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

                   For the fiscal year ended December 31, 1997

                                       OR

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

                  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 reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
                                              -
Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates  computed by reference to the price at which the common equity
was sold,  or the average bid and asked  price of such  common  equity,  as of a
specified date within the past 60 days.

   Specified date -- March 15, 1998; Aggregate market value -- $267,103,568
                                                                -----------

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 March 15, 1998 -- 32,050,452
                                                                   ----------
<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 1998 Annual Meeting of  Shareholders of the registrant (the
"1998 Proxy Statement").


                                TABLE OF CONTENTS

ITEM              DESCRIPTION                                               PAGE

                  PART I

1   Business.................................................................  3
2   Properties............................................................... 29
3   Legal Proceedings........................................................ 30
4   Submission of Matters to a Vote of Security Holders...................... 30

                  PART II

5   Market for Registrant's Common Equity and Related Stockholder Matters.... 31
6   Selected Financial Data.................................................. 32
7   Management's Discussion and Analysis of Financial Condition and Results
    of Operation............................................................. 34
7A  Quantitative and Qualitative Disclosures About Market Risk .............. 45
8   Financial Statements and Supplementary Data.............................. 45
9   Changes in and Disagreements with Accountants on Accounting and Financial
    Disclosure............................................................... 68

                  PART III

10  Directors and Executive Officers of the Registrant....................... 68
11  Executive Compensation................................................... 68
12  Security Ownership of Certain Beneficial Owners and Management........... 68
13  Certain Relationships and Related Transactions........................... 68

                  PART IV

14  Exhibits, Financial Statement Schedules, and Reports on Form 8-K......... 69

    Signatures............................................................... 70


                                      - 2 -

<PAGE>

                                     PART I


ITEM 1.    BUSINESS


INTRODUCTION

         North  American  Vaccine,  Inc.  (the  "Company")  is  engaged  in  the
research,  development,  production  and sale of vaccines for the  prevention of
human  infectious   diseases.   The  Company's  first  product  is  a  patented,
monocomponent  acellular pertussis ("aP") vaccine for the prevention of whooping
cough. The aP vaccine has been combined with diphtheria and tetanus toxoids as a
combined diphtheria-tetanus-acellular  pertussis ("DTaP") vaccine to be marketed
in the United States under the trade name Certiva(TM). Regulatory approvals were
granted in 1996 in Sweden  for a  European  formulation  of  Certiva(TM)  and in
Denmark for a DTaP-IPV  vaccine,  which  combines  the European  formulation  of
Certiva(TM) with an enhanced,  inactivated  polio vaccine ("IPV").  In addition,
regulatory  approval  was granted in Sweden in April 1997 for the  Company's  aP
vaccine  for  children  and young  adolescents  at risk for  pertussis,  thereby
expanding the indications and usage of the aP vaccine.  The Company has numerous
other vaccines in varying stages of development,  including combination vaccines
using Certiva(TM) as an "anchor," as well as several 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, ten pediatric vaccines,
including  vaccines for the  prevention of  diphtheria,  tetanus,  pertussis and
polio,  are  generally  required  by state  immunization  programs.  The Company
estimates  that over 25 million  doses of  combination  diphtheria,  tetanus and
pertussis  vaccines  were sold in the United  States  during  1996.  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  number of deaths  annually  in the  United  States  from  influenza,
pneumonia and hepatitis B infections.  In 1994, The United States  Department of
Health and Human  Services  estimated  that the costs to society of diseases for
which  vaccines  currently  exist  exceeded $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 a total of five doses administered
at two,  four, six and between 15 to 18 months of age and  immediately  prior to
entering  grade school.  Prior to 1996,  only combined  diphtheria,  tetanus and
"whole cell"  pertussis  ("DTP")  vaccines  were  approved for use in the United
States for all recommended pediatric doses; however,  within the past two years,
three  DTaP  vaccines  have been  licensed  by the United  States  Food and Drug
Administration  ("FDA") for all five doses of the pediatric immunization series.
The Company  believes  that DTaP vaccines are now replacing the "whole cell" DTP
vaccines and are preferred in the childhood immunization schedule recommended by
the Advisory  Committee on Immunization  Practices  ("ACIP") of the U.S. Centers
for  Disease  Control  and  Prevention  ("CDC")  and  the  American  Academy  of
Pediatrics  ("AAP").  The Company's  acellular  pertussis  vaccine is unique and
distinct from all other  pertussis  vaccines in that it contains only  pertussis
"toxoid"   (i.e.,   pertussis  toxin  that  has  been  purified  and  chemically
inactivated by hydrogen  peroxide),  instead of the entire Bordetella  pertussis
bacteria or two or more of its components.  Clinical studies have shown that the



                                      - 3 -

<PAGE>

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's license  applications for approval to market  Certiva(TM)
in the United States are pending with the FDA. In addition, license applications
for the European  formulation  of  Certiva(TM)  are pending in several  European
countries. See "Products Under Development - Acellular Pertussis Vaccines."

         COMBINATION  VACCINES.  Using  Certiva(TM) as an "anchor" for combining
additional  pediatric vaccines,  the Company is developing  combination 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,
which  could  lower  treatment  costs  and  improve   compliance  with  standard
vaccination  schedules.  The  Company's  first  combination  vaccine,  DTaP-IPV,
combines an IPV with  Certiva(TM).  In September 1996, the Danish National Board
of Health granted Statens Seruminstitut ("SSI") of Copenhagen,  Denmark approval
to market the DTaP-IPV vaccine for all primary and booster doses for infants and
children.  In the  United  States,  the  ACIP  and AAP  have  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 has filed an  investigational  new drug  application
with the FDA to conduct  clinical  trials with a DTaP-IPV in the United  States.
The Company is pursuing  regulatory  approval of a DTaP-IPV  vaccine in selected
European  countries.  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."

         CONJUGATE  VACCINES.   The  Company,  using  patented  and  proprietary
technologies,  is  developing  several  conjugate  vaccines  for  prevention  of
infectious  diseases in children  and adults.  Conjugate  vaccines are formed by
chemically linking (i.e.,  conjugating)  polysaccharides to a "carrier" protein.
This  procedure  has been shown to enhance  the  immunogenic  properties  of the
polysaccharides,  particularly in infants.  Conjugate  vaccines may be useful in
preventing several serious diseases,  including meningitis,  pneumonia and strep
throat in all groups, including infants and children. Vaccines are not currently
available  for the  prevention  of several  of these  diseases.  The  Company is
currently  participating in Phase II clinical trials in infants and children for
its Group C meningococcal  conjugate vaccine in the United Kingdom,  and a Phase
II clinical trial is being conducted for a vaccine against Group B streptococcal
infections  utilizing patented  technologies held by the Company.  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 Group B  meningococcal  infection,  for  immunization of adults,
adolescents and infants.



                                      - 4 -

<PAGE>


         The Company also has entered  into  marketing  alliances  for its first
commercial  products.  For example,  under an agreement with Abbott Laboratories
("Abbott"), Certiva(TM) will be marketed and distributed in the United States by
Abbott to the private  physicians and managed care markets and by the Company to
government  purchasers,  including state  governments and the CDC. 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
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.

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  ten  vaccines   generally  required  by  state  pediatric
vaccination  programs are intended to prevent  diphtheria,  tetanus,  pertussis,
measles, mumps, rubella, polio, HIB, hepatitis B and varicella (chicken pox). In
addition to these ten vaccines,  the ACIP and AAP  periodically  review  current
immunization  practices and issue their recommendations for additional pediatric
vaccinations.  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 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 1994, the United States  Department of Health and Human
Services  estimated  that the costs to society of  diseases  for which  vaccines
currently exist exceeded $10 billion each year. In addition,  vaccines have been
widely  recognized  as highly  cost-effective  in  preventing  the  incidence of


                                      - 5 -

<PAGE>


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  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.  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 Company  spent $19.9  million,  $11.6
million and $10.2 million on research and  development of its products for 1997,
1996 and 1995,  respectively.  See Item 7 - Management's Discussion and Analysis
of  Financial  Condition  and  Results of  Operation.  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."





                                      - 6 -

<PAGE>
<TABLE>
<CAPTION>

                                          TABLE 1
                                PRODUCTS UNDER DEVELOPMENT

         PRODUCTS                            DISEASE                        STATUS(1)
-------------------------            ----------------------               ------------------

<S>                                  <C>                                  <C>
ACELLULAR PERTUSSIS VACCINES
Certiva(TM)......................    Diphtheria, tetanus and pertussis     Licensed in Sweden; license
                                     (whooping cough)                      applications pending in U.S. and
                                                                           additional European countries

aP...............................    Pertussis                             Licensed in Sweden for children       
                                                                           and young adolescents

TdaP.............................    Tetanus, diphtheria and pertussis     Phase II trial being planned
                                     (adolescent/adult booster)

COMBINATION VACCINES
DTaP-IPV.........................    Diphtheria, tetanus, pertussis        Licensed in Denmark; license
                                     and polio                             applications pending in other
                                                                           European countries; IND filed for
                                                                           Phase II clinical trials in U.S.

DTaP-HIB.........................    Diphtheria, tetanus, pertussis        Preclinical; clinical trial being
                                     and meningitis                        planned

DTaP-IPV-HIB.....................    Diphtheria, tetanus, pertussis,       Trial ongoing in Sweden;
                                     polio and meningitis                  clinical trial being planned


CONJUGATE VACCINES
Group B Streptococcal.............   Neonatal sepsis and meningitis        Phase II clinical trials

Group B Meningococcal.............   Meningitis                            Clinical trial being planned

Group C Meningococcal.............   Meningitis                            Phase II clinical trials commenced in
                                                                           U.K. in infants and children

Group A/C Meningococcal...........   Meningitis                            Preclinical

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

Haemophilus Influenzae
type b............................   Meningitis                            Preclinical; clinical trial being
                                                                           planned

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

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

Pneumococcal (pneumonia)..........   Pneumococcal pneumonia                Preclinical
</TABLE>

--------------
(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  or IND 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."

                                      - 7 -

<PAGE>

         ACELLULAR PERTUSSIS VACCINES

         BACKGROUND.  Immunization  against  diphtheria,  tetanus and  pertussis
using a combined  vaccine during infancy and childhood is a routine  practice in
the United  States,  and 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, 15 to 18 months, and 4 to 6 years of age. In addition, immunization against
diphtheria,  tetanus and pertussis is also required in many countries outside of
the United States.

         Since the late 1940s,  the  widespread use of "whole cell" DTP vaccines
led to a rapid decline in disease-related morbidity and mortality, especially in
children.  These  "whole  cell"  DTP  vaccines  include  the  entire  Bordetella
pertussis  bacterium that has been inactivated in the production process by heat
or  chemicals,  and 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 "whole cell" DTP vaccines.  These adverse reactions
range from minor local reactions to more serious  systemic  reactions.  Clinical
trials  have  established  that  acellular   pertussis   vaccines  should  offer
advantages  over  licensed  "whole  cell"  pertussis  vaccines  with  respect to
improved tolerability and fewer serious adverse reactions.  The Company believes
that DTaP  vaccines  are now  replacing  the "whole  cell" DTP  vaccines and are
preferred for all doses in the immunization schedule recommended by the ACIP and
AAP. Currently, three DTaP vaccines have been licensed by the FDA for use in the
United  States.  In  addition  to the  Company,  one  other  firm has  filed for
regulatory  approval  in the U.S.  for its DTaP  vaccine.  See  "Products  Under
Development - Acellular Pertussis Vaccines - DTaP Vaccine" and "Competition."

         DTAP  VACCINE.  The Company has  developed  Certiva(TM),  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  vaccine is unique and  distinct  from all other  pertussis
vaccines in that it contains only pertussis  toxoid (i.e.,  pertussis toxin that
has been purified and chemically  inactivated by hydrogen peroxide),  instead of
the entire Bordetella  pertussis bacterium or two or more of its components.  In
clinical trials, this single toxoid has been shown to induce immunity with fewer
serious adverse reactions than the "whole cell" pertussis vaccine. The method of
manufacture  for this  pertussis  toxoid are the  subject  of United  States and
foreign   patents   licensed   exclusively   to  the  Company.   See   "Business
Relationships."

         Regulatory  approval  to market  Certiva(TM)  in the  United  States is
pending before the FDA. In January 1998, the Company was advised by the FDA that
Certiva(TM)  is on track for  completing  the final  steps  for  licensure.  The
Company  has  prepared  and  submitted  additional  information  to  the  FDA in
furtherance of its license  application.  The factors that may affect the timing
for, or the ability of the Company to secure, regulatory approval of Certiva(TM)
include the acceptability of the Company's submissions to FDA, the timeliness of
the FDA in completing  its entire review  process and the  acceptability  of the
Company's license applications in their entirety,  among others. There can be no
assurances given that Certiva(TM) will receive  regulatory  approval in a timely
manner  or  at  all.  See  "Risk   Factors  -  Dependence   Upon   Approval  and
Commercialization  of DTaP  Vaccines"  and  "Risk  Factors  Need for  Regulatory
Approvals."

         In  February  1996,  a license was  granted to the  Company's  European
partner,  SSI, to market in Sweden a European formulation of Certiva(TM) for all
recommended doses for infants and children.  The Company's  strategy is to file,


                                      - 8 -

<PAGE>

or have filed on its behalf, regulatory applications in other selected  European
countries.  Approvals  in  any of  these  European  countries  can  precede  and
generally  are not  dependent  upon  filings  with or approval  by the FDA.  See
"Marketing of Vaccines" and "Business  Relationships." There can be no assurance
that the  Company's  regulatory  filings 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."

         Since 1995,  the Company has been working  together with the Health and
Medical Services of Goteborg,  Sweden in a mass vaccination  project in Goteborg
using the Company's  acellular  pertussis  vaccine to immunize,  free of charge,
more  than  60,000  infants  and  children,  representing  more  than 80% of the
eligible  pediatric  population  in the Goteborg  metropolitan  area.  Under the
vaccination  project,  newborn  infants are receiving a European  formulation of
Certiva(TM) 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 are
receiving three doses of the Company's stand alone aP vaccine.  During 1997, the
Company  announced  preliminary  results from the project.  These results reveal
that, within the first year following the start of the project, vaccination with
these DTaP and aP vaccines has  dramatically  reduced the incidence of pertussis
infections  in the  Goteborg  area  and  substantially  reduced  the  number  of
hospitalizations of infants due to complications from pertussis.  Moreover, none
of the infants and children  participating  in the project have  experienced any
serious   vaccine-related   adverse   reactions   following  more  than  150,000
injections. The Swedish mass vaccination project, which is providing the Company
with additional  data on the widespread use of its vaccines,  is not required in
order to obtain  regulatory  approval for Certiva(TM) and has not been requested
by any regulatory agency.

         AP  VACCINE.  In April  1997,  the  Company's  stand-alone  aP  vaccine
received  regulatory  and  marketing  authorization  in  Sweden.  This  approval
expanded  the  indication  in Sweden for the  Company's  aP vaccine to  children
previously  vaccinated against diphtheria and tetanus, but who are still at risk
for pertussis,  and is intended to permit physicians to vaccinate older children
and young adolescents against pertussis. The Company, directly or through one or
more  distributors,  intends  to  seek  regulatory  approval  for  sale  of  the
stand-alone aP vaccine for use in other European  countries,  although there can
be no assurance that any additional such approval will be granted.

         The  Company  also  believes  that  sale  of  a  stand-alone  acellular
pertussis vaccine may be appropriate for adult booster immunizations. 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  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.  During 1997, the
Vaccine and Related  Biologics  Advisory  Committee to the FDA recommended  that
safety and  immunogenicity  trials  alone would be adequate to support  expanded
indication of aP vaccines for adolescent and adult booster doses. The Company is
presently  considering  sponsoring such safety and immunogenicity adult clinical
trials in the United States using its aP vaccine.  As part of this process,  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, or in lieu of, the clinical
development of the aP vaccine.


                                      - 9 -

<PAGE>

         COMBINATION VACCINES

         The Company is developing three combination  vaccines using Certiva(TM)
as an "anchor."  Additional  vaccines  would be added to Certiva(TM) to form the
combination  vaccine.  The Company  anticipates that these combination  vaccines
will become generally  acceptable because the ACIP/AAP  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 potential 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 Certiva(TM). 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.  This  combination  vaccine,  which includes the Company's
acellular pertussis vaccine,  was developed jointly by SSI and the Company,  and
SSI holds the  product  rights in  Denmark  and other  Scandinavian  and  Baltic
countries.

         In 1997,  regulatory filings for the DTaP-IPV vaccine were prepared and
filed in other European  countries.  In addition,  the Company in  collaboration
with Abbott has filed an  investigational  new drug  application with the FDA to
conduct Phase II clinical  trials in the United States with a DTaP-IPV  vaccine.
There can be no assurance that the clinical trial will commence,  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  immunologic  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.  The Company is presently  planning clinical
trials  for a  DTaP-HIB  vaccine  in the  United  States.  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."


                                     - 10 -

<PAGE>


         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  presently
planning   clinical  trials  of  the  DTaP-IPV-HIB   vaccine.   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) that coat or encapsulate
certain  bacteria's outer membranes.  While these  polysaccharide  vaccines have
generally  proven  to be safe,  many of them do not  elicit an  adequate  immune
response, particularly in infants whose immature immune systems do not recognize
or respond to 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 by effectively carrying or showing
the  polysaccharide  to the immune system.  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  all age groups in the United  States  and is the most  common  cause of
life-threatening  infections,  including  sepsis  meningitis  in  newborns.  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.  Disease in newborns  during the first
week of life generally is caused by infection of the infant passing  through the
mother's  colonized  birth  canal.  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.  A primary  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.


                                     - 11 -

<PAGE>

         A vaccine against GBS infection,  utilizing patented  technologies that
the Company has  licensed  from the NRC, the Brigham and Women's  Hospital,  and
Harvard  University,  has been tested in a Phase I/II clinical  trial  conducted
under  the  sponsorship  of the  NIAID.  In that  trial,  the  vaccine  was well
tolerated with minimal  reactogenicity  and no serious  side-effects in healthy,
nonpregnant  women  subjects.  Antibodies  elicited  by  immunization  with  the
conjugate vaccine displayed  protective  activity against multiple GBS serotypes
in vitro and in vivo. In addition,  the clinical investigators reported that the
delivery of a GBS 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.  Trials for this GBS vaccine have been  expanded,  and the vaccine is
currently in Phase II clinical trials. The Company is presently planning a Phase
III clinical study for its vaccine in nonpregnant adolescent girls and women.

         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.  Serogroups A, B and C
of Neisseria meningitidis (meningococcus) cause a significant number of cases of
meningitidis and systemic meningococcemia. The incidence of meningitis caused by
Group A, B and C meningococcus varies from country to country,  with Group B and
C  meningococcus  accounting  for nearly all  disease  in  developed  countries.
Currently,  a  polysaccharide  vaccine  for  the  prevention  of  Group  A and C
meningococcal  infections is licensed in the United States and is  predominantly
used in the adult population,  and in particular,  is routinely  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  Group  B
meningococcal infection.

         Group B meningococcal  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  Group  C
meningococcal  bacteria).  Epidemic  outbreaks occur  periodically in the United
States,  South  America  and  Europe.  The  Company  has  developed  a  Group  B
meningococcal  conjugate  vaccine  utilizing  an unique  carrier  protein  which
appears to reduce many of the previously  reported problems  associated with the
development of an effective Group B meningococcal polysaccharide vaccine. At the
end of 1995, the Company entered into agreements with Pasteur  Merieux-Connaught
to jointly develop this conjugate  vaccine,  and the two companies  successfully
collaborated   in  1997  on  preclinical   primate  studies  for  this  Group  B
meningococcal  conjugate  vaccine that confirmed its safety and  immunogenicity.
These studies  demonstrated  that the conjugate vaccine made using the Company's
proprietary  technologies  elicited in vivo superior  bactericidal  responses to
other  Group B  meningococcal  vaccines.  In  addition,  the Company and Pasteur
Merieux-Connaught  together  are  planning to file an  investigational  new drug
application  with  the FDA to begin a Phase I  clinical  trial  in  adults.  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 Group 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 in the  United  Kingdom
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 Group C


                                     - 12 -

<PAGE>


meningococcal   bacterial   infection  by  eliciting   functional   bactericidal
antibodies.  The Company is presently  participating in Phase II clinical trials
of the  vaccine  in infants  and  children  in the United  Kingdom to assess the
safety and  immunogenicity  of the  vaccine,  and  expects to  participate  in a
clinical study of the vaccine in U.K. adolescents.  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 either a two
or three dose primary  regimen  (depending on vaccine used),  with 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 has
developed  more than one  conjugate  vaccine  against HIB for use in infants and
children  and  for  possible  use in the  Company's  combination  vaccines.  See
"Products Under  Development - Combination  Vaccines." The Company has completed
its preclinical development of these vaccines. 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 toxic  streptococcal  syndrome.  Sequelae of Group A streptococcal
infections include rheumatic fever and glomerulonephritis.  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.

         PNEUMOCOCCAL  (PNEUMONIA) 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 preclinical stage of the development
of a multivalent conjugate vaccine against pneumococcus.

OTHER VACCINES

         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. The Company's research and development
efforts are being conducted independently and in conjunction or in collaboration



                                     - 13 -

<PAGE>



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
human infectious  diseases.  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 these  alliances
following expiration of the respective agreements. Towards this end, the Company
has entered into marketing  alliances for certain  products in the United States
and  selected  countries  within  Europe.  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 1997 and 1996  were  for  export  of the  Company's
acellular  pertussis  vaccine  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.  The backlog of orders  believed to be firm
for the Company's acellular pertussis vaccine was approximately $1 million as of
December  31,  1997.  The  Company  did not have a backlog of firm  orders as of
December 31, 1996. The Company does not consider orders for any of the Company's
products to be firm until such time as regulatory  approval is obtained for each
such product.

         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(TM)  in the United States upon receipt of regulatory
approval.  The  Company  intends to market  Certiva(TM)  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 such  governments  will
continue their  historical  practice of purchasing  DTaP 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  that 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(TM) in the United
States,  the Company  will be  required,  among  other  things,  to  participate


                                     - 14 -

<PAGE>


successfully   in   established   purchasing   programs  of  Federal  and  state
governments,  to establish an identity  and  reputation  for the Company and its
products,  to create 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,  to  establish  efficient  and  consistent  production  of  sufficient
quantities of vaccine 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 August 9, 2005.  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 2014,  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 2014.  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 2014.  See also "Products Under Development - Conjugate Vaccines."

         STATENS  SERUMINSTITUT SUPPLY AGREEMENTS.  In 1991, the Company and SSI
executed a supply  agreement  under  which SSI is required to supply the Company


                                     - 15 -

<PAGE>


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  vaccine.  The  Company has been using  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 certain  designated  countries and  nonexclusive in the
rest of the world with the  exception  of  Scandinavia,  the  Baltics  and other
select countries ("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  various   countries  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.

         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.


                                     - 16 -

<PAGE>


         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 Group B meningococcus 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 this project in the amount of $13 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 $39
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 Group B
meningococcal  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 Group B  meningococcal  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  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 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.

         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 Group B meningococcal vaccine through the completion of Phase
II clinical trials. Pasteur Merieux-Connaught's  obligations will terminate upon
a change of control of the Company  involving  certain  specified  corporations.
Pasteur  Merieux-Connaught  is subject to specific diligence  obligations 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(TM) when
approved by the FDA. The  marketing  agreement  also will allow Abbott to market
the  Company's  DTaP-IPV  vaccine,  and  DTaP-HIB and  DTaP-IPV-HIB  combination
vaccines that  incorporate  one of the Company's  Haemophilus  influenzae type b
conjugate vaccines under development.

         Abbott  will market  Certiva(TM)  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(TM)  and the combination
vaccines to government purchasers, including state governments and the CDC.


                                     - 17 -

<PAGE>


         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,  of which the Company has  received $16
million to date. In addition,  the Company will receive  revenues from Abbott as
it purchases  Certiva(TM) 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.

         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 Wyeth-Lederle (a subsidiary of American Home Products),  Merck & Co.,
SmithKline Beecham plc, and Pasteur Merieux-Connaught,  most of which are active
in the development of acellular  pertussis,  combination and conjugate  vaccines
for use in infants and  children.  For example,  over the past two years,  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  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 of this combination vaccine 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."



                                     - 18 -

<PAGE>


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 employees,  consultants and officers. There
can be no assurance  that  disclosure  of the  Company's  trade secrets will not
occur,  or that others  will not  independently  develop  and patent  equivalent
technology.

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;  the filing of a  product/establishment  license application;  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
("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


                                     - 19 -

<PAGE>



facilities,  equipment and personnel involved in the manufacturing  process.  An
establishment  license is granted on the basis of inspections of the applicant's
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.

         The FDA  Modernization  Act of 1997, which became effective on February
16,  1998,  is intended to reform the FDA's review and  approval  processes  by,
among other things, streamlining the product licensing application processes for
biologics,  including  vaccines.  Provisions  of the  new law  are  designed  to
eliminate  the  requirement  for  separate  ELAs and to  simplify  the  approval
process.  The FDA is in the process of developing  implementing  regulations and
guidelines,  which is expected to take months and perhaps years to complete.  At
this time the  Company is unable to predict  the effect that this new law or its
implementing  regulations  and guidelines  may have on the FDA's  application or
approval  process for  Certiva(TM) or the Company's  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.  The new legislation now permits,  provided that
certain  conditions are satisfied,  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,  immunogenicity  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
evaluated.  Each protocol must be submitted to the FDA as part of the IND and is
subject to FDA approval.  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 limited  target  patient  populations  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 or some  measure  thereof  and to further  test for
safety within an expanded target patient population at geographically  dispersed
clinical study sites.

                                     - 20 -

<PAGE>


         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 FDA's CGMP regulations set specific requirements for
the  production of  biologics,  including  vaccines,  and the failure to satisfy
these  regulations  can result in delays in, or  suspension or  withdrawals  of,
export  authorizations or U.S. regulatory  approvals.  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
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


                                     - 21 -

<PAGE>


determination  and  rejected  it in favor of  litigation.  The NCVI Act may not,
however,  protect vaccine  manufacturers  against liability if the conditions of
the NCVI Act are not satisfied, or against suits by family members of an injured
party.

         As the  vaccines  covered  by the NCVI  Act  include  vaccines  for the
prevention of diphtheria, tetanus, pertussis, polio and HIB, the Company's DTaP,
IPV and HIB 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 to reduce the excise taxes that fund, the program.  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."

EMPLOYEES

         As of December 31,  1997,  the Company had 260  full-time  employees of
whom 31 have Ph.D.  degrees and two have M.D. degrees.  Of these employees,  171
were engaged in research, development and production activities, 32 were engaged
in administration, and 57 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,  Certiva(TM)  and  the
Company's  combination  vaccines  must be  approved  by the FDA for sales in the
United  States  and by  similar  authorities  for  sales in other  countries.  A
European  formulation  of  Certiva(TM)  and a  stand-alone  aP vaccine have been
approved for sale in Sweden,  and a DTaP-IPV  vaccine has been approved for sale
in Denmark.  Certiva(TM) is currently being  considered for approval for sale in



                                     - 22 -

<PAGE>

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 or other limitations that may affect
the commercialization of the product. The commercial introduction of Certiva(TM)
will require the Company to manufacture and produce large  quantities of vaccine
in its manufacturing  facility,  which has been and continues to be modified for
increased  production.  The  Company  has limited  experience  in  manufacturing
commercial quantities of its vaccines,  including Certiva(TM), and operating its
manufacturing  facilities.  Accordingly,  there  can be no  assurance  that  the
production  process will not fail at any point or become  subject to substantial
disruptions.  See "Risk Factors -  Manufacturing  and Scale-Up." To successfully
introduce and commercialize Certiva(TM),  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, produce
sufficient quantities of vaccine and establish effective  distribution channels.
The Company and Abbott have signed an agreement for Abbott to market Certiva(TM)
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  government  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,
distinguish  its  vaccine  product  from  that of its  competitors,  or  achieve
profitability from the sale of Certiva(TM) or any of its other vaccine products.
See "Risk Factors Competition" and "Risk Factors - Lack of Profitability."

         Currently,   the  Company's   prospects  for  becoming  profitable  are
substantially dependent upon the successful commercialization of Certiva(TM), 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  manufacture or market  Certiva(TM) or any other vaccine product at
levels   sufficient   to  generate   profits.   See  "Risk  Factors  -  Lack  of
Profitability."

         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.  The Company has limited  experience in  manufacturing  commercial
quantities  of  its  vaccine   products  and  in  operating  its   manufacturing
facilities.   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. 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.  The  Company's  manufacturing  operations  for  Certiva(TM)  are  located
principally in one facility.  Any condition or event that adversely  affects the
operation of such facility would have a material adverse affect on the Company's
financial  condition and future  results of operations.  In addition,  given its
size  and  configuration,   such  facility  has  limited  production   capacity.
Accordingly,  there are no  assurances  that the Company will be able to produce
sufficient quantities of vaccine to meet market demand or achieve profitability.


                                     - 23 -

<PAGE>


         DEPENDENCE  ON  SUPPLIERS.  While the Company  produces  the  pertussis
component of Certiva(TM), it has purchased, and intends to continue to purchase,
its requirements of the diphtheria and tetanus toxoids from SSI and enhanced IPV
from SSI and another  supplier.  There can be no assurance that these  suppliers
will be able to meet the Company's  requirements,  that their components will be
supplied on  commercially  reasonable  terms,  or that they will not  experience
difficulties in obtaining necessary regulatory approvals or disruptions in their
production of diphtheria and tetanus toxoids or 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  could have a material  adverse effect on the Company,  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
qualifying 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


                                     - 24 -

<PAGE>

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;  establishing  efficient  and  consistent  production  of
sufficient  quantities  of  vaccine;  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.

         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
United States  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 Certiva(TM). Even if the necessary licenses
are  obtained  from the FDA,  there may be  limitations  imposed that affect the
commercialization of the product,  including limitations on product use, and the
FDA  can  withdraw  approvals  at any  time  upon  compliance  with  appropriate
regulatory  procedures.  The FDA can also limit or prevent  the  manufacture  or
distribution of the Company's  products both in the United States and abroad and
can  require  recalls  of  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,  including,  without
limitation,  product recalls, suspensions or withdrawals of licenses, revocation
or suspension of export authorizations, and denials of any pending applications.

         PATENT  PROTECTION AND PROPRIETARY  INFORMATION.  The vaccine  industry
traditionally  has placed  considerable  importance on obtaining and maintaining


                                     - 25 -

<PAGE>


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,  during the
past two years, 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.  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, 1997 was approximately $102.6 million, and the Company presently has limited


                                     - 26 -

<PAGE>


revenues.  The Company expects to incur additional losses until such time as the
Company  makes  significant  commercial  sales  of one or  more  of its  vaccine
products.  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
and in sufficient  quantities.  There can be no assurance  that the Company will
become   profitable.   See  "Risk   Factors  -  Dependence   Upon  Approval  and
Commercialization of DTaP Vaccine."

         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; lines of credit; 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  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
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 February 27, 1998, these principal
shareholders beneficially owned approximately 19,062,202 shares of the Company's
outstanding Common Stock, which represented approximately 52.7% of the Company's
then outstanding  Common Stock. See Item 13 - Certain  Relationships and Related
Transactions.


                                     - 27 -

<PAGE>


         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
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.






                                     - 28 -

<PAGE>


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>
<S>                                 <C>                      <C>           <C>

                                                             SQUARE
FACILITY/FUNCTION                   LOCATION                  FEET             OWN/LEASE

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 Services      Beltsville, MD            31,000        Owned
for Production Facility

Research and Development            Beltsville, MD            27,700        Subleased until April 1998
Laboratory Facility                                                         (contingent renewal option)

Executive Offices and               Beltsville, MD            25,600        Leased until December 2000
Warehouse Facility                                                          (remaining three-year renewal option)

</TABLE>

         The  Company's  production  facilities  have been designed and built to
produce  vaccines for large scale  clinical  trials and  commercial  sales after
product  licensing.  The Company has modified and continues to modify its 26,000
square foot production  facility to expand production  capacity for Certiva(TM).
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 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.

         The  Company  is  presently   subleasing   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.


                                     - 29 -

<PAGE>


         The  Company  reached a  preliminary  understanding  with a real estate
investment  trust to lease an  approximately  75,500  square foot facility for a
period of ten years, with two five-year renewal options. The initial base annual
rent  under  the lease  would be  approximately  $981,000  with  minimum  annual
escalations. At the end of the fifth year of the initial term, the Company would
have the right to  terminate  the lease for a specified  fee. In  addition,  the
Company would have an option to purchase the facility during  specified  periods
of the lease term.  The trust would  provide the Company  with an  allowance  of
approximately $1.4 million for tenant improvements,  and would make available to
the  Company a line of credit of up to  approximately  $1.8  million to fund any
additional  improvements in excess of the tenant improvement allowance.  Monthly
payments  under this line of credit would  consist of interest  only accruing at
the simple annual rate of 12.75%,  and the entire unpaid principal balance would
mature in September  2000,  unless extended by the Company up to March 2002. The
line of credit also would be secured by all leasehold  improvements  and related
facility   enhancements   purchased  with  funds  provided  by  the  trust.  The
negotiations  on  these  agreements  are   substantially   completed  and  these
agreements may be executed in the near future.  There can be no assurances  that
the  Company  will be able to  negotiate  successfully  and sign the  terms of a
definitive  lease for the  facility  or the line of  credit,  or that,  if these
documents  are  executed,  the  financial  terms thereof would not be materially
different.  If the Company secures this facility,  it intends to consolidate its
general, administrative, research and development groups in this facility and to
reduce its existing leased space for those functions.  See Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operation.


ITEM 3. LEGAL PROCEEDINGS

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


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

         None.



                                     - 30 -

<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 1996 and 1997.

                                               HIGH                LOW
           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

           1997
             First Quarter                    $27 1/2            $19 3/4
             Second Quarter                    21                 17 1/2
             Third Quarter                     25 1/2             18 5/8
             Fourth Quarter                    29 3/4             22 7/16

         The  number of  record  holders  of the  Company's  Common  Stock as of
February 27, 1998 was  approximately  246. 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
"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


                                     - 31 -

<PAGE>


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 1998,
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.


ITEM 6. SELECTED FINANCIAL DATA

         Selected  consolidated  financial  data for the  Company  are set forth
below. The selected financial data as of December 31, 1997 and 1996, and for the
years ended  December 31, 1997,  1996 and 1995 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 December 31, 1995, 1994
and 1993 and for the years ended  December  31, 1994 and 1993 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.



                                     - 32 -

<PAGE>

<TABLE>
<CAPTION>


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

                                                                             NORTH AMERICAN VACCINE, INC.
                                                                           Fiscal Year Ended December 31,


                                                      1997             1996             1995             1994               1993
                                                      ----             ----             ----             ----               ----
<S>                                              <C>                 <C>            <C>              <C>             <C>    
STATEMENT OF OPERATIONS
DATA:
Revenues:
    Marketing, research and development
       agreements                                         $   8,001       $   9,656       $   3,000       $      --         $    --
    Contract revenue                                             --              --              --              --             141
    Product sales                                             1,699             892              --              --              --
                                                          ---------       ---------       ---------       ---------       ---------
Total revenues                                                9,700          10,548           3,000              --             141
                                                          ---------       ---------       ---------       ---------       ---------

Operating Expenses:
    Production                                               18,662          14,764           6,317           6,188           3,032
    Research and development                                 19,860          11,594          10,206           5,763           5,824
    General and administrative                               11,386           6,753           6,696           4,543           4,070
                                                          ---------       ---------       ---------       ---------       ---------

      Total operating expenses                               49,908          33,111          23,219          16,494          12,926
                                                          ---------       ---------       ---------       ---------       ---------

Operating loss                                              (40,208)        (22,563)        (20,219)        (16,494)        (12,785)

Gain on sale of investments in affiliates                        --           4,228          14,429          11,929              --
Interest and dividend income                                  3,140           2,934             804             638             657
Interest expense                                             (6,772)         (4,088)             --              --              --
                                                          ---------       ---------       ---------       ---------       ---------

Net loss                                                  $ (43,840)      $ (19,489)      $  (4,986)      $  (3,927)      $ (12,128)
                                                          =========       =========       =========       =========       =========

Basic and diluted net loss per share                      $   (1.39)      $   (0.63)      $   (0.17)      $   (0.14)      $   (0.44)
                                                          =========       =========       =========       =========       =========

Weighted-average number of common
  shares outstanding                                         31,641          30,764          29,745          28,785          27,622


BALANCE SHEET DATA:
Cash and cash equivalents                                 $  45,502       $  70,881       $  10,443       $  20,922       $  17,166
Investments in affiliates                                       843           1,281           9,065          17,724          38,039
Total assets                                                 84,508         122,962          41,249          49,580          63,762
Convertible subordinated notes                               83,734          86,250              --              --              --
Long-term portion of capital lease                            4,110           5,871              --              --              --
Preferred stock                                               6,538           6,538           6,538           6,538           6,538
Common stock                                                 78,509          71,357          58,474          56,922          51,958
Unrealized investment holding gains                             215             653           7,466          14,762          33,165
Accumulated deficit                                        (102,609)        (58,769)        (39,280)        (34,294)        (30,367)
Dividends                                                        --              --              --              --              --

</TABLE>

                                     - 33 -

<PAGE>



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

         THE  FOLLOWING  PARAGRAPHS  IN THIS FORM 10-K 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,   THE  PROSPECTS  FOR  MARKETING  AND
DISTRIBUTION OF VACCINE PRODUCTS, THE PROSPECTS FOR AND FACTORS AFFECTING FUTURE
REVENUES AND PROFITABILITY,  FUTURE COMPLIANCE WITH FINANCIAL  COVENANTS UNDER A
DEBT  OBLIGATION,  LIKELIHOOD OF ADDITIONAL  FUNDING UNDER  LICENSE,  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 REGULATORY AGENCIES INCLUDING THE FDA; THE PRODUCTION OF
VACCINES; THE NATURE OF COMPETITION; NEED FOR EFFECTIVE MARKETING; DEPENDENCE ON
SUPPLIERS,  INCLUDING  STATENS  SERUMINSTITUT;  AND  UNCERTAINTIES  RELATING  TO
CLINICAL  TRIALS,  ALL AS  DISCUSSED  IN THE  COMPANY'S  FILINGS  WITH  THE U.S.
SECURITIES AND EXCHANGE COMMISSION ("SEC").

BACKGROUND

         The Company is engaged in the research,  development,  production,  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 April 1997, the Swedish Ministry of Health
granted regulatory  approval for the Company's  monovalent  acellular  pertussis
(aP)  vaccine  to  vaccinate  children,  thereby  expanding  the  market for the
Company's aP vaccine.  In addition,  the Danish National Board of Health granted
regulatory approval in September 1996 of a combined DTaP-IPV (polio) 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"),   was   developed   jointly  by  Statens
Seruminstitut ("SSI") and the Company.

         Under  supply  agreements,   the  Company  manufactures  the  acellular
pertussis  component,  and SSI  manufactures  the  diphtheria,  tetanus  and IPV
components  for the DTaP  and  DTaP-IPV  vaccines.  SSI is  responsible  for the
manufacturing,  formulation, marketing and distribution of the DTaP and DTaP-IPV
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 Sweden and Denmark, respectively.


                                     - 34 -

<PAGE>


         In 1995, 1996 and 1997, the Company has recognized development revenues
pursuant to agreements with Pasteur  Merieux-Connaught,  under which the Company
and  Pasteur  Merieux-Connaught  will  jointly  develop  the  Company's  Group B
meningococcal  vaccine.  Additional  funding  may be  provided to the Company by
Pasteur   Merieux-Connaught   under  the  terms  of  the  license  and  clinical
development agreements. See "Outlook," below.

         In the fourth  quarter of 1996,  the  Company  and Abbott  Laboratories
("Abbott") signed an agreement under which Abbott would market Certiva(TM),  the
Company's DTaP vaccine,  when approved by the FDA. The marketing  agreement also
will allow Abbott to market the  Company's  DTaP-HIB  (incorporating  one of its
Haemophilus influenzae type b vaccines),  DTaP-IPV and DTaP-IPV- HIB combination
vaccines,  which are under  development.  Abbott will market Certiva(TM) 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(TM) and the  combination  vaccines to government  purchasers,  including
state governments and the Centers for Disease Control and Prevention ("CDC").

         The Company and Abbott will collaborate in the clinical  development of
the  combination  vaccines  and Abbott is providing  the Company  with  clinical
development  funding.  In  addition,  the Company  will  receive  payments  upon
achievement  of prescribed  milestones.  In September  1995, the Company filed a
product license  application with the FDA for approval to market Certiva(TM) and
FDA  approval  for the  vaccine is pending.  Under the  agreement  with  Abbott,
following  FDA  approval,  the Company will receive  revenues  from Abbott as it
purchases  Certiva(TM)  and the combination  vaccine  products for resale to the
private pediatric market. See "Outlook," below.

         In May 1996,  the Company  completed  an offering of 6.50%  convertible
subordinated  notes in the principal amount of $86.25 million due in full on 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 with the
SEC, which has been declared effective, registering resales of the notes and the
underlying  shares of Common  Stock.  In  December of 1997,  approximately  $2.5
million of the principal  amount of the notes were converted into 101,207 shares
of the Company's  common stock. As of December 31, 1997, the principal amount of
the outstanding notes was $83.7 million.

         In  November   1996,   the  Company   acquired  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  accounted for as a capital lease,  which expires in 2000.  Under the
equipment  lease  agreement  there are  financial  covenants  that  obligate the
Company to maintain certain minimum cash and investment balances, a minimum

                                     - 35 -

<PAGE>



tangible net worth (defined to include amounts under the outstanding convertible
subordinated notes) and certain other financial ratios.

         Research and  development  expenses were $19.9 million,  $11.6 million,
and $10.2 million in 1997,  1996, and 1995,  respectively.  The Company had 268,
206,  and 167  full-time  employees as of December  31,  1997,  1996,  and 1995,
respectively.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1997 AND 1996

         In 1997,  the Company  recognized  $1.7 million in revenue from product
sales to SSI, compared to $892,000 in 1996. In addition,  the Company recognized
in 1997 $8.0 million under collaborative agreements, compared to $9.7 million in
1996.  Revenue in 1997 from  collaboration  agreements  consists of a $6 million
milestone  payment  from  Pasteur   Merieux-Connaught   under  the  license  and
development  agreements  covering the Company's Group B  meningococcal  vaccine,
with the balance  representing revenue attributable to development funding under
the Company's  agreement with Abbott.  Revenue from collaborative  agreements in
1996 were principally with Abbott and Pasteur Merieux-Connaught.

         Production  expenses  were  $18.7  million  in 1997  compared  to $14.8
million in 1996.  The increase in these  expenses in 1997 is due to increases in
materials,  labor,  and facilities  operating costs as the Company  produces its
acellular   pertussis  vaccine  for  European   distribution  and  prepares  for
regulatory  approval of Certiva(TM) in the United States.  The increase in labor
cost is  attributable  primarily  to an  increase  in the  number of  employees.
Production costs attributable to the Company's products,  including Certiva(TM),
are expensed until regulatory approval is obtained for such product.

         Research and  development  expenses  increased to $19.9 million in 1997
from $11.6  million in 1996.  The increase is  attributable  primarily to higher
depreciation  and operating  costs for  development  work in the Company's newly
acquired facility,  and to a lesser extent, labor and supplies as a result of an
increase  in the  number of  employees,  and costs to prepare  and file  product
license  applications.  These  increases  were offset in part by lower  clinical
testing and related expenses.

         General  and  administrative  expenses  were  $11.4  million in 1997 as
compared to $6.8 million in 1996. Approximately $2.0 million of this increase is
due to the combined effect of the recognition of non-cash  compensation  expense
in the amount of  approximately  $1.3  million,  related to the extension of the
term of one  expiring  stock option, and to a one-time  technology  license  fee
payment.  The  remaining  increase is  attributable  to higher  labor costs as a
result of an  increase  in  salaries  and the  number of  employees,  as well as
professional service costs.

         In the first  quarter of 1996,  the Company sold 193,084  shares of its
investment  in  common  stock  of IVAX  Corporation  ("IVAX"),  which  generated
proceeds of approximately $5.2 million, and a realized gain of $4.2 million.

         Interest  and  dividend  income  increased to $3.1 million in 1997 from
$2.9 in 1996.  This increase is due primarily to higher average cash balances as
a result of the placement of $86.25 million  convertible  subordinated  notes in
May 1996. See "Liquidity and Capital Resources," below.


                                     - 36 -

<PAGE>

         Interest expense increased to $6.8 million in 1997 from $4.1 million in
1996  due  to  the  Company's   interest   obligations   under  the  convertible
subordinated notes and an equipment lease accounted for as a capital lease.

         The  factors  cited above  resulted  in a net loss of $43.8  million or
$1.39 per share in 1997 as compared to a net loss of $19.5  million or $0.63 per
share in 1996.  Without  the  effect  of the  non-cash  expense  related  to the
extension  of an  expiring  stock  option,  the net loss in 1997 would have been
$42.5  million or $1.34 per share.  Without the $4.2 million gain on the sale of
investment  securities in 1996,  the net loss per share for 1996 would have been
$0.77. The weighted-average number of common shares outstanding was 31.6 million
for 1997  compared  to 30.8  million  for 1996.  The  increase  in the number of
weighted-average shares outstanding for 1997 as compared to 1996 is attributable
primarily to the exercise of stock  options,  the sale of 350,000  shares of the
Company's  Common  Stock to  Abbott  in the  fourth  quarter  of  1996,  and the
conversion of a portion of the  outstanding  convertible  subordinated  notes as
described above.

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.

         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(TM) 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  in the
common stock of 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 common stock of BioChem  Pharma,  Inc. 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.


                                     - 37 -

<PAGE>


         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
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.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's cash  requirement for operations was $10.5 million in the
fourth  quarter of 1997 and $37.9 million for the year ended  December 31, 1997.
The Company's cash requirement for operations is defined as the net cash used in
operating  activities for the period being reported less amounts  received under
marketing,  research  and  development  agreements  and further  adjusted by the
timing of proceeds from the sale of investments  in affiliates.  At December 31,
1997, the Company had cash and cash  equivalents of $45.5 million and investment
securities  in an  affiliate  with a market value of  $843,000.  The  investment
consisted of 125,000  shares of IVAX common  stock.  The fair market value as of
March 17, 1998 was approximately  $1.2 million.  This investment is volatile and
therefore subject to significant fluctuations in value.

         The Company  anticipates  that cash  requirements for operations in the
first quarter of 1998 could be between  approximately $10.5 and $11.5 million as
the Company:  produces its acellular  pertussis  vaccine for commercial  sale in
Europe;  produces  Certiva(TM)  in  anticipation  of regulatory  approval in the
United  States  and  other  territories;  produces  investigational  combination
vaccines and conjugate  vaccines;  and conducts clinical trials.  Quarterly cash
requirements  for operations  beyond these periods will depend  principally upon
the level and efficiency of vaccine  production,  the timing of FDA approval for
Certiva(TM),  level of sales of Certiva(TM) in the U.S.,  level of product sales
in Europe as  additional  approvals are  obtained,  costs to market  Certiva(TM)
following approval, 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. If the Company does not secure
FDA licensure and generate  commercial  sales of  Certiva(TM),  the Company will
need to address its future cash  requirements for operations.  This issue may be
addressed through reductions in operating levels and through the sale of debt or
equity securities, among other means as more fully described below. There are no
assurances that the Company will be successful,  under these  circumstances,  in
significantly  reducing operating levels or in placing debt or equity securities
on favorable terms or in an amount required to meet its future cash requirements
for  operations.  The foregoing  are forward  looking  statements.  There are no
assurances that the Company will meet the projections for cash  requirements for
operations,  that any further  regulatory  approvals will be received,  that the
milestones under existing marketing and research and development agreements 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 milestones would have a
significant adverse effect on the Company's future financial position.


                                     - 38 -

<PAGE>


         Total capital  expenditures for 1997 were $2.1 million.  The Company is
in the planning stages of expanding its  manufacturing  capacity for its vaccine
products for both  clinical  trials and for  commercial  sale.  Total  projected
capital expenditures for 1998 for facilities' modifications,  equipment, systems
and other  capital  additions  could  range  between $4  million to $8  million,
depending  upon the ultimate  extent of the  expansions,  which has not yet been
determined.  The foregoing is a forward looking statement, and the amount of and
timing for capital  expenditures  could fluctuate based upon a number of factors
including,  without  limitation:  the magnitude of the changes in the facilities
required to meet demand for the  Company's  acellular  pertussis  products;  the
equipment and leasehold  improvements  required in order to expand the Company's
production  capacity for  investigational  products;  the anticipated timing for
further regulatory  approvals of existing  products;  the anticipated timing for
regulatory  approval of future products;  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 capital  expenditures  described  above are exclusive of any future
real estate  acquisition or build-out plans.  The Company  continues to evaluate
its need to build-out,  lease or acquire additional research,  development,  and
other  facilities to accommodate  the Company's  expanding  vaccine  development
program.  The Company  reached a  preliminary  understanding  with a real estate
investment  trust to lease an  approximately  75,500  square foot facility for a
period of ten years, with two five-year renewal options. The initial base annual
rent  under  the lease  would be  approximately  $981,000  with  minimum  annual
escalations. At the end of the fifth year of the initial term, the Company would
have the right to  terminate  the lease for a specified  fee. In  addition,  the
Company would have an option to purchase the facility during  specified  periods
of the lease term.  The trust would  provide the Company  with an  allowance  of
approximately $1.4 million for tenant improvements,  and would make available to
the  Company a line of credit of up to  approximately  $1.8  million to fund any
additional  improvements in excess of the tenant improvement allowance.  Monthly
payments  under this line of credit would  consist of interest  only accruing at
the simple annual rate of 12.75%,  and the entire unpaid principal balance would
mature in September  2000,  unless extended by the Company up to March 2002. The
line of credit also would be secured by all leasehold  improvements  and related
facility   enhancements   purchased  with  funds  provided  by  the  trust.  The
negotiation of these agreements is substantially  completed and these agreements
may be executed in the near future.  There can be no assurances that the Company
will be able to  negotiate  successfully  and sign a  definitive  lease  for the
facility  or the  attendant  line of  credit,  or that if  these  documents  are
executed,  the financial  terms thereof will not be  materially  different.  The
lease payments and operating costs for this facility are included in, and not in
addition to, the anticipated cash  requirements for operations  described above.
The Company  currently  anticipates  that capital  expenditures of approximately
$1.0-$2.0  million would be required to modify the facility to  accommodate  the
Company's  operations.   Additional  capital  expenditures  for  this  or  other
facilities may vary substantially  depending upon a number of factors including,
among other  things,  the size of such  facilities,  the  equipment  and systems
requirements  for  the  facilities,   location,   zoning  and  other  government
restrictions and the magnitude of available financing.

         As noted above,  the Company is obligated to maintain  compliance  with
certain  financial  covenants under an equipment lease agreement entered into in
connection  with the 1996  acquisition  of a 35,000  square  foot  manufacturing
facility.  These  financial  covenants  include  maintaining  minimum  cash  and
investment balances,  minimum tangible net worth, and compliance with prescribed
financial  ratios.  The Company may at any time, and intends during the first or
second  quarter of 1998 to,  eliminate  these  financial  covenants by posting a
letter of credit for a predetermined  amount. The amount of the letter of credit
would be approximately $5.9 million as of March 31, 1998 and would be secured by
a cash  deposit of an equal  amount.  In the absence of  posting  this letter of
credit,  a breach of the financial  covenants  would result in the Company being
obligated to post such letter of credit.


                                     - 39 -

<PAGE>



         Cash requirements for operations and capital  expenditures for 1998 are
expected to be financed  through a  combination  of: cash and cash  equivalents;
fees and payments  from  existing  and/or new license,  marketing,  distribution
and/or development  agreements;  the exercise of stock options; the sale of debt
and/or equity  securities;  mortgage  financing;  lines of credit; and equipment
leases. The Company currently has no agreements or understandings  regarding any
of the debt or  equity  financing  options.  The  Company  believes  that it has
adequate cash resources to meet its 1998 funding requirements although there are
no  assurances  in this  regard.  Failure  or  significant  delays in  receiving
additional   regulatory  approvals  and  satisfying   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 would reduce cash
requirements for operations through significant  reductions in operating levels,
although  there are no  assurances  that the Company would be successful in this
regard.  This  paragraph  contains  forward  looking  statements and the factors
affecting the ability of the Company to meet its funding requirements and manage
its cash resources  include,  among other things: the timing of FDA approval for
Certiva(TM);  the efficiency of the Company's production  operations;  the sales
price  for  products  established  by the  Company  and  its  distributors;  the
magnitude and timing of product sales;  the magnitude and timing of any fees and
payments from license,  marketing,  distribution and/or development  agreements;
the magnitude of fixed costs; and the capital  expenditures  required to operate
and expand existing and future facilities.

OUTLOOK

         The Company recognized an operating loss of $43.8 million in 1997 based
on revenues of $1.7 million from product sales, $6.0 million from  collaborative
milestone and license payments,  and $2.0 million under a development agreement.
The  Company  expects  to incur an  operating  loss of  between  $12.5 and $13.5
million  in the  first  quarter  of 1998,  which is  approximately  equal to the
operating  loss  incurred in the last quarter of 1997.  Thereafter,  the Company
anticipates  that the 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 marketing  clearance
for Certiva(TM);  the timing for the commercial introduction of Certiva(TM); the
ability of the  Company  and its  distributors  to compete  against  competitive
products,  several of which have been approved,  and to  effectively  market and
sell products in their respective territories;  the sales prices established for
products by the Company and its  distributors;  the  efficiency of the Company's
production  operations;  the timing of the payments  under  license,  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,   marketing,   distribution   and/or
development  agreements  with  third  parties;  and the  timing of and amount of
proceeds  from the sale of  additional  investment  securities.  The  backlog of
orders  believed to be firm for the Company's  acellular  pertussis  vaccine was
approximately  $1 million as of December 31, 1997. The Company does not consider
orders  for  any of the  Company's  products  to be  firm  until  such  time  as
regulatory  approval is obtained for each such product. To date, the Company has
manufactured  Certiva(TM) in  anticipation  of FDA approval and has expensed all
related production expenses.  There are no assurances that the FDA will allow or
permit  the  Company  to sell all or any  portion of the  vaccine  produced  and
failure to receive permission to sell a significant portion of the product could
have a material  adverse  affect on the  future  results  of  operations  of the
Company.  The foregoing are forward looking statements and the factors affecting
its outcome are described elsewhere in this Management's Discussion and Analysis
of Financial  Condition and Results of Operation,  including the first paragraph
hereof,  and in the risk  factors and other  information  contained in this Form
10-K and  other  filings  with  the SEC,  to which  the  reader's  attention  is
directed.

                                     - 40 -

<PAGE>


         The quarterly operating results may also be affected by the quantity of
product  produced for sale since the production  expenses have been mainly fixed
and consist primarily of costs to operate the production facilities, to scale up
production and to maintain a ready work force.  To date, the Company has limited
experience  and success in  manufacturing  commercial  quantities of its vaccine
products and in operating its manufacturing  facilities.  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.  Such
disruptions  or failures  would have a material  adverse effect on the Company's
future  operating  results  and could  affect  the  Company's  ability to obtain
regulatory  approval  for  its  products  or the  timing  of such  approval.  No
assurances can be given that the Company will be successful in establishing  and
maintaining  consistent 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 Company's  manufacturing
operations  for  Certiva(TM)  are  located  principally  in  one  facility.  Any
condition  or event that  adversely  affects the  condition or operation of such
facility  would  have a  material  adverse  affect  on the  Company's  financial
condition  and future  results of  operations.  In addition,  given its size and
configuration, such facility has limited production capacity. Accordingly, there
are no assurances that the Company will be able to produce sufficient quantities
of vaccine to meet market demand or achieve profitability.

         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. The Company anticipates additional revenues from product
sales during 1998 to European  distributors  for sale and distribution in select
European  countries.  As of December 31, 1997,  the Company's  backlog of orders
believed to be firm are  approximately  $1.0  million.  Any  additional  product
approvals  in  Europe  could  lead to  increased  revenues  from the sale of the
Company's  acellular  pertussis  vaccine.  There are no assurances  that further
product approvals will be obtained in Europe during 1998 or at all, or that once
obtained  the  Company's  European  distributors  will launch the  products in a
timely  manner or at all, or that if  launched,  that the  distributors  will be
effective in the marketing and distributing  the products.  The Company does not
control the marketing and  distribution  efforts of such  distributors  in their
respective territories and, therefore,  the Company's revenues for product sales
in  those  territories  are  dependent  upon  the  timing,  implementation,  and
effectiveness  of these  parties'  sales,  marketing and  distribution  efforts.
Additionally,  although  the FDA Export  Reform and  Enhancement  Act  permits a
company to export  vaccines  manufactured in the United States with little or no
prior FDA review and  approval,  the FDA  retains the  authority  and ability to
delay,  suspend or  terminate a  manufacturer's  ability to commence or continue
such efforts. This authority may be exercised if the FDA finds the product fails
to  meet  prescribed   standards  relating  to  manufacturing,   labeling,   and
promotional activities,  among others. There are no assurances that the FDA will
not,  at any time or from time to time,  seek to  delay,  defer or  suspend  the
Company's export activities for failure to meet any of the prescribed  standards
of the  statute.  Any such action  could have a material  adverse  affect on the
future results of operations.

         As  described  above,  during  1996,  the Company and Abbott  signed an
agreement under which Abbott would market  Certiva(TM)  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 CDC. FDA approval of
the Company's product license application for Certiva(TM) is pending. In January
1998,  the  Company  was  advised  by the FDA that  Certiva(TM)  is on track for
completing the final steps for licensure. The

                                     - 41 -

<PAGE>



Company  has  prepared  and  submitted  additional  information  to  the  FDA in
furtherance  of its license  application.  Following FDA approval,  the Company,
therefore,  anticipates revenues during the second or third quarter of 1998 from
the sale of Certiva(TM) 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
increase.  The  foregoing  are  forward  looking  statements,  and  there are no
assurances that the Company will achieve  profitability based solely on revenues
from its acellular  pertussis vaccine or any future vaccines under  development.
There can be no assurance that the FDA's approval will be obtained or that, once
obtained,  product  revenues will be generated in the time frame  projected,  or
that the Company  and/or Abbott will be effective in marketing and  distributing
the product. The principal factors affecting the approval of Certiva(TM) and its
timing are believed to be the adequacy of the most recent information submitted,
the timeliness of the FDA completing its entire review process,  the sufficiency
of the clinical  trials'  design,  the quality of the clinical data submitted to
the FDA, and the adequacy of the systems, procedures,  operations and facilities
relating to the product,  among other things.  The factors affecting  successful
commercial  launch of  Certiva(TM) 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
vaccines;   establishing  efficient  and  consistent  production  of  sufficient
quantities of vaccine and establishing effective distribution channels.

         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 risk factors and other information
contained in this Form 10-K,  as well as the  Company's  other  filings with the
SEC, for a more complete  description of the risks and  uncertainties  affecting
the Company and its business.

         MARKETING,  RESEARCH & DEVELOPMENT  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 Group B  meningococcal  infection for both adults
and pediatric indications.  In 1996, the Company recognized revenue from Pasteur
Merieux-Connaught under these agreements,  and in the third quarter of 1997, the
Company received a $6 million milestone payment 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 $39 million. The
time it may take to achieve future  milestones  cannot be predicted  accurately,
and there are no  assurances  that any  additional  milestones  will be met.  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  clinical   development   payments  and  milestone  payments  upon
achievement  of  prescribed  clinical and  regulatory  events.  Total  remaining
payments by Abbott to the Company under the agreement amount to $26 million.  In
addition,  the  Company  will  receive  revenues  from  Abbott  as it  purchases
Certiva(TM)  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(TM) 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.


                                     - 42 -

<PAGE>


         In 1998, the Company  anticipates  that total receipts of license fees,
clinical   development   funding  and  milestone  payments  under  its  existing
marketing,  research  and  development  agreements  could  be  approximately  $5
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.  In 1997,  the Company  recognized  $8.0 million of
revenue under marketing, research and development agreements, which includes the
$6 million  received under the agreements  with Pasteur  Merieux-Connaught.  The
revenue  recognized by the Company from clinical  development  payments received
from Abbott are and will be equal to the Company's  expenditures in the clinical
development  program  for  Certiva(TM)  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 the
planning,  commencement  and  completion of 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(TM) and the combination vaccines.

         The Company is considering  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. In 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, 1997, the Company and its  subsidiaries  had income tax
loss carry  forwards of  approximately  $22.3 million to offset future  Canadian
source  income and  approximately  $77.1  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
becomes  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 it  intends  to, and  believes  that it can,
generate  sufficient other income to avoid being classified as a PFIC. This is a
forward looking statement and the factors affecting this classification include,
among other  things,  the timing and amount of revenue from product  sales;  the
timing and amount of license fees,  milestone  payments and development  funding
under  license,   marketing,   distribution  and  development  agreements;   the
classification of payments received by the Company as active or passive; and the
classification of the Company's assets as active or passive.

         In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128,  "Earnings  Per Share."  SFAS No. 128 is effective  for  financial
statements  issued for periods  ending after  December 15, 1997. The Company has
implemented  SFAS No. 128 for 1997.  SFAS No. 128 requires dual  presentation of
basic and diluted earnings per share.  Basic loss per share includes no dilution



                                     - 43 -

<PAGE>


and is computed by dividing  net loss  available to common  stockholders  by the
weighted  average number of common shares  outstanding  for the period.  Diluted
loss per share includes the potential dilution that could occur if securities or
other  contracts to issue common stock were  exercised or converted  into common
stock.  Options,  warrants and convertible  securities that were  outstanding at
December 31,  1997,  were not  included in the  computation  of diluted loss per
share as their effect would be anti-dilutive. As a result, the basic and diluted
loss per share amounts are identical.

         In  June  1997,  the  Financial   Accounting   Standards  Board  issued
Statements of Financial Accounting  Standards No. 130, "Reporting  Comprehensive
Income" and No. 131,  "Disclosures  about  Segments of an Enterprise and Related
Information." These statements become effective for the Company's 1998 financial
statements.  The Company is evaluating  these statements to determine the impact
on its reporting and disclosure requirements.

IMPACT OF THE YEAR 2000 ISSUE ON THE COMPANY

         The Year 2000 Issue is the result of computer  programs  being  written
using two digits rather than four to define the applicable year.  Management has
initiated a company-wide  program to prepare the Company's  computer systems and
programs for the year 2000. Based on a recent internal interim  assessment,  the
Company believes that the principal management  information system software that
was recently purchased and is currently being implemented is designed to be Year
2000 compliant. The Company intends to test the system for Year 2000 compliance.
The Company also uses various "off the shelf" software  applications  throughout
the  Company  for the  storage  and  analysis  of  various  types  of data  that
management is dependent upon for day to day operations. Management's preliminary
assessment is that little or no  modifications  or replacement will be necessary
to the Company's existing software to achieve Year 2000 qualification.

         The Company has not communicated with all of its significant  suppliers
to determine  the extent to which the Company is  vulnerable to failures by such
third  parties to  remediate  their own Year 2000  issues.  The Company does not
anticipate that the suppliers cost to obtain Year 2000 compliance will be passed
on to the Company.  However,  there are no assurances  that the systems of other
companies  on which the  Company's  systems  rely will be timely  converted.  In
addition,  there are no  assurances  that the  failure by such other  companies'
systems to comply,  or compliance in a manner that is not  compatible to Company
systems, would not have a material, adverse effect on the Company.

         The Company  has  determined  that it has no exposure to  contingencies
related to the Year 2000 Issue for  product  it has sold.  Based on the  interim
internal   assessment,   the  Company  does  not  anticipate  that  expenditures
specifically related to software  modifications for year 2000 compatibility will
have a material  adverse affect on future  results from  operations or financial
condition, although there are no assurances in this regard.




                                     - 44 -

<PAGE>



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.


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 46 to 67 of this Annual  Report  immediately
following.  The table of contents to the Financial  Statements and  accompanying
Notes appears on page 69 of this Annual Report.







                                     - 45 -

<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, 1997
and 1996, and the related consolidated  statements of operations,  shareholders'
equity  (deficit) and cash flows for each of the three years in the period ended
December 31, 1997.  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,  1997 and 1996,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.




                                             /s/ Arthur Andersen LLP
                                             ------------------------
                                                 Arthur Anderson LLP

Washington, D.C.
February 6, 1998


                                     - 46 -

<PAGE>
<TABLE>
<CAPTION>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
                                                                                    December 31,         December 31,
                                                                                        1997                 1996
                                                                                 -------------------   -----------------
<S>                                                                              <C>                    <C>
ASSETS
------

Current assets:
  Cash and cash equivalents                                                                $ 45,502            $ 70,881
  Accounts receivable                                                                           324               4,166
  Inventory                                                                                   2,730               1,782
  Prepaid expenses and other current assets                                                     615                 533
                                                                                 -------------------   -----------------
          Total current assets                                                               49,171              77,362

Property, plant and equipment, net                                                           31,428              40,629
Investment in affiliate, at market                                                              843               1,281
Deferred financing costs, net                                                                 2,603               3,184
Other assets                                                                                    463                 506
                                                                                 -------------------   -----------------
     Total assets                                                                         $  84,508           $ 122,962
                                                                                 ===================   =================

LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
----------------------------------------------
Current liabilities:
  Accounts payable                                                                          $ 3,343             $ 1,912
  Deferred revenue                                                                            3,999               3,000
  Obligation under capital lease, current portion                                             1,593               1,496
  Other current liabilities                                                                   5,064               4,540
                                                                                 -------------------   -----------------
         Total current liabilities                                                           13,999              10,948
                                                                                                        
6.50% Convertible subordinated notes, due May 1, 2003                                        83,734              86,250
Obligation under capital lease, net of current portion                                        4,110               5,871
Deferred rent credit, net of current portion                                                     12                 114
                                                                                 -------------------   -----------------
     Total liabilities                                                                      101,855             103,183

COMMITMENTS AND CONTINGENCIES

Shareholders' (deficit) 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
    31,936,539 shares at December 31, 1997 and 31,406,999 shares at
    December 31, 1996                                                                        78,509              71,357
  Unrealized investment holding gain                                                            215                 653
  Accumulated deficit                                                                      (102,609)            (58,769)
                                                                                 -------------------   -----------------
      Total shareholders' (deficit) equity                                                  (17,347)             19,779
                                                                                 -------------------   -----------------

     Total liabilities and shareholders' (deficit) equity                                   $84,508            $122,962
                                                                                 ===================   =================


 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                     - 47 -

<PAGE>
<TABLE>
<CAPTION>

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


                                                                             Years ended December 31,

                                                                    1997               1996              1995
                                                               ----------------   ---------------   ---------------
<S>                                                            <C>                <C>               <C>
Revenues:
      Marketing, research and development agreements                   $ 8,001           $ 9,656           $ 3,000
      Product sales                                                      1,699               892                 -
                                                               ----------------   ---------------   ---------------
           Total revenues                                                9,700            10,548             3,000
                                                               ----------------   ---------------   ---------------
 Operating expenses:
     Production                                                         18,662            14,764             6,317
     Research and development                                           19,860            11,594            10,206
     General and administrative                                         11,386             6,753             6,696
                                                               ----------------   ---------------   ---------------
           Total  operating expenses                                    49,908            33,111            23,219
                                                               ----------------   ---------------   ---------------

 Operating loss                                                        (40,208)          (22,563)          (20,219)

 Other income (expenses):
     Gain on sale of investment in affiliate                                 -             4,228            14,429
     Interest and dividend income                                        3,140             2,934               804
     Interest expense                                                   (6,772)           (4,088)                -
                                                               ----------------   ---------------   ---------------
 Net loss                                                            $ (43,840)        $ (19,489)         $ (4,986)
                                                               ================   ===============   ===============

 Basic and diluted net loss per share                                  $ (1.39)          $ (0.63)          $ (0.17)

 Weighted-average number of common shares
      outstanding                                                       31,641            30,764            29,745






 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                     - 48 -

<PAGE>
<TABLE>
<CAPTION>

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




                                               Series A                                       Unrealized                   Total
                                             Convertible                                        Invest-                    Share-
                                           Preferred Stock              Common Stock             ment       Accum-        holders'
                                      ---------------------------  -------------------------   Holding      ulated         Equity
                                         Shares        Amount       Shares        Amount         Gains      Deficit      (Deficit)
                                      -------------  ------------  ----------  -------------  ------------ ------------ ------------
<S>                                   <C>             <C>          <C>          <C>           <C>           <C>            <C>
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 gain                 -             -           -              -       (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 gain                 -             -           -              -        (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

Exercises of stock options                       -             -         498          5,036             -            -       5,036
Retirement of stock used to exercise
   options                                       -             -         (80)        (1,890)            -            -      (1,890)
Shares issued under
  401(k) plan                                    -             -          11            238             -            -         238
Stock option compensation                        -             -           -          1,313             -            -       1,313
Conversion of subordinated convertible
  notes into common stock                        -             -         101          2,455             -            -       2,455
Decrease in market value
  of investment                                  -             -           -              -          (438)           -        (438)
Net loss                                         -             -           -              -             -      (43,840)    (43,840)
                                      -------------  ------------  ----------  -------------  ------------- ----------- ------------
Balance, December 31, 1997                   2,000       $ 6,538      31,937        $78,509         $ 215    $(102,609)   $(17,347)
                                      =============  ============  ==========  =============  ============= =========== ============


 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                     - 49 -

<PAGE>
<TABLE>
<CAPTION>

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


                                                                                           Years ended December 31,

                                                                                 1997                1996               1995
                                                                           ------------------  -----------------  -----------------

<S>                                                                       <C>                    <C>                <C>

Cash flows from operating activities:
    Net loss                                                                       $ (43,840)         $ (19,489)          $ (4,986)
    Adjustments to reconcile net loss to net cash used in operating
    activities:
          Gain on sale of investment in affiliate                                          -             (4,228)           (14,429)
          Loss (gain) on disposal of equipment                                           131                (12)                27
          Depreciation and amortization                                               11,017              6,154              2,223
          Amortization and reduction of deferred financing costs                         520                335                  -
          Contribution of common stock to 401(k) plan                                    238                183                128
          Stock option compensation                                                    1,313                  -                  -
          Decrease (increase)  in other assets                                            43                 47               (248)
          Decrease in deferred rent                                                      (91)               (81)               (75)
          Cash flows provided by (used in) other working capital items                 5,756             (1,818)               (56)
                                                                           ------------------  -----------------  -----------------
              Net cash  used in operating activities                                 (24,913)           (18,909)           (17,416)
                                                                           ------------------  -----------------  -----------------

Cash flows from investing activities:
    Capital expenditures                                                              (2,132)           (21,012)           (10,279)
    Proceeds from sale of investment in affiliate                                          -              5,199             15,792
    Proceeds from sale of equipment                                                      225                 27                  -
                                                                           ------------------  -----------------  -----------------
              Net cash (used in) provided by investing activities                     (1,907)           (15,786)             5,513
                                                                           ------------------  -----------------  -----------------

Cash flows from financing activities:
    Proceeds from issuance of convertible notes                                            -             86,250                  -
    Deferred financing costs of convertible notes                                          -             (3,519)                 -
    Proceeds from exercises of stock options                                           3,146              6,356              1,424
    Principal payments on capital lease obligation                                    (1,705)              (298)                 -
    Proceeds from issuance of common stock                                                 -              6,344                  -
                                                                           ------------------  -----------------  -----------------
              Net cash provided by financing activities                                1,441             95,133              1,424
                                                                           ------------------  -----------------  -----------------

Net (decrease) increase in cash and cash equivalents                                 (25,379)            60,438            (10,479)
Cash and cash equivalents, beginning of period                                        70,881             10,443             20,922
                                                                           ------------------  -----------------  -----------------
Cash and cash equivalents, end of period                                            $ 45,502           $ 70,881           $ 10,443
                                                                           ==================  =================  =================



 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                     - 50 -

<PAGE>
<TABLE>
<CAPTION>

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



                                                                                        Years ended December 31,
                                                                               1997               1996              1995
                                                                         -----------------   ---------------   ----------------

<S>                                                                     <C>                  <C>              <C>

Cash Flows Provided By Other Working Capital Items:

    Decrease (increase) in:
          Accounts receivable                                                     $ 3,842          $ (2,166)          $ (2,000)
          Inventory                                                                  (948)           (1,286)              (266)
          Prepaid expenses and other current assets                                   (81)               38               (264)

    Increase (decrease) in:
          Accounts payable                                                          1,431            (1,638)               404
          Other current liabilities                                                 1,512             3,234              2,070
                                                                         -----------------   ---------------   ----------------
    Net cash provided by (used in) other working capital items                    $ 5,756          $ (1,818)          $    (56)
                                                                         =================   ===============   ================



 Supplemental Disclosure of Cash Flow Information:

 Cash paid for interest                                                           $ 6,249           $ 2,758           $      -
                                                                         =================   ===============   ================

 Equipment acquired through capital lease                                         $     -           $ 7,665           $      -
                                                                         =================   ===============   ================

 Conversion of subordinated notes to common stock                                 $ 2,516           $     -           $      -
                                                                         =================   ===============   ================

 Use of stock to exercise stock options                                           $ 1,890           $     -           $      -
                                                                         =================   ===============   ================


The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                     - 51 -

<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,  production, and sale 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  generated  only  limited  revenue  from the sale of its
acellular  pertussis  vaccine.  Prior to commercial  introduction of Certiva(TM)
(the  Company's  DTaP vaccine for the  prevention of  diphtheria,  tetanus,  and
pertussis),  and its combination  vaccines,  the Company must receive regulatory
approval  from the U.S.  Food and Drug  Administration  ("FDA") for sales in the
United  States  and by  similar  authorities  for  sales in other  countries.  A
European  formulation  of  Certiva(TM)  and a  stand-alone  aP vaccine have been
approved for sale in Sweden,  and a DTaP-IPV  vaccine has been approved for sale
in Denmark.  Certiva(TM) 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 or other limitations that may affect
the commercialization of the product. The commercial introduction of Certiva(TM)
will require the Company to manufacture and produce large  quantities of vaccine
in its manufacturing  facility,  which has been and continues to be modified for
increased  production.  The  Company  has limited  experience  in  manufacturing
commercial quantities of its vaccines,  including Certiva(TM), and operating its
manufacturing  facilities.  Accordingly,  there  can be no  assurance  that  the
production  process will not fail at any point or become  subject to substantial
disruptions.  To  successfully  introduce  and  commercialize  Certiva(TM),  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,  produce  sufficient  quantities of
vaccine and establish effective  distribution  channels.  The Company and Abbott
Laboratories   ("Abbott")   have  signed  an  agreement  for  Abbott  to  market
Certiva(TM) 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 government  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


                                     - 52 -

<PAGE>


Company will produce a commercially  viable product,  attain  sufficient  market
share, distinguish its vaccine product from that of its competitors,  or achieve
profitability from the sale of Certiva(TM) or any of its other vaccine products.

         Currently,   the  Company's   prospects  for  becoming  profitable  are
substantially dependent upon the successful commercialization of Certiva(TM), 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  manufacture or market  Certiva(TM) or any other vaccine product 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.  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.  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. The Company's
manufacturing   operations  for  Certiva(TM)  are  located  principally  in  one
facility.  Any condition or event that  adversely  affects the operation of such
facility  would  have a  material  adverse  affect  on the  Company's  financial
condition  and future  results of  operations.  In addition,  given its size and
configuration, such facility has limited production capacity. Accordingly, there
are no assurances that the Company will be able to produce sufficient quantities
of vaccine to meet market demand or achieve profitability.

         While the Company produces the pertussis  component of Certiva(TM),  it
has  purchased,  and intends to continue to purchase,  its  requirements  of the
diphtheria and tetanus toxoids from Statens  Seruminstitut  ("SSI") and enhanced
IPV  from  SSI and  another  supplier.  There  can be no  assurance  that  these
suppliers will be able to meet the Company's requirements, that their components
will be  supplied  on  commercially  reasonable  terms,  or that  they  will not
experience   difficulties  in  obtaining  necessary   regulatory   approvals  or
disruptions in their production of diphtheria and tetanus toxoids or 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, 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  could have a material  adverse effect on the Company,  may involve
costly delays and significant expense,  and would require additional  regulatory
approval as the Company seeks alternative arrangements.

         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



                                     - 53 -

<PAGE>


programs  are  intended  to  reduce  barriers  to  immunization  and to  improve
immunization rates by providing free vaccine to qualifying 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.

         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; producing sufficient quantities of vaccine; and establishing effective
distribution channels.

         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  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.   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


                                     - 54 -

<PAGE>


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.

         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.

         The Company had cash and cash  equivalents of $45.5 million at December
31, 1997. The Company's cash utilization for operations, net of amounts received
under marketing,  research and development agreements,  was $10.5 million in the
fourth  quarter of 1997 and $37.9 million for the year ended  December 31, 1997.
Total  capital  expenditures  were $2.1  million for 1997.  These levels of cash
expenditure  have  continued  in  the  first  quarter  of  1998.  Management  is
developing  plans to access  other  sources of  funding or take other  necessary
actions as appropriate to address future cash utilization for operations,  which
plans  may  depend  on  the  timing  of  FDA  licensure  of  Certiva(TM).   Cash
requirements for operations and capital expenditures for 1998 are expected to be
financed through a combination of: cash and cash equivalents,  fees and payments
from existing  and/or new license  marketing,  distribution  and/or  development
agreements;  the  exercise  of stock  options;  the sale of debt  and/or  equity
securities;  mortgage  financing;  lines of credit;  and equipment  leases.  The
Company  currently  has no agreements  or  understandings  regarding any debt or
equity financing.

(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.

         (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.


                                     - 55 -

<PAGE>


         (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):

                                        1997                1996
                                        ------------------------
               Raw materials            $2,584            $1,518
               Work-in-process               0               162
               Finished goods              146               102
                                        ======            ======
                                        $2,730            $1,782
                                        ======            ======

         (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.

         (i) DEFERRED  FINANCING COSTS.  Deferred financing costs represent fees
and  other  costs  incurred  in  connection  with  the  issuance  of  the  6.50%
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, 1997 and 1996 was $838,000 and $335,000, respectively.

         (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) BASIC AND DILUTED  NET LOSS PER COMMON  SHARE.  In March 1997,  the
Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per
Share." SFAS No. 128 is effective  for financial  statements  issued for periods
ending after December 15, 1997. The Company has implemented SFAS No. 128 for the
year ended December 31, 1997.  SFAS No. 128 requires dual  presentation of basic
and diluted earnings per share. Basic loss per share includes no dilution and is
computed by dividing net loss by the weighted  average  number of common  shares
outstanding  for the  period.  Diluted  loss per share  includes  the  potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Options, warrants and convertible
securities  that were  outstanding at December 31, 1997, 1996 and 1995, were not
included in the computation of diluted loss per share as their effect would have


                                     - 56 -

<PAGE>


been  anti-dilutive.  As a result,  the basic and diluted loss per share amounts
are identical for all periods presented.

(4) PRODUCTION, DEVELOPMENT, AND MARKETING CONTRACTS

         (a)  AGREEMENTS  WITH PASTEUR  MERIEUX-CONNAUGHT.  In the December 1995
clinical  development  agreement  and license  agreement  with  Pasteur Merieux-
Connaught,  the parties  agreed to jointly  develop the  Company's new conjugate
vaccine against Group B meningococcus for both adult and pediatric  indications.
The  Company  recognized  $3, $4, and $6 million  of  research  and  development
revenue for  non-refundable  payments made by Pasteur Merieux-Connaught in 1995,
1996,  and 1997,  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 Group B meningococcal vaccine through the completion of Phase
II clinical trials.  The Company will retain  co-exclusive  world-wide rights to
manufacture  and sell the Group B  meningococcal  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 1996, the Company and Abbott
signed an agreement under which Abbott would market  Certiva(TM),  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(TM)  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(TM)  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.  The Company also received $3 million in 1997 for clinical
development  funding.  The Company and Abbott will  collaborate  in the clinical
development of the combination vaccines and Abbott will provide the Company with
clinical  development  funding.  Amounts received for clinical development to be
expended in the future by the Company have been recorded as deferred revenue. 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 $16 million received through December 31, 1997. The first
milestone  relates  to  FDA  approval  of  Certiva(TM)  provided  certain  other
conditions are satisfied.  In addition,  the Company will receive  revenues from
Abbott as it purchases  Certiva(TM)  and the  combination  vaccine  products for
resale to the private pediatric market. Abbott may terminate this arrangement at
any time with advance notice.

         (c) 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


                                     - 57 -

<PAGE>



Company's  acellular  pertussis  vaccine,  for all primary and booster doses for
infants and children in Denmark.  SSI formulates and markets the DTaP vaccine in
Sweden,  and  the  DTaP-IPV  vaccine  in  Denmark,   and  has  filed  additional
applications for these vaccines in other countries  within its territory.  There
can be no assurance given that such additional  applications will be approved by
the appropriate  regulatory  authorities or that any further application will be
filed or approved.

         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.

(5)  PROPERTY, PLANT AND EQUIPMENT

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

                                                           AS OF DECEMBER 31,
                                                            1997         1996
                                                            ----         ----

                                                              (in thousands)

Property, plant and equipment:
  Land                                                     $   498       $   498
  Building and improvements                                  2,421         2,407
  Machinery, equipment and laboratory fixtures              42,380        41,405
  Leasehold improvements                                     8,587         8,567
  Office furniture, equipment and software                   4,398         3,488
                                                           -------       -------
                                                            58,284        56,365

Accumulated depreciation and amortization:
  Building and improvements                                    250           129
  Machinery, equipment and laboratory fixtures              19,885        10,728
  Leasehold improvements                                     4,423         3,537
  Office furniture, equipment and software                   2,298         1,342
                                                           -------       -------
                                                            26,856        15,736
                                                           -------       -------
Property, plant and equipment, net                         $31,428       $40,629
                                                           =======       =======

         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.

(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



                                     - 58 -

<PAGE>



December 31, 1997 and 1996, of $843,000 and $1.3 million, respectively (original
cost of $629,000).

         In  1995,  the  Company  sold  the  remaining  695,936  shares  of  its
investment in BioChem  stock (see Note 16). 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  Corporation  common 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, 1997.

         The market values of these securities as of December 31, 1997 and 1996,
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 March 17, 1998, was  approximately  $1.2  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,
                                                         1997         1996
                                                         ----         ----
                                                          (in thousands)
        Payroll and fringe benefits                  $ 1,488         $ 1,114
        Accrued interest                                 959             999
        Reserve for contract loss                        720             720
        Accrued taxes                                    642             608
        Other accrued liabilities                        605             534
        Accrued consulting and professional fees         381             144
        Accrued costs of clinical trials                 269             421
                                                     -------         -------
               Total other current liabilities       $ 5,064         $ 4,540
                                                     =======         =======

(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 renewed its office  space lease  through  December  31,
2000, and has one three-year renewal option remaining. The Company may terminate
this lease with a six month advance notice.


                                     - 59 -

<PAGE>


         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.

         In 1998 the Company  reached a  preliminary  understanding  with a real
estate  investment trust to lease an  approximately  75,500 square foot facility
for a period of ten years, with two five-year renewal options.  The initial base
annual rent under the lease would be approximately  $981,000 with minimum annual
escalations. At the end of the fifth year of the initial term, the Company would
have the right to  terminate  the lease for a specified  fee. In  addition,  the
Company would have an option to purchase the facility during  specified  periods
of the lease term.  The trust would  provide the Company  with an  allowance  of
approximately $1.4 million for tenant improvements,  and would make available to
the  Company a line of credit of up to  approximately  $1.8  million to fund any
additional  improvements in excess of the tenant improvement allowance.  Monthly
payments  under this line of credit would  consist of interest  only accruing at
the simple annual rate of 12.75%,  and the entire unpaid principal balance would
mature in September  2000,  unless extended by the Company up to March 2002. The
line of credit also would be secured by all leasehold  improvements  and related
facility   enhancements   purchased  with  funds  provided  by  the  trust.  The
negotiations  on  these  agreements  are   substantially   completed  and  these
agreements may be executed in the near future.  There can be no assurances  that
the Company will be able to negotiate  successfully  and sign a definitive lease
for the  facility  or the line of  credit,  or  that,  if  these  documents  are
executed, the financial terms thereof will not be materially different.

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


                     YEARS ENDING
                     DECEMBER 31,
                     (in thousands)

                     1998                        $   1,127
                     1999                              810
                     2000                              762
                     2001                               71
                     2002                                -
                                                 ---------
                         Total                     $ 2,770
                                                 =========

         Total rent  expense was  $1,232,000;  $898,000;  and  $812,000 in 1997,
1996, and 1995, respectively.

         (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. In 1997,
the Company disposed of approximately  $457,000 of this equipment  recognizing a
non-cash loss of approximately  $97,000.  The equipment lease has been accounted
for as a capital lease for financial reporting  purposes,  with monthly payments
of approximately  $174,000.  As of December 31, 1997, the total obligation under
this capital lease was $5.7 million.  Total depreciation expense associated with
equipment under the capital lease was approximately $4.1 million for 1997. 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 a buyout 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


                                     - 60 -

<PAGE>


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 the  predetermined  amounts at such time as the Company is not in compliance
with any of these financial covenants.  In addition, the Company may at any time
eliminate  these  financial  covenants  by  posting  a letter  of  credit  for a
predetermined amount. Minimum future lease payments are as follows:

              YEARS ENDING
              DECEMBER 31,
              (in thousands)

              1998 (includes interest of $481)          $ 2,074
              1999 (includes interest of $320)            2,074
              2000 (includes interest of $139)            2,495
              2001                                           -
                                                       --------
                Total                                     6,643
              Less interest component                      (940)
                                                       --------
              Total principal payments                  $ 5,703
                                                       ========

         (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 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 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.

(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 in full on 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. In
December 1997, the Company issued 101,207 shares of common stock upon conversion
of $2,516,000 principal amount of notes.

(10)  FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying  amounts  reported in the Company's  consolidated  balance
sheets at December 31, 1997 and 1996,  for cash and cash  equivalents,  accounts
receivable, accounts payable and accrued liabilities approximate fair values due

                                     - 61 -

<PAGE>



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 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, the Company  realized a net
gain in  Canada  and a net loss in the  United  States.  In 1997 and  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
offset the 1995 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 net deferred tax assets consisted of:

                                                          AS OF DECEMBER 31,
                                                        1997             1996
                                                        ----             ----
                                                     (in thousands)

     Deferred tax assets:
     Net operating loss carryforwards                 $38,489           $25,314
     Accrued intercompany interest                      4,172             3,097
     Depreciation and amortization                      1,497             1,143
     Reserve for contract loss                            278               278
     Deferred rent                                         46                81
     Other                                              2,447             3,323
                                                    ----------        ---------
       Total deferred tax assets                       46,929            33,236

     Deferred tax liabilities:
     Historical accrual to cash difference             (1,489)           (2,235)
     Investments in affiliates                           (312)             (433)
     Other                                                -                 (85)
                                                 ------------         ----------
       Total deferred tax liability                    (1,801)           (2,753)
                                                 ------------          --------

      Net deferred tax assets before allowance         45,128            30,483
      Less:  Valuation allowance                      (45,128)          (30,483)
                                                 ------------       -----------
        Net deferred tax assets                  $         --       $        --
                                                 ============       ===========


                                     - 62 -

<PAGE>


         The Company has determined that $45.1 million in 1997 and $30.5 million
in 1996 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.

         At December 31, 1997, the Company had net operating loss  carryforwards
of approximately $99.4 million. Of this consolidated total,  approximately $22.3
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 2004. Of the remaining  balance,  American  Vaccine and
AMVAX had net operating loss  carryforwards of  approximately  $76.1 million and
$911,000, respectively, available to offset future United States taxable income,
if any. These loss carryforwards expire between 2002 and 2012.

         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, 1997,  its  obligations  to the
affected shareholders could approximate $15.6 million.

(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



                                     - 63 -

<PAGE>


the  volume  of sales of such  products  and  services.  BioChem  had  agreed to
reimburse the Company for 10 percent of these minimum  annual  royalties,  which
was  terminated  in 1996 (see Note 16). 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. $3.5 million in the aggregate at December 31, 1997. 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.
The fair market value of the Company's stock on the new grant date was less than
the exercise price of these options, therefore no expense was recorded. In 1997,
the Company  extended  the  expiration  date for an option to  purchase  150,000
shares  of  common  stock  previously  granted  under  this  plan.  The  Company
recognized  approximately  $1.3 million of expense  representing  the difference
between the fair market  value and the  exercise  price of the option on the new
grant date. For accounting  purposes,  the extensions of these options have been
treated as new grants.

         (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, 1994, through December 31, 1997:


                                     - 64 -

<PAGE>
<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, 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

Granted                                 150,000       500,500                --        11.13-24.50      18.69
Exercised                              (230,964)      (19,291)          (57,812)        9.00-13.88       9.66
Expired or canceled                    (153,069)      (67,738)               --         9.13-24.50      14.68
                                     ------------------------------------------------------------------------
Balance at December 31, 1997            965,649       912,971            57,812       $ 2.92-24.50     $13.93
                                     ==========     =========         =========         ==========     ======
</TABLE>

         At  December  31,  1997,  under the 1990 Plan,  options to  purchase an
aggregate of 965,649 common shares were exercisable at prices ranging from $9.00
to $13.63 per share (weighted  average exercise price per share of $11.62),  and
no options were available for grant. At December 31, 1997,  under the 1995 Plan,
options to purchase an aggregate of 912,971  common shares were  exercisable  at
prices ranging from $11.25 to $21.50 per share (weighted  average exercise price
per share of $17.08), and 67,738 options were available for grant.

         The weighted-average per share grant date fair value of options granted
during  1997 and 1996 for the 1990 Plan was $8.76 and $5.11,  respectively.  The
weighted-average  per share grant date fair value of options granted during 1997
and 1996 for the 1995 Plan was $6.62 and $10.59, 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.

                                     - 65 -

<PAGE>


Upon a change of control of the Company,  all outstanding  stock options granted
under the 1995 SESOP become fully exercisable.

         The following  table  summarizes  option  activity under the 1990 SESOP
plan and the 1995 SESOP plan from December 31, 1994 through December 31, 1997:
<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, 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

Granted                                      --      130,000              --              24.38         24.38
Exercised                              (190,000)          --       12.88-15.10       9.01-10.56         10.31
Expired or canceled                          --           --              --                 --            --
                                      ----------------------------------------------------------------------------
Balance at December 31, 1997            300,000      250,000      $11.75-14.56      $8.22-24.38        $13.83
                                      =========     ========       ===========     ============      ========
</TABLE>

         At December  31,  1997,  under the 1990  SESOP,  263,329  options  were
exercisable at prices  ranging from Can.  $11.75 to Can.  $14.56 (U.S.  $8.22 to
U.S.  $10.18) per share  (weighted  average U.S.  price of $9.15) and no options
were available for grant under the 1990 SESOP.  At December 31, 1997,  under the
1995 SESOP, 39,996 options were exercisable at a per share price of U.S. $14.13,
and 250,000 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. $24.94.  The  weighted-average  per share grant date fair value of
options  granted during 1997 and 1996 for the 1995 SESOP plan was U.S. $8.27 and
U.S. $10.58, respectively.

         (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 1997,  1996 and 1995 would  have been  $47.5  million or a loss of $1.50 per
share, $23.9 million or a loss of $0.78 per share, and $6.7 million or a loss of
$0.22 per share, respectively.

         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



                                     - 66 -

<PAGE>


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 1997, 1996, and
1995,  respectively:  risk-free interest rates of 6.04-7.59 percent for the 1990
Plan options, 5.26- 6.99 percent for the 1995 Plan options, 7.79 percent for the
1990 SESOP options and 5.21-6.47 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  volatilities  of 58 and 78
percent.  Of the 2,486,432 options  outstanding at December 31, 1997,  1,528,924
options have a weighted average remaining  contractual life of approximately 2.8
years. All of these options are exercisable.  The remaining 957,508 options have
a weighted average remaining contractual life of approximately 7.7 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
$251,000, $200,000, and $135,000 for 1997, 1996, and 1995, 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.

         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 $0,  $2,200,  and  $20,000 in 1997,  1996,  and 1995,  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.

         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. In the first quarter of 1998, this
demand registration was further extended to January 17, 2001.

                                     - 67 -

<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 1998 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  1998 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 1998 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 1998 Proxy Statement.


                                     - 68 -

<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                 46
                  Consolidated Balance Sheets as of
                    December 31, 1997 and 1996                             47
                  Consolidated Statements of Operations for the
                    Years Ended December 31, 1997, 1996 and 1995           48
                  Consolidated Statements of Shareholders' Equity
                    (Deficit) for the Years Ended December 31, 1997,
                    1996 and 1995                                          49
                  Consolidated Statements of Cash Flows for the
                    Years Ended December 31, 1997, 1996 and 1995           50
                  Notes to Consolidated Financial Statements               52

         2.       FINANCIAL STATEMENT SCHEDULES:

                  None Required.

         3.       EXHIBITS:   See Exhibit Index on page 71.


b)       REPORTS ON FORM 8-K.

         No  reports  on Form 8-K were  filed  during  the  three  months  ended
December 31, 1997;  however,  the Company did file the  following two reports on
Form 8-K during January 1998:

         (1)      On January 9, 1998,  the Company filed with the Securities and
                  Exchange  Commission a Current Report on Form 8-K under Item 5
                  updating  the  license  application  review  process  for  the
                  Company's DTaP vaccine Certiva(TM) with the FDA.

         (2)      On January 29, 1998, the Company filed with the Securities and
                  Exchange  Commission a Current Report on Form 8-K under Item 5
                  reporting that the demand  registration  right held by BioChem
                  for its shares of Company Common Stock had been extended until
                  January 17, 2001.


                                     - 69 -

<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 23, 1998                   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 23, 1998
------------------------------------
Sharon Mates, Ph.D.
President

PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:

/s/ Lawrence J. Hineline                                          March 23, 1998
------------------------------------
Lawrence J. Hineline
Vice President-Finance

<TABLE>
<CAPTION>

A MAJORITY OF THE BOARD OF DIRECTORS:

<S>                                  <C>               <C>                                <C>
/s/ Francesco Bellini                March 23, 1998    /s/ Rondi R. Grey                  March 2, 1998
---------------------------------                      ------------------------------
Francesco Bellini, Ph.D.                               Rondi R. Grey

/s/ Alain Cousineau                  March 23, 1998    /s/ Lyle Kasprick                  March 23, 1998
---------------------------------                      ------------------------------
Alain Cousineau                                        Lyle Kasprick

/s/ Jonathan Deitcher                March 2, 1998     /s/ Francois Legault               March 23, 1998
---------------------------------                      ------------------------------
Jonathan Deitcher                                      Francois Legault

/s/ Denis Dionne                     March 2, 1998     /s/ Sharon Mates                   March 23, 1998
---------------------------------                      ------------------------------
Denis Dionne                                           Sharon Mates, Ph.D.

/s/ Neil W. Flanzraich               March 23, 1998    /s/ Richard C. Pfenninger, Jr.     March 23, 1998
---------------------------------                      ------------------------------
Neil W. Flanzraich                                     Richard C. Pfenninger, Jr.

/s/ Phillip Frost                    March 23, 1998
---------------------------------
Phillip Frost, M.D.
</TABLE>


                                     - 70 -

<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)

2.5    Amendment to Share Purchase Agreement dated as of January 8, 1998 between
       NAV and BioChem. (2)

3.1    Articles of Incorporation of NAV, as amended. (1)(6)

3.2    Restated Bylaws of NAV. (3)

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)

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]. (6)

10.6*  North American Vaccine, Inc. Share Option Plan, as amended. (8)

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)

                                     - 71 -

<PAGE>


Exhibit
No.               Description

10.13  Modification  No. 11 to Contract  with NICHD dated January 31, 1991 [with
       certain confidential information deleted therefrom]. (4)

10.14  Supply Agreement between AMVAX and Statens  Seruminstitut dated March 26,
       1991 [with certain confidential information deleted therefrom]. (4)

10.16  Supply Agreement between AMVAX and Statens  Seruminstitut dated March 26,
       1991 [with certain confidential information deleted therefrom]. (4)

10.17  Research,  Development  and License  Agreement  between AMVAX and Statens
       Seruminstitut dated March 26, 1991 [with certain confidential information
       deleted therefrom]. (4)

10.18* Non-Employee Director and Senior Executive Stock Option Plan, as amended.
       (8)

10.19  Modification  No. 12 to  Contract  with NICHD  dated  April 1, 1992 [with
       certain confidential information deleted therefrom]. (7)

10.20  Contract  dated  April 9,  1992 with  NICHD  [with  certain  confidential
       information deleted therefrom]. (7)

10.21  Modification No. 13 to Contract with NICHD dated September 24, 1992 [with
       certain confidential information deleted therefrom]. (8)

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.
       (9)

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 Serums 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)

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


                                     - 72 -

<PAGE>



Exhibit
No.               Description

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. (16)

10.35  Master  Agreement dated November 1, 1996 between NAV and General Electric
       Capital  Corporation  [with  certain  confidential   information  deleted
       therefrom]. (16)

10.36* North American Vaccine, Inc. 1997 Share Option Plan.

21     Subsidiaries. (5)

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 SEC and declared  effective on January
       24, 1990.

(2)    This   exhibit  is   incorporated   herein  by  this   reference  to  the
       corresponding  exhibit in the Company's  Current Report on Form 8-K filed
       with the SEC on January 29, 1998 (File No. 1-10451).

(3)    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).

(4)    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).

(5)    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).

(6)    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).

(7)    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).

(8)    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).

(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 March 31, 1994 (File No. 1-10451).


                                     - 73 -

<PAGE>



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

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

(12)   This exhibit is  incorporated  herein by this reference to Exhibit 4.2 in
       the  Company's  Registration  Statement  on Form  S-8  (Registration  No.
       33-80479) filed with the SEC 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).

(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).

(16)   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, 1996 (File No. 1-10451).





                                     - 74 -