agreement will be significant.

COMPETITION

         Competition in the vaccine  industry is intense.  The Company will face
competition  from many  companies,  including  a number of large  companies  and
specialized  firms in the  United  States  and  abroad  that are  engaged in the
development  and  production of vaccines,  and major  universities  and research
institutions.  Many of the  Company's  competitors  have  substantially  greater
financial and other resources,  more extensive experience in conducting clinical
testing and obtaining regulatory approvals for their products, greater operating
experience,  larger research and development and marketing  staffs,  and greater
production capabilities than those of the Company. The Company believes that the
principal  competitive  factors in the vaccine  industry  are  product  quality,
measured by the safety and efficacy of a vaccine product, ease of administration
(represented  by  combination  vaccines and  vaccines  that are stable in liquid
form) and price. See "Marketing of Vaccines."

         The  Company  believes  that its  principal  competitors  in the United
States are Merck & Co., Pasteur Merieux-Connaught,  SmithKline Beecham plc., and
Lederle Laboratories (a subsidiary of American Home Products), most of which are
active in the  development  of acellular  pertussis,  combination  and conjugate
vaccines for use in infants and  children.  For  example,  during 1996 and 1997,
three  companies  announced  that they had  received FDA approval for their DTaP
vaccine for infants and children.  One of these  competitors also announced that
the FDA licensed a vaccine that combines by reconstitution that


                                     - 24 -
<PAGE>



company's HIB vaccine with its DTaP vaccine for  administration  at 15-18 months
of age and that it continues to seek FDA  approval  for  administration  at two,
four and six months of age. In addition,  several  competing  DTaP  vaccines and
certain  combination  vaccines have been licensed for sale outside of the United
States. See "Risk Factors Competition and Technological Change."

PATENTS AND PROPRIETARY INFORMATION

         The Company  actively  pursues a strategy of seeking patent  protection
for valuable  patentable  subject matter.  The Company  believes that patent and
trade secret  protection  is an  important  element of its business and that its
success will depend in part on its ability to obtain strong patents, to maintain
trade secret protection and to operate without infringing the proprietary rights
of third parties. The Company holds as assignee and licensee a number of patents
and patent applications. See "Business Relationships" and "Risk Factors - Patent
Protection and Proprietary Information."

         The Company also relies upon trade  secrets,  know-how  and  continuing
technological  advancement  to develop and  maintain its  competitive  position.
Disclosure  and use of the  Company's  know-how is  generally  controlled  under
agreements   with  the  parties   involved.   In   addition,   the  Company  has
confidentiality  agreements  with its key employees,  consultants  and officers.
There can be no assurance that  disclosure of the Company's  trade secretes will
not occur, or that others will not  independently  develop and patent equivalent
technology.


                                     - 25 -
<PAGE>



GOVERNMENT REGULATION

         The Company is currently subject to regulation by various  governmental
agencies and to Federal and other laws.  United  States and foreign  regulations
will be a significant  factor in the  production  and marketing of the Company's
products  and are  currently a  significant  factor in its ongoing  research and
development activities. In order to test, produce and market vaccines, mandatory
procedures  must be  followed  to  ensure  that  safety,  quality  and  efficacy
standards  established by the FDA and comparable  agencies in foreign  countries
are  satisfied.  See also  "Risk  Factors -  Changes  in  Government  Purchasing
Policies" for a description of regulatory and legislative  initiatives  that may
affect the marketing and distribution of vaccines.

         In the United States, the marketing of human vaccines is subject to FDA
review  and  approval.  The steps  required  before a new human  vaccine  can be
marketed include: preclinical studies; the filing of an investigational new drug
application  ("IND") with the FDA; clinical trials in humans to determine safety
and efficacy;  FDA approval of the product for commercial sale; and FDA approval
of the production-related facilities. The results of the preclinical studies and
human clinical trials are submitted to the FDA in a product license application,
or PLA,  approval of which must be obtained prior to  commencement of commercial
sales. The FDA may deny a PLA if, among other reasons,  clinical trial protocols
are not adequate or appropriate.  The FDA also may require additional testing or
information to assess the safety and efficacy of a company's products if the FDA
does not view the PLA as containing adequate evidence of the safety and efficacy
of the  product.  Notwithstanding  the  submission  of  such  data,  the FDA may
ultimately decide that the application does not satisfy its regulatory  criteria
for  approval.  Even if the PLA is  approved,  the  product  may be  required to
undergo  post-licensure  testing  and  surveillance  to  continue to monitor its
safety and effectiveness.  At this stage,  product approvals may be withdrawn if
compliance  with  regulatory  standards is not  maintained or if problems  occur
following initial marketing.  These regulatory  standards relate to, among other
things,  manufacturing,  testing,  labelling,  advertising  and  marketing.  The
interval between the filing of an IND and the filing of a PLA application can be
lengthy and in some instances the data obtained from clinical trials  authorized
under an IND do not support the filing of a PLA.

         The product  manufacturing and support facilities also must be licensed
for the production of vaccines.  To accomplish  this, an  establishment  license
application  ("ELA")  must  be  filed  with  the  FDA.  The  ELA  describes  the
facilities,  equipment and personnel involved in the manufacturing  process.  An
establishment  license is granted on the basis of inspections of the applicant's


                                     - 26 -
<PAGE>



facilities in which the primary  focus is on compliance  with FDA's current good
manufacturing  practices  ("CGMP") and the  applicant's  ability to consistently
manufacture  the product in the facility in accordance  with the PLA. If the FDA
finds  the  inspection  unsatisfactory,  it may  decline  to  approve  the  ELA,
resulting in a delay in production or  distribution  by the applicant.  Although
reviewed separately,  approval of both the PLA and ELA must be received prior to
commercial marketing of a vaccine.

         Presently,   there  are  a  number  of  legislative  initiatives  being
considered in Congress and proposed  regulations under consideration by the FDA,
which if adopted, could reform the FDA's review and approval processes by, among
other  things,  streamlining  the product  licensing  application  processes for
biologics, including vaccines. Some of these proposals are designed to eliminate
the  requirement for ELAs and to simplify the approval  process.  The Company is
unable to predict  which  legislative  or regulatory  initiatives,  if any, will
ultimately  be enacted or the effect  that any such  initiative  may have on the
FDA's application or approval process for the Company's DTaP and other vaccines,
or on the Company's business or results of future operations.

         The FDA  Export  Reform  and  Enhancement  Act of  1996,  which  became
effective  on April 26,  1996,  revised  the terms and  conditions  under  which
biologics may be exported. The legislation was designed to facilitate the export
of drugs, including biologics, by revising and in some circumstances eliminating
the requirement  for FDA approval as a condition of export.  The new legislation
now  permits,   in  most  cases,  a  company  to  commercially  export  vaccines
manufactured in the United States with little or no prior FDA review or approval
before  these  vaccines  are  licensed  by the FDA for  marketing  in the United
States.

         Preclinical  studies  are  conducted  in the  laboratory  and in animal
systems to evaluate the safety and potential  efficacy of vaccines.  The results
of these  preclinical  studies are submitted as part of the IND.  Human clinical
trials may  commence  if, 30 days after  receipt by the FDA of the IND,  the FDA
does not notify  the IND  applicant  that the  trials are  subject to a clinical
hold.

         Clinical trials involve the administration of the  investigational  new
vaccine  to  healthy  volunteers  or to  patients,  under the  supervision  of a
qualified  principal  investigator.  Clinical trials are conducted in accordance
with certain  standards under protocols that detail the objectives of the study,
the  parameters  to be used to monitor  safety and the  efficacy  criteria to be


                                     - 27 -
<PAGE>



evaluated.  Each  protocol  must be  submitted  to the  FDA as part of the  IND.
Further,  each  clinical  study  must be  conducted  under  the  auspices  of an
independent  Institutional  Review Board ("IRB") at the institution at which the
study will be conducted or by a qualified  centralized  independent IRB. The IRB
must approve the study to be conducted.  In its review,  the IRB will  consider,
among  other  things,  ethical  factors,  the safety of human  subjects  and the
possible liability of the institution.

         Clinical trials are typically conducted in three sequential phases, but
the phases may overlap. In Phase I, the initial introduction of the vaccine into
healthy  human  subjects,  the vaccine is tested for safety  (adverse  effects),
optimal dosage,  and its ability to induce an immune response  (immunogenicity).
Phase II involves  studies in a limited  target  patient  population  to further
evaluate  immunogenicity  and optimal dosage,  and to identify  possible adverse
effects and safety risks.  When a product is found to have an acceptable  safety
profile in Phase II  evaluations,  Phase III clinical  trials are  undertaken to
evaluate  clinical  efficacy and to further  test for safety  within an expanded
target patient population at geographically dispersed clinical study sites.

         Clinical trials generally  require several years to complete and may be
very costly.  To date,  the Company has been  successful in reducing the cost of
clinical trials by obtaining third-party  sponsorship of the clinical trials for
its first vaccine products. The Company, where appropriate, may continue to seek
third-party sponsorship or funding for clinical trials for its vaccine products.
There can be no assurance that such sponsorship or funding,  if sought,  will be
obtained.

         The Company's  activities  are subject to specific  government  quality
assurance  regulations.  The CGMP regulations set specific  requirements for the
production of biologics,  including vaccines,  and similar requirements are also
in effect in the European  Union and other foreign  countries  where the Company
has applied or may apply for  regulatory  approval for clinical  studies  and/or
marketing  of its  vaccines.  The  Company's  research and  operations  also are
subject  to  regulation  by the  Occupational  Safety  and  Health  Agency,  the
Environmental  Protection  Agency,  the  Department  of  Agriculture,   and  the
Department of  Transportation.  The Company also is subject to regulation  under
the Toxic  Substances  Control Act, the Resource  Conservation and Recovery Act,
and  other  regulatory  statutes,  and may in the  future  be  subject  to other
Federal, state, local or foreign regulations. The Company's compliance with laws
that  regulate  the  discharge of materials  into the  environment  or otherwise
relate to the protection of the  environment  does not have a material effect on
the ongoing  operations  of the  Company.  The Company has not made any material
expenditures for environmental  control  facilities,  nor does it anticipate any
such expenditures during the current fiscal year.

RAW MATERIALS

         Laboratory  supplies utilized in the Company's research and development
generally are available from several  commercial  suppliers under standard terms
and conditions.  Most raw materials necessary for process development,  scale-up
and commercial  manufacturing are generally  available from multiple  commercial
suppliers. However, certain processes require raw materials from sole sources or
materials  that are  difficult  for  suppliers  to  produce  and  certify to the


                                     - 28 -
<PAGE>



Company's  specifications.  In addition, the Company may experience temporary or
permanent shortages of critical raw materials necessary for continued production
of its vaccines.  Accordingly,  given the specific  nature of, and critical need
for, certain raw materials,  there is a risk that material shortages could delay
production  efforts,  adversely  impact  production  costs and yields,  and even
necessitate  the use of substitute  materials.  Any of these events could have a
significant adverse impact on the Company's operations. See also "Risk Factors -
Dependence on Suppliers."

PRODUCT LIABILITY

         The  testing and  marketing  of  vaccines  entail an  inherent  risk of
product  liability  attributable  to unwanted  and  potentially  serious  health
effects.  The extent of this risk was  sufficiently  great in the United  States
that,  by the  mid-1980s,  many  manufacturers  ceased  production  of pediatric
vaccines because of liability exposure.

         In response to these  withdrawals  from the  vaccine  market,  Congress
enacted the NCVI Act to ensure the availability of government mandated pediatric
vaccines by addressing the liability of manufacturers  for  immunization-related
injuries. Among other things, the NCVI Act created a trust fund, supported by an
excise tax on each dose of vaccine sold, to compensate eligible injured parties.
Compensation  awards are statutorily  established  and are generally  limited to
actual  and  projected   unreimbursed  medical,   rehabilitative  and  custodial
expenses,  lost  earnings,  and pain and  suffering,  together  with  reasonable
attorneys' fees.  Injured parties are not allowed to bring a lawsuit against the
manufacturer  unless they have filed a claim with the program,  received a final
determination  and  rejected  it in favor of  litigation.  The NCVI Act may not,
however,  protect  vaccine  manufacturers  against suits by family members of an
injured party. See "Overview of Vaccine Market."

         As the  vaccines  covered  by the NCVI  Act  include  vaccines  for the
prevention of diphtheria,  tetanus,  pertussis and polio, the Company's DTaP and
IPV vaccines have certain  protection from liability  claims.  While none of the
Company's  other  products are  presently  covered by the NCVI Act, from time to
time  there are  legislative  and  regulatory  proposals  to expand  the list of
vaccines  covered by, and reduce the excise  taxes that fund,  the  program.  In
1997,  varicella,  hepatitis B and HIB vaccines were added to the program's list
of covered  vaccines  provided that Congress  establishes an excise tax for such
vaccines.  In  addition,  the  Company  is unable to predict  whether  any other
legislative or regulatory  proposal will ultimately be enacted or the effect any
of these proposals may ultimately  have on the Company's  business or results of
future operations.

         The  Company has  limited  product  liability  insurance  coverage.  It
intends to seek additional insurance coverage as it commences  commercialization
of  its  vaccines,  but  there  can be no  assurance  that  adequate  additional
insurance  coverage will be available at acceptable  costs, if at all, or that a
product  liability claim would not materially  adversely  affect the business or
financial  condition  of the  Company.  See "Risk  Factors - Product  Liability;
Limited Insurance."


                                     - 29 -
<PAGE>



EMPLOYEES

         As of December 31,  1996,  the Company had 206  full-time  employees of
whom 28 have Ph.D.  degrees and two have M.D. degrees.  Of these employees,  133
were engaged in research, development and production activities, 31 were engaged
in administration, and 42 were engaged in quality/regulatory and related aspects
of the  Company's  operations.  The  Company  considers  its  relationship  with
employees to be satisfactory.

RISK FACTORS

         IN ADDITION TO THE OTHER  INFORMATION  INCLUDED  HEREIN,  THE FOLLOWING
RISK FACTORS  SHOULD BE CAREFULLY  CONSIDERED.  THIS ANNUAL  REPORT ON FORM 10-K
CONTAINS  CERTAIN  FORWARD  LOOKING  STATEMENTS  WITHIN THE  MEANING OF AND MADE
PURSUANT TO THE SAFE HARBOR  PROVISIONS  OF THE  PRIVATE  SECURITIES  LITIGATION
REFORM ACT OF 1995, WHICH STATEMENTS  INHERENTLY INVOLVE RISKS AND UNCERTAINTIES
THAT MAY AFFECT THE  COMPANY'S  BUSINESS AND  PROSPECTS.  THE  COMPANY'S  ACTUAL
RESULTS  MAY DIFFER  SIGNIFICANTLY  FROM THE  RESULTS  DISCUSSED  IN THE FORWARD
LOOKING STATEMENTS.  FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE
NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION.

         DEPENDENCE  UPON APPROVAL AND  COMMERCIALIZATION  OF DTaP VACCINE.  The
Company  has  generated  only  limited  revenue  from the sale of its  acellular
pertussis  vaccine.  Prior to commercial  introduction,  the Company's  DTaP and
combination  vaccines must be approved by the FDA for sales in the United States
and by  similar  authorities  for sales in other  countries.  In 1996,  the DTaP
vaccine was  approved  for sale in Sweden and the DTaP-IPV was approved for sale
in Denmark. The DTaP vaccine is currently being considered for approval for sale
in the United States by the FDA. There can be no assurance as to when or whether
the Company will receive such  approval,  or that any such  approval will not be
subject to additional testing requirements.  The commercial  introduction of the
Company's DTaP vaccine will require the Company to manufacture and produce large
quantities of vaccine in its manufacturing facility,  which was modified in 1995
for  increased  production.  The Company has  limited  experience  manufacturing
commercial  quantities  of vaccines and operating  its  manufacturing  facility.
Accordingly, there can be no assurance that the production process will not fail
or become subject to substantial disruptions.  See "Risk Factors - Manufacturing
and Scale-Up." To successfully introduce and commercialize its DTaP vaccine, the
Company will be required  to, among other  things,  participate  in  established
purchasing programs of Federal and state governments,  establish an identity and
reputation  for  the  Company  and  its  products,  create  an  awareness  among
pediatricians  of the  safety  and  efficacy  of the  vaccine,  distinguish  the
Company's  product  from that of its  competitors,  establish  the Company as an
effective  and  reliable   supplier  of  vaccines,   and   establish   effective
distribution  channels.  In October  1996,  the  Company  and  Abbott  signed an
agreement  for  Abbott  to  market  the  Company's   DTaP  vaccine  and  certain
combination  vaccines in the United States to the private  physician and managed



                                     - 30 -
<PAGE>



care markets upon approval by the FDA, with the Company marketing those products
to governmental purchasers. There can be no assurance that the Company or Abbott
will successfully  implement its sales and marketing strategy.  In attempting to
do so, the Company believes there will be intense competition from other vaccine
producers.   There  can  be  no  assurance  that  the  Company  will  produce  a
commercially viable product,  attain sufficient market share, or distinguish its
vaccine product from that of its competitors.

         Currently,   the  Company's   prospects  for  becoming  profitable  are
substantially  dependent  upon  the  successful  commercialization  of the  DTaP
vaccine, as well as the successful  development and  commercialization  of other
vaccines under  development.  There can be no assurance that the Company will be
able to  successfully  market  its  vaccine  products  at levels  sufficient  to
generate profits.

         DEPENDENCE  ON  SUPPLIERS.  While the Company  produces  the  pertussis
component  of the DTaP  vaccine,  it has  purchased,  and intends to continue to
purchase,  its  requirements  of the diphtheria and tetanus toxoids and enhanced
IPV  from  SSI.  There  can be no  assurance  that  SSI will be able to meet the
Company's requirements or that SSI will not experience difficulties in obtaining
necessary  regulatory  approvals or  disruptions in its production of diphtheria
and tetanus toxoids and IPV.

         Certain of the  Company's  production  processes  require raw materials
from sole sources or materials  that are  difficult for suppliers to produce and
certify  to the  Company's  specifications.  The  Company  also  may  experience
temporary  or  permanent  shortages  of critical  raw  materials  necessary  for
continued  production of its  vaccines.  Any shortage of these  materials  could
delay  production  efforts,  adversely impact  production  costs and yields,  or
necessitate  the  use  of  substitute  materials,  any  of  which  could  have a
significant adverse impact on the Company's operations. In addition, the Company
has contracted with third parties for the sterile fill, labelling, and packaging
of its vaccine  products until the Company obtains its own facilities to perform
these  operations.  Failure  of  any  such  contractor  to  meet  the  Company's
requirements  may  involve  costly  delays and  significant  expense,  and would
require  additional   regulatory  approval  as  the  Company  seeks  alternative
arrangements.

         CHANGES  IN  GOVERNMENT  PURCHASING  POLICIES.  Children  in the United
States  receive  immunizations  from  public  providers,  such as  local  health
departments, as well as from private providers. Immunizations provided by public
providers are generally paid for through  federal and state  government  funding
under public health programs.  These programs are intended to reduce barriers to
immunization  and to improve  immunization  rates by  providing  free vaccine to


                                     - 31 -
<PAGE>



qualifying  low-income and uninsured infants and children.  Government purchases
historically  have been at  prices  substantially  below  those  offered  to the
private sector and presently account for a substantial portion of the vaccine
doses  distributed  in the United  States.  From time to time,  legislative  and
regulatory initiatives are proposed that, if adopted, could significantly modify
government vaccine programs by, among other things, modifying or restricting the
federal  government's  purchasing  authority  or  substantially   increasing  or
reducing the funding available for government vaccine purchases.  The Company is
unable to predict  which  legislative  initiative,  if any,  will  ultimately be
enacted or the effect any such  initiative may ultimately  have on the Company's
business  or  results  of  future   operations.   In  addition,   proposals  for
health-care, insurance and tax reform may be considered in the future by federal
and  state  governments  and some of these  proposals,  if  adopted,  may  limit
government or third-party,  private reimbursement policies, or prices charged by
pharmaceutical and vaccine manufacturers for their product.

         NO ASSURANCE OF EFFECTIVE MARKETING.  The Company has little experience
in marketing its  products.  The Company is in the process of  implementing  its
marketing and sales plans for its products;  however,  there can be no assurance
that the  Company's  current  marketing  and  sales  strategies  or the size and
make-up of the Company's sales and marketing organization will be sufficient for
the  successful   commercialization  of  its  products.  The  factors  affecting
successful  commercial  launch of the  Company's  vaccines in the United  States
include,  among others:  establishing an identity and reputation for the Company
and its products;  creating an awareness among  pediatricians  of the safety and
efficacy of the Company's  vaccines;  distinguishing the Company's products from
those of its competitors;  establishing the Company as an effective and reliable
supplier of vaccines;  and establishing  effective  distribution  channels.  The
Company has entered into supply,  marketing  and  distribution  agreements  with
third parties under which such parties hold  exclusive  rights to market certain
of the Company's products within their respective  territories.  There can be no
assurance  that any of these third parties will be able to distribute and market
those products successfully within its territory. There also can be no assurance
that the Company will be  successful  in  negotiating  and  executing  marketing
and/or  distribution  agreements  with any  other  third  parties  covering  any
products  or that any other  third  party will be able to market  the  Company's
products successfully. See "Business Relationships."

         UNCERTAINTIES  RELATED TO CLINICAL TRIALS.  Before obtaining regulatory
approval for the commercial sale of any products under development,  the Company
must  demonstrate  through pre- clinical  studies and clinical trials that these
products  are safe and  effective.  The results from pre-  clinical  studies and
early clinical  trials may not be predictive of results  obtained in large-scale
clinical trials.  There can be no assurance that large-scale clinical trials for
any  of  the  Company's  products  will  demonstrate  safety  and  efficacy,  be
sufficient to support application for regulatory approval, or lead to marketable
products.  A number of companies in the  biotechnology  industry  have  suffered
significant  setbacks in advanced clinical trials even after achieving promising
results in earlier trials.


                                     - 32 -
<PAGE>



         NEED FOR REGULATORY  APPROVALS.  The Company has not commercialized any
products  or received  product  approval  from the FDA.  The  Company's  vaccine
products,  product  development  activities  and  manufacturing  facilities  and
processes are subject to extensive and rigorous regulation by the FDA, including
preclinical  and clinical  testing  requirements,  and  inspection  and approval
processes. Approval of the Company's products for commercial introduction in the
U.S.  currently  requires both a license for each product and a license for each
production  facility.  The process of obtaining  licenses can be costly and time
consuming,  and there can be no assurance that the licenses will be granted,  or
that FDA  review  will not  involve  delays  that  would  adversely  affect  the
Company's ability to market products. There also can be no assurance that any of
the products  under  development by the Company will  demonstrate  the safety or
efficacy  profiles  necessary  for  regulatory  approval,  or that the Company's
products under development or its production facility will receive the requisite
regulatory  approvals and licenses in a timely fashion or at all. There also can
be no assurance that the FDA or other  regulatory  authorities  will not require
the Company to conduct  additional  testing to assess the safety and/or efficacy
of the Company's  vaccines,  including  its DTaP vaccine.  Even if the necessary
licenses are obtained from the FDA,  there may be limitations on product use and
the FDA can withdraw  approvals at any time upon the  occurrence  of  unforeseen
problems.  The FDA can also limit or prevent the  manufacture or distribution of
the  Company's  products  and  require  a  recall  of  such  products.  The  FDA
regulations depend heavily on administrative  and scientific  interpretation and
advisory  committee  determinations,  and there can be no assurance  that future
interpretations by the FDA or other regulatory bodies, with possible prospective
and retroactive effect, will not adversely affect the Company. In addition,  the
FDA and various state agencies  inspect the Company and its facilities from time
to time to  determine  whether the Company is in  compliance  with  regulations,
including manufacturing,  testing, recordkeeping,  quality control and labelling
practices.  A  determination  that the Company is in material  violation of such
regulations could have a material adverse effect on the Company.

         MANUFACTURING  AND  SCALE-UP.  The  production  of vaccines is a highly
complex,  biological process involving many steps,  commencing from seed culture
through  final  production.  The  production  process  could  fail at any  point
resulting  in  the  failure  and   continued   inability   to  meet   production
requirements.  From  time to  time,  the  Company  experiences  disruptions  and
production  failures  and there are no  assurances  that the steps  taken by the
Company to address such  failures  will be effective or that such  failures will


                                     - 33 -
<PAGE>



not continue in the future or affect the Company's  ability to obtain regulatory
approval for its products or the timing of such approval or affect the Company's
ability to produce vaccines. No assurances can be given that the Company will be
successful in establishing and maintaining consistent manufacture and continuous
commercial production of its vaccines in sufficient quantity and quality or that
it will be capable of producing a  competitively  priced  product for commercial
sale.

         PATENT  PROTECTION AND PROPRIETARY  INFORMATION.  The vaccine  industry
traditionally  has placed  considerable  importance on obtaining and maintaining
patent and trade secret  protection for significant new  technologies,  products
and processes.  The Company  believes that such  protection will be an important
factor in its success and may require the expenditure of substantial  resources.
Many companies,  universities and research  institutions have applied for and/or
obtained patents for vaccine  products and technologies  that may be competitive
or inconsistent with those held by or licensed to the Company. No assurances can
be given as to the degree and range of  protection  any patents  will afford the
Company,  that  additional  patents will be issued to the Company,  or as to the
extent to which the Company will be successful  in avoiding any patents  granted
to others.  Further,  there can be no assurance that others have not or will not
independently  develop  or  otherwise  properly  gain  access to  technology  or
information  that is  substantially  similar  to that  which is  unpatented  yet
considered  proprietary  by the  Company.  The  Company  also may  desire  or be
required to obtain licenses from others in order to develop,  produce and market
commercially viable products effectively. Failure to obtain those licenses could
have a significant  adverse effect on the Company's ability to commercialize its
vaccine  products.  There  can  be no  assurance  that  such  licenses  will  be
obtainable  on  commercially  reasonable  terms,  if at all,  that  the  patents
underlying  such licenses will be valid and  enforceable or that the proprietary
nature  of the  unpatented  technology  underlying  such  licenses  will  remain
proprietary.  There has been, and the Company  believes that there may be in the
future,  significant  litigation  in the  industry  regarding  patent  and other
intellectual   property  rights.   If  the  Company  becomes  involved  in  such
litigation, it could consume substantial resources.

         COMPETITION  AND  TECHNOLOGICAL  CHANGE.  Competition  in  the  vaccine
industry is intense.  Competitors  of the Company both in the United  States and
internationally include major pharmaceutical and chemical companies, specialized
biotechnology firms, universities and other research institutions. Many of these
competitors are actively developing competing vaccines. For example, in 1996 and
1997,  three  competitors  announced  that their  respective  DTaP vaccines were
approved by the FDA for use in infants and  children.  One of those  competitors
also announced  that the FDA licensed a vaccine that combines by  reconstitution
that  company's  HIB vaccine with its DTaP vaccine for  administration  at 15-18


                                     - 34 -
<PAGE>



months of age and that it continues to seek FDA approval for  administration  at
two, four and six months of age. In addition, several competitors' DTaP vaccines
and certain  combination  vaccines  have been  licensed  for sale outside of the
United States.  Many of these competitors have substantially  greater resources,
more  extensive   experience  in  conducting   clinical  testing  and  obtaining
regulatory approvals for their products,  greater operating  experience,  larger
research  and  development  and  marketing   staffs,   and  greater   production
capabilities  than those of the Company.  In addition,  the vaccine  industry is
subject to significant  technological change. There can be no assurance that the
Company's  competitors  will not  succeed  in  designing  around  the  Company's
patents, developing technologies and products that are as or more effective than
any  that  have  been or are  being  developed  by the  Company,  or  developing
technologies  and  products  that would  render  the  Company's  technology  and
products obsolete and noncompetitive.

         PRODUCT  LIABILITY;  LIMITED  INSURANCE.  The testing and  marketing of
vaccine  products  entail an inherent  risk of product  liability.  Although the
Company has limited product  liability  insurance  coverage,  it intends to seek
additional insurance coverage as it commences commercialization of its products.
There can be no assurance that adequate  additional  insurance  coverage will be
available at acceptable cost, if at all, or that a product liability claim would
not  materially  adversely  affect the  business or  financial  condition of the
Company.  To the extent the  Company is not  covered by  insurance,  the Company
faces potential liability that could be substantial in the event of claims.

         LACK  OF  PROFITABILITY.  The  Company's  accumulated  deficit,  as  of
December 31, 1996 was approximately $58.8 million, and the Company presently has
limited revenues. The Company expects to incur additional losses until such time
as the Company  makes  significant  commercial  sales of its DTaP  product.  The
Company's  ability to achieve and maintain  profitability  is dependent upon its
ability to develop  products  that are  effective and  commercially  viable,  to
continue to obtain regulatory approvals for production and sale of its products,
and to produce and market its products  successfully.  There can be no assurance
that the Company will become profitable.

         AVAILABILITY  OF  CAPITAL.  It is  anticipated  that the  Company  will
continue to expend  significant  amounts of capital to fund its  operations  and
capital expenditures. The Company plans to finance its cash requirements through
a  combination  of: cash and cash  equivalents;  revenues from product sales and
from  license,   collaboration,   marketing,   distribution  and/or  development
agreements;  the  exercise  of stock  options;  the sale of debt  and/or  equity
securities;  mortgage financing; and equipment leases. There can be no assurance
that the Company  will be able to satisfy its funding  requirements  from any of
these  alternatives  or that it will be effective in reducing cash  requirements
for  operations  if FDA approval is not timely  received.  See Item 6 - Selected
Consolidated  Financial Data, and Item 7 - Management's  Discussion and Analysis
of Financial Condition and Results of Operation.

         DEPENDENCE  ON  ATTRACTING  AND  RETAINING  QUALIFIED  PERSONNEL.   The
Company's success in developing  marketable products and achieving a competitive
position will depend,  in part,  on its ability to attract and retain  qualified


                                     - 35 -
<PAGE>



personnel.  Competition  for such personnel is intense,  and no assurance can be
given that the  Company  will be able to  continue  to  attract  or retain  such
personnel. The loss of key personnel could adversely affect the Company.

         DIVIDENDS  AND TAXATION.  The Company has never paid cash  dividends on
its Common Stock. The Company currently  intends to retain earnings,  if any, to
finance  the growth and  development  of its  business  and does not  anticipate
paying cash dividends in the foreseeable future. Moreover, any profits earned by
the U.S.  subsidiary  of the Company will not be  distributable  directly to the
Company's shareholders. Instead, such subsidiary must declare and pay a dividend
to the  Company,  and the  Company  in  turn  must  declare  a  dividend  to its
shareholders. This will subject each dividend to a withholding tax. See Item 5 -
Market for Registrant's Common Equity and Related Stockholder  Matters, and Item
7 - Management's  Discussion and Analysis of Financial  Condition and Results of
Operation.

         IMPACT OF BECOMING A PASSIVE FOREIGN INVESTMENT COMPANY. If more than a
certain percentage of the Company's assets or income become passive, the Company
will be classified for U.S. tax purposes as a passive foreign investment company
("PFIC"), and a U.S. taxpayer may be subject to an additional Federal income tax
on receiving  certain dividends from the Company or selling the Company's Common
Stock.  See  Item  5  -  Market  for  Registrant's  Common  Equity  and  Related
Stockholder  Matters,  and Item 7 -  Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operation.

         VOTING CONTROL BY PRINCIPAL SHAREHOLDERS. The principal shareholders of
the  Company,  BioChem  and  Dr.  Phillip  Frost,  either  directly  or  through
affiliates,  are parties to a  Shareholders'  Agreement  requiring,  among other
things,  that the  Company's  Common  Stock  covered by the  agreement  be voted
together for the election of directors.  As of January 31, 1997, these principal
shareholders beneficially owned approximately 18,991,601 shares of the Company's
outstanding Common Stock, which represented approximately 50.8% of the Company's
then outstanding  Common Stock. See Item 13 - Certain  Relationships and Related
Transactions.

         VOLATILITY  OF STOCK PRICE.  The market  prices for  securities of many
biotechnology and  pharmaceutical  companies,  including the Company,  have been
highly  volatile.  Many  factors  have  historically  had,  and are  expected to
continue to have,  a  significant  impact on the  Company's  business and on the
market price of the Company's securities including: announcements by the Company


                                     - 36 -
<PAGE>



and others regarding the results of regulatory approval filings, clinical trials
or other testing;  technological  innovations or new commercial  products by the
Company or its  competitors;  government  regulations;  developments  concerning
proprietary  rights;  public concern as to safety of vaccine and  pharmaceutical
products; and economic or other external factors.

         SHARES  ELIGIBLE FOR FUTURE SALE.  Sales of substantial  amounts of the
Company's Common Stock in the public market following the exercise of options or
the  conversion of  convertible  securities  could have an adverse effect on the
price  of the  Company's  securities.  To the  extent  that  either  of the  two
principal  shareholder  groups determines to sell a substantial  number of their
shares of the Company's Common Stock,  such sales could  significantly  increase
the volatility of the market price of the issued and  outstanding  securities of
the Company.  In  addition,  one of the  principal  shareholders  holds  certain
registration  rights  concerning  shares of the  Company's  Common Stock that it
owns. See Item 13 - Certain Relationships and Related Transactions.

ITEM 2.    PROPERTIES
           ----------

         The  production  of vaccines is a highly  complex,  biological  process
involving many steps, commencing from seed culture through final production. The
Company's vaccine production processes involve the use of patented  technologies
and  proprietary  rights and trade  secrets  at the  Company's  facilities.  The
Company's facilities are briefly described below:

<TABLE>
<CAPTION>

                                                Square
  Facility/Function           Location           Feet             Own/lease
---------------------------------------------------------------------------------------------
<S>                         <C>                  <C>         <C>
Production Facility         Beltsville, MD       26,000      Leased until February 1999
                                                             (ten-year renewal option)

Production Facility         Beltsville, MD       35,000      Leased until February 2001
                                                             (two five-year renewal options)

Warehouse and Support       Beltsville, MD       31,000       Owned
Services for Production 
Facility

Research and Development    Beltsville, MD       27,700       Subleased until April 1998
Laboratory Facility

Executive Offices and       Beltsville, MD       25,600       Leased until December 1997
Warehouse Facility                                            (two three-year renewal options)

</TABLE>


                                     - 37 -
<PAGE>



         The  Company's  production  facilities  have been designed and built to
produce  vaccines for large scale  clinical  trials and  commercial  sales after
product  licensing.  In 1995,  the  Company  modified  its  26,000  square  foot
production   facility  to   significantly   expand   production   capacity   for
Certiva[TRADEMARK].  See Item 1 - Business,  "Risk Factors -  Manufacturing  and
Scale-Up."

         In 1996, the Company acquired a 35,000 square foot production  facility
in  Beltsville,  Maryland.  The  acquisition  included the purchase and lease of
equipment and leasehold  improvements  and the  assumption of real estate leases
underlying the facility,  which are scheduled to expire in 2001,  subject to two
five-year  extensions.  The  facility is being  dedicated to the  production  of
vaccines for clinical trials and commercial sale.

         The Company is presently  leasing space for a research and  development
laboratory  facility.  This facility,  consisting of approximately 27,700 square
feet,  is used for  research  in areas  such as protein  chemistry,  immunology,
molecular biology and conjugation technology.

         The Company owns a building located adjacent to its current  production
facility.  This  building has been  modified to house the service and  warehouse
departments that support the Company's  production  facility.  In addition,  the
Company is continuously exploring  opportunities to build-out,  lease or acquire
additional  research,  development and production  facilities to accommodate the
Company's  expanding  vaccine  development  program.  The Company has no present
agreements,   commitments  or   understandings  in  respect  of  any  additional
facilities.

ITEM 3.    LEGAL PROCEEDINGS
           -----------------

         The  Company  is, and from time to time  becomes,  involved  in various
claims and lawsuits that are  incidental to its business.  In the opinion of the
Company's  management,  there are no material legal proceedings  pending against
the Company.


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

           None.


                                     - 38 -
<PAGE>



                                     PART II


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

         The  Company's  Common Stock is listed on the American  Stock  Exchange
("AMEX")  under the symbol  "NVX."  The table  below sets forth the high and low
closing  sales prices as reported on the AMEX  composite  tape for each calendar
quarter of 1995 and 1996.

                                                 HIGH                LOW
                                                 ----                ---

              1995
                First Quarter                  $ 9  1/4            $ 6
                Second Quarter                   9 15/16             5 7/8
                Third Quarter                   11 7/8               7 5/16
                Fourth Quarter                  15 1/2               9 3/8

               1996
                First Quarter                  $16 1/8             $12 1/2
                Second Quarter                  25 3/4              12 1/8
                Third Quarter                   28                  14 5/8
                Fourth Quarter                  28                  17 3/8


         The  number of  record  holders  of the  Company's  Common  Stock as of
February 28, 1997 was  approximately  271. The transfer  agent and registrar for
the Common Stock is American Stock Transfer and Trust Company,  which is located
at 40 Wall Street, New York, New York 10005.

         The  Company  has never paid cash  dividends  on its  Common  Stock and
anticipates  that its earnings,  if any, will be retained for development of the
Company's business.  Therefore, it is not anticipated that any cash dividends on
its Common Stock will be declared in the foreseeable  future. The payment of any
future  dividends will be at the discretion of the Company's  Board of Directors
and will depend upon, among other things, future earnings,  operations,  capital
requirements,  the general financial condition of the Company,  general business
conditions and tax considerations.

         Because the Company is a Canadian  corporation,  any profits  earned by
its U.S. subsidiary will not be distributable directly to shareholders. Instead,
for those profits to be distributed to shareholders, the subsidiary must declare
a dividend to the  Company,  and the Company in turn must  declare a dividend to
its  shareholders.  This will subject each dividend to a withholding tax. First,
the  dividend  from  the  subsidiary  to the  Company  will be  subject  to a 5%
withholding  tax  imposed  by the  United  States  on the  gross  amount  of the
dividend. Pursuant to the Canada-United States Income Tax Convention (1980) (the



                                     - 39 -
<PAGE>



"Treaty"), the subsequent dividend paid by the Company to a shareholder resident
in the United States will be subject to Canadian  withholding tax at the rate of
15% on the gross amount of the  dividend.  The rate of  withholding  tax will be
reduced to 5% in respect of  dividends  paid to a company  that is a resident of
the United States for purposes of the Treaty and owns at least 10% of the voting
stock of the Company. Each shareholder should consult his or her own tax advisor
as to tax  consequences  associated  with  dividends  received on the  Company's
Common Stock.

         If more than a certain  percentage of the Company's assets or income is
passive,  the Company  will be  classified  for United  States tax purposes as a
passive foreign  investment company or PFIC, and a United States taxpayer may be
subject to an additional  federal income tax on receiving certain dividends from
the Company or selling Common Stock.  Certain interest,  dividend,  capital gain
and royalty income may be considered passive income for PFIC purposes, which, in
the absence of  sufficient  other  income,  would  result in the  Company  being
classified as a PFIC.

         If the Company becomes a PFIC, a United States taxpayer will be subject
to special rules with respect to transactions  involving the Common Stock. Under
these rules,  all gains realized on disposition of the United States  taxpayer's
Common  Stock will be  allocated  pro rata over the number of years in which the
shareholder  held the Common  Stock.  The gain that is allocated to a prior year
(subsequent  to  December  31,  1986) in which the  Company  was a PFIC,  or any
subsequent year other than the year of disposition, will be taxed at the highest
marginal  rate for that year and such tax will be subject to an interest  charge
as if it had originally been due in that year. In addition, gain realized on the
disposition  of the United States  taxpayer's  Common Stock that is allocated to
the  current  year or to a prior  year  before  the  Company  was a PFIC will be
treated as ordinary income.  Similar rules will apply to  distributions  made by
the Company. The above rules will not apply if the United States taxpayer elects
to treat the Company as a  qualified  electing  fund and the  Company  agrees to
provide certain  information to the United States Internal Revenue  Service.  In
such case,  the United  States  taxpayer  will include in his or her income each
year his or her pro rata share of the ordinary  income and capital  gains of the
Company. The Company has not been classified as a PFIC to date, and during 1997,
the Company  intends to, and believes  that it can,  generate  sufficient  other
income to avoid being classified as a PFIC. See Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operation.



                                     - 40 -
<PAGE>



         On May 7, 1996, the Company  completed an offering of 6.5%  convertible
subordinated  notes (the "Notes") in the principal  amount of $86.25 million due
May 1, 2003 for cash.  The net proceeds from this  offering  were  approximately
$82.7 million.  Goldman Sachs and UBS Securities were the initial  purchasers of
the Notes, and the aggregate fee to the initial purchasers was $3.0 million. The
Notes  were sold in the  United  States to  qualified  institutional  buyers (as
defined in Rule 144A, "Qualified Institutional Buyers") amended (the "Securities
Act"), and to a limited number of institutional accredited investors in a manner
exempt from  registration  in reliance on Regulation D of the Securities Act and
outside the United States in reliance on Regulation S under the Securities  Act.
The Notes are  convertible  into shares of the Company's  Common  Stock,  at the
initial  conversion  price  of  approximately  $24.86  per  share.  See Item 7 -
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operation.

         On October 11, 1996 the Company  sold to Abbott in a private  sale,  in
reliance on Section 4(2) of the Securities Act,  350,000 shares of the Company's
Common  Stock  for $6.3  million  in  cash.  See  Item 1 -  Business,  "Business
Relationships  -  Abbott  Laboratories  Agreement"  and  Item  7 -  Management's
Discussion and Analysis of Financial Condition and Results of Operation.

 
ITEM 6.    SELECTED FINANCIAL DATA
           -----------------------

         Selected  consolidated  financial  data for the  Company  are set forth
below. The selected financial data as of December 31, 1996 and 1995, and for the
years ended  December 31, 1996,  1995 and 1994 have been derived  from,  and are
qualified by reference to, the audited financial  statements  included elsewhere
in this Annual Report. The selected financial data as of and for the years ended
December  31,  1993 and 1992  have  been  derived  from  the  audited  financial
statements  of the Company not  included in this  Annual  Report.  The  selected
consolidated  financial  data should be read in  conjunction  with the financial
statements  of the  Company  and other  financial  information  included in this
Annual Report.


                                     - 41 -

<PAGE>




<TABLE>
<CAPTION>

                                   SELECTED CONSOLIDATED FINANCIAL DATA
                                  (In thousands, except per share data)

                                                                          North American Vaccine, Inc.
                                                                         Fiscal Year Ended December 31,
                                                        ---------------------------------------------------
                                                           1996       1995      1994       1993       1992
                                                           ----       ----      ----       ----       ----
<S>                                                    <C>         <C>        <C>       <C>         <C>
Statement of Operations Data:
Revenues
  Marketing, research and development agreements        $ 9,656   $  3,000   $     -     $     -     $      -
  Contract revenue                                           -          -          -         141        1,527
  Product sales                                             892         -          -           -           -
                                                        -------   --------   --------    --------    --------
     Total revenue                                       10,548      3,000         -          141       1,527
Operating Expenses:
  Production                                             14,764      6,317      6,188       3,032       3,669
  Research and development                               11,594     10,206      5,763       5,824       3,770
  General and administrative                              6,753      6,696      4,543       4,070       5,958
                                                        -------   --------   --------    --------    --------
     Total operating expenses                            33,111     23,219     16,494      12,926      13,397
                                                        -------   --------   --------    --------    --------

Operating loss                                           (22,563)  (20,219)   (16,494)    (12,785)    (11,870)

Gain on sale of investments in affiliates                  4,228    14,429     11,929          -            -
Interest and dividend income                               2,934       804        638         657       1,151
Interest expense                                          (4,088)       -          -           -           (5)
                                                        --------  --------   --------    ---------   --------- 
                                                                                                              
Net loss                                                $(19,489) $ (4,986)  $ (3,927)   $(12,128)   $(10,724)
                                                        ========  ========   ========    ========   =========  
                                                                                                              
Net loss per share                                      $  (0.63) $  (0.17)  $  (0.14)   $  (0.44)  $   (0.40)
                                                        ========  ========   ========    ========   =========

Weighted-average number
  of common shares outstanding                            30,764    29,745     28,785      27,622      26,970
                                                                                               
Balance Sheet Data:

Cash and cash equivalents                               $ 70,881  $ 10,443   $ 20,922    $ 17,166   $  28,207
Investments in affiliates (1)                              1,281     9,065     17,724      38,039       4,874
Total assets                                             122,962    41,249     49,580      63,762      42,575
Preferred stock                                            6,538     6,538      6,538       6,538       6,538
Common stock                                              71,357    58,474     56,922      51,958      51,312
Unrealized investment holding gains (1)                      653     7,466     14,762      33,165          -
Accumulated deficit                                      (58,769)  (39,280)   (34,294)    (30,367)    (18,239)
Dividends                                                     -         -          -           -           -

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

(1)   In December of 1993, the Company adopted Statement of Financial  Accounting Standard
      (SFAS)  115. In  accordance  with SFAS 115,  investments  in equity  securities  are
      reported on the  Company's  balance  sheet at their fair market  value  resulting in
      unrealized investment holding gains as a separate component of shareholders' equity.
      The original cost of these  investments at December 31, 1996,  1995,  1994, and 1993
      was $628, $1,599, $2,962, and $4,874 respectively. The market value of the Company's
      investment in affiliates at February 28, 1997 was approximately $1.5 million.


</TABLE>


                                     - 42 -
<PAGE>



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

         THE FOLLOWING  PARAGRAPHS  CONTAIN CERTAIN FORWARD LOOKING  STATEMENTS,
WHICH ARE WITHIN THE MEANING OF AND MADE PURSUANT TO THE SAFE HARBOR  PROVISIONS
OF THE PRIVATE  SECURITIES  LITIGATION REFORM ACT OF 1995. THESE FORWARD LOOKING
STATEMENTS  INCLUDE,  WITHOUT  LIMITATION,  THOSE  REGARDING  THE  PROSPECTS FOR
REGULATORY APPROVAL AND THE NEED FOR FURTHER CLINICAL EVALUATION,  THE PROSPECTS
FOR MARKETING AND  DISTRIBUTION OF VACCINE  PRODUCTS,  ASSESSMENTS OF REGULATORY
AND ADVISORY COMMITTEE REVIEWS OF THE COMPANY'S AND COMPETITORS'  PRODUCTS,  THE
PROSPECTS  FOR  AND  FACTORS   AFFECTING  FUTURE  REVENUES  AND   PROFITABILITY,
LIKELIHOOD  OF  ADDITIONAL  FUNDING  UNDER  LICENSE,  COLLABORATION,  MARKETING,
DISTRIBUTION  AND/OR  DEVELOPMENT  AGREEMENTS,   CASH  REQUIREMENTS  FOR  FUTURE
OPERATIONS,  AND PROJECTED  CAPITAL  EXPENDITURES.  READERS ARE  CAUTIONED  THAT
FORWARD LOOKING  STATEMENTS INVOLVE RISKS,  UNCERTAINTIES,  AND FACTORS THAT MAY
AFFECT THE COMPANY'S BUSINESS AND PROSPECTS,  INCLUDING WITHOUT LIMITATION THOSE
DESCRIBED  BELOW AS WELL AS THE  RISKS  ASSOCIATED  WITH:  OBTAINING  REGULATORY
APPROVAL OF PRODUCTS  BY THE FDA;  THE  PRODUCTION  OF  VACCINES;  THE NATURE OF
COMPETITION; EFFECTIVE MARKETING; AND UNCERTAINTIES RELATING TO CLINICAL TRIALS,
ALL AS DISCUSSED IN THE COMPANY'S FILINGS WITH THE U.S.  SECURITIES AND EXCHANGE
COMMISSION.

Background
----------

         The  Company  is  engaged  in the  research,  development,  production,
marketing  and sale of vaccines for the  prevention  of  infectious  diseases in
children and adults.

         In February  1996, the Swedish  Ministry of Health  granted  regulatory
approval to market the Company's  acellular  pertussis  vaccine  formulated as a
combined DTaP vaccine for the prevention of diphtheria,  tetanus,  and pertussis
(whooping cough). This marketing authorization was the first regulatory approval
for any of the Company's products.  In September 1996, the Danish National Board
of Health granted regulatory  approval to market a combined DTaP-IPV vaccine for
all  primary  and booster  doses for  infants  and  children  in  Denmark.  This
combination  vaccine,   which  combines  the  DTaP  vaccine  with  an  enhanced,
inactivated  polio vaccine ("IPV")  developed  jointly by Statens  Seruminstitut
("SSI") and the Company. Under a supply agreement,  the Company manufactures the
acellular component of the vaccine, and SSI manufactures the diphtheria, tetanus
and IPV  components and markets and  distributes  the DTaP vaccine in Sweden and
the DTaP-IPV in Denmark.  In addition,  upon receipt of any required  regulatory
approvals,  SSI will market and  distribute  such products in the  Scandinavian,
Baltic  and  other  countries  comprising  its  territory  ("SSI's  Territory").
Accordingly,  the Company has been selling its acellular pertussis toxoid to SSI
for formulation into DTaP and DTaP-IPV for sale in SSI Territory.


                                     - 43 -
<PAGE>



         In 1995 and 1996, the Company recognized  development revenues pursuant
to  agreements  with  Pasteur  Merieux-Connaught,  under  which the  Company and
Pasteur  Merieux-Connaught  will jointly  develop the Company's  meningococcus B
vaccine.   Additional  funding  may  be  provided  to  the  Company  by  Pasteur
Merieux-Connaught  under  the  terms of the  license  and  clinical  development
agreements. See "Liquidity and Capital Resources," below.

         In the fourth  quarter of 1996,  the  Company  and Abbott  Laboratories
("Abbott")    signed   an   agreement    under   which   Abbott   would   market
Certiva[TRADEMARK],  the Company's  DTaP vaccine,  when approved by the FDA. The
marketing  agreement  also will allow Abbott to market the  Company's  DTaP-HIB,
DTaP-IPV and DTaP-IPV-HIB  combination  vaccines,  which are under  development.
Abbott will market  Certiva[TRADEMARK]  and the combination  vaccines to private
physicians  and managed care markets in the United  States for  immunization  of
infants  and  children.  The  Company  will  market  Certiva[TRADEMARK]  and the
combination vaccines to government  purchasers,  including state governments and
the CDC.

         On execution of the  agreement  with Abbott,  the Company  received $13
million of which $6.3  million  represented  payment for  350,000  shares of the
Company's  Common  Stock,  and the balance  represented  a  marketing  fee and a
clinical  development  payment.  The Company and Abbott will  collaborate in the
clinical  development  of the  combination  vaccines and Abbott will provide the
Company with clinical  development  funding.  The Company will receive  payments
upon  achievement  of prescribed  milestones.  The agreement  provides for total
payments  of up to $42  million by Abbott.  The first  milestone  relates to FDA
approval of Certiva[TRADEMARK]  provided certain other conditions are satisfied.
In  addition,  the Company  will  receive  revenues  from Abbott as it purchases
Certiva[TRADEMARK]  and the  combination  vaccine  products  for  resale  to the
private pediatric market.

         In September 1995, the Company filed a product license application with
the FDA for  approval  to market  Certiva[TRADEMARK]  and FDA  approval  for the
vaccine is pending.  During the fourth  quarter of 1996,  the  clinical  data on
Certiva[TRADEMARK]  was  presented  to and  reviewed  by the FDA's  Vaccine  and
Related Biological  Products Advisory Committee (the "FDA Advisory  Committee").
The FDA Advisory  Committee,  after the presentation of the data and discussion,
concluded that Certiva[TRADEMARK] is safe and effective for administration at 2,
4, 6 and 15-18 months of age. In addition,  the FDA Advisory Committee concluded
that  the data  supported  concurrent  administration  with  polio,  HAEMOPHILUS
INFLUENZAE type b, hepatitis B and measles-mumps-rubella vaccines, which are all
recommended  for  immunization  during  the  first  two  years of life.  The FDA



                                     - 44 -
<PAGE>



Advisory  Committee  raised  no  concerns  regarding  the  adequacy  of the data
regarding the use of  Certiva[TRADEMARK]  for the booster dose given to children
at 4-6  years of age  following  primary  immunization  using the  "whole  cell"
pertussis  vaccine.  Additional  data is required to support use at 4-6 years of
age following four  consecutive  doses of  Certiva[TRADEMARK].  The FDA Advisory
Committee commented on the adequacy of the data regarding the use of the vaccine
for the  booster  dose given to toddlers at 15-18  months of age  following  the
primary  immunization using the "whole cell" pertussis  vaccine.  In response to
those comments,  the Company intends to supplement the data presented at the FDA
Advisory  Committee meeting and additional data for this matter may be addressed
in  post-marketing  studies.  The Company does not believe  that any  additional
clinical  studies  will be  required  in  connection  with its  product  license
application, other than the standard post-licensure testing and surveillance for
continued monitoring of the vaccine. This is a forward looking statement and the
necessity   for   any   additional    clinical    studies   for   licensure   of
Certiva[TRADEMARK]  depends in large  measure upon the FDA's  requirements.  The
conclusions  of the FDA  Advisory  Committee  are not  binding  on the  FDA.  In
addition,  three  competitors  announced in 1996 and 1997 that their  respective
DTaP vaccines were approved by the FDA for use in infants and children.

         In May 1996,  the Company  completed  an  offering of 6.5%  convertible
subordinated  notes in the principal  amount of $86.25  million due May 1, 2003.
The net proceeds from this offering were approximately  $82.7 million.  Interest
on the notes is payable  semiannually  on May 1 and  November  1 each year.  The
notes are convertible  into shares of the Company's Common Stock, at the initial
conversion  price  of  approximately  $24.86  per  share.  The  notes  are  also
subordinated  to present and future senior  indebtedness of the Company and will
not  restrict  the  incurrence  of future  senior or other  indebtedness  by the
Company. See "Liquidity and Capital Resources," below.

         Prior to 1995, the Company's  limited  operating  revenues were derived
primarily from contracts  with NICHD to supply an  investigational  DTaP vaccine
for clinical  trials.  Performance  under these contracts was completed in 1993.
Provisional  payments  to the  Company  under  cost-reimbursable  contracts  are
subject to adjustment upon completion of audits of reimbursable  costs by NICHD.
In the opinion of management,  adjustments, if any, resulting from the audits of
the  contracts  are  not  expected  to have a  material  adverse  impact  on the
Company's  future financial  position or future results of operations,  although
there are no assurances in this regard.  This is a forward looking statement and
the factors affecting its outcome are in large measure outside of the control of
the Company.

         Research and development expenses were $11.6 million, $10.2 million and
$5.8 million in 1996, 1995 and 1994, respectively. The Company had 206, 167 and
118 full-time employees as of December 31, 1996, 1995 and 1994, respectively.

Years Ended December 31, 1996 And 1995
--------------------------------------

         In 1996, the Company recognized  $892,000 of revenue from product sales
of its acellular  pertussis vaccine.  All such product sales were for export. In
addition,  the Company recognized $9.7 million of revenue from its collaboration
agreements principally with Pasteur Merieux-Connaught and Abbott.


                                     - 45 -
<PAGE>



         Production expenses were $14.8 million in 1996 compared to $6.3 million
in  1995.  The  increase  in  these  expenses  in  1996 is due to  increases  in
depreciation,  materials, and  labor,  as the  Company  produces  the  acellular
pertussis vaccine for European distribution and prepares for regulatory approval
of  Certiva[TRADEMARK]  in the  United  States.  The  increase  in labor cost is
attributable  primarily  to an increase  in number of  employees.  In  addition,
facility  costs  increased  in 1996 over 1995 due to the  Company's  placing  in
service its expanded production facility and its adjacent support facility.

         Research and  development  expenses  increased to $11.6 million in 1996
from $10.2  million  in 1995.  The  increase  in these  expenses  in 1996 is due
primarily  to  depreciation  expenses  related  to  the  acquisition  of  a  new
manufacturing  facility, and to a lesser extent, an increase in clinical testing
and related  expenses as the number of clinical trials  sponsored by the Company
increased  and as the Company  expanded  its  clinical  and  regulatory  affairs
operations.  See  "Liquidity and Capital  Resources"  below for a description of
acquisition of the new facility.

         General  and  administrative  expenses  were  $6.8  million  in 1996 as
compared to $6.7 million in 1995.  The  increase is  primarily  due to a greater
number of  employees  and related use of  supplies,  offset in part by decreased
outside consulting expenses.

         In 1996,  the Company sold 193,084  shares of its investment the common
stock of IVAX Corporation  ("IVAX"),  which generated  proceeds of approximately
$5.2 million and a realized gain of $4.2 million.  In 1995, the Company sold the
remaining  695,936  shares of its investment in BioChem common stock and 156,916
shares of its  investment in IVAX common stock,  which  generated  approximately
$11.5 and $4.3 million of cash  respectively.  The realized  gain on these sales
were $10.9 and $3.5 million respectively.

         Interest  and  dividend  income  increased to $2.9 million in 1996 from
$804,000 in 1995.  This  increase is due  primarily to higher cash balances as a
result of the placement of $86.25 million convertible  subordinated notes in May
1996. See "Liquidity and Capital Resources" below.

         Interest  expense in 1996 was $4.1  million due to the  issuance of the
convertible  subordinated  notes, and the capital lease  obligations for certain
equipment in the newly acquired manufacturing facility.

         The  factors  cited above  resulted  in a net loss of $19.5  million or
$0.63 per share of the Company's Common Stock in 1996 as compared to net loss of
$5.0 million or $0.17 per share of the Company's  Common Stock in 1995.  Without
the gains on the sales of investment securities in 1996 and 1995, the net losses
per share  for 1996 and 1995  would  have been  $0.77 and $0.65 per share of the
Company's Common Stock, respectively.  The weighted-average number of common and
common equivalent shares  outstanding was 30.8 million for 1996 compared to 29.7



                                     - 46 -
<PAGE>



million  for  1995.  The  increase  in the  number  of  weighted-average  shares
outstanding  for 1996 as  compared  to 1995 was  attributable  primarily  to the
exercises  of stock  options  and the sale of  350,000  shares of the  Company's
Common Stock to Abbott.

Years Ended December 31, 1995 And 1994
--------------------------------------

         In 1995,  the Company  recognized  $3 million of revenue  from  Pasteur
Merieux-Connaught  in connection with the execution of the previously  announced
memorandum of  understanding  and from  development  payments under the clinical
development agreement for the Company's meningococcus B vaccine.

         Production  expenses were $6.3 million in 1995 compared to $6.2 million
in 1994. The 1994 results included a one-time  write-off of  approximately  $1.8
million  related  to  modifications  to  the  Company's  production   facilities
build-out  plan. The increase in production  expenses in 1995,  exclusive of the
write-off in 1994, is due to increases in labor, materials and supplies expenses
in 1995 as the Company  prepared for regulatory  approval of its DTaP vaccine in
the United States.  The increase in labor cost is primarily  attributable  to an
increase in number of employees.  In addition,  depreciation expense in 1995 was
greater  than in 1994 due to the  Company's  placing  in  service  its  modified
production facility.

         Research and  development  expenses  increased to $10.2 million in 1995
from $5.8  million in 1994.  The  increase was  primarily  clinical  testing and
related  expenses  and  to a  lesser  extent  increased  labor  and  patent  and
regulatory  filing  expenses.  These  increases  are the result of expanding the
clinical and regulatory affairs operations of the Company.

         General  and  administrative  expenses  were  $6.7  million  in 1995 as
compared to $4.5  million in 1994.  The  increase  was  primarily  due to higher
consulting and professional fees as the Company prepared for regulatory approval
to market  its DTaP  vaccine  in the  United  States  and,  to a lesser  extent,
increased labor, insurance and travel costs.

         In  1995,  the  Company  sold  the  remaining  695,936  shares  of  its
investment in BioChem  common stock and 156,916 shares of its investment in IVAX
common  stock,  which  generated  approximately  $11.5 and $4.3 million of cash,
respectively.  The  realized  gains on the sales  were  $10.9 and $3.5  million,
respectively.

         Interest  and  dividend  income  increased  to  $804,000  in 1995  from
$638,000 in 1994.  This  increase is due primarily to higher  interest  rates in
1995.


                                     - 47 -
<PAGE>



         The factors cited above  resulted in a net loss of $5.0 million in 1995
as compared to a net loss of $3.9 million in 1994. The net loss per share of the
Company's  Common  Stock was  $0.17  and $0.14 for 1995 and 1994,  respectively.
Without the $14.4  million gain on the sales of investment  securities,  the net
loss per share for 1995 would have been $0.65.  The loss per share in 1994 would
have been $0.49 without the write off of $1.8 million related to modification to
the Company's production facilities build-out plan and the gain of $11.9 million
on the sale of investment securities.  The weighted-average  number of shares of
the  Company's  Common Stock  outstanding  was 29.7 million for 1995 compared to
28.8 million for 1994. The increase in  weighted-average  shares  outstanding is
attributable primarily to exercises of stock options in 1995.

Liquidity And Capital Resources
-------------------------------

         In May 1996,  the Company  completed  an  offering of 6.5%  convertible
subordinated  notes in the principal  amount of $86.25  million due May 1, 2003.
The net proceeds from this offering were approximately  $82.7 million.  Interest
on the notes is payable  semiannually  on May 1 and  November  1 each year.  The
notes are convertible  into shares of the Company's Common Stock, at the initial
conversion  price  of  approximately  $24.86  per  share.  The  notes  also  are
subordinated  to present and future senior  indebtedness of the Company and will
not  restrict  the  incurrence  of future  senior or other  indebtedness  by the
Company.  The notes are  redeemable,  in whole or in part,  at the option of the
Company on or after May 1, 1999 at certain  pre-established  redemption  prices,
plus  accrued  interest.  Upon a change in  control,  the Company is required to
offer to purchase all or part of the notes then  outstanding at a purchase price
equal to 100% of the principal  amount  thereof,  plus interest.  The repurchase
price is  payable  in cash or, at the  option of the  Company,  in shares of the
Company's  Common  Stock.  The  Company  has  filed  a  registration   statement
registering resales of the notes and the underlying shares of Common Stock.

         The Company spent $9.8 million for  operations in the fourth quarter of
1996 and $30.3  million  for the year  ended  1996.  The  Company  financed  its
operations  and  capital  expenditures  for 1996 from cash,  sale of  investment
securities,  proceeds  from the  offering of its  convertible  notes,  a capital
lease,  and amounts from  marketing,  research and development  agreements,  and
product sales.  At December 31, 1996, the Company had cash and cash  equivalents
of approximately $70.9 million and investment  securities in an affiliate with a
market value of $1.3 million.  The  investment  securities  consisted of 125,000
shares  of IVAX  common  stock.  The  fair  market  value  of  these  investment
securities  as of February  28, 1997 was $1.5  million.  These  investments  are
volatile and therefore subject to significant fluctuations in value.


                                     - 48 -
<PAGE>



         The Company  anticipates  that cash  requirements for operations in the
first quarter in 1997 will be between approximately $7 million and $8 million as
the  Company:   expands   production  for  commercial  sale  in  Europe  and  in
anticipation  of  regulatory  approval  in the  United  States;  plans  for  and
commences  additional clinical trials for its combination vaccines and conjugate
vaccines;  and operates its newly acquired  development and production facility.
Thereafter,  quarterly cash  requirements  for  operations  will depend upon the
level of vaccine production, costs in preparing for and the timing of the market
introduction of Certiva[TRADEMARK],  the level of expenditures for the Company's
ongoing research and development  program,  and the timing of interest  payments
due on the convertible  subordinated  notes described  above. The foregoing is a
forward  looking  statement.  There are no assurances that the Company will meet
the  projections  for  cash  requirements  for  operations,   that  any  further
regulatory  approvals  will  be  received  as  projected,  that  the  milestones
described above will be achieved, or that, if such milestones are obtained, they
will  contribute  materially  to the  quarterly  cash  requirements.  Failure or
significant  delays in receiving  additional  regulatory  approvals  and meeting
required  milestones  would have a significant  adverse  effect on the Company's
future financial position.

         Total  capital  expenditures  for 1996 were  $28.7  million,  primarily
attributable to the acquisition of a 35,000 square foot  manufacturing  facility
in Beltsville,  Maryland.  That  acquisition  included the purchase and lease of
equipment and leasehold improvements and the assumption of real estate leases.

         The total acquisition cost for the equipment and leasehold improvements
was approximately $24.9 million, which included a cash payment of $17.2 million.
The balance of $7.7  million is  represented  by an equipment  lease  obligation
which  expires in 2000.  The lease will be accounted  for as a capital lease for
financial reporting purposes,  with monthly payments of approximately  $179,000.
In  addition,  the Company has assumed  the real estate  leases  underlying  the
facility,  which are scheduled to expire in February  2001,  but may be extended
through 2011.  Under the terms of the equipment  lease, the Company has a buyout
option at the end of the third year for a predetermined amount, and an option at
the end of the  fourth  year at the  greater  of the  fair  market  value of the
equipment or a predetermined  amount.  Under the equipment lease agreement there
are financial  covenants that obligate the Company to maintain  certain  minimum
cash and  investment  balances,  a minimum  tangible net worth and certain other
financial ratios. The Company would be required to post an irrevocable letter of
credit  for  predetermined  amounts  at  such  time  as  the  Company  is not in
compliance with any of these financial covenants.


                                     - 49 -
<PAGE>



         Total projected capital  expenditures for the first quarter of 1997 are
expected to be approximately  $1.5 million.  Thereafter,  capital  expenditures,
exclusive  of any future real  estate  acquisition  or  build-out  plans,  could
fluctuate  based upon a number of factors  including:  the Company's  ability to
meet  demand  for its  licensed  products  from  its  existing  facilities;  the
Company's ability to produce sufficient quantities of investigational product in
its existing  facilities;  and unanticipated costs to replace or repair existing
equipment  and  systems  in  order  to keep the  manufacturing  and  development
facilities  operational  or in  compliance  with  regulatory  requirements.  The
Company continues to evaluate its need to build-out, lease or acquire additional
research,  development,  production  and other  facilities  to  accommodate  the
Company's  expanding  vaccine  development  program.  The Company has no present
agreements,   commitments  or   understandings  in  respect  of  any  additional
facilities  and the total  capital  expenditures  for such a  project  will vary
substantially depending upon a number of factors including,  among other things,
the size of such a facility,  the  equipment  and systems  requirements  for the
facility, location, zoning and other government restrictions.

         Cash requirements for operations and capital expenditures for 1997 will
be financed through a combination of: cash and cash  equivalents;  revenues from
product  sales and fees and payments  from  license,  collaboration,  marketing,
distribution and/or development  agreements;  the exercise of stock options; the
sale of debt and/or equity securities; mortgage financing; and equipment leases.
The  Company  believes  that it has  adequate  cash  resources  to meet its 1997
funding  requirements  although  there are no assurances  in this regard.  While
failure or significant delays in receiving  additional  regulatory approvals and
meeting  required  milestones  would have a  significant  adverse  effect on the
Company's future operating  results and future financial  position,  the Company
believes  that in such event it could  manage and reduce cash  requirements  for
operations,  although  there are no  assurances in this regard.  This  paragraph
contains forward looking statements and the factors affecting the ability of the
Company to meets its funding requirements and manage its cash resources include,
among other things, the magnitude and timing of product sales; the magnitude and
timing of any fees and payments  from  license,  marketing,  and/or  development
agreements; and the magnitude of fixed costs.


                                     - 50 -
<PAGE>



Outlook
-------

         The  Company  recognized  an  operating  loss of $199,000 in the fourth
quarter of 1996 based on revenues of $9.8 million  principally from up-front and
milestone  payments  from  marketing  and  development  agreements.  The Company
anticipates   that  the  1997   quarterly   operating   results  may   fluctuate
significantly based upon a number of factors including,  among other things: the
magnitude  of  product  sales for  distribution  in  Europe;  the  timing of FDA
approval  for,  and the  commercial  introduction  of,  Certiva[TRADEMARK];  the
ability of the  Company  and its  distributors  to  effectively  market and sell
products in their  respective  territories;  the sales  prices  established  for
products by the Company and its distributors;  compensation  expense  associated
with stock-based compensation plans; the efficiency of production; the timing of
the payments under license,  collaboration,  marketing,  distribution and/or
development  agreements  with  third  parties;  the  ability  of the  Company to
manufacture and deliver products in accordance with customer orders;  the timing
and costs  associated  with clinical  trials and  post-licensure  testing of the
Company's products;  the timing and amount of funding that may be received under
any  additional   license,   collaboration,   marketing,   distribution   and/or
development  agreements  with  third  parties;  and the  timing of and amount of
proceeds from the sale of additional  investment  securities.  This is a forward
looking  statement and the factors affecting its outcome are described herein as
well as in the first paragraph of this  Management's  Discussion and Analysis of
Financial Condition and Results of Operations.

         There  are no  assurances  that the  Company  will  meet the  operating
results projected,  that any further regulatory approvals will be received, that
any milestones will be achieved,  or if achieved,  that milestone  payments will
contribute materially to the quarterly operating results of the Company.

         PRODUCT SALES.  During 1996, the government of Sweden granted marketing
authorization  for the Company's  acellular  pertussis  vaccine  formulated as a
combined  DTaP  vaccine  and  the  government  of  Denmark   granted   marketing
authorization  for the Company's  acellular  pertussis  vaccine  formulated as a
combined  DTaP-IPV  vaccine.  SSI is responsible for marketing and  distributing
these  products in SSI's  Territory.  In addition,  during the fourth quarter of
1996,  the  Company  executed a supply and  distribution  agreement  with Chiron
Behring  ("Behring")  covering  the  Company's  DTaP and  DTaP-IPV  vaccines for
Germany and Austria ("Behring's Territory").


                                     - 51 -
<PAGE>



         The  Company  therefore  anticipates  revenues  during  1997  from  the
continued sale of its acellular  pertussis  component to SSI for its sale of the
DTaP and the  DTaP-IPV  vaccines  in SSI's  Territory.  Any  additional  product
approvals  granted to SSI could lead to increased  revenues from the sale of the
Company's  acellular  pertussis vaccine.  Additional revenues may be forthcoming
from sale of the DTaP and/or DTaP-IPV  vaccines to Behring in anticipation of or
following  regulatory  approval for one or both of these products in the Behring
Territory.  There are no  assurances  that  further  product  approvals  will be
obtained in these  territories  during 1997 or at all, or that once obtained SSI
or Behring will be effective in the marketing and  distribution of the products.
The Company does not control the  marketing and  distribution  efforts of SSI or
Behring in their respective  territories and, therefore,  the Company's revenues
for product sales in those  territories are dependent upon the  effectiveness of
these parties' sales, marketing and distribution efforts.

         As  described  above,  during  1996,  the Company and Abbott  signed an
agreement  under  which  Abbott  would  market  Certiva[TRADEMARK]  and  certain
combination  vaccines  to private  physicians  and managed  care  markets in the
United States for immunization of infants and children.  The Company will market
these products to government  purchasers,  including  state  governments and the
Centers for Disease Control and Prevention ("CDC").  The Company filed a product
license  application for  Certiva[TRADEMARK]  with the FDA in September 1995 and
FDA approval is pending.

         The Company therefore anticipates revenues during 1997 from the sale of
Certiva[TRADEMARK] in the United States to state governments and the CDC, and to
Abbott for resale to private  physicians  and the managed  care  market.  If the
product is launched successfully in the United States by the Company and Abbott,
revenues from operations and the prospects for profitability would significantly
increase.  There can be no assurance that the FDA's approval will be obtained or
that,  once  obtained,  the Company and/or Abbott will be effective in marketing
and distributing the product.  The principal  factors  affecting the approval of
Certiva[TRADEMARK]  and its timing are  believed  to be the  sufficiency  of the
clinical trials' design,  the quality of the clinical data submitted to the FDA,
and the adequacy of the manufacturing facilities and operations for the product,
among  other  things.  The factors  affecting  successful  commercial  launch of
Certiva[TRADEMARK]  in the United States  include,  among  others:  successfully
participating   in  established   purchasing   programs  of  Federal  and  state
governments;  establishing  an identity and  reputation  for the Company and its
products;  creating an awareness among  pediatricians of the safety and efficacy
of  the  vaccine;   distinguishing  the  Company's  product  from  that  of  its
competitors;  establishing the Company as an effective and reliable  supplier of



                                     - 52 -
<PAGE>



vaccines;  and establishing  effective  distribution channels. In 1996 and 1997,
three competitors announced that their respective DTaP vaccines were approved by
the FDA for use in infants and children. One of those competitors also announced
that the FDA licensed a vaccine that combines by  reconstitution  that company's
HIB vaccine with its DTaP vaccine for  administration at 15-18 months of age and
that it continues to seek FDA approval for  administration  at two, four and six
months of age. In  addition,  several  competitors'  DTaP  vaccines  and certain
combination  vaccines have been licensed for sale outside of the United  States.
Accordingly,  there can be no  assurance  that the Company and its  distributors
will attain sufficient  market share for the Company's  products at satisfactory
sales price levels.

         Approval of  Certiva[TRADEMARK]  for commercial  introduction  requires
that the FDA issue a license for the  product  and a license for the  production
facilities. Production of vaccines is a highly complex, biological process which
involves many steps commencing from seed culture through final  production.  The
production  process  could  fail  at any  point  resulting  in the  failure  and
inability  to meet  production  requirements.  From  time to time,  the  Company
experiences  disruptions  and production  failures,  and there are no assurances
that the steps taken by the Company to address such  failures  will be effective
or that such  failures  will not continue in the future or affect the  Company's
ability to obtain  regulatory  approval  for its  products or the timing of such
approval or affect the Company's  ability to produce vaccines.  Moreover,  there
are no assurances  that the Company will be able to  successfully  establish and
maintain  consistent  manufacture  and continuous  commercial  production of its
vaccines  in  sufficient  quantity  and  quality  or that it will be  capable of
producing a  competitively  priced  product for  commercial  sale. The foregoing
paragraphs  contain  only a partial  description  of the factors  affecting  the
Company's  business  prospects  and risk factors  affecting  future  operations.
Reference  is made to the  Company's  filings with the  Securities  and Exchange
Commission  for a more  complete  description  of the  risks  and  uncertainties
affecting the Company and its business.

         RESEARCH & DEVELOPMENT, LICENSING AND MARKETING AGREEMENTS. In December
1995, the Company signed a clinical development  agreement and license agreement
with Pasteur Merieux-Connaught under which the parties agreed to jointly develop
its new conjugate vaccine against  meningococcus B infection for both adults and
pediatric  indications.  In 1996 and 1995, the Company  recognized  revenue from
Pasteur  Merieux-Connaught  under this  collaboration.  Future  fees and funding
would  be  made  upon  achievement  of  development,   clinical  and  regulatory
milestones. Total remaining fees and payments to the Company upon achievement of
all  clinical  and  regulatory  milestones  amount  to $45  million.  The  first
milestone is the satisfactory  completion of a pre-clinical  study. In addition,
the  license  agreement  must be ratified by the  National  Research  Council of
Canada ("NRC").  Successful  completion of the milestone and ratification of the




                                     - 53 -
<PAGE>



license by the NRC would trigger a payment from Pasteur  Merieux-Connaught.  The
time it may take to achieve future milestones cannot be predicted accurately and
there are no assurances  that any milestone will be met during 1997 or at all or
that  the  NRC  will  ratify  the  license  agreement.   In  addition,   Pasteur
Merieux-Connaught  may terminate these  agreements in its sole discretion at any
time.

         Under the marketing and distribution agreement with Abbott, the Company
will receive during 1997 clinical development payments aggregating $7 million on
dates certain and milestone payments upon achievement of prescribed clinical and
regulatory   events.   The  first   milestone   relates  to  FDA   approval   of
Certiva[TRADEMARK]  provided  certain  other  conditions  are  satisfied.  Total
remaining  payments by Abbott to the Company under the agreements,  inclusive of
payments expected during 1997, amount to $29 million.  In addition,  the Company
will receive  revenues  from Abbott as it purchases  Certiva[TRADEMARK]  and the
combination  vaccine products for resale to the private pediatric market.  There
are no  assurances  that the  milestones  will be met,  that the  quantities  of
Abbott's purchases of Certiva[TRADEMARK] will be significant or as to the timing
of such purchases,  or that Abbott will not exercise its right to terminate this
arrangement at any time with advance notice.

         During  1997,  the Company  anticipates  that  license  fees,  clinical
development  funding and milestone  payments under its existing  agreements will
range from $7 million to  approximately  $19 million.  This is a forward looking
statement  and the  factors  that  affect  the  timing  of the  license  fee and
milestone  payments are in large measure  outside of the control of the Company.
The  revenue  recognized  by the  Company  from  clinical  development  payments
received from Abbott will be equal to the Company's expenditures in the clinical
development program for  Certiva[TRADEMARK] and the combination vaccines up to a
specified  amount.  Accordingly,  such  revenues  are likely to  fluctuate  from
quarter  to  quarter  and would  have no effect on net  operating  results.  The
factors that affect the timing of these expenditures, and therefore the revenues
to be recognized  therefrom,  are subject to  uncertainties  related to clinical
trials and the regulatory  approval  process.  There are no assurances  that the
clinical  development  funding from Abbott will be sufficient to fund all of the
Company's    expenditures    in   the   clinical    development    program   for
Certiva[TRADEMARK] and the combination vaccines.

         The  Company is  considering  the  advisability  of  executing  further
distribution  agreements for certain markets  throughout the world.  The Company
also intends to collaborate in the development of selected  vaccine products and
may enter into additional collaborative development agreements similar in nature
to that which was signed with Pasteur Merieux-Connaught,  as described above. In


                                     - 54 -
<PAGE>



addition,  the Company is in various  stages of  discussions  with third parties
regarding  various business  arrangements  including  licensing,  joint venture,
acquisition,  and  other  business  agreements,  some of which  possibly  may be
concluded  in the near  term.  There are no  assurances  that the  Company  will
successfully  negotiate and sign any such  agreements or that, if executed,  the
financial terms for any such agreement will be significant.

Tax And Other Matters
---------------------

         At December 31, 1996, the Company and its  subsidiaries  had income tax
loss  carryforwards  of  approximately  $9.9 million to offset  future  Canadian
source  income and  approximately  $55.5  million to offset future United States
taxable  income  subject  to the  alternative  minimum  tax rules in the  United
States.

         If more than a certain  percentage  of the  Company's  assets or income
become  passive,  the Company  will be  classified  for U.S.  tax  purposes as a
passive foreign investment company ("PFIC"),  and a U.S. taxpayer may be subject
to an additional  Federal  income tax on receiving  certain  dividends  from the
Company or selling the Company's Common Stock.

         The Company has not been classified as a PFIC to date, and during 1997,
the Company  intends to, and believes  that it can,  generate  sufficient  other
income to avoid being classified as a PFIC.


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
           -------------------------------------------

         The  Financial   Statements  and   accompanying   Notes  thereto,   the
Accountants'  Report,  required  Supplementary Data, and certain other financial
information  are set forth on pages 56 to 82 of this Annual  Report  immediately
following.  The table of contents to the Financial  Statements and  accompanying
Notes appears on page 84 of this Annual Report.


                                     - 55 -
<PAGE>


                    Report of Independent Public Accountants


To North American Vaccine, Inc. and Subsidiaries:

We have audited the accompanying  consolidated  balance sheets of North American
Vaccine,  Inc. (a Canadian corporation) and Subsidiaries as of December 31, 1996
and 1995, and the related consolidated  statements of operations,  shareholders'
equity and cash flows for each of the three years in the period  ended  December
31, 1996.  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 an audit to obtain
reasonable  assurances  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 North American Vaccine,  Inc.
and  Subsidiaries  as of December  31,  1996 and 1995,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.



                                             /s/ Arthur Andersen LLP


Washington, D.C.
February 14, 1997



                                     - 56 -
<PAGE>





NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
                                                              
                                                             December 31,
                                                         1996           1995
                                                      ---------      ----------
ASSETS
Current assets:
  Cash and cash equivalents                            $  70,881     $  10,443
  Accounts receivable                                      4,166         2,000
  Inventory                                                1,782           496
  Prepaid expenses and other current assets                  533           571
                                                       ---------     ---------
          Total current assets                            77,362        13,510

Property, plant and equipment, net                        40,629        18,121
Investment in affiliate, at market                         1,281         9,065
Deferred financing costs, net                              3,184             -
Other assets                                                 506           553
                                                       ---------     ---------
     Total assets                                      $ 122,962     $  41,249
                                                       =========     =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                     $   1,912     $   3,550
  Deferred revenue                                         3,000             -
  Obligation under capital lease, 
      current portion                                      1,496             -
  Other current liabilities                                4,540         4,296
                                                       ---------     ---------
         Total current liabilities                        10,948         7,846

6.50% Convertible subordinated notes                      86,250             -
Obligation under capital lease, net of     
     current portion                                       5,871             -
Deferred rent credit, net of current portion                 114           205
                                                       ---------     ---------
     Total liabilities                                   103,183         8,051

Commitments and contingencies

Shareholders' equity:                                
 Preferred  stock,  no  par  value;   unlimited  
     shares  authorized-Series  A, convertible; 
     issued and outstanding 2,000,000 shares;
     entitled to Can $2.50 per share in liquidation        6,538         6,538
 Common stock, no par value; unlimited shares 
     authorized; issued
     31,406,999 shares at December 31, 1996 and 
     30,186,711 shares at December 31, 1995               71,357        58,474
 Unrealized investment holding gain                          653         7,466
 Accumulated deficit                                     (58,769)      (39,280)
                                                       ---------      --------
         Total shareholders' equity                       19,779        33,198
                                                       ---------      --------

     Total liabilities and shareholders' equity        $ 122,962      $ 41,249
                                                       =========      ========

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



                                     - 57 -
<PAGE>




<TABLE>
<CAPTION>


NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)


                                                            Years ended December 31,
                                                          1996         1995        1994
                                                        ---------   ---------   ----------
<S>                                                    <C>          <C>         <C>
Revenues
   Marketing, research and development agreements       $  9,656    $  3,000    $     -
   Product sales                                             892           -          -
                                                        --------    --------    --------
Total revenues                                            10,548       3,000          -
                                                        --------    --------    --------

Operating expenses:
   Production                                             14,764       6,317       6,188
   Research and development                               11,594      10,206       5,763
   General and administrative                              6,753       6,696       4,543
                                                        --------    --------    --------
         Total operating expenses                         33,111      23,219      16,494
                                                        --------    --------    --------

Operating loss                                           (22,563)    (20,219)    (16,494)

Other income (expenses):
   Gain on sale of investments in affiliates               4,228      14,429      11,929
   Interest and dividend income                            2,934         804         638
   Interest expense                                       (4,088)          -           -
                                                        --------    --------    --------
Net loss                                                $(19,489)   $ (4,986)   $ (3,927)
                                                        ========    ========    ========

Net loss per share                                      $  (0.63)   $  (0.17)   $  (0.14)

Weighted-average number of common shares
  outstanding                                             30,764      29,745      28,785









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


</TABLE>

                                     - 58 -
<PAGE>


<TABLE>
<CAPTION>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)



                                                                                     
                                          Series A                         
                                        Convertible                       Unrealized     
                                      Preferred Stock      Common Stock    Investment                    Total
                                     ------------------  ----------------   Holding    Accumulated    Shareholders'
                                     Shares     Amount   Shares    Amount    Gains       Deficit        Equity
                                    -------    -------   ------   -------  ----------  ------------  -------------

<S>                                <C>        <C>       <C>      <C>       <C>         <C>            <C>     
Balance, December 31, 1993           2,000      $6,538   27,732   $51,958   $33,165      $(30,367)      $61,294

Exercises of stock options               -           -    1,512     4,861         -             -         4,861
Shares issued under
  401(k) plan                            -           -        9       103         -             -           103
Realized investment holding gains        -           -        -         -   (11,929)            -       (11,929)
Decrease in market value
  of investments                         -           -        -         -    (6,474)            -        (6,474)
Net loss                                 -           -        -         -         -        (3,927)       (3,927)
                                   -------      ------   ------   -------    ------     ---------       -------
Balance, December 31, 1994           2,000       6,538   29,253    56,922    14,762       (34,294)       43,928

Exercises of stock options               -           -      920     1,424         -             -         1,424
Shares issued under
  401(k) plan                            -           -       14       128         -             -           128
Realized investment holding gains        -           -        -         -   (14,429)            -       (14,429)
Increase in market value
  of investment                          -           -        -         -     7,133             -         7,133
Net loss                                 -           -        -         -         -        (4,986)       (4,986)
                                   -------      ------   ------   -------    ------     ---------       -------
Balance, December 31, 1995           2,000       6,538   30,187    58,474     7,466       (39,280)       33,198

Exercises of stock options               -           -      859     6,356         -             -         6,356
Issuance of common stock                 -           -      350     6,344         -             -         6,344
Shares issued under
  401(k) plan                            -           -       11       183         -             -           183
Realized investment holding gains        -           -        -         -    (4,228)            -        (4,228)
Decrease in market value
  of investment                          -           -        -         -    (2,585)            -        (2,585)
Net loss                                 -           -        -         -         -       (19,489)      (19,489)
                                   -------      ------   ------   -------   -------      --------       -------
Balance, December 31, 1996           2,000      $6,538   31,407   $71,357   $   653      $(58,769)      $19,779
                                   =======      ======   ======   =======   =======      ========       =======







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

</TABLE>

                                     - 59 -
<PAGE>


<TABLE>
<CAPTION>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

                                                             Years ended December 31,
                                                          1996         1995        1994
                                                        ---------   ---------   ----------
<S>                                                    <C>          <C>         <C>       
Cash flows from operating activities:
    Net loss                                            $(19,489)    $ (4,986)    $ (3,927)
    Adjustments to reconcile net loss to net cash 
    used in operating activities:
       Gain on sale of investments in affiliates          (4,228)     (14,429)     (11,929)
       Gain on disposal of equipment                         (12)           -            -
       Write-off of property and equipment                     -           27        1,806
       Depreciation and amortization                       6,154        2,223        2,206
       Amortization of deferred financing costs              335            -            -
       Contribution of common stock to 401(k) plan           183          128          103
       Decrease (increase) in other assets                    47         (248)        (205)
       Decrease in deferred rent                             (81)         (75)         (65)
       Cash flows (used in) provided by other              
       working capital items                              (1,818)         (56)       3,442
                                                         --------    --------     --------  

          Net cash used in operating activities          (18,909)     (17,416)      (8,569)
                                                         --------    --------     --------  

Cash flows from investing activities:
    Capital expenditures                                 (21,012)     (10,279)      (6,377)
    Proceeds from sale of investments in affiliates        5,199       15,792       13,841
    Proceeds from sale of equipment                           27            -            -
                                                        --------     --------     --------  
          Net cash (used in) provided by 
          investing activities                           (15,786)       5,513        7,464
                                                        --------     --------     --------  

Cash flows from financing activities:                  
    Proceeds from issuance of convertible notes           86,250            -            -
    Deferred financing costs of convertible notes         (3,519)           -            -
    Repayment of lease obligation                           (298)           -            -
    Proceeds from exercises of stock options               6,356        1,424        4,861
    Proceeds from issuance of common stock                 6,344            -            -
                                                        --------     --------     --------  
          Net cash provided by financing activities       95,133        1,424        4,861
                                                        --------     --------     --------

Net increase (decrease) in cash and cash equivalents      60,438      (10,479)       3,756
Cash and cash equivalents, beginning of period            10,443       20,922       17,166
                                                        --------     --------     --------  
Cash and cash equivalents, end of period                $ 70,881     $ 10,443     $ 20,922
                                                        ========     ========     ========












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

</TABLE>

                                     - 60 -
<PAGE>




<TABLE>
<CAPTION>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)

                                                              Years ended December 31,
                                                           1996         1995        1994
                                                        ---------    ---------   ---------
<S>                                                    <C>           <C>         <C>
Cash Flows Provided By Other Working Capital Items:

    Decrease (increase) in :
       Accounts receivable                              $ (2,166)      $(2,000)    $   340
       Accounts receivable from affiliate                      -            81          53
       Inventory                                          (1,286)         (347)        (93)       
       Prepaid expenses and other current assets              38          (264)       (108)

    Increase (decrease) in :
       Accounts payable                                   (1,638)          404       2,990
       Deferred revenue and other current 
          liabilities                                      3,234         2,070         260
                                                        --------       -------     -------
    Net cash provided by (used in) other working 
       capital items                                    $ (1,818)      $   (56)    $ 3,442
                                                        ========       =======     =======

Supplemental Disclosure of Cash Flow Information

Cash paid for interest                                  $  2,758       $     -     $     -
                                                        ========       =======     =======
Equipment acquired through capital lease                $  7,665       $     -     $     -
                                                        ========       =======     =======


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

</TABLE>


                                     - 61 -
<PAGE>





                  NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  ORGANIZATION

         North  American  Vaccine,  Inc. and  Subsidiaries  (the  "Company")  is
engaged  in the  research,  development  and  production  of  vaccines  for  the
prevention of infectious diseases in children and adults.

         The  Company  was   incorporated  in  Canada  on  August  31,  1989  to
consolidate  the  assets,   liabilities  and  operations  of  American   Vaccine
Corporation  ("American  Vaccine"),   and  certain  assets  and  vaccine-related
technologies of BioChem Pharma Inc. ("BioChem"),  in a share purchase and merger
transaction  (the "Merger").  On February 28, 1990, the shareholders of American
Vaccine  approved the Merger.  Prior to February  28,  1990,  the Company had no
operations.

         Pursuant to the Merger,  shareholders  of  American  Vaccine  exchanged
their shares for 50 percent  ownership of the Company.  Simultaneously,  BioChem
purchased  a 50 percent  interest  in the  Company  for cash,  shares of BioChem
common stock, and certain rights in BioChem's vaccine-related technologies.  The
net assets of  American  Vaccine,  common  stock of  BioChem,  and the rights in
vaccine-related  technologies transferred by BioChem were carried forward to the
Company at their  previously  recorded  amounts as reflected  in the  historical
financial statements of BioChem and American Vaccine.

(2)  RISK FACTORS

         The Company has incurred  substantial  losses in the development of its
technologies.  The Company has generated  only limited  revenue from the sale of
its  acellular  pertussis  vaccine  and  marketing,   research  and  development
agreements. Prior to commercial introduction, the Company's DTaP vaccine for the
prevention  of  diphtheria,  tetanus,  and  pertussis  (whooping  cough) must be
approved  by the U.S.  Food and Drug  Administration  ("FDA")  for  sales in the
United States and by similar authorities for sales in other countries.  The DTaP



                                     - 62 -
<PAGE>


vaccine was  approved  for sale in Sweden in  February  1996,  and the  DTaP-IPV
(polio)  vaccine was approved for sale in Denmark in the third  quarter of 1996.
The DTaP  vaccine is  currently  being  considered  for approval for sale in the
United  States by the FDA.  There can be no  assurance as to when or whether the
Company  will  receive  such  approval,  or that any such  approval  will not be
subject to additional testing requirements.  The commercial  introduction of the
Company's DTaP vaccine will require the Company to manufacture and produce large
quantities  of vaccine in its  manufacturing  facility,  which was  modified for
increased  production in 1995. The Company has limited experience  manufacturing
commercial  quantities  of vaccines and operating  its  manufacturing  facility.
Accordingly, there can be no assurance that the production process will not fail
or become  subject to substantial  disruptions.  To  successfully  introduce and
commercialize  its DTaP  vaccine,  the Company  will be  required  to  implement
successfully  its sales and  marketing  strategy  that will enable it to,  among
other things,  participate  in  established  purchasing  programs of Federal and
State governments,  establish an identity and reputation for the Company and its
products,  create an awareness among pediatricians of the safety and efficacy of
the vaccine, distinguish the Company's product from that of its competitors, and
establish  effective  distribution  channels.  In October 1996,  the Company and
Abbott  Laboratories  ("Abbott")  signed an  agreement  for Abbott to market the
Company's DTaP vaccine and certain combination  vaccines in the United States to
the private  physician  and managed care markets upon  approval by the FDA, with
the Company marketing those products to governmental purchasers. There can be no
assurance that the Company or Abbott will  successfully  implement its sales and
marketing  strategy.  In attempting to do so, the Company believes there will be
intense competition from other vaccine producers. There can be no assurance that
the Company will produce a commercially viable product, attain sufficient market
share, or distinguish its vaccine product from that of its competitors.

         Currently,   the  Company's   prospects  for  becoming  profitable  are
substantially  dependent  upon  the  successful  commercialization  of the  DTaP
vaccine, as well as the successful  development and  commercialization  of other
vaccines under  development.  There can be no assurance that the Company will be
able to  successfully  market  its  vaccine  products  at levels  sufficient  to
generate profits.

         The  production  of vaccines is a highly  complex,  biological  process
involving many steps, commencing from seed culture through final production. The
production  process  could  fail  at any  point  resulting  in the  failure  and
continued inability to meet production  requirements.  No assurance can be given
that  the  Company  will be  successful  in  establishing  and  maintaining  the
commercial  production of its vaccines or that it will be capable of producing a
competitively priced product.


                                     - 63 -
<PAGE>



         The Company produces the pertussis component of the DTaP vaccine and it
has  purchased,  and intends to continue to purchase,  its  requirements  of the
diphtheria and tetanus  toxoids and enhanced  inactivated  polio vaccine ("IPV")
from Statens  Seruminstitut  ("SSI"),  an enterprise  owned by the government of
Denmark.  There can be no assurances that SSI will be able to meet the Company's
requirements or that SSI will not experience  difficulties or disruptions in its
production of diphtheria and tetanus  toxoids and IPV.  Certain of the Company's
production  processes  require raw materials from sole sources or materials that
are   difficult   for  suppliers  to  produce  and  certify  for  the  Company's
specifications. The Company also may experience temporary or permanent shortages
of critical raw materials  necessary  for continued  production of its vaccines.
Any shortage of these materials could delay production efforts, adversely impact
production costs and yields, or necessitate the use of substitute materials, any
of which could have a significant adverse impact on the Company's operations. In
addition,  the Company has  contracted  with third parties for the sterile fill,
labeling,  and packaging of its vaccine  products until the Company  obtains its
own facilities to perform these  operations.  Failure of any such  contractor to
meet the  Company's  requirements  may  involve  costly  delays and  significant
expense,  and would require additional  regulatory approval as the Company seeks
alternative arrangements.

         The vaccine  industry is subject to significant  technological  changes
and many of the Company's  competitors have substantially  greater financial and
technical  resources,  and production,  marketing,  research and development and
regulatory  capabilities,  than the Company. In addition,  the Company is in the
process of establishing a marketing and sales organization for its products.

         Under existing  government vaccine programs,  the manufacturers  submit
contract  bids  under  which  they would  sell  vaccines  to  Federal  and State
governments  for  vaccination of qualified  individuals  under Federal and State
sponsored vaccination programs. In addition,  State governments are permitted to
purchase   vaccines   directly  from  the  manufacturers  at  the  same  prices.
Historically,  government  purchases  under  existing  government  programs have
represented a significant  portion of the pediatric vaccine doses distributed in
the United States and have been at prices  substantially  below those offered to
the private sector.  From time to time,  legislative and regulatory  initiatives
are proposed that, if adopted,  could  significantly  modify government  vaccine
programs by, among other things, restricting the federal government's purchasing
authority or substantially reducing the funding available for government vaccine
purchases.  The Company is unable to predict which  legislative  initiative,  if
any, will ultimately be enacted or the effect any such initiative may ultimately
have on the Company's business or results of future operations.


                                     - 64 -
<PAGE>



         The Company believes that patent protection will be an important factor
in its success and may require the  expenditure  of  substantial  resources.  No
assurance can be given as to the degree and range of protection any patents will
afford the Company,  that  patents  will be issued to the Company,  or as to the
extent  to  which  the  Company  will be  successful  in  avoiding  or  securing
commercially  reasonable  licenses  under patents  granted to others.  There has
been,  and the Company  believes  that there may be in the  future,  significant
litigation  in the industry  regarding  patent and other  intellectual  property
rights.  If the Company becomes  involved in such  litigation,  it could consume
substantial resources.

         Although the Company has limited product liability  insurance coverage,
it may seek additional  insurance coverage as it commences  commercialization of
its DTaP vaccine.  There can be no assurance that adequate additional  insurance
coverage  will be available at  acceptable  costs,  if at all, or that a product
liability claim would not materially  adversely affect the business or financial
condition of the Company.

(3)  SIGNIFICANT ACCOUNTING POLICIES

         (a) BASIS OF ACCOUNTING  AND CURRENCY.  The  accompanying  consolidated
financial  statements have been prepared in conformity  with generally  accepted
accounting  principles ("GAAP") in the United States and are denominated in U.S.
dollars,  because the Company  conducts the majority of its transactions in this
currency.  The  application  of  Canadian  GAAP  would not  result  in  material
adjustments to the accompanying  financial statements,  except for the impact of
the adoption of Statement of Financial Accounting Standards ("SFAS") No. 115, as
discussed  in Note 6.  The  effect  of  foreign  currency  translation  has been
immaterial.

         (b) PRINCIPLES OF CONSOLIDATION.  The consolidated financial statements
include the accounts of North American Vaccine,  Inc. and its subsidiaries.  All
significant intercompany transactions have been eliminated in consolidation.

         (c) PERVASIVENESS OF ESTIMATES. The preparation of financial statements
in conformity  with GAAP requires  management to make estimates and  assumptions
that affect the reported  amounts of assets and  liabilities  and  disclosure of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from estimates.


                                     - 65 -
<PAGE>



         (d) CASH AND CASH EQUIVALENTS.  The Company considers all highly liquid
investments  with  an  original  maturity  of  three  months  or less to be cash
equivalents. Cash and cash equivalents consist primarily of commercial paper and
U.S. Treasury Bills.

         (e) INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out) or market. Components of inventory cost include materials, labor, and
manufacturing overhead. Inventories consist of the following (in thousands):

                                         1996             1995
                                         ----             ----

               Raw Materials           $1,518           $  496
               Work-in-process            162                -
               Finished goods             102                -
                                      -------           ------
                                       $1,782           $  496
                                       ======           ======

         (f) REVENUE  RECOGNITION.  Nonrefundable  fees or milestone payments in
connection  with  research  and  development  or  collaborative  agreements  are
recognized  when they are earned in accordance  with the applicable  performance
requirements  and contract terms.  Revenue from product sales is recognized when
all  significant  risks of ownership  have been  transferred,  the amount of the
selling  price  is fixed  and  determinable,  all  significant  related  acts of
performance have been completed,  and no other significant  uncertainties exist.
In most cases, these criteria are met when the goods are shipped.

         (g) RESEARCH AND DEVELOPMENT  COSTS.  The Company expenses all research
and  development  costs as incurred.  Under Canadian GAAP,  certain  development
costs should be deferred to future periods if certain criteria are met. No costs
have been  capitalized for Canadian GAAP purposes  because the Company  believes
that the applicable deferral criteria have not been met.

         (h) DEPRECIATION AND AMORTIZATION.  Depreciation of property, plant and
equipment,  with the exception of leasehold  improvements and an owned facility,
is provided using an accelerated  method over the estimated  useful lives of the
assets.  The  estimated  useful  lives  are  generally  five to seven  years for
machinery,   equipment  and  laboratory  fixtures.  Leasehold  improvements  are
amortized  over  the  term  of  the  lease.  The  Company's  owned  facility  is
depreciated on a straight line basis over twenty years.


                                     - 66 -
<PAGE>



         (i) DEFERRED  FINANCING COSTS.  Deferred financing costs represent fees
and other costs incurred in connection with the issuance of the 6.5% convertible
notes.  These costs are  amortized  over the term of the related  debt using the
effective interest rate method. Total accumulated  amortization through December
31, 1996 is $335,000.

         (j)  INCOME  TAXES.  The  Company  computes   deferred  tax  assets  or
liabilities based on the difference  between the financial  statement and income
tax bases of assets and liabilities using the enacted tax rate.

         (k) NET LOSS PER COMMON SHARE.  Net loss per common share is based upon
the weighted-average number of common shares outstanding during each period. The
effect of outstanding convertible preferred stock, convertible notes and options
on net loss per share is not included because it would be antidilutive.

         (l)  RECLASSIFICATIONS.  Certain items in the prior year's consolidated
financial  statements have been  reclassified  to conform with the  presentation
used in the 1996 financial statements.

(4)  PRODUCTION, DEVELOPMENT, AND MARKETING CONTRACTS

         (a)  AGREEMENTS  WITH PASTEUR  MERIEUX-CONNAUGHT.  In the December 1995
clinical   development   agreement   and   license   agreements   with   Pasteur
Merieux-Connaught,  the  parties  agreed to jointly  develop the  Company's  new
conjugate  vaccine  against   meningococcus  B  for  both  adult  and  pediatric
indications.  The Company  recognized  $3 million and $4 million of research and
development    revenue   for    non-refundable    payments   made   by   Pasteur
Merieux-Connaught  in 1995  and  1996,  respectively,  in  connection  with  the
clinical  development  agreement.  Further  fees and  funding  will be made upon
achievement of development, clinical and regulatory milestones. In addition, the
Company   will   receive   royalties   on   any   product   sales   by   Pasteur
Merieux-Connaught.

         Under the  clinical  development  agreement,  the parties  will jointly
develop the vaccine through Phase II clinical  trials,  and each party will have
access  to  and  the  right  to  use  the  clinical   trial   results.   Pasteur
Merieux-Connaught will be responsible for all costs associated with the clinical
development of the  meningococcus  B vaccine  through the completion of Phase II
clinical trials.

         In order to become  operational the license  agreement must be ratified
by the  National  Research  Council of Canada and the results of a  pre-clinical
study  must  be  deemed  satisfactory.   After  the  license  agreement  becomes
operational,  Pasteur Merieux-Connaught will hold co-exclusive world-wide rights


                                     - 67 -
<PAGE>




to  manufacture  and sell the  meningococcus  B  vaccine  both as a  stand-alone
product  and in  combination  with  other  vaccines.  The  Company  will  retain
co-exclusive  world-wide  rights to  manufacture  and sell the  meningococcus  B
vaccine both as a stand-alone  product and in combination  with other  vaccines.
Pasteur Merieux-Connaught may elect to terminate the agreements at any time.

         (b) AGREEMENT WITH ABBOTT LABORATORIES.  In the fourth quarter of 1996,
the Company and Abbott  signed an  agreement  under which  Abbott  would  market
Certiva(TRADEMARK),  the Company's  DTaP vaccine,  when approved by the FDA. The
marketing  agreement  also will allow Abbott to market the  Company's  DTaP-HIB,
DTaP- IPV and DTaP-IPV-HIB combination vaccines which are under development.

         Abbott  will  market  Certiva(TRADEMARK)  and  combination  vaccines to
private   physicians   and  managed  care  markets  in  the  United  States  for
immunization of infants and children. The Company will market Certiva(TRADEMARK)
and  the  combination  vaccines  to  government   purchasers,   including  state
governments and the Centers for Disease Control and Prevention.

         On  execution  of the  agreement,  the Company  received $13 million of
which  approximately $6.3 million  represented payment for 350,000 shares of the
Company's common stock, and the balance represented a marketing fee and clinical
development funding. Amounts received for clinical development to be expended in
the future by the  Company  have been  deferred.  The  Company  and Abbott  will
collaborate in the clinical  development of the combination  vaccines and Abbott
will provide the Company with clinical  development  funding.  In addition,  the
Company will receive  payments upon  achievement of prescribed  milestones.  The
agreement provides for total payments of up to $42 million by Abbott,  including
the $13 million  received upon  execution.  The first  milestone  relates to FDA
approval of Certiva(TRADEMARK)  provided certain other conditions are satisfied.
In  addition,  the Company  will  receive  revenues  from Abbott as it purchases
Certiva(TRADEMARK)  and the  combination  vaccine  products  for  resale  to the
private pediatric market.

         (c) AGREEMENT  WITH CHIRON  BEHRING GMBH & CO. In the fourth quarter of
1996,  the Company and Chiron  Behring GmbH & Co.  ("Chiron  Behring")  signed a
definitive  agreement under which Chiron Behring would market the Company's DTaP
vaccine.  The marketing  agreement  will also allow Chiron Behring to market the
Company's  combination  DTaP-IPV vaccine.  Under terms of the agreement,  Chiron


                                     - 68 -
<PAGE>



Behring  will  market the DTaP and  DTaP-IPV  vaccines  in Germany  and  Austria
following  appropriate  regulatory  approval.  The  agreement  provides  for  an
up-front  nonrefundable payment and future milestone payments. In addition,  the
Company will receive revenues as it sells the vaccine products to Chiron Behring
for resale in its territory.

         (d) PRODUCT  SALES.  In February  1996,  the Swedish  Medical  Products
Agency  granted  regulatory  approval  to market a combined  DTaP  vaccine  that
contains the Company's  acellular  pertussis vaccine for all primary and booster
doses. In September 1996, the Danish National Board of Health granted regulatory
approval to market a combined  DTaP-IPV  (polio)  vaccine,  which  includes  the
Company's  acellular  pertussis  vaccine,  for all primary and booster doses for
infants and children in Denmark. SSI markets the DTaP vaccine in Sweden, and the
DTaP-IPV  vaccine in Denmark,  and has  indicated  that it will file  additional
applications for the acellular pertussis vaccine,  both alone and in combination
with other antigens,  in other countries  within its territory.  There can be no
assurance  given that SSI will file such  additional  applications  or that,  if
filed,  such  applications  will  be  approved  by  the  appropriate  regulatory
authorities.

         Following the regulatory  approvals  described  above,  the Company has
recognized  revenues from sale of its acellular  pertussis  vaccine.  Additional
revenues from such product sales are dependent upon successful commercialization
of the DTaP vaccine in Sweden and the DTaP-IPV vaccine in Denmark and additional
product  approvals  of  acellular  pertussis  products in other  countries.  The
Company does not control the marketing and  distribution  efforts of third party
distributors  in their  respective  territories  and,  therefore,  the Company's
revenues for product sales in those  territories  are dependent  upon  effective
sales,  marketing  and  distribution  efforts  of  such  parties.  There  are no
assurances if or when further  product  approvals will be obtained,  or that the
vaccines will be marketed and distributed effectively.


                                     - 69 -
<PAGE>



(5)  PROPERTY, PLANT AND EQUIPMENT

         Property,  plant and  equipment  were recorded at cost and consisted of
the following components:


                                                             As Of December 31,
                                                             ------------------
                                                             1996          1995
                                                             ----          ----
                                                              (in thousands)

    Property, plant and equipment:
      Land                                                $   498       $   498
      Building and improvements                             2,407         2,014
      Machinery, equipment and laboratory fixtures         41,405        17,764
      Leasehold improvements                                8,567         6,122
      Office furniture, equipment and software              3,488         1,373
                                                          -------       -------
                                                           56,365        27,771

    Accumulated depreciation and amortization:
      Building and improvements                               129            22
      Machinery, equipment and laboratory fixtures         10,728         5,847
      Leasehold improvements                                3,537         2,818
      Office furniture, equipment and software              1,342           963
                                                          -------       -------
                                                           15,736         9,650
                                                          -------       -------
    Property, plant and equipment, net                    $40,629       $18,121
                                                          =======       =======


         In 1994, the Company began  modifications  to its  production  facility
that  were  completed  in  1995.  In the  third  quarter  of 1994,  the  Company
recognized a non-cash  expense of  approximately  $1.8 million  associated  with
these  modifications to its production  facilities  build-out plan. This expense
represents  a  write-off  of  property  and  equipment,  previously  capitalized
leasehold  improvements  and design  costs.  The original  cost and  accumulated
depreciation of the property and equipment  written-off was  approximately  $4.9
and $3.1 million, respectively.

         In 1996,  the Company  entered  into an  agreement  which  included the
assumption  of a lease of a 35,000  square foot  manufacturing  facility and the
purchase  and lease of  equipment  and  leasehold  improvements.  See Note 8 for
further description of the transaction.


                                     - 70 -
<PAGE>



(6)  INVESTMENTS IN AFFILIATES

         In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," equity securities  classified as available-for-sale
are  reported  at fair value,  with  unrealized  gains and losses  reported as a
separate  component  of  shareholders'   equity.  As  a  result,  the  Company's
investments  in its affiliates are reflected at their current market value as of
December 31, 1996, and 1995, of $1.3, and $9.1 million,  respectively  (original
cost of $629,000 and $1.6 million, respectively).

         In 1994,  the Company  sold 1.1  million  shares of its  investment  in
BioChem  stock (see Note 16). The gross  proceeds and the realized gain from the
sales were $10.2 and $9.3 million,  respectively.  The Company also sold 200,000
shares of its investment in IVAX stock. The gross proceeds and the realized gain
from the sales were $3.6 and $2.7 million, respectively.

         In  1995,  the  Company  sold  the  remaining  695,936  shares  of  its
investment in BioChem  stock.  The gross proceeds and the realized gain from the
sales were $11.5 and $10.9 million,  respectively. The Company also sold 156,916
shares of its investment in IVAX stock. The gross proceeds and the realized gain
from the sales were $4.3 and $3.5 million, respectively.

         In 1996,  the Company sold  193,084  shares of its  investment  in IVAX
stock.  The gross  proceeds and the  realized  gain from the sales were $5.2 and
$4.2 million,  respectively. The historical cost of the remaining 125,000 shares
of IVAX common stock was $629,000 or $5.03 per share at December 31, 1996.

         The market values of these securities as of December 31, 1996 and 1995,
as  disclosed  on  the  accompanying  consolidated  balance  sheets,  have  been
determined  based on the closing prices for registered  securities of IVAX as of
those dates. The aggregate market value of the Company's remaining investment in
IVAX common stock at February 28, 1997, was  approximately  $1.5 million.  These
investment  securities are volatile and,  therefore,  are subject to significant
fluctuations in value.

(7)  OTHER CURRENT LIABILITIES

         Other current liabilities consisted of the following components:

                                                         As Of December 31,
                                                        --------------------
                                                        1996            1995
                                                        ----            ----
                                                           (In thousands)

       Payroll and fringe benefits                    $1,114          $   736
       Accrued interest                                  999               --
       Accrued consulting and professional fees          144              767
       Reserve for contract loss                         720              720
       Accrued taxes                                     608              633
       Accrued costs of clinical trials                  421              574
       Other accrued liabilities                         247              471
       Accrued construction costs                        192              310
       Deferred rent credit                               95               85
                                                      ------           ------
              Total other current liabilities         $4,540           $4,296
                                                      ======           ======


                                     - 71 -
<PAGE>



(8) COMMITMENTS AND CONTINGENCIES

         (a)  OPERATING  LEASES.  The  Company  has a  lease  agreement  for its
production  facility  through  February 28, 1999.  The Company has the option of
extending  this lease for an additional ten years at the then fair market value.
Under the terms of the lease of this facility, the lessor reimbursed the Company
for $625,000 of improvements made to the property.  This  reimbursement has been
reflected as a deferred rent credit,  which is being  amortized over the term of
the lease.  The lease provides for minimum annual  escalations of the base rent.
These escalations are recorded as expense ratably over the term of the lease.

         The Company has also leased  office  space  through  December 31, 1997,
with two three-year renewal options.

         In December 1993, the Company signed a sublease agreement to rent space
for a research and development facility through April 30, 1998. In October 1996,
the Company signed a sublease agreement to rent additional space adjacent to the
existing research and development facility through April 30, 1998.

         In November  1996,  the Company  assumed a lease to rent 35,000  square
feet of space for a development  and  production  facility  through  February 1,
2001, with two five-year renewal options.  The lease provides for minimum annual
escalations of the base rent.

         Minimum  future  lease  payments  under all leases,  exclusive  of real
estate tax escalations, are as follows:


                  Years Ending
                  December 31,
                  --------------
                  (In Thousands)

                  1997                              $1,514
                  1998                               1,051
                  1999                                 652
                  2000                                 568
                  2001                                  71
                                                    ------
                  Total                             $3,856
                                                    ======


Total rent expense was $898,000; $812,000; and $742,000 in 1996, 1995, and 1994,
respectively.


                                     - 72 -
<PAGE>



         (b) CAPITAL LEASE.  In connection  with the operating  lease  agreement
described  above that was entered into in 1996, the Company also entered into an
agreement  that  included  the purchase  and lease of  equipment  and  leasehold
improvements.  The total acquisition cost was approximately $24.9 million, which
included a cash  payment of $17.2  million.  The  balance  of $7.7  million  was
financed  through an  equipment  lease  obligation  which  expires in 2000.  The
equipment  lease  has  been  accounted  for as a  capital  lease  for  financial
reporting  purposes,  with monthly  payments of  approximately  $179,000.  Total
depreciation  expense  associated  with  equipment  under the capital  lease was
approximately  $715,000 for 1996.  Under the terms of the equipment  lease,  the
Company  has a buyout  option at the end of the third  year for a  predetermined
amount,  and an option at the end of the fourth  year at the greater of the fair
market value of the  equipment or a  predetermined  amount.  Under the equipment
lease  agreement  there are  financial  covenants  that  obligate the Company to
maintain  certain minimum cash and investment  balances,  a minimum tangible net
worth and certain other financial ratios.  The Company would be required to post
an irrevocable  letter of credit for  predetermined  amounts at such time as the
Company is not in  compliance  with any of these  financial  covenants.  Minimum
future lease payments are as follows:


               Years Ending
               December 31,
               ------------
               (In Thousands)

               1997 (includes interest of $646)           $2,142
               1998 (includes interest of $495)            2,142
               1999 (includes interest of $329)            2,142
               2000 (includes interest of $141)            2,552
                                                          ------
                    Total                                  8,978
               Less interest component                    (1,611)
                                                          ------
               Total principal payments                   $7,367
                                                          ======

         (c)  CONTINGENCIES.  In prior  years,  the Company was awarded  various
cost-plus-fixed-fee  contracts  by the  National  Institute  of Child Health and
Human Development  ("NICHD").  Performance under these contract was completed in
1993. Provisional payments to the Company under cost-reimbursable  contracts are
subject to adjustment  upon  completion of audits of  reimbursable  costs by the
NICHD.  In the opinion of management,  adjustments,  if any,  resulting from the
audits of the  contracts are not expected to have a material  adverse  impact on
the Company's financial position or future results of operations.

         The  Company  is, and from time to time  becomes,  involved  in various
claims and lawsuits that are  incidental to its business.  In the opinion of the
Company's  management,  there are no material legal proceedings  pending against
the Company.


                                     - 73 -
<PAGE>



(9) CONVERTIBLE SUBORDINATED NOTES

         In May 1996,  the Company  completed  an offering of 6.50%  convertible
subordinated  notes in the principal  amount of $86.25  million due May 1, 2003.
The net proceeds from this offering were approximately  $82.7 million.  Interest
on the notes is payable  semi-annually on May 1 and November 1 of each year. The
notes are convertible  into common shares of the Company at the conversion price
of approximately  $24.86 per common share. The notes are subordinated to present
and  future  senior  indebtedness  of the  Company  and  will not  restrict  the
incurrence of future senior or other indebtedness by the Company.  The notes are
redeemable, in whole or in part, at the option of the Company on or after May 1,
1999, at certain pre-established redemption prices plus accrued interest. Upon a
change in control,  the Company is required to offer to purchase  all or part of
the notes then  outstanding  at a purchase  price equal to 100% of the principal
amount thereof,  plus interest.  The repurchase  price is payable in cash or, at
the option of the Company, in common shares.

(10)  FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying  amounts  reported in the Company's  consolidated  balance
sheets at December 31, 1996 and 1995,  for cash and cash  equivalents,  accounts
receivable, accounts payable and accrued liabilities approximate fair values due
to the short  maturity of those  instruments.  Management  believes the carrying
value of the  convertible  subordinated  notes and the capital lease  obligation
approximates fair value.

(11)  INCOME TAXES

         The operations of the Company are taxed under Canadian  income tax laws
and the  operations  of its United  States  branch are also taxed  under  United
States income tax laws subject to applicable treaty provisions for the avoidance
of double taxation.  The Company's wholly owned  subsidiaries,  American Vaccine
and AMVAX, Inc., are both taxed under United States income tax laws.

         For  income  tax  reporting  purposes  in 1995 and  1994,  the  Company
realized a net gain in Canada and a net loss in the United States.  In 1996, the
Company  incurred  a loss for income tax  reporting  purposes  in Canada and the
United States.  The Company had sufficient net operating loss  carryforwards  to


                                     - 74 -
<PAGE>



offset the 1995 and 1994 taxable income in Canada.  Accordingly, no provision or
benefit for United  States or  Canadian  income  taxes has been  recorded in the
accompanying  financial statements.  The components of the Company's net results
from operations for tax reporting purposes are:

                        1996           1995            1994
                        ----           ----            ----
                                    (in thousands)


     United States    $(14,736)      $(11,973)     $ (6,749)
     Canada             (4,753)         6,987         2,822
                      ---------      ---------     ---------
         Total        $(19,489)      $ (4,986)     $ (3,927)
                      =========      =========     =========


The components of the net deferred tax assets consisted of:

                                                      As Of December 31,
                                                 ---------------------------
                                                 1996                  1995
                                               --------              --------
                                                       (in thousands)

    Deferred tax assets:
    Net operating loss carryforwards            $25,314               $23,221
    Accrued intercompany interest                 3,097                 1,923
    Depreciation and amortization                 1,143                   236
    Reserve for contract loss                       278                   278
    Deferred rent                                    81                   112
    Other                                         3,323                 2,293
                                                -------               -------
      Total deferred tax assets                  33,236                28,063

    Deferred tax liabilities:
    Historical accrual to cash difference        (2,235)               (2,980)
    Investments in affiliates                      (433)               (6,250)
    Other                                           (85)                 (136)
                                                --------              --------
      Total deferred tax liability               (2,753)               (9,366)
                                                --------              --------

    Net deferred tax assets before allowance     30,483                18,697
    Less:  Valuation allowance                  (30,483)              (18,697)
                                                -------               -------
    Net deferred tax assets                     $    --               $    --
                                                =======               =======


         The Company has determined that $30.5 million in 1996 and $18.7 million
in 1995 of net deferred tax assets do not satisfy the  recognition  criteria set
forth in SFAS No. 109.  Accordingly,  a valuation allowance was recorded against
the applicable net deferred tax assets.


                                     - 75 -
<PAGE>



         At December 31, 1996, the Company had net operating loss  carryforwards
of approximately $65.4 million.  Of this consolidated total,  approximately $9.9
million of the  Company's  net  operating  loss  carryforwards  are available to
offset future Canadian-sourced  taxable income, if any. These loss carryforwards
expire  between 1999 and 2003. Of the remaining  balance,  American  Vaccine and
AMVAX had net operating loss  carryforwards of  approximately  $54.6 million and
$911,000, respectively, available to offset future United States taxable income,
if any. These loss carryforwards expire between 2002 and 2011.

         The net operating loss carryforwards  available to be used in any given
year may be limited due to significant  changes in ownership interests resulting
from future stock issuances or other changes in equity interests.

(12)  INDEMNIFICATION AGREEMENT

         In connection with the Merger described in Note 1, certain shareholders
of American Vaccine with significant  ownership  interests were required to file
gain  recognition  agreements with the United States Internal  Revenue  Service.
Under the terms of the gain  recognition  agreements,  these  shareholders  have
agreed to amend their  income tax  returns  for 1990 if the Company  disposes of
substantially  all of the stock or assets of American  Vaccine within a ten-year
period. With those amended returns, the shareholders will be required to pay tax
based on the  difference  between their basis in American  Vaccine stock and the
value,  at February 28, 1990, of the Company stock received in the Merger,  plus
interest  from the time of the Merger to the  disposition  of  American  Vaccine
stock or assets by the Company.

         In   connection   with  the  Merger,   the  Company   entered  into  an
indemnification  agreement with these  shareholders of American  Vaccine whereby
the Company will (i) lend to the affected shareholders,  on an interest-free and
after-tax  basis,  an amount  equal to the taxes to be paid with the amended tax
returns; and (ii) pay to the affected  shareholders,  on an after-tax basis, any
interest and penalties with respect to the taxes to be paid with the amended tax
returns.  Under the terms of the  indemnification  agreement,  repayment  of the
loans  described  above will only be required at the time and to the extent that
the affected shareholders receive benefit from the resulting increase in the tax
basis of their Company  stock.  There can be no assurance  that any such benefit
will be received.

         The  ultimate  amount  of this  potential  liability,  if  any,  is not
presently  determinable but will be based on the amount of gain,  interest rates
in effect during the period,  and the length of time between the consummation of
the  Merger  and the event  triggering  the gain  recognition.  Based on current
interest  rates,  the  Company  estimates  that,  in the  event  that  the  gain
recognition  would have occurred at December 31, 1996,  its  obligations  to the
affected shareholders could approximate $15.1 million.



                                     - 76 -
<PAGE>



(13)  LICENSE AGREEMENTS

         Certain of the conjugate  vaccine-related  technologies  transferred to
the  Company by BioChem in  connection  with the Merger are  licensed  under two
agreements with the National  Research Council of Canada (the "NRC"), a Canadian
federal governmental agency. Under these license agreements, the Company will be
required to pay royalties to the NRC on all sales of such licensed  products and
related services.  Certain minimum annual royalties are payable  irrespective of
the  volume  of sales of such  products  and  services.  BioChem  has  agreed to
reimburse the Company for 10 percent of these minimum annual royalties.  The NRC
has the right to  terminate  the  license  agreements  under  certain  specified
conditions  including if it concludes that all reasonable  efforts are not being
used to develop and commercialize the technologies.

         The  Company  has a  license  agreement  with  the  National  Technical
Information Service (the "NTIS"), an agency of the United States government,  to
bring the method of preparing  the acellular  pertussis  vaccine to the point of
practical application. In return, the NTIS granted an exclusive license to make,
have made, use and sell the vaccine following approval of commercial sale by the
FDA. Under the agreement, the Company will pay to the NTIS an annual maintenance
fee and a royalty based on sales or other similar  dispositions  of the vaccine.
The exclusive  rights under this agreement  will terminate  seven years from the
date of the first  commercial  sale of the  vaccine.  The Company has acquired a
royalty-bearing  exclusive  license for the use of this  patented  technology in
certain foreign jurisdictions for the full term of the patents.

(14)  SHAREHOLDERS' EQUITY

         (a) PREFERRED  STOCK.  Preferred  shares are  nonvoting  (other than as
required  by law) and may be  issued in one or more  series.  Shares of Series A
preferred stock are convertible,  at the option of the holder, into common stock
on the basis of two  shares of common  stock for each share of  preferred  stock
held. The preferred  stock had a liquidation  preference of Can. $2.50 per share
or U.S. $3.6 million in the aggregate at December 31, 1996. The conversion ratio
is subject to adjustment for certain dilutive events.

         (b) 1990 SHARE  OPTION  PLAN.  In 1990,  the Company  adopted the North
American Vaccine,  Inc. Share Option Plan (the "1990 Plan"),  which, as amended,
provided  for the  issuance  of up to  3,650,000  shares of its common  stock to
officers, directors,  employees and consultants. The 1990 Plan, which expired in
February 1995,  provided that options be granted at no less than market value on
the date of grant. In 1996 the Company  extended the expiration date for options
to purchase 540,000 shares of common stock  previously  granted under this plan.
These  options have been  accounted  for as new grants under the plan.  The fair
market  value of the  Company's  stock on the new  grant  date was less than the
exercise  price of these  options.  Subsequent to December 31, 1996, the Company
extended the expiration date for an option to purchase  150,000 shares of common
stock previously  granted under this plan, at an exercise price of $11.13.  This
option will be accounted  for as a new option  under this plan.  The fair market
value of the  Company's  common stock on the new grant date was greater than the
exercise price of the options,  which will result in compensation expense to the
Company in 1997.


                                     - 77 -
<PAGE>



         (c) 1995 SHARE  OPTION  PLAN.  In 1995,  the Company  adopted the North
American Vaccine,  Inc. 1995 Share Option Plan (the "1995 Plan"), which provides
for the  issuance of up to  1,000,000  shares of its common  stock to  officers,
directors,  employees  and  consultants.  The 1995 Plan,  which expires in March
2000,  provides that options be granted at no less than market value on the date
of the grant and may have a term of up to 10 years.

         The following table  summarizes  option activity  outside of any formal
stock  option plan and under both the 1990 Plan and the 1995 Plan for the period
from December 31, 1993, through December 31, 1996:

<TABLE>
<CAPTION>

                                             NUMBER OF SHARES
                                 ------------------------------------    
                                 1990 Plan     1995 Plan     Non-Plan      Exercise      Wtg.Avg.
                                  Options       Options       Options       Price       Exer.price
                                  -------       -------       -------       -----       ----------

<S>                              <C>           <C>           <C>         <C>            <C>
Balance at December 31, 1993      2,218,294          --      1,610,788   $ 1.19-12.88     $ 6.30
 
Granted                             150,000          --             --     9.88-13.63      12.38
Exercised                          (149,536)         --     (1,252,350)    1.19-12.88       3.38
Expired or canceled                (100,203)         --             --     9.00-12.88      10.74
                                 ----------     ---------   ----------   ------------     ------  
Balance at December 31, 1994      2,118,555          --        358,438     1.19-13.63       8.15

Granted                             172,500       505,000           --     9.13-14.13      12.44
Exercised                          (487,688)         --        (11,562)    1.19- 2.00       1.84
Expired or canceled                (156,467)         --             --     1.81-12.88      11.83
                                 ----------     ---------   ----------     -----------    ------  
Balance at December 31, 1995      1,646,900       505,000      346,876     1.56-14.13      10.34

Granted                             540,000        18,500           --    12.88-21.50      13.16
Exercised                          (428,231)           --     (231,252)    1.56-12.88       7.08
Expired or canceled                (558,987)      (24,000)          --     9.13-13.88      12.82
                                 ----------     ---------   ----------   ------------     ------  
Balance at December 31, 1996      1,199,682       499,500      115,624   $ 2.92-21.50     $11.59
                                 ==========     =========   ==========   ============     ======  
</TABLE>


         At  December  31,  1996,  under the 1990 Plan,  options to  purchase an
aggregate of 1,049,633  common shares were  exercisable  at prices  ranging from
$9.00 to $13.63 per share (weighted average exercise price per share of $11.68),
and no options were  available for grant.  At December 31, 1996,  under the 1995
Plan, options to purchase an aggregate of 168,235 common shares were exercisable



                                     - 78 -
<PAGE>


at prices  ranging from $11.25 to $13.88 per share  (weighted  average  exercise
price per share of  $13.57),  and  500,500  options  were  available  for grant.
Subsequent  to year end,  options to acquire an additional  110,000  shares were
granted under this plan at an exercise price of U.S. $24.50.

         In addition, non-plan options to purchase an aggregate of 57,812 shares
of common stock were  exercisable  at December 31, 1996, at a price of $2.92 per
share.  The weighted  average per share grant date fair value of options granted
during  1996 and 1995 for the 1990 plan was $5.11  and $4.53  respectively.  The
weighted  average per share grant date fair value of options granted during 1996
and 1995 for the 1995 plan was $10.59 and $8.40 respectively.

         (d) 1990  NON-EMPLOYEE  DIRECTOR AND SENIOR EXECUTIVE STOCK OPTION PLAN
("1990 SESOP") . In 1990, the Company adopted the 1990 SESOP, which, as amended,
provided for the  issuance of up to 1,850,000  shares of its common stock to all
the Company's non-employee directors, and senior executives who are residents of
Canada.  Under the 1990  SESOP,  which  expired in October  1995,  options  were
granted  automatically to each non-employee  director annually on January 1. The
1990 SESOP  required  that the  exercise  price must not be less than the market
value  of the  stock  at the  date of  grant.  Options  issued  to  non-employee
directors  under the 1990  SESOP are  exercisable  in  Canadian  currency,  vest
ratably  over a period of three  years and  expire  five  years from the date of
grant.  Upon a change of control of the Company,  all outstanding  stock options
granted under the 1990 SESOP become fully exercisable.

         (e) 1995  NON-EMPLOYEE  DIRECTOR AND SENIOR EXECUTIVE STOCK OPTION PLAN
("1995 SESOP").  In 1995, the Company adopted the 1995 SESOP, which provides for
the issuance of up to 500,000  shares of its common  stock to all the  Company's
non-employee  directors,  and its senior executives who are residents of Canada.
Under  the  1995  SESOP,  which  expires  in March  2000,  options  are  granted
automatically  to each  non-employee  director  annually  on January 1. The 1995
SESOP requires that the exercise price must not be less than the market value of
the stock at the date of grant.  Options issued to  non-employee  directors vest
ratably  over a period of three  years  and  expire  ten years  from the date of
grant.  Upon a change of control of the Company,  all outstanding  stock options
granted under the 1995 SESOP become fully exercisable.



                                     - 79 -
<PAGE>


         The following  table  summarizes  option  activity under the 1990 SESOP
plan and the 1995 SESOP plan from December 31, 1993 through December 31, 1996:

<TABLE>
<CAPTION>


                                      1990 Plan    1995 Plan  Exercise Price              Wtg.Avg.
                                       Options      Options       Can.$         U.S. $   Exer.price(U.S.)
                                     -----------   ---------  ---------------   -------  ----------------
<S>                                  <C>           <C>         <C>             <C>           <C>    
Balance at December 31, 1993          1,030,002           --     $ 1.40-15.10  $1.02-11.02     $ 5.29

Granted                                 130,000           --            14.56        10.62      10.62
Exercised                              (110,000)          --       1.40- 1.88   1.02- 1.37       1.11
Expired or canceled                     (50,000)          --      12.88-15.10   9.40-11.02      10.61
                                      ---------      -------     ------------  -----------     ------
Balance at December 31, 1994          1,000,002           --       1.40-15.10   1.02-11.02       6.17

Granted                                 120,000           --            11.75         8.57       8.57
Exercised                              (420,002)          --       1.40- 1.88   1.02- 1.37       1.21
                                      ---------      -------     ------------  -----------     ------
Balance at December 31, 1995            700,000           --       1.88-15.10   1.37-11.02       9.56

Granted                                      --      130,000               --        14.13      14.13
Exercised                              (199,999)          --       1.88-15.10   1.37-11.01       8.47
Expired or canceled                     (10,001)     (10,000)     11.75-14.56   8.58-14.13      11.69
                                      ---------     --------     ------------  -----------     ------ 
Balance at December 31, 1996            490,000      120,000     $11.75-15.10  $8.58-14.13     $10.82
                                      =========     ========     ============  ===========     ======

</TABLE>

         At December  31,  1996,  under the 1990  SESOP,  379,992  options  were
exercisable at prices  ranging from Can.  $11.75 to Can.  $15.10 (U.S.  $8.57 to
U.S.  $11.02) per share  (weighted  average U.S. price of $10.24) and no options
were available for grant under the 1990 SESOP.  At December 31, 1996,  under the
1995  SESOP,  there were no  exercisable  options to  purchase  shares of common
stock,  and 380,000  options were  available for grant.  Subsequent to year end,
options to acquire an additional  130,000 shares were granted under this plan at
an exercise price of U.S. $24.38. The weighted average per share grant date fair
value of options  granted  during  1995 for the 1990  SESOP plan was $3.91.  The
weighted  average per share grant date fair value of options granted during 1996
for the 1995 SESOP plan was $10.58.

         (f) STOCK BASED  COMPENSATION  PLANS. The Company applies the intrinsic
value based method of accounting pursuant to APB Opinion No. 25, "Accounting For
Stock Issued To Employees," and related  interpretations for option grants under
its stock based compensation plans.  Accordingly,  no compensation cost has been
recognized in the accompanying  financial statements.  Had compensation cost for
the  Company's  four stock option plans been  determined on the fair value based
method of SFAS 123,  "Accounting  for  Stock-Based  Compensation,"  at the grant
dates for awards under these plans,  the  Company's  net loss and loss per share
for 1996 and 1995 would have been $23.9 million or a loss of $0.78 per share and
$6.7 million or a loss of $0.22 per share, respectively.


                                     - 80 -
<PAGE>



         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
characteristics  significantly  different  from  those of  traded  options,  and
because changes in the subjective  input  assumptions can materially  affect the
fair  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.

         Pursuant to SFAS 123,  the fair value of each option grant is estimated
on the date of grant  using a  Black-  Scholes  option  pricing  model  with the
following  weighted  average  assumptions  used for  grants  in 1996,  and 1995,
respectively: risk-free interest rates of 6.04 to 7.59 percent for the 1990 Plan
options, 5.26 to 6.49 for the 1995 Plan options, 7.79 percent for the 1990 SESOP
options  and 5.21  percent  for the 1995 SESOP  options;  no  expected  dividend
yields;  expected  lives of 4 years for the 1990 Plan  options,  between 5 and 6
years for the 1995 Plan options, 4 years for the 1990 SESOP options, and 8 years
for the 1995 SESOP  options;  and  expected  volatility  of 78  percent.  Of the
2,424,806  options  outstanding at December 31, 1996,  1,655,672  options have a
weighted  average  remaining  contractual  life of approximately 2 years. All of
these options are  exercisable.  The remaining  769,134  options have a weighted
average remaining contractual life of approximately 6 years.


(15)  RETIREMENT AND SAVINGS 401(k) PLAN AND TRUST

         The Company's Retirement and Savings 401(k) Plan and Trust ("the Plan")
became effective April 1, 1991. The Plan is a qualified profit-sharing plan with
a  cash  or  deferred  compensation   arrangement  and  discretionary   matching
contributions. Under the Plan, eligible employees may elect to contribute to the
Plan by  salary  deferrals  up to an  annual  limit,  which is the  lesser of 20
percent of a  participant's  annual  compensation or the maximum allowed by law,
and the Company may contribute  matching amounts as provided by the Plan. Salary
deferrals  and matching  contributions  are vested  immediately.  The  Company's
matching  expense,  contributed in the form of the Company's  common stock,  was
$200,000, $135,000, and $109,000 for 1996, 1995, and 1994, respectively.

         The Company  may elect to make  additional  contributions  to the Plan,
from its current or  accumulated  net profits,  in the form of a profit  sharing
contribution.  This  discretionary  contribution  will be made for all  eligible
participants  regardless of whether such  participants make any salary deferrals
for that plan year. Profit sharing  contributions are vested ratably over a five
year  period.  From  inception  of the Plan,  the  Company has not made a profit
sharing contribution.


                                     - 81 -
<PAGE>



         The Plan provides for an overall  limitation with respect to the amount
of contributions (including company match, if any) which can be allocated to any
participant in any plan year.  This  limitation is the lesser of 25 percent of a
participant's annual compensation or the maximum allowed by law.

(16) RELATED-PARTY TRANSACTIONS

         Pursuant to the terms of the technology  transfer agreement executed by
the Company and BioChem at the time of the Merger,  the companies  shared in the
expenses  of  researching  and  developing  the  subject  vaccine  technologies,
including  expenses related to obtaining  applicable  patent rights.  In January
1995,  BioChem exercised its option under the technology  transfer  agreement to
terminate this joint  arrangement.  BioChem's portion of the expenses  including
reimbursements  for its share of minimum  annual  royalties as discussed in Note
12, was $2,200, $20,000, and $496,000 in 1996, 1995, and 1994, respectively.  In
addition,  BioChem paid certain  expenses for the  development  of the conjugate
vaccine  technologies  transferred  to the  Company  in the  Merger,  subject to
reimbursement  by the Company.  The Company's  portion of these expenses was $0,
$0,  and $1,200 in 1996,  1995,  and 1994,  respectively,  and are  included  in
research  and  development  in  the  accompanying   consolidated  statements  of
operations.  In 1994 the Company  also  received  $336,000  from BioChem for its
share of the costs of a withdrawn public offering.

         In 1994 the Company  sold  1,100,000  shares of common stock of BioChem
held by the  Company as  investment  securities  since  1990.  The sale of these
investment securities was pursuant to a negotiated  transaction at a discount of
approximately  10 percent from the then trading  price of that stock.  The sales
were made to thirteen purchasers, several of whom were directors of the Company.
All sales were made at the same price per share.

         In the Merger,  as discussed in Note 1, the Company and Biochem granted
to each other a one time demand  registration right (with expenses to be paid by
the party exercising the registration right) and certain piggy-back registration
rights,  through January 17, 1995. In connection with a proposed offering of the
Company's  stock in 1994 by both  BioChem and the  Company,  which  offering was
later withdrawn at BioChem's  request,  BioChem's  one-time demand  registration
right was extended through January 17, 1998.


                                     - 82 -
<PAGE>



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

           None.


                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
           --------------------------------------------------

         The  information  required by this Item 10 is incorporated by reference
to the discussion under the headings "Election of Directors," "Identification of
Senior  Management"  and "Security  Ownership of Certain  Beneficial  Owners and
Management - Section 16(a)  Beneficial  Ownership  Reporting  Compliance" as set
forth in the Company's 1997 Proxy Statement.


ITEM 11.   EXECUTIVE COMPENSATION
           ----------------------

         The  information  required by this Item 11 is incorporated by reference
to the discussion under the heading  "Executive  Compensation"  and "Election of
Directors -  Compensation  of Directors"  set forth in the Company's  1997 Proxy
Statement.


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT
           ---------------------------------------------------

         The  information  required by this Item 12 is incorporated by reference
to the discussion under the heading  "Security  Ownership of Certain  Beneficial
Owners and Management" set forth in the Company's 1997 Proxy Statement.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
           ----------------------------------------------

         The  information  required by this Item 13 is incorporated by reference
to the  discussion  under the heading  "Certain  Transactions"  set forth in the
Company's 1997 Proxy Statement.


                                     - 83 -
<PAGE>




                                     PART IV

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

a)       DOCUMENTS FILED AS PART OF FORM 10-K.
         -------------------------------------

         The following documents are filed as part of this Annual Report on Form
10-K:

         1.    FINANCIAL STATEMENTS:                                       PAGE

               Report of Independent Public Accountants                     56
               Consolidated Balance Sheets as of 
                  December 31, 1996 and 1995                                57
               Consolidated Statements of Operations for the 
                  Years Ended December 31, 1996, 1995 and 1994              58
               Consolidated Statements of Shareholders' Equity 
                  for the Years Ended December 31, 1996, 
                  1995 and 1994                                             59
               Consolidated Statements of Cash Flows for the 
                  Years Ended December 31, 1996, 1995 and 1994              60
               Notes to Consolidated Financial Statements                   62

         2.    FINANCIAL STATEMENT SCHEDULES:
               
               None Required.

         3.    EXHIBITS:   See Exhibit Index on page 86.


(b)      REPORTS ON FORM 8-K.
         --------------------
                  None.



                                     - 84 -
<PAGE>



                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, North American  Vaccine,  Inc. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.


                                               NORTH AMERICAN VACCINE, INC.

Dated:  March 10, 1997                         By:  /s/ Sharon Mates
                                                    ------------------
                                                    Sharon Mates, President


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this report has been signed  below by the  following  persons on behalf of North
American Vaccine, Inc. in the capacities and on the dates indicated.

Principal Executive Officer:

/s/ Sharon Mates                                                March 10, 1997
-------------------------
Sharon Mates, Ph.D.
President

Principal Financial Officer And
Principal Accounting Officer:

/s/ Lawrence J. Hineline                                        March 10, 1997
--------------------------
Lawrence J. Hineline
Vice President-Finance

<TABLE>
<CAPTION>

A Majority Of The Board Of Directors:

<S>                         <C>               <C>                            <C>
/s/ Francesco Bellini       March 10, 1997    /s/ Rondi R. Grey               March 3, 1997 
--------------------------                    --------------------------                   
Francesco Bellini, Ph.D.                      Rondi R. Grey                                
                                                                                           
/s/ Alain Cousineau         March 10, 1997    /s/ Lyle Kasprick               March 10, 1997
--------------------------                    --------------------------                   
Alain Cousineau                               Lyle Kasprick                                
                                                                                           
/s/ Jonathan Deitcher       March 10, 1997    /s/ Francois Legault            March 3, 1997
--------------------------                    --------------------------                   
Jonathan Deitcher                             Francois Legault                             
                                                                                           
/s/ Denis Dionne            March 3, 1997     /s/ Sharon Mates                March 10, 1997
--------------------------                    --------------------------                   
Denis Dionne                                  Sharon Mates, Ph.D.                          
                                                                                           
/s/ Neil W. Flanzraich      March 10, 1997     /s/ Richard C. Pfenniger, Jr.  March 10, 1997
--------------------------                    ---------------------------                
Neil W. Flanzraich                            Richard C. Pfenniger, Jr.                    
                                                                                           
/s/ Phillip Frost           March 10, 1997    
--------------------------                    
Phillip Frost, M.D.                              
                                                 
</TABLE>


                                     - 85 -
<PAGE>





                                 EXHIBIT INDEX


Exhibit
 No.           Description
-------        -----------

2.1      Master Agreement, dated October 25, 1989, among North American Vaccine,
         Inc. ("NAV"), American Vaccine Corporation ("American Vaccine") and IAF
         BioChem International, Inc. ("BioChem"). (1)

2.2      Agreement and Plan of Merger,  dated as of October 25, 1989, among NAV,
         American Vaccine and NAVA Acquiring Corp. (1)

2.3      Share  Purchase  Agreement,  dated  January 17,  1990,  between NAV and
         BioChem. (1)

2.4      Technology Transfer Agreement,  dated January 17, 1990, between NAV and
         BioChem. (1)

3.1      Articles of Incorporation of NAV, as amended. (1)(5)

3.2      Restated Bylaws of NAV. (2)

4.2      Specimen Certificate for NAV Common Shares. (1)

4.3      Specimen Certificate for NAV Preferred Shares. (1)

9.1      Shareholders' Agreement, dated January 17, 1990, among BioChem, Phillip
         Frost,  M.D.,  IVAX  Corporation  ("IVAX")  and  Frost-Nevada,  Limited
         Partnership ("Frost-Nevada"). (1)

10.1     License  Agreement,  dated July 27, 1987,  between Canadian Patents and
         Development  Limited  ("CPDL") and BioChem [with  certain  confidential
         information deleted therefrom]. (1)

10.2     License Agreement,  dated June 27, 1988, between CPDL and BioChem [with
         certain confidential information deleted therefrom]. (1)

10.3     Agreement,  dated April 6, 1989,  between AMVAX, Inc. ("AMVAX") and the
         National Institute of Child Health and Human Development ("NICHD"). (1)

10.4     License  Agreement,  dated March 25, 1988,  between National  Technical
         Information   Service   ("NTIS")   and  Selcore   Laboratories,   Inc.,
         predecessor to AMVAX ("Selcore") [with certain confidential information
         deleted therefrom]. (1)


                                     - 86 -
<PAGE>


Exhibit
 No.           Description
-------        -----------

10.5     Second Amended and Restated Patent License  Agreement,  dated March 12,
         1992,  between  Ronald  D.  Sekura,  Ph.D.,  and  AMVAX  [with  certain
         confidential information deleted therefrom]. (5)

10.6*    North American Vaccine, Inc. Share Option Plan, as amended. (7)

10.9     Form of  Indemnification  Agreement among NAV, American Vaccine,  IVAX,
         Frost-Nevada and Ronald D. Sekura, Ph.D. (1)

10.12    Lease  Agreement  dated December 31, 1987, as amended,  between Selcore
         and Indian Creek Holding Associates Limited Partnership. (1)

10.13    Modification No. 11 to Contract with NICHD dated January 31, 1991 [with
         certain confidential information deleted therefrom]. (3)

10.14    Supply Agreement  between AMVAX and Statens  Seruminstitut  dated March
         26, 1991 [with certain confidential information deleted therefrom]. (3)

10.16    Supply Agreement  between AMVAX and Statens  Seruminstitut  dated March
         26, 1991 [with certain confidential information deleted therefrom]. (3)

10.17    Research,  Development and License  Agreement between AMVAX and Statens
         Seruminstitut   dated  March  26,  1991  [with   certain   confidential
         information deleted therefrom]. (3)

10.18*   Non-Employee  Director  and Senior  Executive  Stock  Option  Plan,  as
         amended. (7)

10.19    Modification  No. 12 to  Contract  with NICHD dated April 1, 1992 [with
         certain confidential information deleted therefrom]. (6)

10.20    Contract  dated  April 9, 1992 with NICHD  [with  certain  confidential
         information deleted therefrom]. (6)

10.21    Modification  No. 13 to Contract  with NICHD dated  September  24, 1992
         [with certain confidential information deleted therefrom]. (7)

10.22    Amended and restated  master  agreement  dated June 20, 1994 among NAV,
         BioChem,  IVAX, D&N Holding  Company,  Frost-Nevada  and Phillip Frost.
         (10)

10.23    Share exchange  agreement dated April 20, 1994 between NAV and BioChem.
         (8)

10.24    Construction  Agreement  dated  July 18,  1994  between  AMVAX  and The
         Whiting-Turner Contracting Company. (9)


                                     - 87 -
<PAGE>



Exhibit
 No.           Description
-------        -----------

10.25*   North American Vaccine, Inc. 1995 Share Option Plan. (11)

10.26*   North  American  Vaccine,  Inc. 1995  Non-Employee  Director and Senior
         Executive Stock Option Plan. (12)

10.27    Clinical Development  Agreement dated December 22, 1995 between NAV and
         Pasteur Merieux SJrums et Vaccins  ("PMSV") [with certain  confidential
         information deleted therefrom]. (13)

10.28    License  Agreement  dated  December 22, 1995 between NAV and PMSV [with
         certain confidential information deleted therefrom]. (13)

10.29    Indenture dated May 7, 1996 between NAV and Marine Midland Bank. (14)

10.30    Registration  Rights Agreement dated May 1, 1996 between NAV,  Goldman,
         Sachs & Co. and UBS Securities LLC. (14)

10.31    Exclusive Distribution Agreement between Abbott Laboratories ("Abbott")
         and NAV dated October 11, 1996 [with certain  confidential  information
         deleted therefrom]. (15)

10.32    Stock Purchase Agreement dated October 11, 1996 between Abbott and NAV.
         (15)

10.33    Assets Purchase  Agreement  dated October 17, 1996 among NAV,  Cephalon
         Property  Management,  Inc.  ("CPMI") and Cephalon,  Inc. [with certain
         confidential information deleted therefrom]. (15)

10.34    Assignment  and  Assumption  of Leases dated  November 12, 1996 between
         CPMI and NAV.

10.35    Master  Agreement  dated  November  1,  1996  between  NAV and  General
         Electric Capital  Corporation  [with certain  confidential  information
         deleted therefrom].

21       Subsidiaries. (4)

23       Consent of Independent Public Accountants.

27       Financial Data Schedule.

__________________________

*        Management contract or compensatory plan or arrangement.

(1)      This  exhibit  is   incorporated   herein  by  this  reference  to  the
         corresponding exhibit in the Company's Form S-4 Registration  Statement
         (File No.  33-31512) filed with the Securities and Exchange  Commission
         and declared effective on January 24, 1990.

(2)      This  exhibit  is   incorporated   herein  by  this  reference  to  the
         corresponding  exhibit in the Company's Form 10-Q Quarterly  Report for
         the Quarter Ended June 30, 1990 (File No. 1-10451).


                                     - 88 -
<PAGE>



(3)      This  exhibit  is   incorporated   herein  by  this  reference  to  the
         corresponding  exhibit in the Company's Form 10-K Annual Report for the
         Year Ended December 31, 1990 (File No. 1-10451).

(4)      This exhibit is incorporated  herein by this reference to Exhibit 22 in
         the Company's  Form 10-K Annual Report for the Year Ended  December 31,
         1990 (File No. 1-10451).

(5)      This  exhibit  is   incorporated   herein  by  this  reference  to  the
         corresponding  exhibit in the Company's Form 10-K Annual Report for the
         Year Ended December 31, 1991 (File No. 1-10451).

(6)      This  exhibit  is   incorporated   herein  by  this  reference  to  the
         corresponding  exhibit in the Company's Form 10-Q Quarterly  Report for
         the Quarter Ended March 31, 1992 (File No. 1-10451).

(7)      This  exhibit  is   incorporated   herein  by  this  reference  to  the
         corresponding  exhibit in the Company's Form 10-K Annual Report for the
         Year Ended December 31, 1992 (File No. 1-10451).

(8)      This  exhibit  is   incorporated   herein  by  this  reference  to  the
         corresponding  exhibit in the Company's Form 10-Q Quarterly  Report for
         the Quarter Ended March 31, 1994 (File No. 1-10451).

(9)      This  exhibit  is   incorporated   herein  by  this  reference  to  the
         corresponding  exhibit in the Company's Form 10-Q Quarterly  Report for
         the Quarter Ended June 30, 1994 (File No. 1-10451).

(10)     This exhibit is  incorporated  herein by this  reference to the Exhibit
         99.1 in the Company's  Registration Statement on Form S-3 (Registration
         No.  33-78002)  filed with the Securities  and Exchange  Commission and
         withdrawn from registration on November 23, 1994.

(11)     This exhibit is  incorporated  herein by this  reference to the Exhibit
         4.1 in the Company's  Registration  Statement on Form S-8 (Registration
         No.  33-80479)  filed with the Securities  and Exchange  Commission and
         effective as of December 15, 1995.

(12)     This exhibit is  incorporated  herein by this  reference to the Exhibit
         4.2 in the Company's  Registration  Statement on Form S-8 (Registration
         No.  33-80479)  filed with the Securities  and Exchange  Commission and
         effective as of December 15, 1995.

(13)     This  exhibit  is   incorporated   herein  by  this  reference  to  the
         corresponding  exhibit in the Company's Form 10-K Annual Report for the
         Year Ended December 31, 1995 (File No. 1-10451).


                                     - 89 -
<PAGE>
 



(14)     This  exhibit  is   incorporated   herein  by  this  reference  to  the
         corresponding  exhibit in the Company's Form 10-Q Quarterly  Report for
         the Quarter Ended March 31, 1996 (File No. 1-10451).

(15)     This  exhibit  is   incorporated   herein  by  this  reference  to  the
         corresponding  exhibit in the Company's Form 10-Q Quarterly  Report for
         the Quarter Ended September 30, 1996 (File No. 1-10451).




                                     - 90 -