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, 1998
                                       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.)

           10150 OLD COLUMBIA ROAD
             COLUMBIA, MARYLAND                        21046
             ------------------                        -----
           (Address of principal executive offices)    (Zip Code)

Registrant's telephone number, including area code: (410) 309-7100
                                                    --------------
Securities registered pursuant to Section 12(b) of the Act:

               Title of each class        Name of each exchange 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 -- JANUARY 26, 1999;  AGGREGATE  MARKET VALUE -- $  121,267,105

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

   COMMON STOCK, NO PAR VALUE, OUTSTANDING AS OF JANUARY 26, 1999 - 32,216,096


<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 1999 Annual Meeting of  Shareholders of the registrant (the
"1999 Proxy Statement").


                                TABLE OF CONTENTS

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


            PART I

1    Business..................................................................3
2    Properties...............................................................31
3    Legal Proceedings........................................................32
4    Submission of Matters to a Vote of Security Holders......................32

            PART II

5    Market for Registrant's Common Equity and Related Stockholder Matters....33
6    Selected Financial Data..................................................35
7    Management's  Discussion and Analysis of Financial Condition and
     Results of Operation.....................................................37
7A   Quantitative and Qualitative Disclosures About Market Risk ..............49
8    Financial Statements and Supplementary Data..............................49
9    Changes in and  Disagreements  with  Accountants on Accounting and
     Financial Disclosure.....................................................78

            PART III

10   Directors and Executive Officers of the Registrant.......................78
11   Executive Compensation...................................................78
12   Security Ownership of Certain Beneficial Owners and Management...........78
13   Certain Relationships and Related Transactions...........................78

            PART IV

14   Exhibits, Financial Statement Schedules, and Reports on Form 8-K.........79

     Signatures...............................................................82


                                     - 2 -
<PAGE>


                                     PART I


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

THE COMPANY

      INTRODUCTION.  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's  first  product  is  a  patented,   novel
monocomponent  acellular  pertussis  (whooping  cough)  vaccine that the Company
believes will significantly reduce the incidence of adverse reactions associated
with the whole cell  pertussis  vaccines  that it was  designed to replace.  The
Company's  acellular  pertussis ("aP") vaccine has been combined with diphtheria
and  tetanus  toxoids  for  use  in a  combination  diphtheria-tetanus-acellular
pertussis  ("DTaP") vaccine marketed in the United States under the name Certiva
(TRADEMARK).   In July 1998, the Company received  regulatory  approval from the
U.S. Food and Drug  Administration  ("FDA") to  manufacture  and market  Certiva
(TRADEMARK)  in the United States for  immunization  of infants and children six
weeks to seven years of age. The product launch for  Certiva(TRADEMARK)commenced
during the fourth quarter of 1998.

      FDA approval of Certiva(TRADEMARK)follows previous regulatory approvals in
Europe of vaccines  using the  Company's  acellular  pertussis  vaccine.  The aP
vaccine  was  licensed  in  Sweden  in  1996  as  a  European   formulation   of
Certiva(TRADEMARK)("Certiva(TRADEMARK)-EU")  in infants and children and in 1997
as a stand-alone  aP vaccine for  children.  Using  Certiva(TRADEMARK)-EU  as an
"anchor" for combining  additional  pediatric vaccines,  the Company and Statens
Serum  Institut  of  Copenhagen,   Denmark  ("SSI")  have  collaborated  in  the
development  of  a  combined  diphtheria,   tetanus,   pertussis  and  enhanced,
inactivated polio ("DTaP-IPV")  vaccine.  This vaccine has been on the market in
Denmark since the first  quarter of 1997.  The Company has been advised that the
regulatory  authorities in Germany,  Austria,  Sweden and Finland have agreed to
recognize the Danish marketing  authorization  for the DTaP-IPV vaccine and will
issue national marketing authorizations in one or more of those countries in the
near  future.   There  can  be  no  assurance  that  these  national   marketing
authorizations  will be issued in a timely fashion as the application process is
principally the responsibility of the Company's European partners, over whom the
Company has no control. In addition to these products,  the Company has 14 other
vaccines  in various  stages of  development,  including  two other  combination
vaccines  using  Certiva(TRADEMARK)as  an  "anchor",  as well as nine  conjugate
vaccines  for the  prevention  of various  bacterial  diseases in  children  and
adults.

      Vaccination   against   infectious  disease  is  a  primary  component  of
pediatric,  and an increasingly  important element of adult health-care programs
throughout the world. For example, in the United States, 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 22 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.


                                     - 3 -
<PAGE>


      CERTIVA(TRADEMARK).  In July 1998,  the Company  received  FDA approval to
manufacture and market  Certiva(TRADEMARK)in  the United States for immunization
of infants and  children  six weeks to seven  years of age.  The Company and its
marketing  partner,  Abbott  Laboratories  ("Abbott"),  commenced the commercial
launch of the product  during the fourth  quarter of 1998.  Abbott is  marketing
Certiva(TRADEMARK)to  private  physicians and managed care markets in the United
States, and the Company is marketing Certiva(TRADEMARK)to government purchasers,
including  state  governments  and the U.S.  Centers  for  Disease  Control  and
Prevention ("CDC"). See "Risk Factors - No Assurance of Effective Marketing."

      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,
Certiva(TRADEMARK)and  three other DTaP  vaccines  have been licensed by the FDA
for use in 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  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 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.  Outside  of the
United  States,  Certiva(TRADEMARK)-EU,  the  European  formulation  of the DTaP
vaccine, has been approved in Sweden since February 1996 and Denmark since April
1998.  The Company  also has been  advised that the  regulatory  authorities  in
Germany,  Austria and Finland  have agreed to  recognize  the Swedish  marketing
authorization and will issue authorizations in one or more of those countries in
the near  future.  There  can be no  assurance  that  these  national  marketing
authorizations  will be issued in a timely fashion as the application process is
principally the responsibility of the Company's European partners, over whom the
Company has no control.  See "Products Under Development  -- Acellular Pertussis
Vaccines"; "Business Relationships."

      COMBINATION VACCINES. Using Certiva(TRADEMARK)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 is a DTaP-IPV vaccine developed in
collaboration  with SSI, which has been on the market in Denmark since the first
quarter of 1997.  The Company has been advised that  regulatory  authorities  in
Germany,   Austria,  Sweden  and  Finland  agreed,  under  the  European  mutual
recognition procedure,  to recognize the Danish marketing  authorization for the
DTaP-IPV vaccine and the issuance of the national  marketing  authorizations  in
one or more of those  countries is expected in the near future.  The Company has
appointed  Chiron-Behring GmbH & Co. ("Chiron Behring") to market and distribute
the DTaP-IPV product in Germany and Austria, and SSI holds all of the European


                                     - 4 -
<PAGE>


product  registrations  and  will  market  and  distribute  the  product  in the
Scandinavian countries.  There can be no assurance that these national marketing
authorizations  will be issued in a timely fashion as the application process is
principally the responsibility of the Company's European partners, over whom the
Company has no control.

      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  Certiva(TRADEMARK)-IPV  in the
United States.  The Company also is developing a DTaP-HIB  vaccine that combines
Certiva(TRADEMARK)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.

      In May 1998,  the Company  announced that in the first of several Phase II
clinical trials  currently being conducted in infants and children in the United
Kingdom, the Company's Group C meningococcal conjugate vaccine had been shown to
be safe and immunogenic in infants as measured by immunologic  response  capable
of  inducing  bactericidal  activity.   Previous  studies  have  demonstrated  a
correlation  between  vaccine  efficacy and its ability to generate  immunologic
response and to stimulate bactericidal activity. 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. See "Business Relationships."

      Moreover, 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 and Europe with  well-established  local partners on a country-by-country
basis. Toward this end, the Company has entered into marketing alliances for its
DTaP and  certain  combination  vaccines  with SSI in  Scandinavian,  Baltic and
certain other countries comprising its territory,  Chiron Behring in Germany and
Austria, and Abbott in the United States. See "Business Relationships."

      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


                                     - 5 -
<PAGE>


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.  See Item 13 -
Certain Relationships and Related Transactions.

      The Company  maintains its executive  offices at 10150 Old Columbia  Road,
Columbia,  Maryland 21046,  and its telephone  number is (410) 309-7100.  Unless
otherwise  indicated  or  the  context  otherwise  requires,  references  to the
"Company" or to "North American Vaccine"  contained herein are to North American
Vaccine, Inc. and its consolidated subsidiaries.

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
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


                                     - 6 -
<PAGE>


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 $18.0  million,  $19.9
million and $11.6 million on research and  development of its products for 1998,
1997 and 1996,  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."




                                     - 7 -
<PAGE>

<TABLE>
<CAPTION>

                           PRODUCTS UNDER DEVELOPMENT


    PRODUCTS                              DISEASE                                STATUS (1)            
    --------                              -------                                ----------            
ACELLULAR PERTUSSIS VACCINES

<S>                               <C>                                  <C>
Certiva(TRADEMARK)                 Diphtheria,  tetanus  and            Licensed      in     United      States; 
                                   pertussis (whooping cough)           Certiva(TRADEMARK) -   EU   licensed  in 
                                                                        Sweden   and   Denmark,   and   national 
                                                                        marketing   authorization   pending   in
                                                                        several European countries             

aP....................... .....    Pertussis                            Licensed  in  Sweden  for  children  and
                                                                        young adolescents
Amvax(REGISTERED)........ .....    Tetanus, diphtheria and              Safety and immunogenicity clinical trial
                                   pertussis (adolescent/adult          being planned
                                   booster)

COMBINATION VACCINES

DTaP-IPV ................ .....    Diphtheria, tetanus, pertussis       Licensed in Denmark;  National marketing
                                   and polio                            authorization    pending    in   several
                                                                        European  countries;  IND filed for U.S.
                                                                        clinical trials

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

DTaP-IPV-HIB............. .....    Diphtheria, tetanus, pertussis,      U.S. clinical trial being planned
                                   polio and meningitis

CONJUGATE VACCINES

Group B Streptococcal.... .....    Neonatal sepsis and meningitis       U.S. Phase II clinical trials(2)

Group B Meningococcal.... .....    Meningitis                           U.S. clinical trial being planned

Group C Meningococcal.... .....    Meningitis                           Phase  II   clinical   trials   in  U.K.
                                                                        commenced  in infants and  children  and
                                                                        pending for  adolescents;  U.S.  Phase I
                                                                        clinical trial being planned
Group A/C Meningococcal.. .....    Meningitis                           Preclinical
Group A/B/C                   
Meningococcal............ .....    Meningitis                           Preclinical

HAEMOPHILUS INFLUENZAE
 type b.................. .....    Meningitis                           Preclinical;  U.S.  clinical trial being
                                                                        planned

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

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

Pneumococcal (pneumonia).......    Pneumococcal pneumonia               Preclinical

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

(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 clinical trials. 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."

(2)               Proof-of-principle  clinical  trials for  monovalent vaccine manufactured  by a third party utilizing 
                  technology licensed to the Company.

</TABLE>


                                     - 8 -
<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,  four DTaP vaccines,  including  Certiva(TRADEMARK),  have been
licensed by the FDA for use in the United  States.  In addition,  one other firm
has  filed  for  regulatory  approval  in the  U.S.  for its DTaP  vaccine.  See
"Products Under Development - Acellular Pertussis Vaccines - Certiva(TRADEMARK)"
and "Competition."

      CERTIVA(TRADEMARK).  In July 1998,  the Company  received  FDA approval to
manufacture  and  market  Certiva(TRADEMARK)  in the  United  States  for use in
infants  and  children  six weeks to seven  years of age.  Abbott  is  marketing
Certiva(TRADEMARK)  in the United States to private  physicians and managed care
markets,  and  the  Company  is  marketing   Certiva(TRADEMARK)   to  government
purchasers,  including  state  governments  and the CDC.  The product  launch of
Certiva(TRADEMARK) by Abbott commenced during the fourth quarter 1998. See "Risk
Factors - No Assurance of Effective Marketing."

      Certiva(TRADEMARK)   combines  the  Company's  proprietary   monocomponent
acellular  pertussis  vaccine 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."

      FDA approval followed prior European  approvals of  Certiva(TRADEMARK)-EU.
In February 1996, a license was granted to the Company's European partner,  SSI,
to market in Sweden  Certiva(TRADEMARK)-EU for all recommended doses for infants
and  children.  Subsequently,  regulatory  applications  were  filed  under  the
European  mutual  recognition  procedures in other selected  European  countries
based on the Swedish approval. In April 1998, Certiva(TRADEMARK)-EU was licensed
in Denmark.  The Company has been advised  that the  regulatory  authorities  in
Germany,  Austria and Finland  have agreed to  recognize  the Swedish  marketing
authorization  for  Certiva(TRADEMARK)-EU  and  will  issue  national  marketing


                                     - 9 -
<PAGE>


authorizations in one or more of these countries in the near future. The Company
has  appointed  Chiron  Behring to market  Certiva(TRADEMARK)-EU  in Germany and
Austria.  SSI holds the  European  registrations,  and  holds  the  product  and
marketing  rights in SSI's  Territory.  There  can be no  assurance  that  these
national  marketing  authorizations  will be issued in a timely  fashion  as the
application  process is principally the responsibility of the Company's European
partners,  over whom the Company has no control. See "Marketing of Vaccines" and
"Business Relationships."

      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,  may 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  developed
Amvax(REGISTERED),    a   combination   of   its   adult    formulation   of   a
tetanus-diphtheria-acellular  pertussis ("TdaP") vaccine for adults. The Company
is presently  considering  sponsoring safety and  immunogenicity  adult clinical
trials in the United States and Europe using Amvax(REGISTERED).

      COMBINATION VACCINES

      The   Company   is   developing   three    combination    vaccines   using
Certiva(TRADEMARK)  as an  "anchor."  Additional  vaccines  would  be  added  to
Certiva(TRADEMARK) 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(TRADEMARK). 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 ACIP and AAP have  issued a
revised  recommendation  related to polio  vaccination.  A sequential  schedule,


                                     - 10 -
<PAGE>


including  two  doses of IPV  followed  by two doses of oral  polio  vaccination
("OPV"), is now the preferred  recommendation.  A four dose OPV or four dose IPV
schedule also 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, was developed jointly by SSI and
the Company,  and has been on the market in Denmark  since the first  quarter of
1997. The Company has been advised that the  regulatory  authorities in Germany,
Austria,  Sweden and Finland, under the European mutual recognition  procedures,
have agreed to recognize  the Danish  marketing  authorization  for the DTaP-IPV
vaccine  and  the  Company   presently   anticipates  that  national   marketing
authorizations  in one or more of  these  countries  may be  issued  in the near
future. The Company has appointed  Chiron Behring to market the DTaP-IPV product
in Germany and Austria. SSI holds the product registrations, and SSI will market
the product, in SSI's  Territory.  There can be no assurance that these national
marketing  authorizations will be issued in a timely fashion as this application
process is principally the  responsibility of the Company's  European  partners,
over whom the Company has no control.  See "Marketing of Vaccines" and "Business
Relationships."

      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
Certiva(TRADEMARK)-IPV  will be accepted,  or receive  regulatory  approval in a
timely  fashion  or at  all,  by  the  FDA or  other  regulatory  agencies.  See
"Government  Regulation" and "Risk Factors - Need for Regulatory Approvals." See
also "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
Certiva(TRADEMARK)-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."

      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   Certiva(TRADEMARK)-IPV-HIB   vaccine.  See
"Products Under Development - Conjugate Vaccines - HAEMOPHILUS INFLUENZAE Type b


                                     - 11 -
<PAGE>


Vaccine"  for a  description  of the  Company's  HIB  vaccine.  The  Company  is
collaborating  with Abbott in the  development  of this  vaccine.  See "Business
Relationships."

      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  serves 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  Certiva(TRADEMARK)  and its  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.

      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 proof-of-principle  Phase I/II  clinical  trial
conducted  under the  sponsorship  of the NIAID.  In that trial,  the monovalent
vaccine  was  well  tolerated  with  minimal   reactogenicity   and  no  serious
side-effects  in healthy,  nonpregnant  women subjects.  Antibodies  elicited by
immunization with different  conjugate vaccine  serotypes  displayed  protective
activity 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


                                     - 12 -
<PAGE>


weeks of gestation.  Trials for monovalent GBS vaccines have been expanded.  The
Company is presently  planning  clinical  studies for its multivalent  conjugate
vaccine  coupled to a new and novel carrier  protein in  nonpregnant  adolescent
girls and women.

      MENINGOCOCCAL  VACCINES.  Meningitis is a serious infection  involving the
membranes  surrounding the brain and spinal cord,  which can lead to significant
central  nervous system damage in all age groups.  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.  This  vaccine 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  a  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.  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  another  Group  B  meningococcal
conjugate  vaccine.  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 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.  In May 1998,  the Company  announced
that in the first of these Phase II trials,  its Group C  meningococcal  vaccine
had been shown to be safe and effective in infants as measured by  immunological
response  capable of  inducing  bactericidal  activity.  Previous  studies  have
demonstrated a correlation  between vaccine efficacy and its ability to generate
immunologic  response  and to  stimulate  bactericidal  activity.  The  clinical
development  and testing of all of these  vaccines  are expected to take several
years to complete.



                                     - 13 -
<PAGE>


      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  a  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 this vaccine.  Three manufacturers are
currently  licensed  by the FDA to sell HIB  conjugate  vaccines  for use in all
primary and booster doses. See "Competition."

      GROUP A STREPTOCOCCAL VACCINE. Group A streptococcal disease occurs in all
age groups with a predominance  in school-age  children.  Group A  streptococcus
causes  infections  ranging  from  severe  sore  throat and sinus  infection  to
pneumonia and 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
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.


                                     - 14 -
<PAGE>


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.  Toward 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 judgment of
the  Company,   such   arrangements   would  be  beneficial  to  the  successful
commercialization of its products. See "Business Relationships."

      In addition to establishing  these commercial  alliances,  the Company has
developed an internal  marketing  and sales  organization,  which  commenced the
product  launch of  Certiva(TRADEMARK)  in the United  States  during the fourth
quarter of 1998. In the United States,  federal and state governments  currently
purchase a  substantial  portion of  pediatric  vaccines  sold.  The  Company is
marketing  Certiva(TRADEMARK)  directly to federal and state governments through
established  purchasing  programs.  In the fourth  quarter of 1998,  the Company
began  participating in the U.S.  government's  multiple contract awards for the
purchase of its annual requirements of DTaP vaccine. Under these contracts,  the
Company and the other  vaccine  suppliers  effectively  are not  guaranteed  any
minimum purchase  requirements,  but they are provided the opportunity to revise
their contract  proposals on a quarterly basis. The Company also is competing to
supply  Certiva(TRADEMARK)  to state  government  programs.  The  foregoing  are
forward looking  statements  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  effectiveness  of
product launch,  nature of competition,  effective marketing,  and uncertainties
relating to government  purchasing policies,  all as discussed under the heading
"Risk Factors",  below. See "Risk Factors - No Assurance of Effective Marketing"
and "Risk Factors - Changes in Government Purchasing Policies."

      For  financial  information  regarding  the  segments in which the Company
operates,  see Note 3 of the Notes to the Consolidated  Financial  Statements in
Item 8 - Financial Statements and Supplementary Data. All of the Company's sales
are made in U.S.  dollars.  The  backlog of orders  believed  to be firm for the
Company's  products was approximately $3.2 million and $1 million as of December
31, 1998 and 1997, respectively. 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 product.

      To successfully commercialize Certiva(TRADEMARK) in the United States, the
Company will be required,  among other things,  to participate  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 those 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


                                     - 15 -
<PAGE>


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
Company  has  exclusive  rights for a term  which,  presently,  is  through  the
expiration  date of the patent.  The patent is  scheduled to expire on August 9,
2005.  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  fourteen
unexpired  foreign patents are issued with expiration dates ranging from 2002 to
2009. 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 thirty-three  issued patents with  expiration  dates
ranging  from 2005 to 2016,  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 2016.  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 2016. See also "Products Under Development Conjugate Vaccines."

      STATENS SERUM  INSTITUT  SUPPLY  AGREEMENTS.  In 1991, the Company and SSI
executed a supply  agreement  under  which SSI is required to supply the Company
with its  requirements  of  diphtheria  and  tetanus  toxoids  to be used by the
Company for developing,  producing and selling the DTaP vaccine, either alone or
as a  combination  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 SSI's Territory. The contract has a term
of 20 years. The Company and SSI also have entered into another supply agreement


                                     - 16 -
<PAGE>


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,  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. If 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, 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 SERUM INSTITUT  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  SERUM  INSTITUT  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
one U.S.  patent that expires in 2015 and two European  patents  which expire in
2011.

      PASTEUR  MERIEUX  CONNAUGHT  AGREEMENTS.  At the end of 1995,  the Company
entered  into a clinical  development  agreement  and a license  agreement  with
Pasteur  Merieux  Connaught  under which both parties  will jointly  develop the
Company's new conjugate vaccine against 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."



                                     - 17 -
<PAGE>


      Through December 31, 1998, 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  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.  Pasteur  Merieux  Connaught may terminate the
agreement 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.  Pasteur Merieux Connaught may
terminate the agreement at any time with advance notice.

      ABBOTT  LABORATORIES  AGREEMENT.  In October 1996,  the Company and Abbott
signed a definitive agreement under which Abbott would market Certiva(TRADEMARK)
following FDA approval. The marketing agreement also will allow Abbott to market
the  Company's  DTaP-IPV  vaccine,  and  DTaP-HIB and  DTaP-IPV-HIB  combination
vaccines under development.

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

      On  execution  of the  agreement  with  Abbott,  the Company  received $13
million of which $6.3  million  represented  payment for  350,000  shares of the
Company's  Common  Stock,  and the balance  represented  a  marketing  fee and a
clinical  development  payment.  The Company and Abbott will  collaborate in the
clinical  development of the combination  vaccines,  and Abbott has provided the
Company with clinical  development  funding.  The Company will receive  payments
upon achievement of prescribed  milestones.  The Company recognized $5.2 million
of  revenues  under  this  contract  in  1998,  including  a  milestone  payment
associated  with the FDA  approval  of  Certiva(TRADEMARK).  The  agreement,  as
amended,  provides for total  payments of up to $40 million by Abbott,  of which
the Company has received $18 million through December 31, 1998. In addition, the
Company has received revenues from Abbott as it purchases Certiva(TRADEMARK) and


                                     - 18 -
<PAGE>


will  receive  additional  revenues  as  Abbott  purchases  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,  Abbott may
terminate  the  agreement  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.  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  faces
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 example,  over the past three years, three companies announced that they had
received  FDA  approval  for their DTaP  vaccine for infants  and  children.  In
addition,  to the extent that these competitors are successful in developing and
marketing  combination  vaccines that include DTaP vaccines,  these  combination
vaccines  may gain market  share at the expense of  stand-alone  DTaP  vaccines,
including  Certiva(TRADEMARK).  One of these  competitors has 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.  Another  competitor has reported that it is
in clinical  trials for a DTaP-Hib  combination  vaccine.  In addition,  several
competing DTaP vaccines and certain combination vaccines incorporating DTaP, IPV
and/or HIB vaccines  have been  licensed for sale outside of the United  States.
See "Risk Factors Competition and Technological Change."


                                     - 19 -
<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 and its products are subject to  comprehensive  regulation  by
the FDA in the United States and by comparable  authorities in other  countries.
These  national  agencies  and  other  federal,  state,  and  local  authorities
regulate,  among other things,  the  preclinical and clinical  testing,  safety,
effectiveness,   approval,  manufacturing,   labeling,  advertising,  promotion,
export,  and  marketing of the Company's  products.  In the United  States,  FDA
regulates human vaccine products under the Federal Food, Drug, and Cosmetic Act,
the Public Health Service Act, and other laws.

      The steps  required  before a human  vaccine  product may be approved  for
marketing in the United States generally include: (i) preclinical laboratory and
animal testing; (ii) submission to the FDA of an IND for human clinical testing,
which must become  effective  before human clinical  trials may commence;  (iii)
human clinical  trials and other studies to establish the safety and efficacy of
the product;  (iv) the  submission to the FDA of license  applications;  (v) FDA
review of the license applications;  and (vi) satisfactory  completion of an FDA
inspection of the  manufacturing  facility or facilities at which the product is
made to assess compliance with Good Manufacturing Practices ("GMP"). The testing
and approval process requires  substantial time, effort and financial resources,
and there can be no  assurance  that any  approval  will be  granted on a timely
basis,  if at all.  See  "Risk  Factors  --  Government  Regulation;  Regulatory
Approvals."

      Preclinical tests include laboratory evaluation of the product, as well as
animal studies to assess its safety, immunogenicity, and potential efficacy. The
results of preclinical  tests,  together with the manufacturing  information and
analytical  data,  are submitted to the FDA as part of an IND, which must become
effective  before human  clinical  trials may begin.  An IND will  automatically
become  effective 30 days after receipt by the FDA,  unless before that time the
FDA raises  concerns or questions.  If it does, the FDA's concerns and questions
must be resolved before clinical trials can proceed.

      Clinical  trials involve the  administration  of the  investigational  new
vaccine  to  healthy  volunteers  or to  patients,  under the  supervision  of a
qualified  investigator.  Clinical  trials are conducted  under  protocols  that
detail  the  objectives  of the study and the  parameters  to be used to monitor
efficacy  and safety.  Each  clinical  study must be reviewed by an  independent
Institutional Review Board ("IRB"), and the IRB must approve the study before it
begins.  In its  review,  the IRB will  consider,  among other  things,  ethical
factors and the safety of human subjects.


                                     - 20 -
<PAGE>


      Clinical trials are typically  conducted in three sequential  phases,  but
the phases may overlap. In Phase I, the initial introduction of the vaccine into
human subjects  (usually healthy  volunteers),  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.  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, usually at
geographically  dispersed  clinical study sites.  There can be no assurance that
Phase I, Phase II or Phase III testing of any of the Company's  products will be
successfully  completed within any specific time period,  if at all, or, that if
they are completed, that the results of the trial will be sufficient to serve as
the basis of a license application  submission to the FDA. Furthermore,  FDA may
suspend clinical trials at any time on various grounds, including a finding that
the subjects in the trial are being exposed to an unacceptable  health risk. See
"Risk Factors -- Uncertainties Related to Clinical Trials."

      The results of  preclinical  testing and clinical  trials,  together  with
detailed  information  on the  manufacture  and  composition  of a product,  are
submitted to the FDA in the form of both a Product License  Application  ("PLA")
and Establishment  License Application ("ELA") requesting approval to market the
product.  Pursuant to the Food and Drug  Modernization  Act, FDA has proposed to
combine the PLA and ELA into a Biologics License Application ("BLA"). Until that
proposal is made final,  companies  will  continue to submit a PLA/ELA.  The PLA
describes the results of clinical and  pre-clinical  studies;  the ELA describes
the facilities,  equipment, and personnel involved in the manufacturing process.
The FDA may deny a BLA or PLA/ELA if applicable regulatory criteria are not met,
require additional testing or information, and/or require post-marketing testing
and  surveillance  to  monitor  the  safety or  efficacy  of a  product.  Before
approving a BLA or PLA/ELA,  FDA will inspect the  facilities at which a product
is  manufactured,  and will not  approve the product  unless GMP  compliance  is
satisfactory.

      Both  before and after  approval is  obtained,  violations  of  regulatory
requirements, including the preclinical and clinical testing process, the BLA or
PLA/ELA review process, or thereafter (including after approval),  may result in
various adverse consequences,  including the FDA's delay in approving or refusal
to  approve a  product,  withdrawal  of an  approved  product  from the  market,
seizure,  injunction,  and/or the imposition of criminal  penalties  against the
license holder. For example, each holder of an IND or FDA license is required to
report  certain  adverse  reactions  to the  FDA,  and to  comply  with  certain
requirements concerning advertising and promotional labeling for their products.
Also,  quality control and manufacturing  procedures must continue to conform to
GMP regulations after approval,  and the FDA periodically inspects manufacturing
facilities  to assess  compliance  with  GMP.  Accordingly,  manufacturers  must
continue  to expend  time,  moneys,  and  effort in the area of  production  and
quality control to maintain GMP compliance.  In addition,  discovery of problems
may result in  restrictions  on a product,  including  withdrawal of the product
from the market. Also, new government requirements may be established that could
delay  or  prevent   regulatory   approval  of  the  Company's   products  under
development.

      The  Company  will also be subject  to a variety  of  foreign  regulations
governing clinical trials and sales of its products. Whether or not FDA approval
has  been  obtained,   approval  of  a  product  by  the  comparable  regulatory
authorities of foreign  countries must be obtained prior to the  commencement of
marketing of the product in those  countries.  The approval  process varies from
country to country and the time may be longer or shorter than that  required for
FDA approval.


                                     - 21 -
<PAGE>


      Requirements similar to FDA's 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,  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
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


                                     - 22 -
<PAGE>


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 testing and marketing of vaccine  products involve an inherent risk of
product liability. The Company has limited product liability insurance coverage.
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 Company's business or financial  condition.
If not covered by insurance, the Company faces potential liability that could be
substantial in the event of claims.

EMPLOYEES

      As of December 31, 1998,  the Company had 308 full-time  employees of whom
35 have Ph.D.  degrees and two have M.D. degrees.  Of these employees,  191 were
engaged in research,  development and production activities,  38 were engaged in
administration, and 79 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 IN THIS ANNUAL  REPORT ON
FORM 10-K,  READERS  SHOULD  CONSIDER THE FOLLOWING  RISK  FACTORS.  THIS ANNUAL
REPORT ON FORM 10-K  CONTAINS  FORWARD  LOOKING  STATEMENTS  COVERED BY THE SAFE
HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE
STATEMENTS  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.

      LACK OF  PROFITABILITY.  The  Company  has  operated  at a loss  since its
inception  and  its  net  loss  for  the  year  ended   December  31,  1998  was
approximately $56.6 million.  The Company expects additional losses during 1999,
and  there  can  be  no  assurance  that  the  Company  will  become  profitable
thereafter. To become profitable, the Company must:

      .     timely and efficiently  expand production  capacity and output for
            its acellular pertussis vaccine products,
      .     increase  commercial  sales  of   Certiva(TRADEMARK)   and  products
            licensed in Europe,
      .     obtain  regulatory  approvals  for new  products  and  produce and
            market those products efficiently,  successfully and in sufficient
            quantities, and
      .     obtain  milestone  and  other  payments  under  existing  and  new
            collaborative agreements.

See "Risk  Factors - No Assurance of Effective  Marketing,"  "Risk Factors Risks
Associated  with  Limited  Production   Capacity"  and  Item  7  -  Management's
Discussion and Analysis of Financial Condition and Results of Operation.

      RISK  ASSOCIATED  WITH LACK OF  AVAILABILITY  OF CAPITAL.  To maintain the
Company's  production,  research,  development  and  growth at  current  levels,
present cash and cash equivalents,  expected product sales of Certiva(TRADEMARK)
and the Company's  other  products,  and revenues  from  existing  collaborative
agreements  are not expected to provide  sufficient  cash to fund the  Company's


                                     - 23 -
<PAGE>


operations,  debt  service  payments and capital  expenditures  in 1999 and into
2000. As a result,  the Company  intends to: enter into new license,  marketing,
distribution  and/or  development  agreements  that are  currently  under active
discussion;   liquidate  its  investment  securities;  enter  into  a  sale  and
lease-back of the Company's one owned facility;  and obtain one or more lines of
credit, which may be secured by accounts  receivable,  inventory or other assets
of the Company. The Company believes that it may meet 1999 cash requirements for
operations  through  these  efforts,  although  there are no  assurances in this
regard.  This is a forward looking statement and the factors that will determine
whether the Company will require additional funding include, without limitation,
the amount and timing of product sales,  the amount and timing of payments under
existing and new  collaborative  agreements  and the amount of any proceeds from
other previously identified funding sources.

      If the  Company is unable to  complete  one or more of these  transactions
and/or  proceeds  from the  transactions  are  inadequate,  the Company would be
required to obtain  additional  funding  through the sale of debt and/or  equity
securities.   The  Company  has  no  current  plans,  agreements,   commitments,
arrangements,  or  understandings  relating to the  placement or issuance of any
securities.  During the course of the year,  the Company will  evaluate its need
for additional debt or equity  financing to meet its cash  requirements for 1999
and 2000. If the Company  determines that such additional  financing is required
but  is  not  available,  then  the  Company  would  have  to  reduce  its  cash
requirements through significant reductions in operating levels. There can be no
assurances  that the Company will be able to obtain debt or equity  financing on
favorable terms or in amounts required to meet future cash requirements, or that
the Company, if necessary,  would be successful in reducing operating levels, or
that if  operating  levels are  reduced,  the Company  would be able to maintain
operations for any extended period of time. See Item 6 - Selected Financial Data
and Item 7 -  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operation.

      NO ASSURANCE OF EFFECTIVE  MARKETING.  The Company is now implementing its
initial  marketing and sales plan for  Certiva(TRADEMARK)  in the United States.
The Company markets  Certiva(TRADEMARK)  to government purchasers and, through a
distribution  agreement  with  Abbott,  markets  Certiva(TRADEMARK)  to  private
physicians  and managed care  organizations.  There can be no assurance that the
Company  or  Abbott  will  successfully  implement  their  respective  sales and
marketing strategies.

      Factors affecting  successful  commercial launch of the Company's vaccines
in the United States include:

      .     establishing  an  identity  and  reputation  for the Company and its
            products,

      .     increasing  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,

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

      .     establishing effective distribution channels.

      In  addition,   the  Company  has  entered  into  supply,   marketing  and
distribution agreements with third parties under which these parties have agreed
to market certain of the Company's products, such as  Certiva(TRADEMARK)-EU  and
the  DTaP-IPV  vaccine,  in  designated   territories.   As  a  result  of  this
arrangement,  the  Company's  revenues  from  product  sales in Europe and other
territories  depend upon the timing,  implementation  and  effectiveness  of the
sales,  marketing and distribution  efforts of others. In addition,  the Company
may not be successful in negotiating and executing marketing and/or distribution
agreements  with any other third  parties  and these other third  parties may be
unable to market the Company's products successfully.  See "Business -- Business
Relationships."


                                     - 24 -
<PAGE>


      RISKS  ASSOCIATED  WITH  LIMITED   PRODUCTION   CAPACITY.   The  Company's
manufacturing  facility  has limited  production  capacity  based on the present
size,  configuration,  equipment,  processes  and  methods  used to produce  its
products.  In  addition,  production  expenses  are  mainly  fixed  and  consist
primarily of expenses relating to the operation of its production facilities and
maintaining  a ready  work  force.  Further,  from  time to  time,  the  Company
experiences disruptions and production failures.  These disruptions and failures
increase  unit  production  costs as units are lost in the  production  process.
These  factors have  contributed  to higher  production  costs for the Company's
acellular pertussis products,  which costs currently exceed their respective net
selling prices.  See Item 7 - Management's  Discussion and Analysis of Financial
Condition and Results of Operation.

      The Company is addressing this issue by modifying its existing  facilities
and operations in a manner intended to significantly  expand production capacity
and efficiency.  These  enhancements are presently  scheduled to be completed in
the  latter  half of 1999,  although  there are no  assurances  in this  regard.
Following  completion  of these  enhancements,  the  Company  believes  that the
manufacturing facility will have substantially increased production capacity and
output,  that unit  production  costs  will be  reduced  significantly  and that
Certiva(TRADEMARK) will be produced in sufficient quantities and efficiencies to
generate a gross profit based on current  known  pricing  arrangements,  current
competitive environment and projected mix of customer purchases.

      The  previous  paragraph  includes  forward  looking  statements  and, the
Company's  ability to timely and  efficiently  expand  its  production  capacity
depends, in large part, upon the following:

      .     adequacy of engineering designs,
      .     availability of needed equipment,
      .     manufacturing experience with these enhancements,
      .     timeliness of regulatory review of modifications, and
      .     acceptability  of  the   modifications   to  applicable   regulatory
            authorities.

      The Company's  plans to increase  production  capacity and output could be
ineffective  or may not result in  production  efficiencies  that  cover  future
production costs. Failure to increase production capacity and output could limit
the Company's ability to meet market demand or achieve profitability. See Item 7
-  Management's  Discussion  and Analysis of Financial  Condition and Results of
Operation.

      RISKS  ASSOCIATED  WITH  MANUFACTURING  AND  SCALE-UP.  The  production of
vaccines is a highly complex,  biological process involving many steps from seed
culture through final production.  Thus, the Company's  production process could
fail or become  subject to  substantial  disruptions  that impede its ability to
meet production requirements.

      From time to time,  the Company  experiences  disruptions  and  production
failures.  There is no assurance  that the Company can  adequately  address such
failures or that  production  failures  will not  continue in the future.  These
disruptions and failures:

      .     limit the Company's production capacity,
      .     increase its  production  costs,  which would  affect the  Company's
            prospects for profitability, and
      .     could have a negative impact on the Company's  existing licenses for
            its products  and delay or inhibit its ability to obtain  additional
            regulatory approvals for its products.


                                     - 25 -
<PAGE>


In addition,  the Company may not consistently  produce its vaccines in quantity
and quality sufficient to achieve competitive commercial sales or profitability.

      The Company's  manufacturing  operations  for  Certiva(TRADEMARK)  and its
acellular  pertussis  vaccine  are  located  principally  in one  facility.  Any
condition or event that  adversely  affects the operation of this facility would
have a material adverse effect on the Company's  financial  condition and future
results of  operations.  See Item 7 -  Management's  Discussion  and Analysis of
Financial Condition and Results of Operation.

      RISK RELATED TO SIGNIFICANT  LEVEL OF INDEBTEDNESS.  The Company currently
has a significant level of indebtedness.  As of December 31, 1998, the Company's
consolidated  indebtedness and capitalized lease obligations were  approximately
$112.8 million,  including $83.7 million of 6.5% Convertible  Subordinated Notes
("6.5% Notes") and $25 million of 4.5% Convertible Secured Notes ("4.5% Notes").

      This  level of  indebtedness  could  have  material  consequences  for the
Company such as:

      .     impairing the Company's ability to obtain  additional  financing for
            working  capital,  capital  expenditures,  and general  corporate or
            other purposes, and

      .     limiting the availability of a substantial  portion of the Company's
            cash flow from operations, as it will be dedicated to the payment of
            the principal and interest on its indebtedness.

      The  Company's  ability to service its  indebtedness  will depend upon its
future operating  performance and the  availability of capital.  The Company may
not generate  sufficient  increases in cash flow from  operations to service its
indebtedness.  In that  case,  the  Company  could  attempt  to  refinance  such
indebtedness.  There can be no assurance, however, that any refinancing would be
available to the Company.  See Item 7 - Management's  Discussion and Analysis of
Financial Condition and Results of Operations.

      RISK OF  FORECLOSURE  OF  COLLATERAL  FOR 4.5%  NOTES.  The 4.5% Notes are
secured by a pledge of  collateral,  which  includes  certain  of the  Company's
equipment and other assets at the Company's principal manufacturing facility and
the Company's ownership rights in U.S. Patent No. 5,425,946,  entitled "Vaccines
Against Group C NEISSERIA MENINGITIDIS" (the "Patent"). If the Company defaulted
on its  obligations  under  the  4.5%  Notes  and the  holders  of  these  notes
foreclosed on the collateral,  the Company's ability to operate its business may
be substantially impaired.

      DEPENDENCE  ON  SUPPLIERS.   While  the  Company  produces  the  pertussis
component of  Certiva(TRADEMARK),  it has purchased,  and intends to continue to
purchase, required diphtheria and tetanus toxoids from SSI and enhanced IPV from
SSI and  another  supplier.  These  suppliers  may  not  fulfill  the  Company's
requirements,  their  components may not be supplied on commercially  reasonable
terms,  or they may experience  difficulties in obtaining  necessary  regulatory
approvals or disruptions in their  production of diphtheria and tetanus  toxoids
or  IPV.  Any  of  the  foregoing  could  significantly   affect  the  Company's
operations.

      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.


                                     - 26 -
<PAGE>


      In addition,  the Company has  contracted  with third  parties for certain
product testing and for the sterile fill,  labeling and packaging of its vaccine
products.  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.

      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.

      Three  competitors  have  received FDA approval for their DTaP vaccine for
use in infants and children.  If these  competitors are successful in developing
and  marketing  combination  vaccines  that  include DTaP  vaccines,  then these
combination  vaccines may gain market share at the expense of  stand-alone  DTaP
vaccines, including  Certiva(TRADEMARK).  One of those competitors has announced
that the FDA licensed a vaccine for  administration  at 15-18 months of age that
combines  that  company's  HIB vaccine with its DTaP vaccine by  reconstitution.
This same  competitor  is also seeking FDA approval for  administration  at two,
four and six  months  of age.  Another  competitor  has  reported  that it is in
clinical trials for a DTaP-HIB  combination  vaccine. In addition,  several DTaP
vaccines  and DTaP  combination  vaccines  are  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 the
Company.  These  factors may be  particularly  advantageous  because the vaccine
industry is subject to significant technological change.

      The  Company's  competitors  could also gain a  competitive  advantage  by
designing around the Company's patents, and developing technologies and products
that are as or more effective than any that have been or are being  developed by
the Company. They could also develop technologies and products that would render
the Company's technology and products obsolete and noncompetitive.

      CHANGES IN GOVERNMENT  PURCHASING POLICIES.  Children in the United States
receive immunizations from private providers and public providers, such as local
health  departments.  Immunizations  provided by public  providers are generally
funded through federal and state government  public health programs.  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.  In the United States,  federal
and state  governments  historically have purchased DTaP and other vaccines from
multiple suppliers. There can be no assurances that this practice will continue.

      From time to time,  legislative  and regulatory  initiatives  are proposed
that, if adopted, could significantly modify government vaccine programs.  These
initiatives  could  materially  affect  the  federal   government's   purchasing
authority,  the contract award process,  or 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


                                     - 27 -
<PAGE>


reimbursement   policies,  or  prices  charged  by  pharmaceutical  and  vaccine
manufacturers for their products.

      GOVERNMENT  REGULATION;   REGULATORY  APPROVALS.   The  Company's  vaccine
products,  product  development  activities  and  manufacturing  facilities  and
processes  are subject to  extensive  and  rigorous  regulation  by the FDA. FDA
regulation includes preclinical and clinical testing requirements and inspection
and approval processes.  To date, the Company has received FDA approval for only
one product.

      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.  Obtaining  licenses  can be  costly  and  time
consuming.  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 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  facilities will receive the requisite  regulatory
approvals and licenses in a timely fashion or at all.

      Moreover,  FDA-granted  licenses  may impose  limitations  that affect the
commercialization  of the  product,  including  limitations  on product  use and
requirements for post-licensure  testing.  The FDA can withdraw approvals at any
time by following 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.  FDA  regulations
depend  heavily on  administrative  and scientific  interpretation  and advisory
committee  determinations.  Such interpretations,  with possible prospective and
retroactive effect, could 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 labeling  practices.  If such entities find that the Company
is in material violation of these regulations,  the Company could be subject to,
among other things,  product  recalls,  suspensions  or withdrawals of licenses,
revocation or suspension  of export  authorizations,  and denials of any pending
applications.

      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.

      PATENT PROTECTION AND PROPRIETARY INFORMATION.  Traditionally, the vaccine
industry has placed  importance  on obtaining and  maintaining  patent and trade
secret protection for significant new technologies,  products and processes. The
Company believes that this 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


                                     - 28 -
<PAGE>


competitive or  inconsistent  with those held by or licensed to the Company.  No
assurances  can be given that the degree and range of  protection of any patents
will be sufficient,  that additional  patents will be issued to the Company,  or
that the Company will not  infringe  upon  patents  granted to others.  Further,
others have or may  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
to effectively develop, produce and market commercially viable products. 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 the Company can obtain these licenses on commercially  reasonable
terms, if at all, that the patents  underlying  these licenses will be valid and
enforceable  or  that  the  proprietary  nature  of  the  unpatented  technology
underlying these 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 this type of litigation,  it
could consume substantial resources.

      RISK OF PRODUCT LIABILITY AND LIMITED INSURANCE. The testing and marketing
of vaccine products involve an inherent risk of product  liability.  The Company
has limited product liability insurance coverage. 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 Company's business or financial condition. If not covered by insurance,  the
Company faces  potential  liability  that could be  substantial  in the event of
claims.

      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.  No assurance can be given that the
Company  will  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  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
Company's  U.S.  subsidiary  will be  declared  and  paid as a  dividend  to the
Company,  and the  Company  will  in turn  declare  and  pay a  dividend  to its
shareholders. Each such dividend would be subject 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  becomes  passive,  the
Company would be classified as a passive foreign investment company ("PFIC") for
U.S.  federal  income tax  purposes.  As a result,  U.S.  taxpayers  who receive
certain  dividends  from the Company or who sell shares of the Company's  Common
Stock would be subject to additional federal income tax. There are no assurances
that the Company will continue to be successful in avoiding PFIC classification.
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.


                                     - 29 -
<PAGE>


      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 December 31, 1998, these principal
shareholders  beneficially  owned  approximately  20.7  million  shares  of  the
Company's outstanding Common Stock, which represented approximately 54.6% of the
then  outstanding  shares of the Company's  Common Stock.  See Item 13 - Certain
Relationships and Related Transactions.

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

      .     financial results,
      .     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.  If either of the two principal  shareholder
groups  decides to sell a substantial  number of shares of the Company's  Common
Stock,  these sales could  significantly  increase the  volatility of the market
price of the Company's issued and outstanding  securities.  In addition,  one of
the  principal  shareholders  has  registration  rights  for the  shares  of the
Company's Common Stock that it owns.

      YEAR 2000 ISSUES.  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.  The Company could be required
to  expend   additional  funds  to  achieve  Year  2000   qualification.   These
expenditures  could have a  material  adverse  effect on the  future  results of
operations or financial condition of the Company.  Additionally,  the failure of
suppliers and other  companies  doing  business with the Company to achieve Year
2000  qualification in a manner compatible with the Company's systems could also
have a  material  adverse  effect  on the  Company.  See  Item 7 -  Management's
Discussion and Analysis of Financial Condition and Results of Operation.




                                     - 30 -
<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:

                                             Square
 Facility/Function         Location           Feet      Own/Lease        
 --------------------------------------------------------------------------

Production Facility        Beltsville, MD    26,000   Leased until February 2009
                                                      (ten-year renewal option)

Production Facility        Beltsville, MD    35,000   Leased until February 2001
                                                      (two five-year renewal
                                                      options)
Warehouse and Support      Beltsville, MD    31,000   Owned
Services for Production
Facility

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

Executive Offices and      Columbia, MD      75,500   Leased until March 2008
Research and Development                              (with two five-year 
Laboratory Facility                                   renewal options)

      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(TRADEMARK). The lease on this facility expires in February 2009, subject
to  a  ten-year  renewal  option.  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 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.

      In March of 1998, the Company leased an  approximately  75,500 square foot
facility for a period of ten years, with two five-year  renewal options.  At the


                                     - 31 -
<PAGE>


end of the  fifth  year of the  initial  term,  the  Company  has the  right  to
terminate the lease for a specified fee. In addition,  the Company has an option
to purchase the facility during specified periods of the lease term. The Company
has  consolidated  the  research  and  development  groups and most  general and
administrative  functions in this facility.  See Item 7 Management's  Discussion
and Analysis of Financial Condition and Results of Operation.


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

      On November 2, 1998,  Sharon Mates,  Ph.D.,  a director of the Company and
the Company's former president,  initiated  litigation in United States District
Court,  District of Maryland  (Civil  Action No. AW 98-3678)  (the  "Complaint")
against the Company,  two of its directors and BioChem.  The claims  against the
Company seek principally the following:  declaratory  relief against the Company
regarding  the approval and  consummation  of the private  placement of the 4.5%
Convertible  Secured Notes due November 13, 2003 (the "4.5% Notes");  injunctive
relief seeking to prevent the Company from consummating the private placement of
the 4.5% Notes (which closed on November 12, 1998);  injunctive  relief  against
the Company relating to Dr. Mates' access to Company books and record and to her
continued service as a director; declaratory relief regarding the termination of
employment  and removal as  president  of the  Company;  and claims  against the
Company  alleging  abusive  discharge and  defamation.  The Complaint also seeks
actual and punitive  damages  against the Company in an unspecified  amount.  In
addition,  the Complaint  seeks  declaratory  and injunctive  relief against Dr.
Phillip  Frost and BioChem  arising out of alleged  violations  of the reporting
requirements of Sections 13(d) and Rule 13d-1(a) of the 1934 Act and unspecified
damages from  BioChem and Drs.  Frost and  Francesco  Bellini  (chief  executive
officer of BioChem) for tortious interference with Dr. Mates' business relations
with the Company. See Item 13 - Certain Relationships and Related Transactions.

      In December  1998,  the Company filed a motion to dismiss the Complaint in
its  totality.  BioChem and Drs.  Frost and Bellini  have also filed  motions to
dismiss Dr. Mates' claims. The Company intends to continue to vigorously contest
and defend against the claims in this litigation.  The Company believes that the
claims against it are without merit,  that the Company has meritorious  defenses
available to it, and that certain claims may be covered by insurance.  Under the
terms of the Company's  By-laws and  indemnification  agreements with directors,
the Company is obligated to indemnify  directors  against  certain  claims.  The
Company is presently  evaluating the extent of its  indemnification  obligations
and available  insurance  coverage.  In the opinion of management,  this lawsuit
will not have a material adverse effect on the Company. If, however,  litigation
costs,  including  indemnification   obligations,   and  judgments  against  the
defendants exceed the Company's available  insurance  coverage,  this litigation
could have a material  adverse effect on the Company's  financial  condition and
results of operations.

      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.


                                     - 32 -
<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 1997 and 1998:

                                         High           Low
                                         ----           ---
            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

             1998
              First Quarter              25              16 5/8
              Second Quarter             20 1/4          15 1/4
              Third Quarter              17 7/16          6 5/8
              Fourth Quarter             15 7/8           7 3/8

      On January 20, 1999, the last reported sales price of the Company's Common
Stock on the AMEX was $7.50 per  share.  The  number  of record  holders  of the
Company's Common Stock as of January 20, 1999 was approximately 266.

      The  transfer  agent  and  registrar  for the  Company's  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.

      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. Because the Company
is a Canadian corporation, 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.


                                     - 33 -
<PAGE>


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

      If the Company becomes a PFIC, a United States taxpayer will be subject to
special rules with respect to  transactions  involving  the Common Stock.  Under
these rules,  all gains realized on disposition of the United States  taxpayer's
Common  Stock will be  allocated  pro rata over the number of years in which the
shareholder  held the Common  Stock.  The gain that is allocated to a prior year
(subsequent  to  December  31,  1986) in which the  Company  was a PFIC,  or any
subsequent year other than the year of disposition, will be taxed at the highest
marginal  rate for that year and such tax will be subject to an interest  charge
as if it had originally been due in that year. In addition, gain realized on the
disposition  of the United States  taxpayer's  Common Stock that is allocated to
the  current  year or to a prior  year  before  the  Company  was a PFIC will be
treated as ordinary income.  Similar rules will apply to  distributions  made by
the Company. The above rules will not apply if the United States taxpayer elects
to treat the Company as a  qualified  electing  fund and the  Company  agrees to
provide certain  information to the United States Internal Revenue  Service.  In
such case,  the United  States  taxpayer  will include in his or her income each
year his or her pro rata share of the ordinary  income and capital  gains of the
Company. The Company has not been classified as a PFIC to date, and during 1999,
the Company  intends to, and believes  that it can,  generate  sufficient  other
income and will hold sufficient  non-passive assets to avoid being classified as
a PFIC.  This is a forward  looking  statement,  and the factors  affecting  the
Company's  ability to avoid being  classified  as a PFIC  include the nature and
source of its revenues,  and  classification of its assets.  See Item 1 Business
Risk  Factors and Item 7 -  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operation.

      On  November  12,  1998,  the Company  completed  a $25 million  financing
through the private placement of the 4.5% Notes. The 4.5% Notes were sold at par
by the  Company.  The 4.5% Notes are  convertible,  in whole or in part,  by the
holder(s)  at  any  time  prior  to  maturity  (unless  previously  redeemed  or
repurchased)  into shares of the Company's Common Stock at a conversion price of
approximately $8.54 per share.

      The net proceeds from the offering of  approximately  $24.6 million are to
be used for marketing and  distribution of first commercial  products,  research
and development,  clinical trials, capital expenditures  (including construction
or acquisition of additional facilities and purchase of equipment) protection of
patent rights,  and general  corporate  purposes and working  capital.  The 4.5%
Notes were issued to certain  existing  shareholders,  affiliates and accredited
investors, including BioChem and Phillip Frost, M.D., which purchased 4.5% Notes
in the aggregate principal amount of $9 million and $4.25 million, respectively.
The 4.5% Notes are not  registered  under the Securities Act of 1933, as amended
(the "Securities  Act"), or any applicable state or foreign securities laws, and
were sold in reliance on  prescribed  exemptions  from  registrations  under the
Securities Act,  including  Regulation D, and other  applicable state or foreign
securities laws. See Item 7 - Management's  Discussion and Analysis of Financial
Condition  and  Results of  Operation  and Item 13 - Certain  Relationships  and
Related Transactions.


                                     - 34 -
<PAGE>


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

      Selected consolidated  financial data for the Company are set forth below.
The selected  financial data as of December 31, 1998 and 1997, and for the years
ended December 31, 1998, 1997 and 1996 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, 1996,  1995 and
1994 and for the years ended  December  31, 1995 and 1994 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.


                                     - 35 -
<PAGE>


<TABLE>
<CAPTION>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                  Fiscal Years Ended December 31,

                                                     1998               1997                1996            1995            1994    
                                                     ----               ----                ----            ----            ----
STATEMENT OF OPERATIONS DATA:                                                                                          
Revenues:                                                                                                              
<S>                                               <C>               <C>                 <C>              <C>               <C>  
  Marketing, research and development agreements  $  6,149          $   8,001           $  9,656         $  3,000          $  -
  Product sales                                                                                                            
                                                     2,230              1,699                892                -             -
                                                 -----------    -----------------    --------------    ------------    -------------
Total revenues                                       8,379              9,700             10,548            3,000             -
                                                                                                                       
Operating Expenses:                                                                                                    
  Production                                        19,196             18,662             14,764            6,317           6,188
  Research and development                          17,986             19,860             11,594           10,206           5,763
  General and administrative                        10,800             11,386              6,753            6,696           4,543
                                                 -----------    -----------------    --------------    ------------    -------------
     Total operating expenses                       47,982             49,908             33,111           23,219          16,494
                                                 -----------    -----------------    --------------    ------------    -------------
Operating loss                                     (39,603)           (40,208)           (22,563)         (20,219)        (16,494)
                                                                                                                       
Gain on sale of investments in affiliates              -                  -                4,228           14,429          11,929
Interest and dividend income                         1,497              3,140              2,934              804             638
Interest expense                                   (18,503)            (6,772)            (4,088)               -             -
                                                 -----------    -----------------    --------------    ------------    -------------
                                                                                                                       
Net loss                                          $(56,609)         $ (43,840)          $(19,489)        $ (4,986)        $(3,927)
                                                 -----------    -----------------    --------------    ------------    -------------
Basic and diluted net loss per share              $  (1.76)         $   (1.39)          $  (0.63)        $  (0.17)        $(0.14)
                                                 ===========    =================    ==============    ============    =============
Weighted-average number                                                                                                
  of common shares outstanding                      32,152             31,641             30,764           29,745          28,785
                                                                                                                       
BALANCE SHEET DATA:                                                                                                    
Cash and cash equivalents                         $ 22,953          $  45,502           $ 70,881         $ 10,443         $20,922
Investment in affiliates, at market                  1,554                843              1,281            9,065          17,724
Total assets                                        64,525             84,508            122,962           41,249          49,580
6.5% Convertible subordinated notes                 83,734             83,734             86,250              -                 -
4.5% Convertible secured notes                      25,000                -                  -                -                 -
Long-term portion of capital lease                   2,356              4,110              5,871              -                 -
Preferred stock                                      6,538              6,538              6,538            6,538           6,538
Common stock                                        80,824             78,509             71,357           58,474          56,922
Additional Paid-in capital                          11,956                -                  -                -                 -
Cumulative comprehensive income excluded                                                                               
   from net loss                                       926                215                653            7,466          14,762
Accumulated deficit                               (159,218)          (102,609)           (58,769)         (39,280)        (34,294)
Dividends                                                -                 -                 -                -                 -

</TABLE>




                                     - 36 -
<PAGE>


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

   THE  FOLLOWING  PARAGRAPHS  IN THIS ANNUAL  REPORT  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  INCREASING  PRODUCTION
CAPACITY AND EFFICIENCY, THE PROSPECTS FOR AND FACTORS AFFECTING FUTURE REVENUES
AND PROFITABILITY,  LIKELIHOOD OF ADDITIONAL  FUNDING UNDER LICENSE,  MARKETING,
DISTRIBUTION AND/OR DEVELOPMENT AGREEMENTS OR FROM FURTHER FINANCINGS, PROJECTED
RESULTS FROM OPERATIONS,  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 UNITED STATES FOOD AND DRUG  ADMINISTRATION  (FDA);  THE
PRODUCTION OF VACCINES; THE NATURE OF COMPETITION; NEED FOR EFFECTIVE MARKETING;
DEPENDENCE  ON  SUPPLIERS,   INCLUDING  STATENS  SERUM  INSTITUT  ("SSI");   AND
UNCERTAINTIES RELATING TO CLINICAL TRIALS, ALL AS DISCUSSED IN THIS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF  OPERATIONS,  AND
ELSEWHERE  IN THIS  ANNUAL  REPORT  AND THE  COMPANY'S  FILINGS  WITH  THE  U.S.
SECURITIES AND EXCHANGE  COMMISSION  ("SEC"), TO WHICH THE READER'S ATTENTION IS
DIRECTED.

   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 July 1998, the Company  received FDA approval to manufacture and market
Certiva(TRADEMARK),  its DTaP  vaccine,  in the  United  States.  Under  the FDA
approval,  Certiva(TRADEMARK)  is  indicated  for  active  immunization  against
diphtheria,  tetanus and pertussis  (whooping cough) in infants and children six
weeks to seven years of age. The Company  produces the  monocomponent  acellular
pertussis  toxoid and formulates  the final product with  diphtheria and tetanus
toxoids manufactured and supplied by SSI.

      The Company is marketing  Certiva(TRADEMARK)  and the combination vaccines
to government purchasers, including federal and state government agencies. Under
a marketing  agreement between the Company and Abbott  Laboratories  ("Abbott"),
Abbott  markets  Certiva(TRADEMARK)  to  private  physicians  and  managed  care
organizations   in   the   United   States.   Abbott   began   the   launch   of
Certiva(TRADEMARK)  in  October  1998  and  the  Company  began  its  launch  of
Certiva(TRADEMARK)  during  November 1998.  Under the marketing  agreement,  the
Company will receive revenue from Abbott as it purchases  Certiva(TRADEMARK) for


                                     - 37 -
<PAGE>


resale to the private pediatric market in the United States.

      The Company and Abbott are  collaborating  in the clinical  development of
the combination vaccines, and the Company will receive payments upon achievement
of prescribed clinical development milestones.  Under the agreement, Abbott will
market those combination  vaccines  following approval to private physicians and
managed care  organizations  in the United States,  and the Company will receive
revenues  from Abbott as it  purchases  the  combination  vaccine  products  for
resale.

      FDA approval of Certiva(TRADEMARK) followed regulatory approval in various
European countries of vaccines using the Company's  acellular pertussis vaccine.
The Swedish Ministry of Health granted  regulatory  approval in February 1996 to
market  a   European   formulation   of   Certiva(TRADEMARK).   This   marketing
authorization  was  the  first  regulatory  approval  for  any of the  Company's
products.  In addition,  the Danish National Board of Health granted  regulatory
approval  in  September  1996 of the  DTaP  vaccine  combined  with an  enhanced
inactivated  polio  vaccine  ("DTaP-IPV")  for all primary and booster doses for
infants  and  children  in  Denmark.  The  Company  has  been  advised  that the
regulatory  authorities in Germany,  Austria,  Sweden and Finland have agreed to
recognize the Danish marketing  authorization  for the DTaP-IPV vaccine and will
issue national marketing authorizations in one or more of these countries in the
near  future.   There  can  be  no  assurance  that  these  national   marketing
authorizations  will be issued in a timely fashion as the application process is
principally the responsibility of the Company's European partners, over whom the
Company has no control.  The Company has appointed  Chiron Behring to market and
distribute the DTaP-IPV  product in Germany and Austria.  SSI holds all European
product  registrations  and is marketing  and  distributing  the products in the
Scandinavian,  Baltic  and other  countries  comprising  its  territory  ("SSI's
Territory").

      Under supply agreements,  the Company manufactures the acellular pertussis
component,  and SSI manufactures the diphtheria,  tetanus and inactivated  polio
vaccine  ("IPV")  components  for  the  DTaP  and  DTaP-IPV  vaccines.   SSI  is
responsible for the marketing and distribution of the DTaP and DTaP-IPV products
in SSI's  Territory.  Accordingly,  the Company has been  selling its  acellular
pertussis toxoid to SSI for formulation into DTaP and DTaP-IPV for sale in SSI's
Territory.

      In 1997 and 1996, the Company recognized  development revenues pursuant to
agreements with Pasteur Merieux  Connaught,  under which the Company and Pasteur
Merieux  Connaught  will jointly  develop the  Company's  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.

       In May 1996,  the  Company  completed  an  offering  of 6.5%  convertible
subordinated  notes in the principal amount of $86.25 million due in full on May
1, 2003 ("6.5% Notes"). The 6.5% Notes are convertible into the Company's Common
Stock  at an  initial  conversion  price  of  approximately  $24.86  per  share,
equivalent to a conversion rate of 40.2293 shares per $1,000 principal amount of
the 6.5%  Notes.  Interest  on the notes is  payable  semiannually  on May 1 and
November  1 each year.  In  December  1997,  approximately  $2.5  million of the


                                     - 38 -
<PAGE>


principal  amount of the 6.5% Notes was  converted  into  101,207  shares of the
Company's  Common Stock.  As of December 31, 1998,  the principal  amount of the
outstanding notes was $83.7 million.

      In November 1998, the Company completed a private placement of $25 million
aggregate  principal amount of 4.5%  Convertible  Secured Notes due November 13,
2003 ("4.5% Notes").  The 4.5% Notes are convertible  into the Company's  Common
Stock  at  an  initial  conversion  price  of  approximately  $8.54  per  share,
equivalent to a conversion rate of 117.0878 shares per $1,000  principal  amount
of the 4.5% Notes.  The  conversion  price was set based on the average  closing
price per share of the  Company's  Common Stock for the twenty (20) trading days
preceding  the  date  of the  announcement  of the  agreement-in-principle.  The
measurement period for determining the conversion price began on August 26, 1998
and  terminated  on  September  23,  1998.  The closing  prices per share of the
Company's  Common Stock during that period ranged from a low of $6.875 to a high
of $11.25.  The 4.5% Notes are  secured by certain  assets of the  Company,  are
otherwise  subordinated  in right of payment to all existing  and future  senior
indebtedness of the Company,  do not restrict the incurrence of future senior or
other  indebtedness of the Company and will be redeemable,  in whole or in part,
at the option of the Company on or after  November  13,  1999.  Upon a change in
control, the Company will be required to offer to purchase all of the 4.5% Notes
then  outstanding  at a purchase  price  equal to 100% of the  principal  amount
thereof, plus interest.  The repurchase price will be payable in cash or, at the
option of the Company,  in shares of the Company's  Common Stock. The 4.5% Notes
were  issued  to  certain  existing  shareholders,   affiliates  and  accredited
investors,  including  BioChem  Pharma  Inc.  and  Phillip  Frost,  M.D.,  which
purchased  4.5% Notes in the principal  amount of $9 million and $4.25  million,
respectively.  In addition,  Societe financiere d'innovation inc. ("Sofinov"), a
high  technology  investment  fund that is a subsidiary of La Caisse de depot et
placement du Quebec,  purchased 4.5% Notes in the aggregate  principal amount of
$6.25  million.  Denis  Dionne,  a director of the Company,  is the President of
Sofinov.

      In November 1996, the Company acquired a 35,000 square foot  manufacturing
facility in  Beltsville,  Maryland  through the assumption of real estate leases
and the purchase and lease of equipment  and leasehold  improvements.  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.  In April  1998,  as  permitted  by the
equipment lease  agreement,  the Company posted a letter of credit in the amount
of $5.9 million,  thereby suspending the application of all financial  covenants
set forth in the equipment lease agreement.  The letter of credit decreases on a
monthly basis as the payments on the lease obligation are made and is secured by
a  restricted  cash  deposit of an equal  amount.  The  balance of the letter of
credit and the  corresponding  restricted  cash is $4.9  million at December 31,
1998.  The letter of credit will  expire by its terms on  November  1, 2000.  In
addition,  the  Company  has  assumed  the real  estate  leases  underlying  the
facility,  which are scheduled to expire in February  2001,  but may be extended
through 2011.

      In March,  1998,  the Company leased an  approximately  75,500 square foot
facility  to be used  for  research,  development,  general  and  administrative
functions and for future  expansion of the Company's  operations  (the "Research
Facility").  The lease is for an initial  term of ten years,  with two five year
renewal  options.  The initial annual base rent under the lease is approximately
$981,000 with minimum  annual  escalations.  At the end of the fifth year of the
initial  term,  the Company has the right to terminate the lease for a specified


                                     - 39 -
<PAGE>


fee. In addition,  the Company has an option to purchase  the Research  Facility
during specified  periods of the lease term.  During 1998, the landlord provided
the Company a tenant  improvement  allowance of $1.4  million,  all of which was
utilized during 1998. In addition, the landlord extended a line of credit to the
Company for an additional $1.8 million,  if needed, to fund improvement costs in
excess of the tenant  improvement  allowance.  The line of credit will expire in
March 1999. 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
to March 2002. The line of credit would be secured by all leasehold improvements
and related facility enhancements purchased with funds provided by the landlord.
No funds have been drawn down under this line of credit.

      Research and development  expenses were $18.0 million,  $19.9 million, and
$11.6 million in 1998, 1997, and 1996,  respectively.  The Company had 308, 260,
and  206  full-time   employees  as  of  December  31,  1998,  1997,  and  1996,
respectively.

   RESULTS OF OPERATIONS
   ---------------------

   YEARS ENDED DECEMBER 31, 1998 AND 1997

      In the fourth quarter of 1998,  the Company  realized its first sales from
the launch of  Certiva(TRADEMARK)  in the U.S. to government  purchasers  and to
Abbott for distribution in the private market.  Total product sales in 1998 were
approximately  $2.2 million of which  approximately $1.2 million were from sales
of  Certiva(TRADEMARK)  to several  government  agencies  and  approximately  $1
million were from sales of product to SSI. In addition, during 1998, the Company
recognized  $6.1  million   consisting   primarily  of  milestone  payments  and
development  funding under the Company's  agreement  with Abbott and to a lesser
extent milestone payments under a supply and distribution  agreement with Chiron
Behring. Revenue in 1997 consisted of $1.7 million from product sales to SSI and
$8.0 million of revenue from collaborative  agreements of which $6.0 million was
from an agreement with Pasteur Merieux Connaught.

      Production  expenses  were $19.2 million in 1998 compared to $18.7 million
in 1997. The increase in these expenses in 1998 is primarily  attributable to an
increase  in the  number of  production  and  service-related  employees  as the
Company prepared for regulatory approval of Certiva(TRADEMARK). The increase was
offset  in  part  by  lower  depreciation  expense  related  to  the  use  of an
accelerated  depreciation method and to the capitalization of Certiva(TRADEMARK)
inventory  for  sale  in  the  United  States  following  FDA  approval.   Costs
attributable to  Certiva(TRADEMARK)  production  were expensed until  regulatory
approval was obtained in July 1998.  Since FDA approval,  production  costs have
exceeded the net realizable value of inventory  produced,  which excess has been
recorded as production expenses incurred in 1998.

      Research and  development  expenses were $18.0 million in 1998 compared to
$19.9  million  in  1997.  The  decrease  is  attributable  primarily  to  lower
depreciation  expense related to the use of an accelerated  depreciation method,
reduced expenses for clinical trials,  and  reimbursements  for expenses under a
collaborative  agreement.  These  decreases  were offset in part by higher labor
expenses  as a result of an  increase  in the  number of  employees  and  higher
building costs.


                                     - 40 -
<PAGE>


      General and administrative expenses were $10.8 million in 1998 as compared
to $11.4 million in 1997.  The decrease is due to the  recognition of a non-cash
compensation  expense of approximately $1.3 million and a non-recurring  royalty
payment  both  incurred in 1997,  offset in part by higher  labor  expenses as a
result of an increase in the number of employees.

      Interest and dividend  income  decreased to $1.5 million in 1998 from $3.1
million in 1997.  This  reduction is due  primarily to a decrease in the average
cash balance.

      Interest  expense  increased to $18.5 million in 1998 from $6.8 million in
1997.  Approximately  $12.0  million  of this  increase  is due to a  beneficial
conversion  feature of the 4.5% Notes  resulting  in a  non-recurring,  non-cash
interest expense charge.  See "Tax and Other Matters,"  below.  Interest expense
also  increased as a result of the accrual of interest on the 4.5% Notes.  These
increases were partially offset due to principal  payments made on the equipment
lease, as well as to the conversion of $2.5 million principal amount of the 6.5%
Notes into shares of the Company's Common Stock in December 1997.

      The factors  cited above  resulted in a net loss of $56.6 million or $1.76
per share in 1998.  Without the effect of the  non-recurring  non-cash  interest
charge of $12.0 million, the loss in 1998 would have been $44.6 million or $1.39
per share.  This  compares to a net loss of $43.8  million or $1.39 per share in
1997. Without the effect of the $1.3 million non-cash  compensation expense, the
loss  in  1997  would  have  been  $42.5   million  or  $1.34  per  share.   The
weighted-average  number of shares of the Company's Common Stock outstanding was
32.2  million for 1998  compared to 31.6  million for 1997.  The increase in the
number of  weighted-average  shares  outstanding for 1998 as compared to 1997 is
attributable  primarily to the exercise of stock  options and the  conversion of
$2.5  million  principal  amount of the 6.5%  Notes into  101,207  shares of the
Company's Common Stock in December 1997.

   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,  in 1997  the  Company
recognized $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  produced its
acellular   pertussis  vaccine  for  European   distribution  and  prepared  for
regulatory approval of  Certiva(TRADEMARK) 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 are expensed  until
regulatory approval is obtained for such product.


                                     - 41 -
<PAGE>


      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  manufacturing
facility  acquired in November 1996, 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  grant,  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
million in 1996.  This increase is due primarily to higher average cash balances
as a result of the placement of the 6.5% Notes for $86.25 million in May 1996.

      Interest  expense  increased  to $6.8 million in 1997 from $4.1 million in
1996 due to the  Company's  interest  obligations  under  the 6.5%  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 shares of the Company's Common Stock 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  6.5%  Notes as  described
above.

   LIQUIDITY AND CAPITAL RESOURCES; OUTLOOK
   ----------------------------------------

      The Company's cash  requirement  for operations for the fourth quarter and
year-ended December 31, 1998 was $12.6 million and $42.7 million,  respectively.
For the  quarter  and year  ended  December  31,  1997,  cash  requirements  for
operations  were $10.5 million and $37.9  million,  respectively.  The Company's
cash requirement for operations is the net cash used in operating activities for
the period  being  reported  less amounts  received  under  license,  marketing,


                                     - 42 -
<PAGE>


distribution and/or development agreements and further adjusted by the timing of
proceeds from the sale of an investment in an affiliate.

      At  December  31,  1998,  the  Company  had cash and cash  equivalents  of
approximately  $23.0 million,  and investment  securities in an affiliate with a
market value of $1.6 million. The investment consisted of 125,000 shares of IVAX
common  stock.  The fair  market  value of such stock as of January 18, 1999 was
approximately $1.5 million. This investment is volatile and therefore subject to
significant  fluctuations in value. In addition, the Company had $4.9 million of
restricted  cash  pledged as  collateral  under the letter of credit  agreement,
which will be reduced in amount as payments are made under the  equipment  lease
described above.

      PROJECTED  RESULTS FROM OPERATIONS.  The Company  anticipates that it will
report a net loss of  between  $8.0 and $9.0  million  for each of the first and
second quarters of 1999, and that it will likely continue to incur quarterly net
operating  losses  during the second half of 1999,  although  projected to be in
lesser  amounts,  based upon several  factors.  The factors  contributing to the
projected losses include,  among others:  limited  projected  revenues;  current
manufacturing  limitations;  the timing and amount of milestone  payments  under
existing  collaboration  agreements;  and the timing and amount of up-front  and
other  payments  under   anticipated   license,   distribution,   marketing  and
collaboration  agreements,  all as more  completely  discussed in the  following
paragraphs.

      As described above,  quarterly  operating  results will be affected by the
revenue associated with the launch of Certiva(TRADEMARK), which began during the
middle  of the  fourth  quarter  of  1998.  Initial  revenues  from  the sale of
Certiva(TRADEMARK),  although  encouraging,  were  limited and the  reported net
sales  during  the  fourth  quarter  of 1998 were  approximately  $1.2  million,
representing  approximately a six percent (6%) market share in the public sector
for that period.  The Company  anticipates  growing but limited  revenues during
1999 as Certiva(TRADEMARK)  continues to be introduced to U.S. pediatricians and
other vaccine  purchasers and as its acellular  pertussis  toxoid is sold to SSI
for further manufacturing and sale in SSI's Territory.  Moreover,  the Company's
national  marketing  authorization for the sale and distribution of its DTaP-IPV
vaccine is pending in Germany and Austria. The Company is presently  developing,
with Chiron  Behring,  a product  launch  schedule,  which should  contribute to
further revenues during 1999. For the reasons described below, however, revenues
associated with  Certiva(TRADEMARK)  sales and further product  launches are not
expected to be sufficient to achieve profitability during 1999 and into 2000.

      As noted above,  quarterly  operating  results will be affected by various
manufacturing  limitations.  The  Company's  manufacturing  facility has limited
production  capacity  based  on  the  present  size,  configuration,  equipment,
processes and methods utilized to produce  Certiva(TRADEMARK)  and its acellular
pertussis toxoid. In addition,  production expenses are mainly fixed and consist
primarily of expenses  relating to the operation of its production  facility and
maintaining  a ready  work  force.  Further,  from  time to  time,  the  Company
experiences disruptions and production failures.  These disruptions and failures
increase  unit  production  costs as units are lost in the  production  process.
These  factors have  contributed  to higher  production  costs for the Company's
acellular pertussis products,  which costs currently exceed their net realizable
value. These excess costs are expensed in the quarter incurred. Thus, during the
first  three  quarters  of 1999,  the  Company  expects  that  costs to  produce
Certiva(TRADEMARK)   and  the  acellular  pertussis  toxoid  will  exceed  their
respective net selling prices.


                                     - 43 -
<PAGE>


      The Company is  modifying  its existing  facilities  and  operations  in a
manner  intended to  significantly  expand  production  capacity and efficiency.
These enhancements are presently scheduled to be completed in the latter half of
1999. Following completion of these enhancements,  the Company believes that the
manufacturing facility will have substantially increased production capacity and
output,  that unit  production  costs  will be  reduced  significantly  and that
Certiva(TRADEMARK)  would be produced  in  sufficient  quantities  to generate a
gross profit based on current known pricing  arrangements,  current  competitive
environment, and projected mix of customer purchases.

      Finally,  as noted above,  future operating results are dependent upon the
amount and timing of further milestone and other payments under existing and new
license,  distribution or development agreements.  During 1999, the Company will
be continuing its  development  efforts for several  products,  including  those
covered by existing marketing,  license and research agreements. As noted above,
the Company is entitled  under  those  agreements  to  milestone  payments  upon
achievement  of prescribed  events.  In addition,  the Company is entitled to be
paid for  certain  prescribed  development  costs  as  incurred.  The  milestone
payments  under the  existing  agreements  are tied to measured  progress in the
regulatory  process  for the  Company's  combination  and Group B  meningococcal
vaccines.  Although initial clinical  development  plans have been completed for
these products, and clinical trials are projected to commence during 1999, there
are no assurances that such milestone  events will occur during 1999, or at all,
or that any such payments will contribute  materially to quarterly net operating
results.

      In addition,  the Company is considering  executing  further  distribution
agreements for its products in certain markets throughout the world. The Company
also has identified  certain vaccines for which it intends to seek collaborative
agreements   for  the  purpose  of  expediting  the  further   development   and
commercialization  of the targeted products.  The Company has begun this process
with the intention of expeditiously  completing  these additional  collaborative
agreements.  The  Company is also in various  stages of  discussions  with third
parties  regarding various business  arrangements.  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.

      The foregoing  paragraphs  include  forward looking  statements  including
statements as to: revenue  projections and  assessments  for further  regulatory
approvals;  the  ability of the  Company to timely  and  efficiently  expand its
production  capacity and lower unit costs; the ability of the Company to address
production  failures;  among others. The factors that affect the level of future
revenues from product  sales  include,  among other  things,  the ability of the
Company and its  distribution  partners to  effectively  position the  Company's
products against competitive products (including safety, efficacy, and pricing),
the Company's  ability to manufacture  and deliver  products in accordance  with
customer  orders,  the timing and  amount of product  orders,  and the timing of
future product  launches.  The factors that affect the ability of the Company to
timely and efficiently expand its production capacity include, among others, the
adequacy of engineering  designs,  the  availability  of needed  equipment,  the
manufacturing  experience with these enhancements,  the timeliness of regulatory
review of  modifications,  and the  acceptability  of such  modifications to the
applicable regulatory authorities. There can be no assurances that the Company's
plans to increase  production capacity and output will be effective or result in


                                     - 44 -
<PAGE>


anticipated production  efficiencies and reduced unit cost or will be acceptable
to any regulatory  agency.  In addition,  there are no assurances that the steps
taken by the  Company to address  production  disruption  and  failures  will be
effective  or  that  failures  will  not  continue  in  the  future.  Production
disruptions  or failures  could have a material  adverse effect on the Company's
future  operating  results and could affect the Company's  existing  licenses as
well as any  applications  for  approval  for its products or the timing of such
approval.  No  assurances  can be given that the Company will be  successful  in
maintaining  consistent  and continuous  commercial  production of its products.
Further,  because the Company's manufacturing operations 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.

      PROJECTED CASH  REQUIREMENTS  FOR OPERATIONS.  The cash  requirements  for
operations  in the first  quarter of 1999 are  projected  to be between $8.5 and
$9.5 million and between  $36.0 and $42.0  million for 1999.  The first  quarter
cash  requirement  is  anticipated  to be lower than that incurred in the fourth
quarter  of 1998 due  primarily  to the  semi-annual  interest  payment  of $2.7
million on the 6.5% Notes paid on November 1, 1998.  The  foregoing is a forward
looking  statement  and the factors  which  affect the actual cash  required for
operations could include,  among other things:  the production levels of vaccine
product  for   commercial   sale;   the   production  of  vaccine  for  clinical
investigations; marketing costs associated with the launch of Certiva(TRADEMARK)
in the United States;  timing of regulatory  authorization to commence  clinical
investigations;  timing for the commencement of planned clinical trials; and the
level  of  expenditures  for the  Company's  ongoing  research  and  development
program.

      CAPITAL  EXPENDITURES.  Total  capital  expenditures  for 1998  were  $2.3
million,  excluding a $1.4 million tenant improvement  allowance provided to the
Company  under the terms of the Research  Facility  lease.  As noted above,  the
Company is expanding its manufacturing capacity and efficiency for its acellular
pertussis toxoid and  Certiva(TRADEMARK).  Total projected capital  expenditures
for 1999 for  facilities'  modifications,  equipment,  systems and other capital
additions could range between $3 million to $5 million,  with about $1.5 to $2.0
million to be  expended  in the first  quarter of 1999.  The  foregoing  include
forward looking  statements.  The amount of and timing for capital  expenditures
could fluctuate based upon a number of factors  including,  without  limitation:
the equipment  purchases  required in order to expand the  Company's  production
capacity and the amount and timing of  unanticipated  costs to replace or repair
existing  equipment and systems in order to keep  facilities  operational and in
compliance with regulatory requirements.

      FUNDING  SOURCES.   To  maintain  the  Company's   production,   research,
development  and growth at current  levels,  present cash and cash  equivalents,
expected product sales of  Certiva(TRADEMARK)  and the Company's other products,
and revenues from existing collaborative  agreements are not expected to provide
sufficient  cash to fund the  Company's  operations,  debt service  payments and
capital expenditures in 1999 and into 2000. As a result, the Company intends to:
enter into new license,  marketing,  distribution and/or development  agreements
that are currently under active discussion; liquidate its investment securities;
enter into a sale and lease-back of the Company's one owned facility; and obtain
one or more  lines of  credit,  which may be  secured  by  accounts  receivable,
inventory or other assets of the Company.  The Company believes that it may meet
1999 cash requirements for operations through these efforts,  although there are


                                     - 45 -
<PAGE>


no  assurances  in this  regard.  This is a forward  looking  statement  and the
factors that will determine whether the Company will require  additional funding
include, without limitation,  the amount and timing of product sales, the amount
and timing of payments under existing and new  collaborative  agreements and the
amount of any proceeds from other previously identified funding sources.

      If the  Company is unable to  complete  one or more of these  transactions
and/or  proceeds  from the  transactions  are  inadequate,  the Company would be
required to obtain  additional  funding  through the sale of debt and/or  equity
securities.   The  Company  has  no  current  plans,  agreements,   commitments,
arrangements,  or  understandings  relating to the  placement or issuance of any
securities.  During the course of the year,  the Company will  evaluate its need
for additional debt or equity  financing to meet its cash  requirements for 1999
and 2000. If the Company  determines that such additional  financing is required
but  is  not  available,  then  the  Company  would  have  to  reduce  its  cash
requirements through significant reductions in operating levels. There can be no
assurances  that the Company will be able to obtain debt or equity  financing on
favorable terms or in amounts required to meet future cash requirements, or that
the Company, if necessary,  would be successful in reducing operating levels, or
that if  operating  levels are  reduced,  the Company  would be able to maintain
operations for any extended period of time.

      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
described  elsewhere in this  management's  discussion and analysis of financial
condition and results of operations,  including in the first  paragraph  hereof,
and appearing  elsewhere in this Annual Report and in the Company's filings with
the  SEC,  for a more  complete  description  of  the  risks  and  uncertainties
affecting the Company and its business.

   TAX AND OTHER MATTERS
   ---------------------

      ACCOUNTING  AND TAX  IMPACT  OF  CONSUMMATION  OF SALE OF THE  4.5%  NOTES
("OFFERING").  On  November  12,  1998,  the date on which the 4.5%  Notes  were
issued,  the closing  price of the Company's  Common Stock was $12.625.  As this
price exceeded the conversion price for the 4.5% Notes,  the Company  recognized
an approximately $12 million beneficial  conversion feature,  which was recorded
as paid-in capital in the fourth quarter of 1998. The amount recorded to paid-in
capital was calculated by  multiplying  the total number of shares then issuable
upon conversion of the 4.5% Notes by the difference between the closing price on
the issuance date and the conversion  price. This discount also was deemed to be
an increase in the effective  interest rate of the 4.5% Notes to be reflected as
a charge to interest  expense and  amortized  over the period from the  issuance
date to the date the 4.5% Notes first  become  convertible.  Given that the 4.5%
Notes are  immediately  convertible,  the  Company  recognized  a  corresponding
one-time  interest charge of approximately  $12 million in the fourth quarter of
1998.  This interest  expense is not deductible for U.S. or Canadian  income tax
purposes.

      In addition,  with recent  amendments to the U.S. tax laws, the 4.5% Notes
may be deemed to be disqualified debt  instruments,  such that the Company would
not be permitted to deduct the annual $1.1  million  interest  payments for U.S.
federal tax  purposes.  Under the new law, if there is a  substantial  certainty
that the 4.5% Notes would be converted as of the date of issuance, they would be
disqualified for deductibility purposes. In the near term, this would reduce the


                                     - 46 -
<PAGE>


Company's  net  operating  losses  to be used to  offset  any  future  operating
profits,  and, if the Company earns any  operating  profits while the 4.5% Notes
are  outstanding,   the   non-deductibility   of  the  interest  payments  would
effectively increase the Company's U.S. federal tax liability.

      OTHER TAX ISSUES.  At December 31, 1998, the Company and its  subsidiaries
had income tax loss carry  forwards  of  approximately  $30.0  million to offset
future Canadian source income and  approximately  $94.7 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.

      NEW ACCOUNTING  PRONOUNCEMENTS.  In March 1997,  the Financial  Accounting
Standards  Board ("FASB")  issued  Statement of Financial  Accounting  Standards
("SFAS") No. 128,  "Earnings Per Share." SFAS No. 128 is effective for financial
statements  issued for periods  ending  after  December  15,  1997.  The Company
implemented SFAS No. 128 in 1997,  retroactive for all periods  presented.  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
available to common  stockholders  by the weighted  average  number of shares of
Common Stock  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, 1998, 1997 and
1996,  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 FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
Income" and No. 131,  "Disclosures  about  Segments of an Enterprise and Related
Information."  The Company has  implemented  SFAS 130  beginning  with the first
quarter 1998 financial  statements.  The implementation of this standard did not
result in a material impact to the Company's financial  statements.  The Company
implemented SFAS No. 131 for the year ended December 31, 1998 and has determined
that it currently does not have reportable segments. Product sales in the United
States were approximately  $1.2 million,  $0 and $0 for the years ended December
31,  1998,   1997  and  1996,   respectively.   Product  sales  to  Europe  were
approximately  $1.0  million,  $1.7  million  and  $900,000  for the years ended
December 31, 1998, 1997 and 1996, respectively. All products are currently being
manufactured at the Company's one production  facility in the United States. The
production  process,  and ultimately product costing,  is primarily the same for
all of the Company's  acellular  pertussis  vaccine  products sold in the United
States and Europe.  Because of this,  and the  relative  consistency  in selling
prices,  as well as the  nature  of the  distribution  methods  utilized  by the


                                     - 47 -
<PAGE>


Company,  the  Company  does not  differentiate  and manage its  business  along
geographic lines.

   IMPACT OF THE YEAR 2000 ISSUE ON THE COMPANY
   --------------------------------------------

      The Year 2000 issue is the result of some  computers,  software  and other
equipment,  including  computer code, in which calendar year data is abbreviated
to only two digits.  Management has initiated a Company-wide  program to prepare
the  Company's  information  systems  for the year  2000.  Based on an  internal
interim  assessment,   the  Company  believes  that  the  principal   management
information  system software that is currently being  implemented is designed to
be Year 2000 compliant.  However, there can be no assurances in this regard. The
Company intends to test the system for Year 2000 compliance.

      The Company also uses various "off the shelf"  software  applications  for
the storage and  analysis of various  types of data and systems.  Management  is
dependent on this software for day-to-day  operations.  The Company is currently
in the  inventory  and  assessment  phases  in which it is  evaluating  all such
applications  and systems,  as well as embedded  systems,  in order to determine
whether or not  modifications  or replacement  will be necessary to achieve Year
2000 qualification. This is an ongoing process and the Company is unable at this
time to assess the impact,  if any, this assessment might ultimately have on the
Company's systems and operations or its future financial position and results of
operations.  Upon  completion of its  assessment,  the Company will commence any
required remediation, beginning with its mission critical systems.

      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 has not been
advised by its  suppliers  that  costs to obtain  Year 2000  compliance  will be
passed on to the Company;  however,  there can be no assurances  that such costs
will not be passed through to the Company  either  directly or indirectly or, if
passed  through to the Company,  the magnitude of such  charges.  The systems of
other companies on which the Company's systems rely may not be timely converted.
Accordingly,  there are no assurances that the failure by such other  companies'
systems  to achieve  Year 2000  qualification,  or  qualify in a manner  that is
compatible to Company  systems,  would not have a material adverse effect on the
Company. Upon completion of the assessment phase, the Company intends to develop
contingency plans for various possible scenarios.

      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 preliminary
internal  assessment,  the  Company has not  identified  any  material  costs or
expenditures  specifically  related to modifications of information  systems for
Year 2000  compatibility.  The costs incurred to date in conducting the internal
assessment  have not been  material.  This  internal  assessment is a continuing
process,  consequently  there can be no assurances  that the Company will not be
required to expend  significant  amounts on achieving Year 2000 qualification or
that such expenditures will not have a material adverse affect on future results
of  operations  or financial  condition.  The Company has not yet  developed any
contingency plans for its operations should any of its systems  ultimately prove
not to be Year 2000 compliant.


                                     - 48 -
<PAGE>


      The  foregoing  paragraphs  contain  forward  looking  statements  and the
factors affecting the impact of Year 2000 on the Company include,  among others,
the availability and cost of programming and testing resources, vendors' ability
to modify proprietary software, unanticipated problems identified in the ongoing
compliance  assessment,  and  compliance of material  third party  suppliers and
vendors.


ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            ----------------------------------------------------------

      The Company does not have significant  exposure to changing interest rates
on invested  cash at December 31,  1998.  The Company  invests in U.S.  Treasury
bills and investment grade commercial paper that have maturities of three months
or  less.  As a  result,  the  interest  rate  market  risk  implicit  in  these
investments at December 31, 1998, is low, as the investments mature within three
months.

      The Company had $25 million of 4.5% Convertible  Secured Notes at December
31, 1998, which bear interest at 4.5% per annum and mature in November 2003. The
Company does not have significant exposure to changing interest rates related to
the 4.5% Notes because the interest rate on these notes is fixed.

      The Company had $83.7 million of 6.5%  Convertible  Subordinated  Notes at
December 31, 1998, which bear interest at 6.5% per annum and mature in May 2003.
The  Company  does not have  significant  exposure to  changing  interest  rates
related to the 6.5% Notes because the interest rate on these notes is fixed.

      The Company has not undertaken  any actions to cover interest  market risk
and is not a party to any interest rate market risk management activities.

      A hypothetical  ten percent  change in the market  interest rates over the
next year would not materially impact the Company's earnings or cash flow as the
interest  rates on the Company's  long-term  convertible  debt are fixed and its
cash investments are short term. A hypothetical ten percent change in the market
interest rate over the next year, by itself,  would not have a material  adverse
effect on the fair  value of the  Company's  long-term  convertible  debt or its
short-term cash investments.

      The Company does  principally all of its  transactions in U.S. dollars and
currently  has limited  payment  obligations  in Swedish  Krona;  however,  such
obligations are not material to the Company's operations.


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 50 to 77 of this Annual  Report  immediately  following.  The
table of contents to the Financial  Statements and accompanying Notes appears on
page 79 of this Annual Report.


                                     - 49 -
<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,  1998 and 1997,  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,  1998.   These   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

   We  conducted  our audits in  accordance  with  generally  accepted  auditing
standards.  Those standards  require that we plan and perform 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,  1998 and 1997,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.






/s/ Arthur Andersen LLP
Arthur Andersen, LLP


Baltimore, Maryland
January 18, 1999














                                     - 50 -
<PAGE>



<TABLE>
<CAPTION>

NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)                       DECEMBER 31,       DECEMBER 31,
                                                                         1998               1997
                                                                   -----------------   ----------------
<S>                                                                 <C>                 <C>      
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                         $        22,953    $        45,502
  Accounts receivable                                                         1,625                324
  Inventory                                                                   4,067              2,730
  Prepaid expenses and other current assets                                     998                615
                                                                    ----------------   ----------------
          Total current assets                                               29,643             49,171

Property, plant and equipment, net                                           25,315             31,428
Investment in affiliate, at market                                            1,554                843
Deferred financing costs, net                                                 2,505              2,603           
Cash restricted for lease obligation                                          4,877                  -           
Other assets                                                                    631                463
                                                                    ----------------   ----------------
     TOTAL ASSETS                                                   $        64,525    $        84,508
                                                                    ================   ================

LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
  Accounts payable                                                  $         3,881    $         3,343
  Deferred revenue                                                              850              3,999
  Obligation under capital lease, current portion                             1,754              1,593
  Other current liabilities                                                   5,848              5,064
                                                                    ----------------   ----------------
         Total current liabilities                                           12,333             13,999

6.5% Convertible subordinated notes, due May 1, 2003                         83,734             83,734
4.5% Convertible secured notes, due November 13, 2003                        25,000                  -
Obligation under capital lease, net of current portion                        2,356              4,110
Deferred rent credits, net of current portion                                    76                 12
                                                                    ----------------   ----------------
     Total liabilities                                                      123,499            101,855

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' DEFICIT:
  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 (or U.S. 
    $3.3 million in the aggregate) in liquidation                             6,538              6,538
  Common stock, no par value;  unlimited shares  authorized;  
    issued  32,216,096 shares at December 31, 1998 and 
    31,936,539 shares at December 31, 1997                                   80,824             78,509
  Additional paid-in capital                                                 11,956                  -
  Cumulative comprehensive income excluded from net loss                        926                215
  Accumulated deficit                                                      (159,218)          (102,609)
                                                                    ----------------   ----------------
         Total shareholders' deficit                                        (58,974)           (17,347)
                                                                    ----------------   ----------------
     TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                    $        64,525    $        84,508
                                                                    ================   ================
</TABLE>






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





                                     - 51 -
<PAGE>


<TABLE>
<CAPTION>

 NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                              YEARS ENDED DECEMBER 31,
                                                         1998               1997                1996
                                                    -------------      --------------      --------------
<S>                                                 <C>                <C>                <C>     
                                                                                          
 REVENUES:                                                                                
    Marketing, research and development agreements  $     6,149       $      8,001        $       9,656
    Product sales                                         2,230              1,699                  892
                                                    -------------      --------------      --------------
           Total revenues                                 8,379              9,700               10,548
                                                    -------------      --------------      --------------
                                                                                          
 OPERATING EXPENSES:                                                                      
    Production                                           19,196             18,662               14,764
    Research and development                             17,986             19,860               11,594
    General and administrative                           10,800             11,386                6,753
                                                    -------------      --------------      --------------
           Total operating expenses                      47,982             49,908               33,111
                                                    -------------      --------------      --------------
                                                                                          
 OPERATING LOSS                                         (39,603)           (40,208)             (22,563)
                                                                                          
 OTHER INCOME (EXPENSES):                                                                 
     Gain on sale of investment in affiliate                  -                  -                4,228
     Interest and dividend income                         1,497              3,140                2,934
     Interest expense                                   (18,503)            (6,772)              (4,088)
                                                    -------------      --------------      --------------
 NET LOSS                                           $   (56,609)      $    (43,840)       $     (19,489)
                                                    =============      ==============      ==============
                                                                                          
 BASIC AND DILUTED NET LOSS PER SHARE               $     (1.76)      $      (1.39)       $       (0.63)
                                                                                          
 WEIGHTED-AVERAGE NUMBER OF COMMON SHARES                                                 
      OUTSTANDING                                        32,152             31,641               30,764

</TABLE> 


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











                                     - 52 -
<PAGE>


<TABLE>
<CAPTION>                                                                                 
                                                                                      
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS)
                                                                                                         
                                                                                        CUMULATIVE                   
                                   SERIES A                                            COMPREHENSIVE              TOTAL
                                  CONVERTIBLE                                             INCOME                  SHARE-
                                PREFERRED STOCK       COMMON STOCK         ADDITIONAL    EXCLUDED     ACCUM-      HOLDERS'
                              ------------------- ---------------------     PAID-IN       FROM        ULATED      EQUITY
                               SHARES    AMOUNT     SHARES     AMOUNT       CAPITAL      NET LOSS     DEFICIT     (DEFICIT)
                              -------- ---------- ---------- ----------  -----------  ------------- ----------  ------------
<S>                           <C>      <C>          <C>        <C>         <C>          <C>           <C>          <C>
Balance,
  December 31, 1995             2,000   $  6,538     30,187  $  58,474  $        -    $    7,466  $  (39,280)   $   33,198

Net loss                            -          -          -          -           -             -     (19,489)      (19,489)
Realized investment
  holding gain                      -          -          -          -           -        (4,228)          -        (4,228)
Decrease in market
  value of investment               -          -          -          -           -        (2,585)          -        (2,585)
                                                                                                               ------------
Comprehensive loss                                                                                                 (26,302)
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
Balance,
                             --------   --------  ---------   --------  ----------   ---------   -----------  ------------
  December 31, 1996             2,000   $  6,538     31,407   $ 71,357    $      -    $     653   $  (58,769)  $    19,779

Net loss                            -          -          -          -           -            -      (43,840)      (43,840)
Decrease in market
  value of investment               -          -          -          -           -         (438)           -          (438)
                                                                                                               ------------
Comprehensive loss                                                                                                 (44,278)
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
Balance,
                              --------   --------  ---------   --------  ----------   ---------   -----------  ------------
  December 31, 1997             2,000    $ 6,538     31,937    $78,509   $       -     $    215   $ (102,609)  $   (17,347)

Net loss                            -          -          -          -           -            -      (56,609)      (56,609)
Increase in market
  value of investment               -          -          -          -           -          711            -           711
                                                                                                               ------------
Comprehensive loss                                                                                                 (55,898)
Exercises of stock
  options                           -          -        462      5,452           -            -            -         5,452
Retirement of stock
  used to exercise                  -          -       (201)    (3,429)          -            -            -        (3,429)
Beneficial conversion
  feature of 4.5% Notes             -          -          -          -      11,956            -            -        11,956
Shares issued under
  401(k) plan                       -          -         18        292           -            -            -           292
Balance,
                              --------   --------   ---------  --------   ---------    ---------  -----------  ------------
  December 31, 1998             2,000    $ 6,538     32,216    $80,824    $ 11,956     $    926   $ (159,218)  $   (58,974)
                              ========   ========   =========  ========   =========    =========  ===========  ============
</TABLE>

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





                                     - 53 -
<PAGE>


<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

                                                                         YEARS ENDED DECEMBER 31,
                                                                       1998         1997         1996
                                                                   -----------  ------------   ----------
<S>                                                                <C>          <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                       $  (56,609)   $  (43,840)   $ (19,489)
    Adjustments to reconcile net loss to net cash used in
    operating activities:
        Gain on sale of investment in affiliate                             -           -         (4,228)
        Loss (gain) on disposal of equipment                              181           131          (12)
        Depreciation and amortization                                   8,177        11,017        6,154
        Amortization and reduction of deferred financing costs            498           520          335
        Recognition of beneficial conversion feature of 4.5% Notes     11,956             -            -
        Contribution of common stock to 401(k) plan                       292           238          183
        Stock option compensation                                         -           1,313            -
        (Increase) decrease in other assets                              (168)           43           47
        Decrease in deferred rent                                         (24)          (91)         (81)
        Cash flows (used in) provided by other working capital
            items                                                      (4,760)        5,756       (1,818)
                                                                   -----------  ------------   ----------
              Net cash used in operating activities                   (40,457)      (24,913)     (18,909)
                                                                   -----------  ------------   ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                               (2,245)       (2,132)     (21,012)
    Proceeds from sale of investment in affiliate                         -               -        5,199
    Proceeds from sale of equipment                                       -             225           27
                                                                   -----------  ------------   ----------
               Net cash used in investing activities                   (2,245)       (1,907)     (15,786)
                                                                   -----------  ------------   ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from issuance of convertible notes                        25,000             -       86,250
    Deferred financing costs of convertible notes                        (400)            -       (3,519)
    Proceeds from exercises of stock options, net                       2,023         3,146        6,356
    Loan to a former officer related to the purchase of
     common stock                                                      (1,228)           -             -
    Repayment of loan from the former officer                           1,228            -             -
    Principal payments on capital lease obligation                     (1,593)       (1,705)        (298)
    Cash restricted for capital lease obligation                       (4,877)           -             -
    Proceeds from issuance of common stock                                -              -         6,344
                                                                   -----------  ------------  -----------
               Net cash provided by financing activities               20,153         1,441       95,133
                                                                   -----------  ------------  -----------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                  (22,549)      (25,379)      60,438
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                         45,502        70,881       10,443
                                                                   -----------   -----------   ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD                           $   22,953    $   45,502    $  70,881
                                                                   ===========   ===========   ==========
</TABLE>


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







                                     - 54 -
<PAGE>


<TABLE>
<CAPTION>
NORTH AMERICAN VACCINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)

                                                                    YEARS ENDED DECEMBER 31,
                                                                  1998         1997        1996
                                                              ------------  ----------  ----------
<S>                                                            <C>          <C>          <C>     

CASH FLOWS PROVIDED BY OTHER WORKING CAPITAL ITEMS:

   (Increase) decrease in :
         Accounts receivable                                   $  (1,301)    $  3,842     $ (2,166)
         Inventory                                                (1,337)        (948)      (1,286)
         Prepaid expenses and other current assets                  (383)         (81)          38

   Increase (decrease) in :
         Accounts payable                                            538        1,431       (1,638)
         Deferred revenue and other current liabilities           (2,277)       1,512        3,234
                                                               ----------    --------     --------
   Net cash (used in) provided by other working capital items  $  (4,760)    $  5,756     $ (1,818)
                                                               ==========    ========     ========



SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for interest                                         $   5,936     $  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                        $   3,429     $  1,890     $      -
                                                               ==========    ========     ========

</TABLE>



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





                                     - 55 -
<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

   RISK  ASSOCIATED  WITH LACK OF  AVAILABILITY  OF  CAPITAL.  To  maintain  the
Company's  production,  research,  development  and  growth at  current  levels,
present cash and cash equivalents,  expected product sales of Certiva(TRADEMARK)
and the Company's  other  products,  and revenues  from  existing  collaborative
agreements  are not expected to provide  sufficient  cash to fund the  Company's
operations,  debt  service  payments and capital  expenditures  in 1999 and into
2000. As a result,  the Company  intends to: enter into new license,  marketing,
distribution  and/or  development  agreements  that are  currently  under active
discussion;   liquidate  its  investment  securities;  enter  into  a  sale  and
lease-back of the Company's one owned facility;  and obtain one or more lines of
credit, which may be secured by accounts  receivable,  inventory or other assets
of the Company.

   If the Company is unable to complete one or more of these transactions and/or
proceeds from the transactions are inadequate,  the Company would be required to
obtain additional funding through the sale of debt and/or equity securities. The
Company  has  no  current  plans,  agreements,  commitments,   arrangements,  or
understandings  relating to the placement or issuance of any securities.  During
the course of the year, the Company will evaluate its need for  additional  debt
or equity  financing  to meet its cash  requirements  for 1999 and 2000.  If the
Company  determines  that  such  additional  financing  is  required  but is not
available,  then the Company would have to reduce its cash requirements  through
significant reductions in operating levels.

   NO ASSURANCE  OF EFFECTIVE  MARKETING.  The Company is now  implementing  its
initial  marketing and sales plan for  Certiva(TRADEMARK)  in the United States.
The Company markets  Certiva(TRADEMARK)  to government purchasers and, through a
distribution  agreement  with  Abbott,  markets  Certiva(TRADEMARK)  to  private


                                       - 56 -
<PAGE>


physicians  and managed care  organizations.  There can be no assurance that the
Company  or  Abbott  will  successfully  implement  their  respective  sales and
marketing  strategies.  Factors  affecting  successful  commercial launch of the
Company's vaccines in the United States include:

            establishing  an  identity  and  reputation  for the Company and its
            products,
            increasing  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,
            establishing  efficient  and  consistent  production  of  sufficient
            quantities of vaccine, and
            establishing effective distribution channels.

   In addition, the Company has entered into supply,  marketing and distribution
agreements  with third  parties  under which these parties have agreed to market
certain  of the  Company's  products,  such  as  Certiva(TRADEMARK)-EU  and  the
DTaP-IPV vaccine,  in designated  territories.  As a result of this arrangement,
the Company's revenues from product sales in Europe and other territories depend
upon the timing,  implementation  and effectiveness of the sales,  marketing and
distribution  efforts of others. In addition,  the Company may not be successful
in negotiating and executing marketing and/or  distribution  agreements with any
other third  parties  and these other third  parties may be unable to market the
Company's products successfully.

   RISKS   ASSOCIATED   WITH  LIMITED   PRODUCTION   CAPACITY.   The   Company's
manufacturing  facility  has limited  production  capacity  based on the present
size,  configuration,  equipment,  processes  and  methods  used to produce  its
products.  In  addition,  production  expenses  are  mainly  fixed  and  consist
primarily of expenses relative to the operation of its production facilities and
maintaining  a ready  work  force.  Further,  from  time to  time,  the  Company
experiences  disruptions  and production  failures.  These  disruption  failures
increase  unit  production  costs as units are lost in the  production  process.
These  factors have  contributed  to higher  production  costs for the Company's
acellular pertussis products,  which costs currently exceed their respective net
selling prices.

   The Company is addressing this issue by modifying its existing facilities and
operations in a manner intended to significantly  expand production capacity and
efficiency.

   In  addition,  the  Company's  ability to timely and  efficiently  expand its
production capacity depends, in large part, upon the following:

            adequacy of engineering designs,
            availability of needed equipment,
            manufacturing experience with these enhancements,
            timeliness of regulatory review of modifications, and
            acceptability  of  the   modifications   to  applicable   regulatory
            authorities.

   The  Company's  plans to increase  production  capacity  and output  could be
ineffective  or may not result in  production  efficiencies  that  cover  future
production costs. Failure to increase production capacity and output could limit
the Company's ability to meet market demand or achieve profitability.

   RISKS ASSOCIATED WITH MANUFACTURING AND SCALE-UP.  The production of vaccines
is a highly complex,  biological  process involving many steps from seed culture
through final production.  Thus, the Company's  production process could fail or
become  subject to  substantial  disruptions  that  impede  its  ability to meet
production requirements.


                                       - 57 -
<PAGE>



   From  time to  time,  the  Company  experiences  disruptions  and  production
failures.  There is no assurance  that the Company can  adequately  address such
failures or that  production  failures  will not  continue in the future.  These
disruptions and failures:

            limit the Company's production capacity,
            increase its  production  costs,  which would  affect the  Company's
            prospects for profitability, and
            could have a negative impact on the Company's  existing licenses for
            its products  and delay or inhibit its ability to obtain  additional
            regulatory approvals for its products.

In addition,  the Company may not consistently  produce its vaccines in quantity
and quality sufficient to achieve competitive commercial sales or profitability.

   The  Company's  manufacturing   operations  for  Certiva(TRADEMARK)  and  its
acellular  pertussis  vaccine  are  located  principally  in one  facility.  Any
condition or event that  adversely  affects the operation of this facility would
have a material adverse effect on the Company's  financial  condition and future
results of operations.

   RISK OF FORECLOSURE OF COLLATERAL FOR 4.5% NOTES.  The 4.5% Notes are secured
by a pledge of collateral, which includes certain of the Company's equipment and
other assets at the Company's principal manufacturing facility and the Company's
ownership rights in U.S. Patent No. 5,425,946,  entitled "Vaccines Against Group
C  NEISSERIA  MENINGITIDIS"  (the  "Patent").  If the Company  defaulted  on its
obligations  under the 4.5% Notes and the holders of these notes  foreclosed  on
the  collateral,   the  Company's   ability  to  operate  its  business  may  be
substantially impaired.

   DEPENDENCE ON SUPPLIERS.  While the Company produces the pertussis  component
of  Certiva(TRADEMARK),  it has purchased,  and intends to continue to purchase,
required  diphtheria and tetanus  toxoids from SSI and enhanced IPV from SSI and
another  supplier.  These suppliers may not fulfill the Company's  requirements,
their components may not be supplied on commercially  reasonable  terms, or they
may  experience  difficulties  in obtaining  necessary  regulatory  approvals or
disruptions in their production of diphtheria and tetanus toxoids or IPV. Any of
the foregoing could significantly affect the Company's operations.

   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 certain
product testing and for the sterile fill,  labeling and packaging of its vaccine
products.  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.

   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



                                       - 58 -
<PAGE>



competitors are actively developing competing vaccines.

   Three  competitors  have received FDA approval for their DTaP vaccine for use
in infants and children.  If these  competitors are successful in developing and
marketing   combination   vaccines  that  include  DTaP  vaccines,   then  these
combination  vaccines may gain market share at the expense of  stand-alone  DTaP
vaccines, including  Certiva(TRADEMARK).  One of those competitors has announced
that the FDA licensed a vaccine for  administration  at 15-18 months of age that
combines  that  company's  HIB vaccine with its DTaP vaccine by  reconstitution.
This same  competitor  is also seeking FDA approval for  administration  at two,
four and six  months  of age.  Another  competitor  has  reported  that it is in
clinical trials for a DTaP-HIB  combination  vaccine. In addition,  several DTaP
vaccines  and DTaP  combination  vaccines  are  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 the
Company.  These  factors may be  particularly  advantageous  because the vaccine
industry is subject to significant technological change.

   The  Company's  competitors  could  also  gain  a  competitive  advantage  by
designing around the Company's patents and developing  technologies and products
that are as or more effective than any that have been or are being  developed by
the Company. They could also develop technologies and products that would render
the Company's technology and products obsolete and noncompetitive.

   CHANGES IN  GOVERNMENT  PURCHASING  POLICIES.  Children in the United  States
receive immunizations from private providers and public providers, such as local
health  departments.  Immunizations  provided by public  providers are generally
funded through federal and state government  public health programs.  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.  In the United States,  federal
and state  governments  historically have purchased DTaP and other vaccines from
multiple suppliers. There can be no assurances that this practice will continue.

   From time to time,  legislative and regulatory initiatives are proposed that,
if adopted,  could  significantly  modify  government  vaccine  programs.  These
initiatives  could  materially  affect  the  federal   government's   purchasing
authority,  the contract award process,  or 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 products.

   GOVERNMENT REGULATION;  REGULATORY APPROVALS. The Company's vaccine products,
product  development  activities and manufacturing  facilities and processes are
subject to extensive and rigorous regulation by the FDA. FDA regulation includes
preclinical  and  clinical  testing  requirements  and  inspection  and approval
processes. To date, the Company has received FDA approval for only one product.

   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.  Obtaining licenses can be costly and time consuming. There



                                       - 59 -
<PAGE>


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 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  facilities  will  receive the  requisite  regulatory  approvals  and
licenses in a timely fashion or at all.

   Moreover,  FDA-granted  licenses  may  impose  limitations  that  affect  the
commercialization  of the  product,  including  limitations  on product  use and
requirements for post-licensure  testing.  The FDA can withdraw approvals at any
time by following 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.  FDA  regulations
depend  heavily on  administrative  and scientific  interpretation  and advisory
committee  determinations.  Such interpretations,  with possible prospective and
retroactive effect, could 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 labeling  practices.  If such  entities  find that the Company is in
material violation of these regulations,  the Company could be subject to, among
other  things,   product  recalls,   suspensions  or  withdrawals  of  licenses,
revocation or suspension  of export  authorizations,  and denials of any pending
applications.

   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.

   PATENT  PROTECTION AND PROPRIETARY  INFORMATION.  Traditionally,  the vaccine
industry has placed  importance  on obtaining and  maintaining  patent and trade
secret protection for significant new technologies,  products and processes. The
Company believes that this 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 that the degree and range of  protection of any patents
will be sufficient,  that additional  patents will be issued to the Company,  or
that the Company will not  infringe  upon  patents  granted to others.  Further,
others have or may  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 to
effectively develop, produce and market commercially viable products. 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
the Company can obtain these licenses on  commercially  reasonable  terms, if at
all, that the patents underlying these licenses will be valid and enforceable or
that the  proprietary  nature  of the  unpatented  technology  underlying  these
licenses will remain proprietary.



                                       - 60 -
<PAGE>



   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 this type of litigation,  it
could consume substantial resources.

   RISK OF PRODUCT LIABILITY AND LIMITED INSURANCE. The testing and marketing of
vaccine products involve an inherent risk of product liability.  The Company has
limited product  liability  insurance  coverage.  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 Company's business or financial condition. If not covered by insurance,  the
Company faces  potential  liability  that could be  substantial  in the event of
claims.

   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.  No assurance can be given that the
Company  will  continue  to attract or retain  such  personnel.  The loss of key
personnel could adversely affect the Company.

   (3) SIGNIFICANT ACCOUNTING POLICIES

   (a) BASIS OF ACCOUNTING AND CURRENCY. The accompanying consolidated financial
statements have been prepared in conformity with generally  accepted  accounting
principles  ("GAAP") in the United States  ("U.S.") 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 and the  interest  charge of $12.0  million  related to the
issuance of the 4.5% Notes as  discussed in Note 10. Under  Canadian  GAAP,  the
beneficial  conversion  feature of the 4.5% Notes  would be assigned a value and
reported as additional  equity to be amortized to retained earnings ratably over
the term of the 4.5% Notes rather than being  charged to interest in the current
period. 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.

   (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.  Production costs attributable to a product are expensed
until regulatory  approval is obtained for such product.  Beginning in the third
quarter  of 1998,  costs to  produce  Certiva(TRADEMARK)  for sale in the United
States  were  capitalized.  Any  production  costs  incurred  in  excess  of net
realizable  value  are  expensed  in the  quarter  in which  they are  incurred.
Inventories consist of the following:



                                       - 61 -
<PAGE>



                                         1998        1997
                                         ----------------
                                           (in thousands)
               Raw Materials            $2,509     $2,584
               Work-in-process           1,024          0
               Finished goods              534        146
                                        ------     ------
                                        $4,067     $2,730
                                        ======     ======

   (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.

   In July 1998,  the Company  received FDA approval to  manufacture  and market
Certiva(TRADEMARK)   in   the   United   States.   Under   the   FDA   approval,
Certiva(TRADEMARK)  is indicated  for active  immunization  against  diphtheria,
tetanus and  pertussis  (whooping  cough) in infants and  children  six weeks to
seven years of age. The Company produces the monocomponent  acellular  pertussis
toxoid and  formulates  the final product with  diphtheria  and tetanus  toxoids
manufactured and supplied by SSI.

   In 1998, the Company has recognized  revenues of  approximately  $1.0 million
from  sales  of  its  acellular   pertussis   vaccine  to  SSI  in  Denmark  and
approximately $1.2 million from sales of  Certiva(TRADEMARK),  primarily under a
contract with the U.S. Centers for Disease Control and Prevention.

   (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.  Prior to 1998,  depreciation of property,
plant and equipment,  with the exception of leasehold  improvements and an owned
facility,  was provided  using an accelerated  method over the estimated  useful
lives of the assets. The estimated useful lives are generally from five to seven
years for  machinery,  equipment,  and  furniture.  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. For property,  plant and
equipment purchased after 1997, depreciation is provided using the straight-line
method over the estimated  useful lives. The effect of this change in accounting
principle is insignificant.

   (i) DEFERRED  FINANCING  COSTS.  Deferred  financing costs represent fees and
other costs  incurred in connection  with the issuance of the 4.5% Notes and the
6.5% Notes.  These costs are  amortized  over the term of the related debt using
the  effective  interest rate method.  Total  accumulated  amortization  through
December 31, 1998 and 1997 was $1,335,000 and $838,000, respectively.



                                       - 62 -
<PAGE>



(j) INCOME TAXES. The Company computes  deferred tax assets or liabilities based
on the difference between the financial statement and income tax basis 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  implemented  SFAS  No.  128 in  1997,
retroactive for all periods  presented.  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, 1998, 1997 and
1996,  were not included in the  computation  of diluted loss per share as their
effect would have been  anti-dilutive.  As a result,  the basic and diluted loss
per share amounts are identical for all periods presented.

   (l) COMPREHENSIVE  INCOME. In 1997, the Financial  Accounting Standards Board
issued  SFAS  No.  130,  "Reporting   Comprehensive  Income."  The  Company  has
implemented  SFAS No.  130  beginning  with the  first  quarter  1998  financial
statements.  The  implementation  of this  standard did not result in a material
impact  to  the  Company's  financial  statements.   The  Company  presents  its
comprehensive income in the statement of shareholders' equity.

   (m) SEGMENT  REPORTING.  In 1997, the Financial  Accounting  Standards  Board
issued SFAS No. 131,  "Disclosures  about  Segments of an Enterprise and Related
Information."  The Company  implemented SFAS No. 131 for the year ended December
31, 1998 and has determined that it currently does not have reportable segments.
Product sales in the United States were  approximately  $1.2 million,  $0 and $0
for the years ended  December 31,  1998,  1997 and 1996,  respectively.  Product
sales to Europe were approximately  $1.0 million,  $1.7 million and $900,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. All products are
currently  being  manufactured  at the Company's one production  facility in the
United  States.  The production  process,  and ultimately  product  costing,  is
primarily the same for all of the Company's acellular pertussis vaccine products
sold in the  United  States  and  Europe.  Because  of  this,  and the  relative
consistency  in  selling  prices,  as well as,  the  nature of the  distribution
methods utilized by the Company,  the Company does not  differentiate and manage
its business along geographic lines.

   (4)  PRODUCTION, DEVELOPMENT, AND MARKETING CONTRACTS

   (a) AGREEMENTS WITH PASTEUR MERIEUX CONNAUGHT.  In the December 1995 clinical
development agreement and license agreements with Pasteur Merieux Connaught, the
parties agreed to jointly  develop the Company's new conjugate  vaccine  against
Group B  meningococcus  for both adult and  pediatric  indications.  The Company
recognized  $4  and  $6  million  of  research  and   development   revenue  for
non-refundable  payments  made by Pasteur  Merieux  Connaught  in 1996 and 1997;
respectively.  No revenue was recognized in 1998 in connection with the clinical
development agreement. Further fees and funding will be made upon achievement of
development,  clinical and regulatory  milestones and as development  funding is
incurred.  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



                                       - 63 -
<PAGE>



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 has incurred  approximately  $4.6 million of cost under the
contract  with  Pasteur  Merieux   Connaught.   The  Company  has  entered  into
discussions with Pasteur Merieux Connaught  regarding the reimbursement of those
costs.  No amounts  have been  recorded.  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(TRADEMARK),  the
Company's  DTaP  vaccine,  when  approved  by the  FDA.  With  FDA  approval  of
Certiva(TRADEMARK)  in July  1998,  Abbott is  marketing  Certiva(TRADEMARK)  to
private   physicians   and  managed  care  markets  in  the  United  States  for
immunization  of infants and  children.  The Company is marketing to  government
purchasers,  including state governments and the Centers for Disease Control and
Prevention.  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.

   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 and Abbott will  collaborate  in the clinical
development of the combination vaccines and Abbott has provided 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.
The Company  received $3 million in 1997 for clinical  development  funding.  In
addition,  the Company will receive  payments  upon  achievement  of  prescribed
milestones.  The Company recognized $5.2 million of revenues under this contract
in 1998,  including  a milestone  payment  associated  with the FDA  approval of
Certiva(TRADEMARK)  in 1998.  Under the agreement,  the Company paid $750,000 to
support and enhance  Abbott's  promotional and advertising  program in 1998. The
agreement,  as  amended,  provides  for total  payments  of up to $40 million by
Abbott,  including  the $18 million  received  through  December 31,  1998.  The
Company has received  revenues from Abbott for  purchases of  Certiva(TRADEMARK)
and will receive revenues as Abbott purchases  combination  vaccine products for
resale to the private pediatric market. Abbott may terminate this arrangement at
any time with advance notice.



                                      - 64 -
<PAGE>



   (5) PROPERTY, PLANT, AND EQUIPMENT

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

                                                             AS OF DECEMBER 31,
                                                             ------------------
                                                               1998      1997
                                                               --------------
                                                               (in thousands)
            Property, plant and equipment:
             Land                                             $  498 $    498
             Building and improvements                         2,443    2,421
             Machinery, equipment and laboratory fixtures     43,806   42,380
             Leasehold improvements                            8,293    8,587
             Office furniture, equipment and software          4,915    4,398
                                                             -------  -------
                                                              59,955   58,284
                                                             -------  -------
            Accumulated depreciation and amortization:
             Building and improvements                           372      250
             Machinery, equipment and laboratory fixtures     26,382   19,885
             Leasehold improvements                            4,899    4,423
             Office furniture, equipment and software          2,987    2,298
                                                             -------  -------
                                                              34,640   26,856
                                                             -------  -------
            Property, plant and equipment, net               $25,315  $31,428
                                                             =======  =======

   In 1996, the Company  entered into an agreement which included the assumption
of an operating  lease of a 35,000  square foot  manufacturing  facility and the
purchase and capital lease of equipment and leasehold  improvements.  See Note 9
for further description of the transaction.


   (6)  INVESTMENT IN AFFILIATE

   In accordance with SFAS No. 115,  "Accounting for Certain Investments in Debt
and Equity Securities," equity securities classified as  available-for-sale  are
reported at fair value,  with unrealized gains and losses reported as a separate
component of shareholders' equity. As a result, the Company's investments in its
affiliates  are reflected at their current  market value as of December 31, 1998
and  1997,  of  $1.6  million  and  $843,000,  respectively  (original  cost  of
$629,000).

   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 remains at $629,000 or $5.03 per share at December 31, 1998.

   The market  values of these  securities  as of December 31, 1998 and 1997, 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 January 18, 1999,  was  approximately  $1.5 million.  These  investment
securities are volatile and, therefore,  are subject to significant fluctuations
in value.



                                       - 65 -
<PAGE>



   (7) OTHER CURRENT LIABILITIES

   Other current liabilities consisted of the following components:

                                                        AS OF DECEMBER 31,
                                                        ------------------
                                                         1998        1997
                                                         ----------------
                                                          (in thousands)
     
            Payroll and fringe benefits                $ 1,702     $ 1,488
            Accrued interest                             1,103         959
            Accrued taxes                                1,149         642
            Reserve for contract loss                      720         720
            Accrued consulting and professional fees       353         381
            Accrued costs of clinical trials               216         269
            Other accrued liabilities                      605         605
                                                       -------     -------
                Total other current liabilities        $ 5,848     $ 5,064
                                                       =======     =======


   (8) RESTRICTED CASH AND OBLIGATIONS UNDER CAPITAL LEASE

   In connection  with an operating  lease for a 35,000 square foot  development
and production facility, the Company entered into an agreement that included the
purchase  and lease of  equipment  and  leasehold  improvements.  As part of the
operating lease, the Company assumed the underlying real estate leases which are
scheduled to expire in February  2001, but may be extended  through 2011.  Under
the terms of the equipment  lease,  there are certain  financial  covenants that
obligate the Company to maintain certain cash and investment balances, a minimum
tangible net worth (defined to include amounts under the outstanding convertible
subordinated  notes),  and certain other financial  ratios.  The equipment lease
agreement  permits the Company,  at its option,  to suspend the  application  of
financial covenants by posting a stand-by letter of credit, which may be revoked
by the Company  provided  certain  conditions are  satisfied.  In April 1998, as
permitted by the equipment lease  agreement,  the Company  voluntarily  posted a
letter  of  credit  in the  amount  of  $5.9  million,  thereby  suspending  the
application  of all  financial  covenants.  The letter of credit  decreases on a
monthly basis as the payments on the lease obligation are made and is secured by
a  restricted  cash  deposit of an equal  amount.  The  balance of the letter of
credit and the  corresponding  restricted  cash is $4.9  million at December 31,
1998. The letter of credit will expire by its terms on November 1, 2000.


   (9) COMMITMENTS AND CONTINGENCIES

   (a) OPERATING  LEASES.  The Company has extended its lease  agreement for its
production  facility  through  February 28, 2009.  The Company has the option of
further extending this lease for an additional ten years. 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 initial base term of the
lease which will expire February 28, 1999. 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 lease for certain  office space through  December
31, 2000,  and has one  three-year  renewal  option  remaining.  The Company may
terminate this lease with a six month advance notice.



                                       - 66 -
<PAGE>


   As discussed in Note 8, 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 March  1998,  the  Company  leased an  approximately  75,500  square  foot
facility  to be used  for  research,  development,  general  and  administrative
functions and for future expansion of the Company's operations. The lease is for
an initial term of ten years,  with two five-year  renewal options.  The initial
base annual rent under the lease is  approximately  $981,000 with minimum annual
escalations.  At the end of the fifth year of the initial term,  the Company has
the right to terminate the lease for a specified  fee. In addition,  the Company
has an option to purchase the  facility  during  specified  periods of the lease
term.  The landlord has provided the Company a tenant  improvement  allowance of
approximately  $1.4 million,  and will provide an additional $1.8 million to the
Company,  if needed,  under a line of credit to fund improvement costs 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  landlord.  No funds have been drawn down
under  this  line of  credit  as of  December  31,  1998.  The line of credit is
available to the Company through March 1999.

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

                     YEARS ENDING
                     DECEMBER 31,
                     ------------
                     (in thousands)

                     1999             $ 1,956
                     2000               2,006
                     2001               1,496
                     2002               1,463
                     2003               1,501
                     Beyond             7,239
                                      -------
                       Total          $15,661 
                                      =======

   Total rent expense was $1,620,000,  $1,232,000,  and $898,000 in 1998,  1997,
and 1996, respectively.

   (b) CAPITAL LEASE. In connection with the operating lease agreement described
in Note 8 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, 1998, the total obligation under
this capital lease was $4.1 million.  Total depreciation expense associated with
equipment  under the  capital  lease was  approximately  $2.7  million  and $4.1
million for 1998 and 1997, respectively. 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  investment  balances,  a minimum



                                       - 67 -
<PAGE>


tangible net worth and certain other financial  ratios.  As discussed in Note 8,
in April 1998,  as  permitted  by the  equipment  lease  agreement,  the Company
voluntarily  posted a letter of credit in the  amount of $5.9  million,  thereby
suspending  the  application  of all financial  covenants.  The letter of credit
decreases on a monthly  basis as the payments on the lease  obligation  are made
and is secured by a restricted  cash deposit of an equal amount.  The balance of
the letter of credit and the  corresponding  restricted  cash is $4.9 million at
December 31, 1998.  The letter of credit will expire by its terms on November 1,
2000.

   Minimum future lease payments are as follows:

                          YEARS ENDING
                          DECEMBER 31,
                          ------------
                          (in thousands)

                          1999 (includes interest of $320)    $  2,074
                          2000 (includes interest of $139)       2,495 
                                                              --------
                            Total                             $  4,569
                          Less interest component                (459)
                                                              --------
                            Total principal payments          $  4,110 
                                                              ========

   (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.

   On November 2, 1998,  Sharon Mates,  Ph.D., a director of the Company and the
Company's  former  president,  initiated  litigation in United  States  District
Court,  District of Maryland  (Civil  Action No. AW 98-3678)  (the  "Complaint")
against the Company,  two of its directors and BioChem.  The claims  against the
Company seek principally the following:  declaratory  relief against the Company
regarding  the approval and  consummation  of the private  placement of the 4.5%
Notes due November 13, 2003 (See Note 10 below);  injunctive  relief  seeking to
prevent the Company from  consummating  the private  placement of the 4.5% Notes
(which closed on, November 12, 1998, as described in Note 10); injunctive relief
against the Company  relating to Dr.  Mates' access to Company books and records
and to her continued  service as a director;  declaratory  relief  regarding the
termination  of employment  and removal as president of the Company;  and claims
against the Company  alleging  abusive  discharge and defamation.  The Complaint
also seeks actual and  punitive  damages  against the Company in an  unspecified
amount.  In addition,  the Complaint  seeks  declaratory  and injunctive  relief
against Dr. Phillip Frost and BioChem  arising out of alleged  violations of the
reporting requirements of Sections 13(d) and Rule 13d-1(a) of the Securities Act
of 1934, as amended,  ("1934 Act") and unspecified damages from BioChem and Drs.
Frost and Francesco  Bellini (chief  executive  officer of BioChem) for tortious
interference with Dr. Mates' business relations with the Company.

   In December  1998, the Company filed a motion to dismiss the Complaint in its
totality.  BioChem and Drs. Frost and Bellini have also filed motions to dismiss
Dr. Mates'  claims.  The Company  intends to continue to vigorously  contest and
defend against these claims in this  litigation.  The Company  believes that the
claims against it are without merit,  that the Company has meritorious  defenses
available to it, and that certain claims may be covered by insurance.  Under the
terms of the Company's  By-laws and  indemnification  agreements with directors,
the Company is obligated to indemnify  directors  against  certain  claims.  The



                                       - 68 -
<PAGE>



Company is presently  evaluating the extent of its  indemnification  obligations
and available  insurance  coverage.  In the opinion of management,  this lawsuit
will not have a material adverse effect on the Company.  If however,  litigation
costs,  including  indemnification   obligations,   and  judgments  against  the
defendants exceed the Company's available  insurance  coverage,  this litigation
could have a material  adverse effect on the Company's  financial  condition and
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 other material legal  proceedings  pending against the
Company.


    (10)  CONVERTIBLE DEBT

   In November 1998, the Company  completed a $25 million  financing through the
private  placement  of 4.5% Notes.  BioChem  and Dr.  Frost,  affiliates  of the
Company,  purchased 4.5% Notes in the aggregate  principal  amount of $9 million
and $4.25 million,  respectively.  In addition,  Sofinov purchased 4.5% Notes in
the aggregate principal amount of $6.25 million. Denis Dionne, a director of the
Company, is the President of Sofinov.

   The 4.5% Notes were sold at par,  mature on November 13, 2003 and provide for
interest payable semi-annually on May 13 and November 13 of each year commencing
on May 13, 1999.  The net proceeds from this offering were  approximately  $24.6
million.  The 4.5% Notes are convertible,  in whole or in part, by the holder(s)
at any time prior to maturity (unless  previously  redeemed or repurchased) into
shares of the Company's  Common Stock at the conversion  price of  approximately
$8.54 per share. The conversion price was set based on the average closing price
of the  Company's  Common Stock for the twenty (20) trading days  preceding  the
date of the announcement of the  agreement-in-principle  between the Company and
prospective  purchasers.  The measurement  period for determining the conversion
price began on August 26, 1998 and terminated on September 23, 1998. The closing
prices of the  Company's  Common Stock  during that period  ranged from a low of
$6.875 to a high of $11.25.  The 4.5% Notes are secured by certain assets of the
Company;  are  otherwise  subordinated  in right of payment to all  existing and
future senior  indebtedness  of the Company,  do not restrict the  incurrence of
future senior or other indebtedness of the Company and are redeemable,  in whole
or in part,  at the option of the  Company on or after one year from the date of
issuance at par, plus accrued  interest to the redemption date. Upon a change in
control, the Company is required to offer to purchase all of the 4.5% Notes then
outstanding at a purchase price equal to 100% of the principal  amount  thereof,
plus interest. The repurchase price will be payable in cash or, at the option of
the  Company,  in shares of the  Company's  Common  Stock  (valued at 95% of the
average  closing prices of the Common Stock for a specified  period prior to the
repurchase date).

    The 4.5%  Notes are not registered  under  the  Securities  Act of 1933,  as
amended,  ("1933 Act") or any applicable  state or foreign  securities laws, and
were sold in reliance on prescribed exemptions from registrations under the 1933
Act and other applicable state or foreign securities laws.

    On November  12,  1998,  the date on which the 4.5% Notes were  issued,  the
closing price for the  Company's  Common Stock was $12.625,  which  exceeded the
initial  conversion price for the 4.5% Notes. The difference between the initial
conversion price and the fair market value per share on the date of issue of the
4.5%  Notes,  for the  number of  equivalent  shares,  has been  recognized  and
recorded as paid in capital,  thus increasing the effective interest rate of the
4.5% Notes. Given that the 4.5% Notes are immediately convertible,  the interest
expense  of  approximately  $12.0  million  was  recognized  immediately  and is
included  in  the  accompanying  Consolidated  Statements  of  Operations.  This
interest expense is not deductible for U.S. or Canadian income tax purposes.



                                       - 69 -
<PAGE> 



   In May 1996, the Company completed an offering of 6.5% Notes in the principal
amount of $86.25  million due May 1, 2003.  The net proceeds  from this offering
were approximately $82.7 million. Interest on the notes is payable semi-annually
on May 1 and November 1 of each year. The 6.5% Notes are convertible into common
shares of the Company at the conversion price of approximately $24.86 per common
share. The 6.5% 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 6.5% 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 the $2,516,000 principal amount of notes.


   (11)  FAIR VALUE OF FINANCIAL INSTRUMENTS

   The carrying amounts reported in the Company's consolidated balance sheets at
December 31, 1998 and 1997, for cash and cash equivalents,  accounts receivable,
accounts  payable and  accrued  liabilities  approximate  fair values due to the
short maturity of those instruments.  Management  believes the carrying value of
the 4.5% Notes and the capital  lease  obligation  approximate  fair  value.  At
December 31, 1998,  Management estimates the fair value of the 6.5% Notes at $42
million  as  determined  by a review of a  December  31,  1998 trade of the 6.5%
Notes.


   (12)  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 Corporation
and AMVAX, Inc.("AMVAX"), are both taxed under United States income tax laws.

   In 1998, 1997 and 1996, the Company  incurred a loss for income tax reporting
purposes in Canada and the United States.



                                       - 70 -
<PAGE>



   The components of the net deferred tax assets consisted of:

                                                           AS OF DECEMBER 31,
                                                           ------------------
                                                          1998           1997
                                                          -------------------
                                                            (in thousands)

          Deferred tax assets:
          Net operating loss carryforwards             $48,348        $38,489
          Accrued intercompany interest                  6,046          4,172
          Depreciation and amortization                  2,581          1,497
          Reserve for contract loss                        278            278
          Deferred rent                                      7             46
          Other                                          3,240          2,447 
                                                       -------        -------
           Total deferred tax assets                    60,500         46,929
                                                       -------        -------

          Deferred tax liabilities:
          Historical accrual to cash difference          (745)        (1,489)
          Investments in affiliates                      (312)          (312)
                                                       -------        -------

           Total deferred tax liability                (1,057)        (1,801)
                                                       -------        -------

          Net deferred tax assets before allowance     59,443         45,128
          Less:  Valuation allowance                  (59,443)       (45,128)
          Net deferred tax assets                     $    --       $     --

   The Company has  determined  that $59.4  million in 1998 and $45.1 million in
1997 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, 1998,  the Company had net operating  loss  carryforwards  of
approximately  $124.7 million. Of this consolidated  total,  approximately $30.0
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 2005. Of the remaining  balance,  American  Vaccine and
AMVAX had net operating loss  carryforwards of  approximately  $93.8 million and
$911,000, respectively, available to offset future United States taxable income,
if any. These loss carryforwards expire between 2002 and 2018.

   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.


   (13)  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



                                       - 71 -
<PAGE>



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, 1998,  its  obligations  to the affected  shareholders
could approximate $15.2 million.


   (14)  LICENSE AGREEMENTS

   Certain of the  conjugate  vaccine-related  technologies  transferred  to the
Company  by  BioChem  in  connection  with the  Merger  are  licensed  under two
agreements with the National  Research Council of Canada (the "NRC"), a Canadian
federal governmental agency. Under these license agreements, the Company will be
required to pay royalties to the NRC on all sales of such licensed  products and
related services.  Certain minimum annual royalties are payable  irrespective of
the  volume  of sales of such  products  and  services.  BioChem  has  agreed to
reimburse  the Company for 10 % of these  minimum  annual  royalties.  BioChem's
share of minimum annual royalties was less than five thousand dollars in each of
the last three years. 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 the Company 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  pays 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,  which was on
October 29, 1998. 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.


   (15)  SHAREHOLDERS' EQUITY

   (a) PREFERRED  STOCK.  Preferred shares are nonvoting (other than as required
by law) and may be issued in one or more series.  The Company has issued  shares
of Series A preferred stock, which are convertible, at the option of the holder,



                                       - 72 -
<PAGE>



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. $3.3 million in the aggregate at December 31, 1998.  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 options 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  options  on the date of the
extension in 1997. 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.

   (d) 1997 SHARE OPTION PLAN. In 1997,  the Company  adopted the North American
Vaccine,  Inc. 1997 Share Option Plan (the "1997 Plan"),  which provides for the
issuance of up to 5,000,000  shares of its common stock to officers,  directors,
employees  and  consultants.  The 1997 Plan,  which  expires in  December  2007,
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.



                                       - 73 -
<PAGE>



   The following table  summarizes  option activity  outside of any formal stock
option  plan and  under the 1990  Plan,  the 1995 Plan and the 1997 Plan for the
period from December 31, 1995, through December 31, 1998:

<TABLE>
<CAPTION>

                                      Number of Shares
                                      ----------------
                             1990 Plan  1995 Plan  1997 Plan  Non-Plan  Exercise    Wtg.Avg.
                               Options   Options    Options    Options   Price      Exer.Price
                             -----------------------------------------------------------------
<S>                         <C>         <C>        <C>     <C>       <C>           <C>

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

Granted                             --    60,000    879,700        --   8.75-19.94     9.96
Exercised                    (368,938)   (3,365)     --            --   9.00-13.88    12.44
Expired or canceled          (200,603) (146,207)     --            --   9.00-24.50    14.52
                             --------------------------------------------------------------
Balance at December 31, 1998  396,108    823,399    879,700    57,812 $ 2.92-24.50  $ 12.37

</TABLE>

   At December 31, 1998, under the 1990 Plan, outstanding options to purchase an
aggregate of 396,108 common shares were exercisable at prices ranging from $9.13
to $13.63 per share (weighted  average exercise price per share of $11.09),  and
no options were available for grant. At December 31, 1998,  under the 1995 Plan,
options to purchase an aggregate of 587,174  common shares were  exercisable  at
prices ranging from $11.25 to $24.50 per share (weighted  average exercise price
per share of $15.52),  and 153,945 options were available for grant. At December
31, 1998, no options were exercisable under the 1997 Plan.

   The  weighted-average  per share  grant date fair  value of  options  granted
during 1997 and 1996 for the 1990 Plan was $13.16 and $5.11,  respectively.  The
weighted-average per share grant date fair value of options granted during 1998,
1997 and 1996 for the 1995 Plan was $10.62, $12.39 and $10.59, respectively. The
weighted-average  per share grant date fair value of options granted during 1998
for the 1997 Plan was $7.59.

   (e) 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.



                                       - 74 -
<PAGE>


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

   The following table summarizes  option activity under the 1990 SESOP plan and
the 1995 SESOP plan from December 31, 1995 through December 31, 1998:

<TABLE>
<CAPTION>

                                 1990         1995
                                SESOP        SESOP            Exercise Price           Wtg.Avg.
                              Plan Options Plan Options     Can.$        U.S.$      Exer.Price(U.S.)
                              ----------------------------------------------------------------------
<S>                             <C>         <C>         <C>           <C>               <C>    
  
   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

   Granted                            --    130,000                --        24.94        24.94
   Exercised                    (90,000)         --       12.88-14.56    8.42-9.52         8.54
   Expired or canceled                --   (20,001)                --  14.13-24.94        22.95
                                ---------------------------------------------------------------
   Balance at December 31, 1998  210,000    359,999     $ 11.75-14.56 $ 7.68-24.94      $ 16.57

</TABLE>

   At  December  31,  1998,  under  the  1990  SESOP,   210,000  options  were
exercisable at prices ranging from Can. $11.75 to Can.  $14.56 (U.S.  $7.68 to
U.S.  $9.52) per share  (weighted  average U.S. price of $8.55) and no options
were  available  for grant under the 1990 SESOP.  At December 31, 1998,  under
the 1995 SESOP,  123,234 options were  exercisable at prices ranging from U.S.
$14.13 to U.S. $24.38 per share (weighted  average U.S. price of $17.73),  and
140,001 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. $8.88. The  weighted-average  per share grant date fair
value of options  granted  during 1998,  1997 and 1996 for the 1995 SESOP plan
was U.S. $16.96, $15.92 and U.S. $10.58, respectively.

   (g) 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



                                       - 75 -
<PAGE>



the  Company's  five stock option plans been  determined on the fair value based
method of SFAS No. 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 1998,  1997 and 1996 would  have been  $61.0  million or a loss of $1.90 per
share,  $49.3 million or a loss of $1.56 per share,  and $23.9 million or a loss
of $0.78 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 stock options.

   Pursuant to SFAS No. 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  1998,  1997,  and  1996,
respectively:  risk-free  interest rates of 6.04-6.41  percent for the 1990 Plan
option  extensions,  5.64-6.99  percent  for the 1995  Plan  options,  4.34-4.81
percent  for the 1997 Plan  options,  and  5.21-6.47  percent for the 1995 SESOP
options; no expected dividend yields;  expected lives of between 1.5 and 4 years
for the 1990  Plan  option  extensions,  between 4 and 8 years for the 1995 Plan
options,  between 5 years and 8 years for the 1997  Plan,  and 7-8 years for the
1995 SESOP options;  and expected  volatilities of 65, 58 and 78 percent. Of the
2,727,018  options  outstanding at December 31, 1998,  1,316,606  options have a
weighted average  remaining  contractual life of approximately 4.5 years. All of
these options are exercisable.  The remaining  1,410,412 options have a weighted
average remaining contractual life of approximately 9.0 years.


   (16)  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
$309,000, $251,000, and $200,000 for 1998, 1997, and 1996, 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.



                                       - 76 -
<PAGE>



   (17)  RELATED-PARTY TRANSACTIONS

   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.

     In April 1998, the Company  extended a loan to its then president,  related
to  the  exercise  of  expiring  stock  options.   The  loan  was  comprised  of
approximately  $1.0  million for the  exercise of the options and  $217,000  for
payment of withholding  taxes.  The loan was made on a full recourse basis,  was
for a six month period,  was  collateralized  by approximately  94,000 shares of
common  stock of the  Company,  which at the time of the loan had a fair  market
value of 125% of the principal  amount of the loan. The loan accrued interest at
a fair market  rate,  was repaid in full at maturity  in October  1998,  and the
related collateral has been released.

   In November 1998, the Company  completed a $25 million  financing through the
private  placement  of an  offering  of  4.5%  Notes.  BioChem  and  Dr.  Frost,
affiliates  of the  Company,  purchased  4.5% Notes in the  aggregate  principal
amount of $9 million  and $4.25  million,  respectively.  In  addition,  Sofinov
purchased 4.5% Notes in the aggregate  principal amount of $6.25 million.  Denis
Dionne, a director of the Company, is the President of Sofinov.  See Note 10 for
further details.



                                       - 77 -
<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 1999 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  1999 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 1999 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 1999 Proxy Statement.



                                       - 78 -
<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                     50
            Consolidated Balance Sheets as of
              December 31, 1998 and 1997                                 51
            Consolidated Statements of Operations for the
              Years Ended December 31, 1998, 1997 and 1996               52
            Consolidated Statements of Shareholders' Equity (Deficit)
              for the Years Ended December 31, 1998,
              1997 and 1996                                              53
            Consolidated Statements of Cash Flows for the
              Years Ended December 31, 1998, 1997 and 1996               54
            Notes to Consolidated Financial Statements                   56

      2.    Financial Statement Schedules:
            -----------------------------

            Schedule II - Valuation and Qualifying Accounts for the
              Years Ended December 31, 1998, 1997 and 1996               81

      3.    Exhibits:   See Exhibit Index on page 83.
            --------

B)    REPORTS ON FORM 8-K.
      --------------------

      The following reports on Form 8-K were filed during the three months ended
December 31, 1998:

      (1)   On November  20, 1998,  the Company  filed with the  Securities  and
            Exchange  Commission  a  Current  Report  on Form 8-K  under  Item 5
            reporting  the  completion  of a $25 million  financing  through the
            private placement of 4.5% Convertible Secured Notes due November 13,
            2003.

      (2)   On December  11, 1998,  the Company  filed with the  Securities  and
            Exchange  Commission  a  Current  Report  on Form 8-K  under  Item 5
            reporting  that the Company's  1999 Annual  Meeting of  Shareholders
            will be held on  February  23,  1999  and the  record  date  for the
            meeting will be January 15, 1999.


C)    FINANCIAL STATEMENT SCHEDULES.
      -----------------------------




                                       - 79 -
<PAGE>





REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To North American Vaccine, Inc. and Subsidiaries:

        We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of North American Vaccine, Inc.
(a Canadian corporation) and subsidiaries included in this Form 10-K and have
issued our report thereon dated January 18, 1999. Our audit was made for the
purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The accompanying schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

Arthur Andersen LLP

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

Baltimore, Maryland
January 18, 1999


                                      - 80 -

<PAGE>


<TABLE>
<CAPTION>

                 North American Vaccine, Inc. and Subsidiaries
                 Schedule II - Valuation and Qualifying Accounts
                For Years Ended December 31, 1996, 1997 and 1998
                                 (In thousands)


                                   Balances as of                Additions                      Balances as of
                                      Beginning         Charges to                                   End of
                                      of Period          Expense          Deductions                 Period
                                   ----------------    -------------    --------------          ---------------
<S>                                <C>                 <C>              <C>                     <C>       


PHYSICAL INVENTORY RESERVE

Year Ended December 31, 1996        $          19        $        54      $        -               $       74

Year Ended December 31, 1997        $          74        $       113      $        -               $      187

Year Ended December 31,1998         $         187        $       787      $        -               $      974

TAX VALUATION ALLOWANCE

Year Ended December 31, 1996        $      18,697        $    11,786      $        -               $   30,483
 
Year Ended December 31, 1997        $      30,483        $    14,645      $        -               $   45,128
 
Year Ended December 31,1998         $      45,128        $    14,315      $        -               $   59,443

</TABLE>


                                      - 81 -
<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:   January 29, 1999                 By:  /s/ Randal Chase              
                                             -----------------------------------
                                             Randal Chase, Ph.D.
                                             President & Chief Executive Officer


      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/ Randal Chase                                         January 29, 1999
------------------------
Randal Chase, Ph.D.
President & Chief Executive Officer

PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:

/s/ Lawrence J. Hineline                                 January 29, 1999
------------------------                                                      
Lawrence J. Hineline
Vice President-Finance

A MAJORITY OF THE BOARD OF DIRECTORS:

<TABLE>
<CAPTION>
<S>                           <C>                     <C>                             <C>

/s/ Francesco Bellini        January 25, 1999         /s/ Philip Frost                 January 25, 1999
----------------------                               ------------------- 
Francesco Bellini, Ph.D      .                       Philip Frost, M.D. 
                                                         
/s/ Alain Cousineau          January 25, 1999         /s/ Lyle Kasprick                January 25, 1999 
----------------------                               -------------------  
Alain Cousineau                                      Lyle Kasprick
                                                       
/s/ Jonathan Deitcher        January 25, 1999         /s/ Francois Legault             January 29, 1999
----------------------                               -------------------
Jonathan Deitcher                                    Francois Legault
                             
/s/ Denis Dionne             January 25, 1999         
----------------------                               --------------------
Denis Dionne                                         Sharon Mates, Ph.D.               January ___, 1999  
                                                       
/s/ Gervais Dionne           January 25, 1999         /s/ Richard C. Pfenninger, Jr. 
----------------------                               ------------------------------   
Gervais Dionne, Ph.D.                                Richard C. Pfenninger, Jr.        January 25, 1999
                                                      
/s/ Neil W. Flanzraich       January 28, 1999                       
----------------------           
Neil W. Flanzraich    
       
</TABLE>
                             

                                      - 82 -


<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. (7)

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

                                       - 83 -
<PAGE>



EXHIBIT
NO.         DESCRIPTION
---         -----------

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

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.
       (7)

10.22  Amended  and  restated  master  agreement  dated June 20, 1994 among NAV,
       BioChem, IVAX, D&N Holding Company, Frost-Nevada and Phillip Frost. (9)

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

10.25* North American Vaccine, Inc. 1995 Share Option Plan. (10)

10.26* North  American  Vaccine,  Inc.  1995  Non-Employee  Director  and Senior
       Executive Stock Option Plan. (11)

10.27  Clinical  Development  Agreement  dated December 22, 1995 between NAV and
       Pasteur  Merieux Serums et Vaccins  ("PMSV")  [with certain  confidential
       information deleted therefrom]. (12)

10.28  License  Agreement  dated  December  22, 1995  between NAV and PMSV [with
       certain confidential information deleted therefrom]. (12)

10.29  Indenture dated May 7, 1996 between NAV and Marine Midland Bank. (13)

10.30  Registration  Rights  Agreement  dated May 1, 1996 between NAV,  Goldman,
       Sachs & Co. and UBS Securities LLC. (13)

10.32  Stock   Purchase   Agreement   dated  October  11,  1996  between  Abbott
       Laboratories and NAV. (14)

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]. (14)

10.34  Assignment  and Assumption of Leases dated November 12, 1996 between CPMI
       and NAV. (15)

10.35  Master  Agreement dated November 1, 1996 between NAV and General Electric
       Capital  Corporation  [with  certain  confidential   information  deleted
       therefrom]. (15)

10.36* North American Vaccine, Inc. 1997 Share Option Plan. (16)


                                       - 84 -
<PAGE>



EXHIBIT
NO.         DESCRIPTION
---         -----------

10.37  Lease  Agreement  dated  as of  March  25,  1998  between  ARE-10150  Old
       Columbia,  LLC and the Company  [with  certain  confidential  information
       deleted therefrom]. (17)

10.38  Indenture  dated November 12, 1998 by and between the Company and Bankers
       Trust Company, as Trustee. (18)

10.39  Security and Pledge  Agreement dated November 12, 1998 by and between the
       Company and Bankers Trust Company, as Trustee. (18)

10.40* North  American  Vaccine,  Inc.  1999  Non-Employee  Director  and Senior
       Executive Stock Option Plan.

10.41  First Amendment to the Lease Agreement dated as of January 21, 1999
       between Liberty Property Limited Partnership and Amvax, Inc. f/k/a
       Selcore Laboratories, Inc.

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-K Annual Report for the
       Year Ended December 31, 1992 (File No. 1-10451).

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



                                      - 85 -
<PAGE>



(9)    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.

(10)   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.

(11)   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.

(12)   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).

(13)   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).

(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 September 30, 1996 (File No. 1-10451).

(15)   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).

(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, 1997 (File No. 1-10451).

(17)   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, 1998 (File No. 1-10451).

(18)   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 November 20, 1998 (File No. 1-10451).




                                     - 86 -