AVIRON, 424B4, 1997-08-13

AVIRON
424B4, 1997-08-13
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-32043

PROSPECTUS

[AVIRON LOGO]

2,400,000 SHARES

COMMON STOCK

All of the 2,400,000 shares of Common Stock offered hereby are being issued
and sold by Aviron (the "Company"). On August 12, 1997, the last sale price of
the Company's Common Stock, as reported on the Nasdaq National Market, was
$27.75 per share. See "Price Range of Common Stock." The Common Stock of the
Company is traded on the Nasdaq National Market under the symbol "AVIR."

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY (1)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................... $27.00 $1.62 $25.38
- ------------------------------------------------------------------------------------------
Total (2)....................... $64,800,000 $3,888,000 $60,912,000
- ------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------

(1) Before deducting expenses payable by the Company estimated at $450,000.

(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 360,000 shares of Common Stock solely, to cover over-
allotments, if any. If such over-allotment option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, and Proceeds
to Company will be $ 74,520,000, $ 4,471,200, and $ 70,048,800,
respectively. See "Underwriting."

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

The Common Stock is offered by the Underwriters, as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens
& Company"), San Francisco, California on or about August 18, 1997.

ROBERTSON, STEPHENS & COMPANY
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST

The date of this Prospectus is August 13, 1997
<PAGE>

[Aviron Uses Both
Its Rational Vaccine Design Technology and
Classical Methods of Live Vaccine Discovery]

[RATIONAL VACCINE DESIGN TECHNOLOGY]

[Virus Particle containing genetic information;
three segments are highlighted to correspond with
methods of modifying the virus' genetic code]

[DELETE VIRULENCE PROTEINS] [ADD ANTIGENIC STRUCTURES]

[Remove genes for viral components [Insert genes to enhance the
thought to be important virus' stimulation
in disease mechanism] of the immune system]

[Virus particle containing genetic [Virus particle
information; one segment of genetic containing genetic information;
information being removed.] one segment of genetic
information being added.]

[DOWN-REGULATE REPLICATION]

[Alter genetic information used by the
virus in controlling its replication]

["Tree" structure comprised of 15 dots
symbolizing virus replication; second
structure comprised of 3 dots symbolizing
virus' reduced ability to replicate.]

[SPECIES SELECTION] [FOREIGN CELL PASSAGE] [ADAPTION TO PHYSICAL
CONDITION]

[Strains originate [Human virus mutates as Human virus mutates as it
from non-human species] it is propagated propagated under
in cells from unusual conditions
non-human species] e.g. cold temperature

[Graphic of a chicken and [Graphic of cells (8) [Petri dishes (2), each
a cow.] sequentially connected by with a corresponding
arrows.] graphic representation
of a thermometer. One
thermometer shows a
higher temperature
than the other.]

[CLASSICAL METHODS]

CERTAIN PERSON PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS ON THE
IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

IN CONNECTION WITH THE UNDERWRITTEN OFFERING, CERTAIN UNDERWRITERS AND
SELLING GROUP MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET
IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT
OF 1934. SEE "UNDERWRITING."

["Aviron" is a trademark of the Company. Certain other trademarks of the
Company and other companies are used in the Prospectus.]
<PAGE>

[Aviron's Proposed Nasal Spray Vaccine for Influenza]

[Genes from naturally-occurring [Genes from cold
influenza viruses selected adapted master
by public health authorities] influenza virus strain]

[Silhouette of human [Virus particle with box [Virus particle
head with lines coming around 2 of 8 segments with box around 6
from nasal area leading of genetic information. of 8 segments
to virus particle to the ....................... of genetic
right] Dashed lines connecting information.]
to second virus particle
with box around 6 of 8
segments.]

[Aviron's influenza vaccine
combines genes from naturally
occurring viruses with genes from
the cold adapted master strain]

[Virus particle
containing 8 segments
of genetic information;
six segments of the
same color, two
segments of different
colors.]

[Photograph of a human hand holding a device
which is used to administer a vaccine in an
aerosal spray (to the upper respiratory
tract-not shown). A spray effect is shown
which serves as the backdrop for an image of
a virus particle to the upper right.]

[THE POTENTIAL IMPACT OF INFLUENZA IN THE COMMUNITY]

[Photo of five young [Photo of one child from [Photo of woman
children playing with previous picture in bed from previous
blocks in a pre-school at home with mother at picture now in
setting. Lines bedside. Child is ill, an office setting
symbolically show how a and is shown with with 5 other
virus spreads from one thermometer in mouth, adults. Lines
child to the next.] mother touching forehead, symbolically
tissues and medication show how the
bottle by bedside. Mother virus might
is on the telephone. spread to others
Lines symbolically show in the room.]
virus spreading from
child to mother.]

AGE GROUP: Children 1 - 18

ESTIMATED ATTACK RATE: 36 per 100

BURDEN OF ILLNESS: illness, doctor visits,
middle ear infections,
school absenteeism,
parents' lost work

ESTIMATED UNITED STATES POPULATION: 70 million

AVIRON PRODUCT STATUS: Pivotal Phase III clinical
trial-Stage 1 completed
<PAGE>

[THE COMPANY'S COLD ADAPTED NASAL SPRAY VACCINE IS AN INVESTIGATIONAL BIOLOGIC
AND HAS NOT BEEN APPROVED FOR SALE IN ANY COUNTRY. THE COMPANY DOES NOT
ANTICIPATE APPLYING FOR REGULATORY APPROVAL TO MARKET THIS PROPOSED VACCINE
UNTIL AT LEAST 1998, IF EVER, AND WILL BE REQUIRED TO SUCCESSFULLY COMPLETE
CLINICAL TRIALS TO DEMONSTRATE ITS SAFETY AND EFFICACY PRIOR TO FILING FOR
REGULATORY APPROVAL. SEE "RISK FACTORS."]

[IMMUNE RESPONSE TO INFLUENZA VACCINES]

[Silhouette of human head and torso [Silhouette of human head and
within which is visible the circulatory torso within which is visible
system (red). The figure is receiving an the circulatory system (red)
injection in the upper arm by a syringe. and the upper respiratory
The injected vaccine forms a small pool of tract (blue). The figure is
liquid at the site of the injection.] receiving an aerosol spray
directed into the nasal
passages and upper respiratory
tract by nasal spray
administration.]

[INJECTABLE INACTIVATED VACCINE] [NASAL SPRAY VACCINE]

[. Strongly stimulates [. Stimulates mucosal immunity
circulating antibodies] in respiratory tract

. Stimulates cell-mediated
immunity

. Stimulates circulating
antibodies]

[Photo of man from previous picture [The elderly woman
(presumably infected with the virus) is shown ill in bed in a
visiting with his elderly mother in her hospital setting. Some medical
home. He is kneeling beside a chair in equipment is visible to the
which she is sitting and he is presenting left; a healthcare worker or
her with a gift. A line symbolically shows nurse is at her bedside. She
the virus being passed between them.] appears awake and alert.]

[Adults 19-65 [Elderly over 65

16 per 100 10 per 100

illness, doctor visits, illnesses, doctor visits,
lost work hospitalization, death

160 million 34 million

Phase II challenge efficacy Clinical trials planned for
study completed, Phase III safety co-administration with
and effectiveness trial planned] injectable inactivated vaccine]
<PAGE>

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED IN
CONNECTION WITH THIS OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION AND REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Price Range of Common Stock.............................................. 22
Capitalization........................................................... 23
Dilution................................................................. 24
Selected Financial Data.................................................. 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business................................................................. 30
Management............................................................... 59
Certain Transactions..................................................... 67
Principal Stockholders................................................... 69
Description of Capital Stock............................................. 71
Shares Eligible for Future Sale.......................................... 74
Underwriting............................................................. 75
Legal Matters............................................................ 76
Experts.................................................................. 76
Additional Information................................................... 77
Available Information.................................................... 77
Index to Financial Statements ........................................... F-1
</TABLE>

3
<PAGE>

SUMMARY

This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
Prospectus.

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," appearing elsewhere in this Prospectus.

THE COMPANY

Aviron is a biopharmaceutical company whose focus is the prevention of
disease through innovative vaccine technology. The Company's goal is to become
a leader in the discovery, development, manufacture and marketing of live virus
vaccines which are sufficiently cost effective to justify their use in
immunization programs targeting the general population. Live virus vaccines,
such as those for smallpox, polio, measles, mumps and rubella, have had a long
record of success in preventing, and in some cases eliminating, disease.

The Company's lead product candidate, a live cold adapted intranasal
influenza vaccine, was recently shown to provide a high protection rate against
influenza, with minimal adverse effects, in a pivotal Phase III clinical trial
in children. Aviron is developing this vaccine for administration to children,
healthy adults and the elderly and high risk individuals. The Company recently
filed an Investigational New Drug Application ("IND") for a live intranasal
vaccine for Parainfluenza Virus Type 3 ("PIV-3") and the Company plans to
initiate Phase II clinical trials for this vaccine candidate by the end of
1997. The Company is also developing a subunit vaccine for Epstein-Barr Virus
("EBV"), in collaboration with SmithKline Beecham Biologicals, S.A.
("SmithKline Beecham"), which is expected to enter Phase I/II clinical trials
in Europe by the end of 1997. In addition, Aviron is using its proprietary
"Rational Vaccine Design" technology to discover new live virus vaccines.
Rational Vaccine Design involves the deletion or modification of virulence
proteins, the alteration of the virus' genetic control signals to slow down its
replication, or the addition of antigenic information to enhance the virus'
stimulation of the immune system. The Company is applying this technology to
develop vaccine candidates for the prevention of influenza in elderly persons
and diseases caused by Cytomegalovirus ("CMV"), Herpes Simplex Virus Type 2
("HSV-2") and Respiratory Syncytial Virus ("RSV").

Influenza. Influenza affects 35 to 50 million Americans each year resulting
in approximately 20,000 deaths annually, primarily in the elderly, despite the
availability of an injectable inactivated vaccine that has been reported to be
60% to 90% effective. The United States Food and Drug Administration (the
"FDA") estimates that approximately 75 million doses of the injectable
influenza vaccine were manufactured for use in the United States in 1996.
Experts suggest that, although over half of Americans at high risk for
complications from influenza receive the annual influenza vaccine, relatively
few of the 70 million children under the age of 18 are vaccinated.

In July 1997, the National Institute of Allergy and Infectious Diseases
("NIAID") of the National Institutes of Health ("NIH") and the Company
announced the results of an initial analysis of the first stage of a pivotal
Phase III clinical trial of Aviron's live cold adapted intranasal influenza
vaccine involving 1,602 children. In this trial, the vaccine demonstrated a 93%
protection rate against culture-confirmed influenza in those children receiving
two doses of the vaccine, the primary endpoint of the study. Only 1% of the
children who received two doses experienced culture-confirmed influenza,
compared to 18% of those receiving placebo. These results were statistically
significant. To date, the data have not yet been peer reviewed, however, the
clinical investigators intend to submit findings of this trial in 1997 for
publication in a peer-reviewed medical journal. The Company plans to conduct
the second stage of this Phase III clinical trial during the 1997/98 influenza
season to collect immunogenicity data, as well as additional safety and
efficacy data. In 1996, the Company completed a Phase II challenge study of
this vaccine in 92 adults which demonstrated an 85% protection rate, compared
to placebo, against culture-confirmed influenza. These results were also
statistically significant. Previously, Aviron conducted Phase I/II clinical
trials of this vaccine in approximately 600 children and healthy adults. Prior
to Aviron's in-licensing of the cold adapted vaccine, formulations of this
vaccine had been tested in over 7,000 patients.

The cold adapted influenza vaccine elicits an immune response similar to that
of the natural infection by stimulating mucosal immunity in the nose, cellular
components of the immune system and circulating antibodies. Aviron intends to
develop the live cold adapted influenza vaccine for widespread annual use in
children and adults, and for co-administration with the inactivated injectable
vaccine for improved protection in the elderly. In addition, Aviron is
developing a genetically engineered influenza vaccine that is intended to be a
better immune stimulus in the elderly than either the cold adapted vaccine or
the inactivated vaccine alone, and, therefore, more suitable for use as a
single-dose vaccine in this population.

4
<PAGE>

Parainfluenza Virus Type 3. PIV-3 is a common respiratory virus of childhood
which causes croup, cough, fever and pneumonia. Over 80% of children have been
infected by age four, many having experienced several cases of PIV-3 infection.
The Company has in-licensed the rights to a bovine PIV-3 ("bPIV-3") vaccine
from the NIH which has been tested in over 100 infants, children and adults for
prevention of PIV-3 illness. Aviron has submitted an IND for a Phase II
clinical trial which the Company expects to begin by the end of 1997.

Epstein-Barr Virus. EBV infects most people at some point in their lifetime.
At least half of the approximately 10% of students who first become infected
with the virus in high school and college develop infectious mononucleosis. EBV
also has been shown to be a contributing factor in the development of certain
types of cancer and lymphoma. The Company has delivered clinical trial
materials to SmithKline Beecham to begin a Phase I/II clinical trial of the
subunit vaccine, expected to be initiated by SmithKline Beecham in Europe by
the end of 1997.

Cytomegalovirus. Most people also become infected with CMV at some time in
their lives, but the resulting disease is typically serious only for those with
impaired immune systems or for babies of women infected in the first trimester
of pregnancy. The Company has selected several Rational Vaccine Design
candidates for clinical testing for the prevention of CMV disease.

Herpes Simplex Virus Type 2. Genital herpes is an incurable disease
characterized by recurrent, often painful genital sores, with over 700,000 new
cases estimated in the United States each year. The Company currently is
developing and evaluating several Rational Vaccine Design candidates in
preclinical models to create a prophylactic vaccine.

Respiratory Syncytial Virus. RSV is the major cause of lower respiratory
tract illness in the very young, responsible for over 90,000 hospitalizations
and more than 4,000 deaths per year in the United States. Aviron is using its
Rational Vaccine Design technology to develop intranasal vaccine candidates to
prevent RSV disease.

Aviron has entered into, and intends to enter into additional, selected
collaborative agreements to gain access to complementary technologies,
capabilities and financial support for its programs. In addition to acquiring
rights from third parties to augment its Rational Vaccine Design technology and
the cold adapted influenza vaccine technology, the Company has entered into a
collaborative agreement with SmithKline Beecham covering worldwide rights to
its EBV vaccine, and a collaboration with Sang-A Pharm. Co., Ltd. ("Sang-A")
involving certain marketing and manufacturing rights to the Company's products
in Korea. In addition, the Company entered into a contract manufacturing
agreement with Evans Medical Limited, a subsidiary of Medeva plc ("Evans"), for
the commercial manufacture of its cold adapted influenza vaccine.

The Company was incorporated in California in April 1992 as Vector
Pharmaceuticals, Inc., changed its name to Aviron in February 1993, and
reincorporated in Delaware in November 1996. The Company's executive offices
are located at 297 North Bernardo Avenue, Mountain View, California 94043, and
its telephone number is (415) 919-6500.

RISK FACTORS

An investment in the Common Stock offered hereby involves a high degree of
risk. In addition to the other information presented or referenced herein, the
discussion of risk factors on pages 7 to 20 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
associated with an investment in the Company include the following factors:
Uncertainties Related to Clinical Trials; Uncertainties Related to Early Stage
of Development; Technological Uncertainty; Lack of Manufacturing Experience;
Reliance on Contract Manufacturers; Need for Future Funding; Uncertainty of
Access to Capital; Uncertainty of Future Profitability; Accumulated Deficit;
Uncertainty of Protection of Patents and Proprietary Rights; Dependence on
Trade Secrets; Lack of Patent Protection of Cold Adapted Influenza Technology;
Litigation with Chiron Corporation; Government Regulation; No Assurance of
Regulatory Approvals; Uncertainty of Market Acceptance; Lack of Marketing
Experience; Dependence on Third Parties; Intense Competition and Risk of
Technological Obsolescence; Dependence on Collaborative Agreements; Volatility
of Common Stock Price; Potential Adverse Effects of Shares Eligible for Future
Sale; Risk of Product Liability; Uncertainty of Availability of Insurance;
Uncertainty Related to Pharmaceutical Pricing and Reimbursement; Need to
Attract and Retain Key Employees and Consultants; Risks Associated with
Hazardous Materials; Dilution; Absence of Dividends; and Anti-Takeover Effects
of Delaware Law and Certain Charter Provisions. For a discussion of the risks
associated with an investment in the Company, see "Risk Factors" below.

5
<PAGE>

THE OFFERING

<TABLE>
<C> <S>
Common Stock Offered by the Company.......... 2,400,000 shares
Common Stock Outstanding after the Offering.. 15,637,880 shares (1)
Use of Proceeds.............................. For clinical trials,
manufacturing and marketing for
the Company's cold adapted
influenza vaccine, and for
research and development,
including preclinical testing
and clinical trials for its
other vaccine programs, capital
expenditures, working capital
and general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market Symbol................ AVIR
</TABLE>

SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------
1993 1994 1995 1996 1996 1997
------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.......... $ -- $ -- $ 1,707 $ 1,625 $ 375 $ 414
Operating expenses:
Research and
development........... 2,073 4,216 10,220 14,997 6,333 8,897
General and
administrative........ 1,874 2,493 3,252 4,595 2,275 2,621
------- ------- -------- -------- ------- --------
Total operating
expenses............ 3,947 6,709 13,472 19,592 8,608 11,518
------- ------- -------- -------- ------- --------
Loss from operations.... (3,947) (6,709) (11,765) (17,967) (8,233) (11,104)
Interest income, net of
interest expense....... 175 207 362 466 318 479
------- ------- -------- -------- ------- --------
Net loss................ $(3,772) $(6,502) $(11,403) $(17,501) $(7,915) $(10,625)
======= ======= ======== ======== ======= ========
Net loss per share (2).. $ (0.86)
========
Shares used in computing
net loss per share
(2).................... 12,384
Pro forma net loss per
share (2).............. $ (1.24) $ (1.84) $ (0.86)
======== ======== =======
Shares used in computing
pro forma net loss per
share (2).............. 9,165 9,528 9,205
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED (3)
------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..... $22,326 $ 82,788
Working capital....................................... 21,242 81,704
Total assets.......................................... 25,995 86,457
Accumulated deficit................................... (50,556) (50,556)
Total stockholders' equity............................ 22,943 83,405
</TABLE>
- --------

(1) Based on the number of shares outstanding on June 30, 1997. Excludes, as of
such date, (i) 795,198 shares of Common Stock issuable upon exercise of
options outstanding, at a weighted average exercise price of approximately
$4.14 per share, (ii) an aggregate of 1,132,354 shares reserved for future
grants or purchases pursuant to the Company's 1996 Equity Incentive Plan,
Employee Stock Purchase Plan and Non-Employee Director Stock Option Plan,
and (iii) 125,923 shares issuable upon exercise of warrants outstanding, at
a weighted average exercise price of $7.48 per share.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
method used to determine the number of shares used to compute per share
amounts.

(3) As adjusted to give effect to the sale of 2,400,000 shares of Common Stock
offered by the Company hereby at an offering price of $27.00 and the
application of the net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."

Except as otherwise indicated, the information contained in this Prospectus
assumes no exercise of the Underwriters' over-allotment option.

6
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby.

UNCERTAINTIES RELATED TO CLINICAL TRIALS

Before obtaining required regulatory approvals for the commercial sale of
any of its products under development, the Company must demonstrate through
preclinical testing and clinical trials that each product is safe and
effective for use in each target indication. The results from preclinical
testing and early clinical trials may not be predictive of results obtained in
large clinical trials. Companies in the pharmaceutical, biopharmaceutical and
biotechnology industries have suffered significant setbacks in various stages
of clinical trials, even in advanced clinical trials after promising results
had been obtained in earlier trials. The Company's vaccines are intended for
use primarily in healthy individuals. To obtain regulatory approval, the
Company must demonstrate safety and efficacy in healthy people, which likely
will require a lengthier process and involve a larger number of trials and
patients than would be customary for clinical trials of therapeutics for
disease management. There can be no assurance that the Company's clinical
trials will demonstrate sufficient safety and efficacy to obtain the requisite
regulatory approvals or will result in marketable products. If the Company's
cold adapted influenza vaccine is not shown to be safe and effective in
Aviron's future clinical trials, the resulting delays in obtaining regulatory
approvals for this vaccine, as well as the need for additional financing,
would have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company's cold adapted influenza vaccine is a trivalent vaccine
delivered as a nasal spray that is based on technology licensed from the NIH
and the University of Michigan. Wyeth-Ayerst Laboratories ("Wyeth-Ayerst"), a
division of American Home Products Corporation, licensed certain rights to the
vaccine in 1991 and was developing it for sale in collaboration with the NIH
until relinquishing its rights in 1993. In addition, Kaketsuken, a Japanese
research foundation ("Kaketsuken"), licensed certain rights to the vaccine in
1993 and was developing it for sale in Japan until relinquishing such rights
in 1996. Formulations of the vaccine have been the subject of a number of
clinical trials performed by Wyeth-Ayerst, the NIAID of the NIH and
Kaketsuken. The Company has reviewed the data from these trials and believes
that it can submit such data in partial support of its application for
regulatory approval of its cold adapted influenza vaccine from the FDA. The
Company did not participate in these trials and cannot be confident in the
accuracy of the data collected. Although a large proportion of these data was
positive, a number of trials included results that were not. Very few of the
trials involved a trivalent vaccine delivered as a nasal spray. The Company
has performed and will need to perform additional trials of its cold adapted
influenza vaccine candidate to support its application to the FDA. There can
be no assurance that the data from these third-party trials are accurate, that
the Company will be able to obtain favorable results from its own trials, or
that the Company can complete these trials on a timely basis, or at all.

To date, none of the data announced by the Company from its clinical trials
have been submitted for publication in peer-reviewed journals. Moreover, the
data necessary to calculate the primary endpoints in the Company's pivotal
Phase III clinical trial of its live cold adapted intranasal influenza vaccine
only became available in July 1997. There can be no assurance that the
analysis of the data regarding the primary endpoint announced by the Company
and the conclusions drawn from this analysis will not change as a result of
further study by the Company or its collaborators of the primary endpoint or
secondary endpoints or in the course of peer review for publication or
regulatory review for licensing. Such changes could have an adverse effect on
the Company's product development efforts and its prospects for regulatory
approval of the vaccine. The Company plans to conduct the second stage of its
Phase III clinical trial during the 1997/98 influenza season. There can be no
assurance that the results of this trial will support the results of the
recently completed first stage of this trial. Failure to do so would have a
material adverse effect on the regulatory approval or labeling

7
<PAGE>

of the cold adapted intranasal influenza vaccine and could have a material
adverse effect on the Company's business, financial results and results of
operations. See "Business -- Influenza Clinical Trials."

The completion of the Company's clinical trials may be delayed by many
factors. For example, delays may be encountered in enrolling a sufficient
number of patients fitting the appropriate trial profile, preparing the
modified vaccine strain for certain influenza seasons, or manufacturing
clinical trial materials. The Company's late-stage clinical trials of its live
cold adapted influenza vaccine must be conducted during the influenza season
and must be commenced early enough in the approximately five-month season so
that subjects may be vaccinated well in advance of a challenge by the wild-
type virus. Were the influenza season to commence earlier than anticipated,
the number of subjects that could participate in a particular study might be
reduced in that season due to the subjects' possible exposure to wild-type
influenza virus. Additionally, there is a risk that there will not be enough
natural influenza in the community in a given influenza season to achieve
statistically significant results from clinical trials. As a result, the
Company would be required to gather data in the next influenza season, which
would not occur for another year in that community, thus delaying the
Company's development program. There can be no assurance that delays in, or
termination of, clinical trials will not occur. Any delays in, or termination
of, the Company's clinical trial efforts would have a material adverse effect
on the Company's business, financial condition and results of operations.

There can be no assurance that Aviron will be permitted by regulatory
authorities to undertake additional clinical trials for its cold adapted
influenza vaccine or continue or initiate clinical trials for its other
programs or, if any such trials are conducted, that any of the Company's
product candidates will prove to be safe and effective or will receive
regulatory approvals. See "Business -- Vaccine Products Under Development."

UNCERTAINTIES RELATED TO EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY

Aviron commenced its operations in April 1992 and until recently was a
development stage company. All of the Company's product candidates are in the
research or development stage. With the exception of two in-licensed product
candidates, none of the Company's proposed products has yet been approved for
clinical trials. To date, the Company has had no revenue from product sales
and all of its resources have been dedicated to the development of vaccines.
There can be no assurance that product revenues will be realized on a timely
basis, if ever.

The development of safe and effective live vaccines for the prevention of
viral diseases such as influenza, herpes simplex and other target diseases is
highly uncertain and subject to numerous risks. Potential products that appear
to be promising at early stages of development may not reach the market for a
number of reasons. Potential products may be found ineffective or cause
harmful side effects during preclinical testing or clinical trials, fail to
receive necessary regulatory approvals, be difficult to manufacture on a large
scale, be uneconomical, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. Aviron has not yet
requested or received the regulatory approvals that are required to market its
products. Aviron does not expect that any of its proposed products will be
ready for commercialization until at least the 1999/2000 influenza season, if
at all. To achieve profitability, the Company, alone or with others, must
successfully identify, develop, test, manufacture and market its products.
There can be no assurance that Aviron will succeed in the development and
marketing of any product. Any potential product requires significant
additional investment, development, preclinical testing and clinical trials
prior to potential regulatory approval and commercialization.

The Company's cold adapted influenza vaccine involves a complex development
process. If the Company were to successfully develop an influenza vaccine, its
composition would require annual modification. Influenza viruses have a high
mutation rate and the surface antigens of influenza viruses that induce
protective immunity are variable from year to year. Each spring, the FDA and
the United States Centers for Disease Control and Prevention (the "CDC")
select circulating influenza strains that will be included in the following
season's influenza vaccines. As a result, manufacturers of vaccines must
modify their influenza vaccines each year to include the selected strains in a
form that meets FDA guidelines, within an approximately six-month

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period, in order to make it available before the influenza season. On one
occasion in the past, the Company experienced difficulty in preparing modified
vaccine strains in time to conduct clinical trials during the influenza
season. Even if the Company is able to develop an influenza vaccine for a
particular year, it must also establish a dependable process by which the
vaccine may be modified and manufactured on a timely basis to include
additional strains each year. If the Company were unable to develop an
influenza vaccine for a particular year that meets FDA and CDC guidelines and
establish a manufacturing process for the vaccine, its business, financial
condition and results of operations would be materially adversely affected. No
assurance can be given that delays in preparing vaccines for use in clinical
trials or commercial sales will not be encountered. In addition, there can be
no assurance that the Company's development efforts will be successful, that
required regulatory approvals will be obtained or that any products, if
introduced, will be successfully marketed. See "Business -- Vaccine Products
Under Development" and "-- Production and Manufacturing."

LACK OF MANUFACTURING EXPERIENCE; RELIANCE ON CONTRACT MANUFACTURERS

The Company plans to obtain any commercial quantities of its cold adapted
influenza vaccine product, if approved by the FDA, initially from Evans.
Pursuant to an agreement entered into by the Company and Evans in April 1997,
Evans has agreed to manufacture the Company's live cold adapted influenza
vaccine until December 31, 2000. To meet any supply needs thereafter, the
Company will be required to either extend its contract with Evans, contract
with an alternative commercial supplier or obtain a commercial manufacturing
facility, which would require a significant amount of funds. There can be no
assurance that the agreement with Evans can be extended on terms satisfactory
to the Company, on a timely basis, or at all. There can be no assurance that
an agreement with any alternative commercial supplier with respect to the
commercial manufacture of the cold adapted influenza vaccine can be reached,
or if reached, on terms satisfactory to the Company and in time for the
relevant influenza season. As part of the regulatory approval process, before
commercial launch of the cold adapted influenza vaccine, the Company will need
to obtain, in addition to an approval of a Product License Application
("PLA"), an approval of an Establishment License Application ("ELA") for the
Evans facility to manufacture the Company's live cold adapted influenza
vaccine.

The production of the Company's cold adapted influenza vaccine is subject to
the availability of a large number of specific pathogen-free hen eggs, for
which there are currently a limited number of suppliers. Contamination or
disruption of this source of supply would adversely affect the ability to
manufacture the Company's cold adapted influenza vaccine. The production of
the cold adapted influenza vaccine is also subject to the availability of the
device for delivery of the vaccine intranasally. The Company is negotiating an
agreement for the commercial manufacture and supply of such devices. Although
the device will not be reviewed separately by regulatory authorities, the
Company will rely on the manufacturer to make available the manufacturing
process of the device as part of the PLA submission for the cold adapted
influenza vaccine. There can be no assurance that an agreement with this or
any other device supplier can be reached on satisfactory terms, on a timely
basis, or at all.

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<PAGE>

addition, there can be no assurance that the Company's development efforts
will be successful, that required regulatory approvals, including those with
respect to an IND or PLA and ELA applications, will be obtained or that any
products, if introduced, will be successfully marketed.

The Company also currently does not have facilities to manufacture any of
its other potential products in commercial quantities and has no experience
with commercial manufacture of vaccine products. To manufacture its other
potential products for large-scale clinical trials or on a commercial scale,
the Company may be required to build a large-scale manufacturing facility,
which would require a significant amount of funds. The scale-up of
manufacturing for commercial production would require the Company to develop
advanced manufacturing techniques and rigorous process controls. Furthermore,
the Company would be required to register its facility with the FDA and with
the California Department of Health Services and would be subject to state and
federal inspections confirming the Company's compliance with current good
manufacturing practice ("cGMP") regulations established by the FDA. However,
no assurance can be given as to the ability of the Company to produce
commercial quantities of its potential products in compliance with applicable
regulations or at an acceptable cost, or at all.

The Company is alternatively considering the use of contract manufacturers
for the commercial production of its potential products. The Company is aware
of only a limited number of manufacturers which it believes have the ability
and capacity to manufacture its potential products, including the cold adapted
influenza vaccine, in a timely manner. There can be no assurance that the
Company would be able to contract with any of these companies for the
manufacture of its products on acceptable terms, if at all. If the Company
enters into an agreement with a third-party manufacturer, it may be required
to relinquish control of the manufacturing process, which could adversely
affect the Company's results of operations. Furthermore, a third-party
manufacturer also will be required to manufacture the Company's products in
compliance with state and federal regulations. Failure of any such third-party
manufacturer to comply with state and federal regulations and to deliver the
required quantities on a timely basis and at commercially reasonable prices
would materially adversely affect the Company's business, financial condition
and results of operations. No assurance can be given that the Company, alone
or with a third party, will be able to make the transition to commercial
production of its potential products successfully, if at all, or that if
successful, the Company will be able to maintain such production. See
"Business -- Production and Manufacturing" and "-- Government Regulation."

NEED FOR FUTURE FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL

The Company's operations to date have consumed substantial and increasing
amounts of cash. The negative cash flow from operations is expected to
continue and to accelerate in the foreseeable future. The development of the
Company's technology and proposed products will require a commitment of
substantial funds to conduct the costly and time-consuming research,
preclinical testing and clinical trials necessary to develop and optimize such
technology and proposed products, to establish manufacturing, marketing and
sales capabilities and to bring any such products to market. The Company's
future capital requirements will depend upon many factors, including continued
scientific progress in the research and development of the Company's
technology and vaccine programs, the size and complexity of these programs,
the ability of the Company to establish and maintain collaborative
arrangements, progress with preclinical testing and clinical trials, the time
and costs involved in obtaining regulatory approvals, the cost involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims or
trade secrets, and product commercialization activities.

The Company anticipates that the proceeds of this offering, together with
the interest thereon, and revenues from existing collaborations, cash, cash
equivalents and short-term investments will enable it to maintain its current
and planned operations at least through mid-1999. The Company is seeking
additional collaborative agreements with corporate partners and may seek
additional funding through public or private equity or debt financing. There
can be no assurance that any additional collaborative agreements will be
entered into or that additional financing will be available on acceptable
terms, if at all. If additional funds are raised by issuing equity securities,
further dilution to stockholders may result. If adequate funds are not

10
<PAGE>

available, the Company may be required to delay, reduce the scope of, or
eliminate one or more of its research or development programs or to obtain
funds through collaborative arrangements with others that may require the
Company to relinquish rights to certain of its technologies, product
candidates or products that the Company would otherwise seek to develop or
commercialize itself, which could materially adversely affect the Company's
business, financial condition or results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."

UNCERTAINTY OF FUTURE PROFITABILITY; ACCUMULATED DEFICIT

The Company has experienced significant and increasing operating losses
since its inception in April 1992. As of June 30, 1997, the Company had an
accumulated deficit of approximately $50.6 million. Aviron has not received
any product revenue to date and does not expect to generate revenues from the
sale of products for several years, if at all. The Company expects to incur
significant and increasing operating losses over at least the next several
years as the Company's research and development efforts and preclinical
testing and clinical trial activities expand. The Company's ability to achieve
profitability depends in part upon its ability, alone or with others, to
complete development of its proposed products, to obtain required regulatory
approvals and to successfully manufacture and market such products. To the
extent that the Company is unable to obtain third-party funding for expenses,
the Company expects that its increased expenses will result in increased
losses from operations. There can be no assurance that Aviron will obtain
required regulatory approvals or successfully identify, develop, test,
manufacture and market any product candidates, or that the Company will ever
achieve product revenues or profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS; DEPENDENCE ON
TRADE SECRETS

The Company's success will depend in part on its ability to maintain its
technology licenses, maintain trade secrets, obtain patents and operate
without infringing the proprietary rights of others, both in the United States
and in other countries. Since patent applications in the United States are
maintained in secrecy until patents issue and since publication of discoveries
in the scientific or patent literature often lag behind actual discoveries,
the Company cannot be certain that it was the first to make the inventions
covered by each of its pending patent applications or that it was the first to
file patent applications for such inventions. The patent positions of
biotechnology and pharmaceutical companies can be highly uncertain and involve
complex legal and factual questions, and therefore the breadth of claims
allowed in biotechnology and pharmaceutical patents, or their enforceability,
cannot be predicted. There can be no assurance that any of the Company's or
its licensors' patents or patent applications will issue or, if issued, will
not be reexamined, reissued, opposed, challenged, invalidated or circumvented,
or that the rights granted thereunder will provide proprietary protection or
competitive advantages to the Company. In May 1996, American Cyanamid Company
filed an opposition to the grant of the Company's European patent with claims
directed to chimeric negative strand RNA viruses and to methods of engineering
these viruses to express foreign proteins and antigens. American Cyanamid
Company primarily challenges the breadth of the claims which the Company was
granted. While the Company is responding to the opposition, no assurance can
be given as to the scope of the claims, if any, which the European Patent
Office ultimately will find patentable. Failure of the Company to prevail in
the opposition would impede the Company's ability to prevent competitors from
using this technology in Europe.

The commercial success of Aviron additionally will depend, in part, upon the
Company not infringing patents issued to others. A number of pharmaceutical
companies, biotechnology companies, universities and research institutions
have filed patent applications or received patents in the areas of the
Company's programs. Some of these patent applications or patents may limit the
scope of claims issuing from the Company's patent applications, prevent
certain claims from being issued, or conflict in certain respects with claims
made under the Company's applications.

The Company is aware of pending patent applications that have been filed by
others that may pertain to certain aspects of the Company's programs,
including the Company's influenza vaccine, or to its issued patents or pending
patent applications. The Company is aware of a claim by a third party
regarding inventorship of subject matter claimed in a United States patent
which, along with its related foreign counterpart patents and

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<PAGE>

applications, is licensed to the Company and which is directed to certain
aspects of technology relating to herpes viruses. This claim may also relate
to a pending United States patent application, which is a continuation of the
licensed patent. It is presently unclear whether this claim of inventorship is
valid, and, if valid, it could affect ownership of the subject United States
patent and patent application as well as their foreign counterparts. If
patents have been or are issued to others containing preclusive or conflicting
claims and such claims are ultimately determined to be valid, the Company may
be required to obtain licenses to these patents or to develop or obtain
alternative technology. No assurance can be given that patents have not been
issued, or will not be issued, to third parties that contain preclusive or
conflicting claims with respect to the cold adapted influenza vaccine or any
of the Company's other programs. The Company's breach of an existing license
or failure to obtain a license to technology required to commercialize its
products may have a material adverse effect on the Company's business,
financial condition and results of operations. Litigation, which could result
in substantial costs to the Company, may also be necessary to enforce any
patents issued to the Company or to determine the scope and validity of third-
party proprietary rights. If competitors of the Company prepare and file
patent applications in the United States that claim technology also claimed by
the Company, the Company may have to participate in interference proceedings
declared by the United States Patent and Trademark Office to determine
priority of invention, which could result in substantial cost to the Company,
even if the eventual outcome is favorable to the Company. An adverse outcome
could subject the Company to significant liabilities to third parties and
require the Company to license disputed rights from third parties or to cease
using such technology.

The patent laws of European and certain other foreign countries generally do
not allow for the issuance of patents for methods of treatment of the human
body. To the extent the Company's patent portfolio includes claims for methods
of treating humans, these methods may not be protectable in Europe and certain
other foreign countries.

The Company also relies on trade secrets to protect its technology,
especially where patent protection is not believed to be appropriate or
obtainable. Certain of the Company's licensors also rely on trade secrets to
protect technology which has been licensed to Aviron, and as a result, the
Company is dependent on the efforts of such licensors to protect such trade
secrets. For example, the University of Michigan relies, in part, on trade
secrets to protect the master strains of the cold adapted influenza virus used
by the Company and the NIH relies in part on trade secrets to protect the
master strains of the bPIV-3 virus. Aviron protects its proprietary technology
and processes, in part, by confidentiality agreements or material transfer
agreements with its employees, consultants, collaborators and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or
that the Company's trade secrets or those of its licensors will not otherwise
become known or be independently discovered by competitors. To the extent that
Aviron or its consultants or research collaborators use intellectual property
owned by others in their work for the Company, disputes may also arise as to
the rights in related or resulting know-how and inventions. On July 1, 1996,
Chiron Corporation ("Chiron") filed a complaint against the Company in San
Mateo County, California, Superior Court, alleging that certain of Aviron's
patent applications relating to its EBV program are based on Chiron
proprietary information which was improperly conveyed to Aviron by a former
Chiron employee, and that the Company has engaged in unfair competition. There
has been no discovery to date in this matter. A trial date has been set for
November 1997 in the Superior Court of San Mateo County, California. See "--
Litigation with Chiron Corporation," "-- Lack of Patent Protection of Cold
Adapted Influenza Technology," "Business -- Patents and Proprietary Rights"
and "-- Legal Proceedings."

LACK OF PATENT PROTECTION OF COLD ADAPTED INFLUENZA TECHNOLOGY

The Company has no issued patents on the technology related to its cold
adapted influenza vaccine. The Company's rights to this technology are
substantially based on an exclusive worldwide license of materials and know-
how from the University of Michigan, which owns the master strains from which
the vaccine is derived, and on an exclusive license of know-how and clinical
trial data from the NIH. Neither the University of Michigan nor the NIH rely
on patents for ownership of the rights licensed to Aviron. There can be no
assurance that a third party will not gain access by some means to University
of Michigan master strains,

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<PAGE>

reproduce the Company's cold adapted influenza vaccine or develop another
live-virus influenza vaccine which might be comparable to Aviron's in terms of
safety and effectiveness. See "-- Uncertainty of Protection of Patents and
Proprietary Rights; Dependence on Trade Secrets," "Business -- Patents and
Proprietary Rights."

LITIGATION WITH CHIRON CORPORATION

On July 1, 1996, Chiron filed a complaint against the Company in San Mateo
County, California, Superior Court, alleging that certain of Aviron's patent
applications relating to its EBV program are based on Chiron proprietary
information which was improperly conveyed to Aviron by a former Chiron
employee, and that the Company has engaged in unfair competition. The
complaint seeks unspecified monetary damages and seeks to impose a
constructive trust, for Chiron's benefit, over the affected patent
applications, an exclusive assignment by the Company to Chiron of such patent
applications and an injunction against the Company from disclosing, using or
applying such alleged proprietary information. Aviron believes that the
allegations in the Chiron complaint are without merit and intends to
vigorously defend itself against such action. Aviron does not utilize the
alleged Chiron proprietary information in any of its potential products
currently under development. Even if Chiron were to prevail in this action,
the Company believes that it is uncertain that a
court would grant a constructive trust over the specified patent applications,
which include many claims (including certain rights the Company licensed to
SmithKline Beecham) not relating to the alleged Chiron proprietary technology.
Were a court to grant a constructive trust over such patent applications, it
could adversely impact the Company's agreement with SmithKline Beecham. There
has been no discovery to date in this matter. A trial date has been set for
November 1997 in the Superior Court of San Mateo County, California. There can
be no assurance that Chiron will not ultimately prevail in this action or that
it will not obtain the remedies it is seeking. In addition, the Company
expects that the legal costs incurred in defending itself against this action
could be substantial.

GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS

The production and marketing of the Company's products and its ongoing
research and development activities are subject to extensive regulation by
numerous government authorities in the United States and other countries.
Prior to marketing in the United States, any product developed by the Company
must undergo rigorous preclinical testing and clinical trials and an extensive
regulatory approval process implemented by the FDA under the Food, Drug and
Cosmetic Act. Satisfaction of such regulatory requirements, which includes
demonstrating that the product is both safe and effective, typically takes
several years or more depending upon the type, complexity and novelty of the
product and requires the expenditure of substantial resources. This process
may be more demanding for vaccines intended for use in healthy people compared
to therapeutics used for treatment of people with diseases. Preclinical
studies must be conducted in compliance with the FDA's Good Laboratory
Practice ("GLP") regulations. Clinical testing must meet requirements for
Institutional Review Board ("IRB") oversight and informed consent, as well as
FDA prior review, oversight and Good Clinical Practice ("GCP") regulations.
The Company has limited experience in conducting and managing the clinical
trials necessary to obtain regulatory approval. Furthermore, the Company or
the FDA may suspend clinical trials at any time if either believes that the
subjects participating in such trials are being exposed to unacceptable health
risks.

The Company believes that its vaccine products will be classified by the FDA
as "biologic products," as opposed to "drug products." The steps ordinarily
required before a biologic product may be marketed in the United States
include (a) preclinical testing and clinical trials; (b) the submission to the
FDA of an IND, which must become effective before clinical trials may
commence; (c) adequate and well-controlled clinical trials to establish the
safety and efficacy of the drug; (d) the submission to the FDA of a PLA,
together with an ELA; and (e) FDA approval of the applications, including
approval of all product labeling.

Preclinical testing includes laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. The results of the preclinical tests are
submitted to the FDA as part of an IND and are reviewed by the FDA before the
commencement of clinical trials. Unless the FDA objects to an IND, the IND
will become effective 30 days following its receipt by the FDA. There can be
no assurance that submission of an IND will result in FDA authorization to

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<PAGE>

commence clinical trials or that the lack of an objection means that the FDA
will ultimately approve an application for marketing approval.

Before receiving FDA approval to market a product in accordance with the
above procedures, the Company will have to demonstrate that the product is
safe and effective and represents an improved form of health management
compared to existing approaches. Data obtained from preclinical testing and
clinical trials are susceptible to varying interpretations which could delay,
limit or prevent regulatory approvals. In addition, delays or rejections may
be encountered based upon additional government regulation from future
legislation or administrative action or changes in FDA policy during the
period of product development, clinical trials and FDA regulatory review.
Similar delays may also be encountered in foreign countries. There can be no
assurance that even after such time and expenditures, regulatory approval will
be obtained for any products developed by the Company. If regulatory approval
of a product is granted, such approval will be limited to those specific
segments of the population for which the product is effective, as demonstrated
through clinical trials. Furthermore, approval may entail ongoing requirements
for post-marketing studies. Even if such regulatory approval is obtained, a
marketed product, its manufacturer and its manufacturing facilities are
subject to continual review and periodic inspections. The regulatory standards
for manufacturing are currently being applied stringently by the FDA.
Discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or manufacturer, including
costly recalls or even withdrawal of the product from the market. There can be
no assurance that any product developed by the Company alone or in conjunction
with others will prove to be safe and efficacious in clinical trials and will
meet all of the applicable regulatory requirements needed to receive or
maintain marketing approval.

The Company believes that the approval process for vaccines may be longer
than for therapeutic products, since vaccines are administered to healthy
individuals. In addition, regulatory scrutiny may be particularly intense for
products, such as Aviron's cold-attenuated influenza vaccine, which are
designed to be given to otherwise healthy children.

Outside the United States, the Company's ability to market a product is
contingent upon receiving marketing authorization from the appropriate
regulatory authorities. The requirements governing the conduct of clinical
trials, marketing authorization, pricing and reimbursement vary widely from
country to country. At present, foreign marketing authorizations are applied
for at a national level, although within the European Union (the "EU"),
procedures are available to companies wishing to market a product in more than
one EU member state. If the regulatory authorities are satisfied that adequate
evidence of safety, quality and efficacy has been presented, a marketing
authorization will be granted. This foreign regulatory approval process
includes all of the risks associated with FDA approval set forth above. See
"Business -- Government Regulation."

UNCERTAINTY OF MARKET ACCEPTANCE

Even if the requisite regulatory approvals are obtained for the Company's
potential products, uncertainty exists as to whether such products will be
accepted in United States or foreign markets. The Company believes, for
example, that widespread use of the Company's proposed vaccines in the United
States is unlikely without positive recommendations from the Advisory
Committee on Immunization Practices (the "ACIP") of the CDC, the American
Academy of Pediatrics or the American College of Physicians. There can be no
assurance that such authorities will recommend the use of the Company's
proposed products. The lack of such recommendations would have a material
adverse effect on the Company's business, financial condition and results of
operations.

A number of additional factors may affect the rate and overall market
acceptance of Aviron's cold adapted influenza vaccine and any other products
which may be developed by the Company, including the safety and efficacy
results in the Company's clinical trials, the rate of adoption of Aviron's
vaccines by health care practitioners, the rate of vaccine acceptance by the
target population, the timing of market entry relative to competitive
products, the availability of alternative technologies, the price of the
Company's products relative to alternative technologies, the means and
frequency of administration, the availability of third-party reimbursement and
the extent of marketing and sales efforts by the Company, collaborative
partners and third-party distributors or agents retained by the Company. Side
effects or unfavorable publicity concerning

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<PAGE>

Aviron's products or any product incorporating live virus vaccines could have
an adverse effect on the Company's ability to obtain physician, patient or
third-party payor acceptance and efforts to sell the Company's products. The
Company's current formulation of the cold adapted influenza vaccine for
clinical trials requires frozen storage, which may adversely affect market
acceptance in certain foreign countries where adequate freezer capacity is not
commonly available. There can be no assurance that physicians, patients or
third-party payors will accept new live virus vaccine products or any of the
Company's products as readily as other types of vaccines, or at all. See
"Business -- Vaccine Products Under Development."

LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES

The Company currently has no sales, marketing or distribution capability or
experience. To market any products, Aviron must either obtain the assistance
of a third party with a suitable distribution system, develop a direct sales
and marketing staff of its own or combine the efforts of a third party with
its own efforts. Other than SmithKline Beecham and Sang-A, the Company to date
has no agreements for marketing or distributing its potential products.

The success and commercialization of the Company's products is dependent in
part upon the ability of the Company to maintain and enter into additional
collaborative agreements with corporate partners for the development, testing
and marketing of certain of its vaccines and upon the ability of these third
parties to perform their responsibilities. The amount and timing of resources
devoted to these activities is not within the control of the Company. There
can be no assurance that any such agreements or arrangements will be available
on terms acceptable to the Company, if at all, that such third parties would
perform their obligations as expected, or that any revenue would be derived
from such arrangements. If Aviron is not able to enter into such agreements or
arrangements, it could encounter delays in introducing its products into the
market or be forced to limit the scope of its commercialization activities. If
the Company were to market products directly, significant additional
expenditures, management resources and time would be required to develop a
sales and marketing staff within the Company. In addition, the Company would
also be competing with other companies that currently have experienced and
well-funded marketing and sales operations. There can be no assurance that the
Company will be able to establish its own sales and marketing force or that
any such force, if established, would be successful in gaining market
acceptance for any products that may be developed by the Company. See
"Business -- Marketing and Sales" and "-- Collaborative Agreements."

INTENSE COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE

The Company operates in a rapidly evolving field. Any product developed by
the Company would compete with existing and new drugs and vaccines being
created by pharmaceutical, biopharmaceutical and biotechnology companies. If
the Company were able to successfully develop its vaccines, it would be
competing with larger companies that have already introduced vaccines and have
significantly greater marketing, sales, manufacturing, financial and
managerial resources. For example, with respect to its cold adapted influenza
vaccine, the Company will be competing against larger companies such as
Pasteur Merieux Connaught, Wyeth-Ayerst, Parke-Davis Group ("Parke-Davis"), a
subsidiary of Warner-Lambert Company, and Evans, the supplier of the Company's
cold adapted influenza vaccine. Each of these companies sells the injectable
inactivated influenza vaccine in the United States, has significantly greater
financial resources than Aviron and has established marketing and distribution
channels for such products. In addition the Company is aware of improved
inactivated injectable influenza vaccines being developed by Chiron (Chiron
Biocine Division); intranasally administered inactivated vaccines by Swiss
Serum and Vaccine Institute, Biovector Therapeutics, S.A. and Viral Research
Institute; a "naked DNA" vaccine by Vical, Inc.; and a commercially available
cold adapted influenza vaccine in Russia. The Company is also aware of several
companies that are marketing or are in late-stage development of products to
prevent CMV or HSV disease, including Glaxo Wellcome plc ("Glaxo"), and a cold
adapted PIV-3 vaccine developed with NIH support which is licensed to Wyeth-
Ayerst.

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<PAGE>

New developments are expected to continue in the pharmaceutical,
biopharmaceutical and biotechnology industries and in academia, government
agencies and other research organizations. Other companies may succeed in
developing products that are safer, more effective or less costly than any
that may be developed by the Company. Such companies may also be more
effective than the Company in the production and marketing of their products.
Furthermore, rapid technological development by competitors may result in the
Company's products becoming obsolete before the Company is able to recover its
research, development or commercialization expenses incurred in connection
with any such product. Many potential competitors have substantially greater
financial, technical, marketing and sales resources than the Company. Some of
these companies also have considerable experience in preclinical testing,
clinical trials and other regulatory approval procedures. Moreover, certain
academic institutions, government agencies and other research organizations
are conducting research in areas in which the Company is working. These
institutions are becoming increasingly aware of the commercial value of their
findings and are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for the use of technology that
they have developed. These institutions may also market competitive commercial
products on their own or through joint ventures.

Aviron believes that competition in the markets it is addressing will
continue to be intense. The vaccine industry is characterized by intense price
competition, and the Company anticipates that it will face this and other
forms of competition. There can be no assurance that pharmaceutical,
biopharmaceutical and biotechnology companies will not develop more effective
products than those of the Company or will not market and sell their products
more effectively than the Company, which would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Competition."

DEPENDENCE ON COLLABORATIVE AGREEMENTS

The Company's strategy for the development, clinical trials, manufacturing
and commercialization of certain of its products includes maintaining and
entering into various collaborations with corporate partners, licensors,
licensees and others. There can be no assurance that the Company will be able
to maintain existing collaborative agreements, negotiate collaborative
arrangements in the future on acceptable terms, if at all, or that any such
collaborative arrangements will be successful. To the extent that the Company
is not able to maintain or establish such arrangements, the Company would be
required to undertake product development and commercialization activities at
its own expense, which would increase the Company's capital requirements or
require the Company to limit the scope of its development and
commercialization activities. In addition, the Company may encounter
significant delays in introducing its products into certain markets or find
that the development, manufacture or sale of its products in such markets is
adversely affected by the absence of such collaborative agreements.

In October 1995, the Company signed an agreement with SmithKline Beecham
defining a collaboration on the Company's EBV vaccine technology (the "SB
Agreement"). Under the terms of the SB Agreement, the Company granted
SmithKline Beecham an exclusive license to produce, use and sell EBV vaccines
incorporating the Company's technology for prophylactic and therapeutic uses
on a worldwide basis, except in South and North Korea (together, "Korea").
SmithKline Beecham made an initial upfront payment to the Company and agreed
to make additional payments upon the achievement of certain product
development milestones. No assurance can be given, however, that the Company
will receive any additional payments from SmithKline Beecham or that
SmithKline Beecham will not terminate its agreement with the Company. The SB
Agreement may be terminated by SmithKline Beecham with respect to any country
at any time. In May 1995, the Company entered into a Development and License
Agreement with Sang-A. The Company granted to Sang-A exclusive clinical
development, manufacturing and marketing rights in Korea for specified
products developed by Aviron, including vaccines for influenza (cold adapted
and recombinant), EBV, CMV, HSV-2 and RSV. Pursuant to its agreement, Sang-A
is required to make payments to the Company upon the Company's meeting certain
regulatory milestones for each product in Korea and will pay a royalty to the
Company on net sales of any such products in Korea. No assurance can be given,
however, that the Company will receive any payments from Sang-A or that Sang-A
will not terminate its agreement with the Company.

16
<PAGE>

ARCH Development Corporation ("ARCH"), an Illinois not-for-profit
corporation associated with the University of Chicago, has recently asserted
an interpretation of the financial terms of its agreement with the Company,
relating to the license by Aviron of its EBV technology to SmithKline Beecham,
which would require the Company to pay ARCH one-half of any future or past
payments (including sub-license fees and milestone payments) received by
Aviron under its agreement with SmithKline Beecham. The Company disputes
ARCH's interpretation of the financial terms of the agreement. No assurance
can be given, however, that the Company's interpretation will prevail. Failure
of the Company to prevail could have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Business -- Collaborative Agreements -- SmithKline Beecham Biologicals S.A."
and --ARCH Development Corporation."

In January 1997, the Hanbo Group, the conglomerate that owns Sang-A,
declared bankruptcy. The Company is unable to predict what, if any, effect the
bankruptcy of the Hanbo Group will have on Hanbo Group subsidiaries, including
Sang-A. The Company may be required to seek an alternative partner to market
its potential products in Korea. There can be no assurance that the Company
will be able to enter into an agreement with any such alternative partner on
acceptable terms, if at all. See "Business -- Collaborative Agreements --
Sang-A Pharm. Co., Ltd."

The Company cannot control the amount and timing of resources which its
collaborative partners devote to the Company's programs or potential products,
which may vary because of factors unrelated to the potential products. If any
of the Company's collaborative partners breach or terminate their agreements
with the Company or otherwise fail to conduct their collaborative activities
in a timely manner, the preclinical or clinical development or
commercialization of product candidates or research programs will be delayed,
and the Company would be required to devote additional resources to product
development and commercialization, or terminate certain development programs.
These relationships generally may be terminated at the discretion of the
Company's collaborative partners, in some cases with only limited notice to
the Company. The termination of collaborative arrangements could have a
material adverse effect on the Company's business, financial condition and
results of operations. There also can be no assurance that disputes will not
arise in the future with respect to the ownership of rights to any technology
developed with third parties. These and other possible disagreements between
collaborators and the Company could lead to delays in the collaborative
research, development or commercialization of certain product candidates, or
could result in litigation or arbitration, which would be time consuming and
expensive, and would have a material adverse effect on the Company's business,
financial condition and results of operations.

In addition, Aviron's collaborative partners may develop, either alone or
with others, products that compete with the development and marketing of the
Company's products. Competing products of the Company's collaborative partners
may result in their withdrawal of support with respect to all or a portion of
the Company's technology, which would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Collaborative Agreements."

VOLATILITY OF COMMON STOCK PRICE

The market prices for securities of pharmaceutical, biopharmaceutical and
biotechnology companies have historically been highly volatile. The market
from time to time experiences significant price and volume fluctuations that
are unrelated to the operating performance of particular companies. In
addition, factors such as fluctuations in the Company's operating results,
future sales of Common Stock, announcements of technological innovations or
new therapeutic products by the Company or its competitors, announcements
regarding collaborative agreements, clinical trial results, government
regulation, developments in patent or other proprietary rights, public concern
as to the safety of drugs developed by the Company or others, changes in
reimbursement policies, comments made by securities analysts and general
market conditions can have an adverse effect on the market price of the Common
Stock. In particular, the realization of any of the risks described in these
"Risk Factors" could have a significant and adverse impact on such market
price. See "Price Range of Common Stock and Dividend Policy."

17
<PAGE>

POTENTIAL ADVERSE EFFECTS OF SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial amount of Common Stock in the public market following
this offering could adversely affect the market price for the Company's Common
Stock. Upon completion of this offering, based on shares outstanding as of
June 30, 1997 and assuming the sale of all shares offered hereby, the Company
will have 15,637,880 shares of Common Stock outstanding. Of such shares
outstanding, approximately 11,019,224 shares, including the 2,400,000 shares
offered hereby (approximately 11,379,224 and 2,760,000 shares, respectively,
if the Underwriters' overallotment option is exercised in full), will be
freely tradable without restriction or further registration under the
Securities Act, except for shares subject to agreements not to sell or
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"). The
remaining approximately 4,618,656 shares of Common Stock outstanding upon
completion of this offering are "restricted securities" as that term is
defined in Rule 144, and may be sold under Rule 144 subject to the holding
period, volume limitations and other restrictions under Rule 144. As a result
of lock-up agreements between certain securityholders and the representatives
of the Underwriters, approximately 1,811,754 shares and 2,314,286 shares of
the Company's restricted Common Stock may not be sold for a period of 90 days
and 30 days, respectively, from the date of this Prospectus. Robertson,
Stephens & Company may, in its sole discretion and at any time without notice,
release all or any portion of the shares subject to lock-up agreements.
Additional shares held by existing shareholders will become eligible for sale
from time to time in the future. After this offering, the holders of
approximately 5,726,764 shares of Common Stock and warrants to purchase
approximately 36,876 shares of Common Stock will be entitled to certain demand
and piggyback registration rights with respect to registration of such shares
under the Act. In addition, the Company is obligated to register 1,714,286
shares sold in a private placement transaction for resale, as soon as
reasonably practicable after November 5, 1997. If such holders, by exercising
their demand or piggyback registration rights, cause a large number of
securities to be registered and sold in the public market, such sales could
have an adverse effect on the market price for the Company's Common Stock. If
the Company were to include in a Company-initiated registration shares held by
such holders pursuant to the exercise of their piggyback registration rights,
such sales could have an adverse effect on the Company's ability to raise
needed capital. See "Shares Eligible for Future Sale."

RISK OF PRODUCT LIABILITY; UNCERTAINTY OF AVAILABILITY OF INSURANCE

The Company's business exposes it to potential product liability risks that
are inherent in the testing, manufacturing and marketing of vaccines. The
Company has obtained clinical trial liability insurance for its clinical
trials, but there can be no assurance that it will be able to maintain
adequate insurance for its clinical trials. The Company also intends to seek
product liability insurance in the future for products approved for marketing,
if any. However, no assurance can be given that the Company will be able to
acquire or maintain insurance or that insurance can be acquired or maintained
at a reasonable cost or in sufficient amounts to protect the Company. There
can be no assurance that insurance coverage and the resources of the Company
would be sufficient to satisfy any liability resulting from product liability
claims. A successful product liability claim or series of claims brought
against the Company could have a material adverse effect on its business,
financial condition and results of operations. The Company intends to seek
inclusion of certain of its products in the United States National Vaccine
Injury Compensation Program, a no-fault compensation program for claims
against vaccine manufacturers, which administers a trust funded by excise
taxes on sales of certain recommended childhood vaccines. There can be no
assurance that this government program will continue or that the Company's
proposed vaccines will be included in the program.

UNCERTAINTY RELATED TO PHARMACEUTICAL PRICING AND REIMBURSEMENT

Political, economic and regulatory influences are subjecting the health care
industry in the United States to fundamental change. Recent initiatives to
reduce the federal deficit and to reform health care delivery are increasing
cost-containment efforts. The Company anticipates that Congress, state
legislatures and the private sector will continue to review and assess
alternative benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, the

18
<PAGE>

creation of large insurance purchasing groups, price controls on
pharmaceuticals and other fundamental changes to the health care delivery
system. Any such proposed or actual changes could cause the Company or its
collaborative partners to limit or eliminate spending on development projects.
Legislative debate is expected to continue in the future, and market forces
are expected to demand reduced costs. Aviron cannot predict what effect the
adoption of any federal or state health care reform measures or future private
sector reforms may have on its business.

In both domestic and foreign markets, sales of the Company's proposed
vaccines will depend in part upon the availability of reimbursement from
third-party payors, such as government health administration authorities,
managed care providers, private health insurers and other organizations. In
addition, other third-party payors are increasingly challenging the price and
cost effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
There can be no assurance that the Company's proposed products will be
considered cost effective or that adequate third-party reimbursement will be
available to enable Aviron to maintain price levels sufficient to realize an
appropriate return on its investment in product development. Legislation and
regulations affecting the pricing of pharmaceuticals may change before the
Company's proposed products are approved for marketing. Adoption of such
legislation could further limit reimbursement for medical products. If
adequate coverage and reimbursement levels are not provided by the government
and third-party payors for the Company's potential products, the market
acceptance of these products would be adversely affected, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.

NEED TO ATTRACT AND RETAIN KEY EMPLOYEES AND CONSULTANTS

The Company is highly dependent on the principal members of its scientific
and management staff. In addition, the Company relies on consultants and
advisors, including its scientific advisors, to assist the Company in
formulating its research and development strategy. Attracting and retaining
qualified personnel, consultants and advisors will be critical to the
Company's success. To pursue its product development and marketing plans, the
Company will be required to hire additional qualified scientific personnel to
perform research and development, as well as personnel with expertise in
conducting clinical trials, government regulation, manufacturing, marketing
and sales. Expansion in the areas of product development, marketing and sales
is also expected to require the addition of management personnel and the
development of additional expertise by existing management personnel. The
Company faces competition for qualified individuals from numerous
pharmaceutical, biopharmaceutical and biotechnology companies, universities
and other research institutions. There can be no assurance that the Company
will be able to attract and retain such individuals.

In addition, a portion of the Company's research and development is
conducted under sponsored research programs with several universities and
research institutions. The Company depends on the availability of a principal
investigator for each such program, and the Company cannot assure that these
individuals or their research staffs will be available to conduct research and
development for Aviron. The Company's academic collaborators are not employees
of the Company. As a result, the Company has limited control over their
activities and can expect that only limited amounts of their time will be
dedicated to Company activities. The Company's academic collaborators may have
relationships with other commercial entities, some of which could compete with
the Company. See "Business -- Scientific Advisory Board" and "Management."

RISKS ASSOCIATED WITH HAZARDOUS MATERIALS

The Company's research and development involves the controlled use of
hazardous materials, chemicals, various radioactive substances and viruses.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company and could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company may incur substantial costs to comply with
environmental regulations if the Company develops manufacturing capacity.

19
<PAGE>

DILUTION; ABSENCE OF DIVIDENDS

The public offering price is substantially higher than the net tangible book
value per share of the Company's Common Stock. Investors purchasing shares of
Common Stock in this offering will therefore incur immediate, substantial
dilution of approximately $21.67 per share. In addition, investors purchasing
shares of Common Stock in this offering will incur additional dilution to the
extent outstanding options and warrants are exercised. Under an agreement with
the University of Michigan, the Company is obligated to issue a warrant to
purchase shares of Common Stock at an exercise price of $10.00 per share, for
a number of shares to be based on 1.25% of the Common Stock outstanding on the
date, if any, of the first commercial sale of the Company's cold adapted
intranasal influenza vaccine. Investors will incur additional dilution to the
extent this warrant is issued and exercised. See "Dilution." The Company has
not paid any dividends on its Common Stock since inception and does not
anticipate paying any cash dividends in the foreseeable future. See "Dividend
Policy."

ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND CERTAIN CHARTER PROVISIONS

The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the Company's
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. While the Company has no present
intention to issue shares of Preferred Stock, such issuance, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. In addition, the Company is subject to the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law, which prohibits the
Company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. The application of Section 203
could have the effect of delaying or preventing a change of control of the
Company. The Company's Certificate of Incorporation provides for staggered
terms for the members of the Board of Directors. The staggered Board of
Directors and certain other provisions of the Company's Certificate of
Incorporation and Bylaws may have the effect of delaying or preventing changes
in control or management of the Company, which could adversely affect the
market price of the Company's Common Stock. See "Description of Capital
Stock -- Delaware Anti-Takeover Law and Certain Charter Provisions."

20
<PAGE>

USE OF PROCEEDS

The estimated net proceeds to the Company from the sale of the 2,400,000
shares of Common Stock offered hereby are $60.5 million ($69.6 million if the
Underwriters' over-allotment option is exercised in full), at a public
offering price of $27.00 per share, after deducting the estimated offering
expenses payable by the Company.

The Company anticipates using approximately $30.0 million of the net
proceeds from this offering for clinical trials, manufacturing and marketing
for its cold adapted influenza vaccine, and $10.0 million for research and
development, preclinical testing and clinical trials for its other vaccine
programs. The Company will have broad discretion over the remaining proceeds,
which will be used for working capital and general corporate purposes. The
amounts and timing of the expenditures for these purposes may vary
significantly depending on numerous factors, such as the status of the
Company's research and development efforts, the regulatory approval process,
technological advances, determinations as to commercial potential, the terms
of collaborative agreements entered into by the Company, the status of
competitive products and the possibility of the Company's construction of a
commercial manufacturing facility for its potential products. In addition, the
Company's research and development expenditures will vary as projects are
added, extended or terminated and as a result of variations in funding from
existing or future collaborative agreements. The Company may also use a
portion of such net proceeds to acquire or invest in businesses, products and
technologies that are complementary to those of the Company, although no such
acquisitions are planned or being negotiated as of the date of this
Prospectus, and no portion of the net proceeds has been allocated for any
specific acquisition.

The Company believes that its available cash, cash equivalents, short-term
investments and revenues from existing collaborations, together with the net
proceeds of this offering and the interest thereon, will be sufficient to meet
its capital requirements at least through mid-1999. Pending application of the
net proceeds as described above, the Company intends to invest the net
proceeds of this offering in short-term, interest-bearing, investment-grade
securities.

DIVIDEND POLICY

The Company has never paid cash dividends on its Common Stock. The Company
presently intends to retain earnings, if any, for use in the operation and
expansion of its business, and therefore does not anticipate paying any cash
dividends in the foreseeable future.

21
<PAGE>

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "AVIR." Public trading of the Common Stock commenced on November 5,
1996. Prior to that, there was no public market for the Common Stock. The
following table sets forth for the periods indicated the high and low price
per share of the Common Stock on the Nasdaq National Market. These prices
represent quotations among dealers without adjustments for retail mark-ups,
mark-downs or commissions, and may not represent actual transactions.

<TABLE>
<CAPTION>
1996 HIGH LOW
---- ------- ------
<S> <C> <C>
Fourth Quarter.......................................... $ 9 $6 7/8
<CAPTION>
1997
----
<S> <C> <C>
First Quarter........................................... 12 3/4 6 3/4
Second Quarter.......................................... 15 1/4 8
Third Quarter (through August 12, 1997)................. 32 3/4 11
</TABLE>

As of June 30, 1997, there were 178 holders of record of the Company's
Common Stock. On August 12, 1997, the last sale price reported on the Nasdaq
National Market for the Company's Common Stock was $27.75 per share.

22
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
30, 1997, and as adjusted to reflect the receipt of the sale of 2,400,000
shares of Common Stock offered hereby at the public offering price of $27.00
per share and after application of the estimated net proceeds therefrom, after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company.

<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------
ACTUAL AS ADJUSTED
------- -----------
(in thousands)
<S> <C> <C> <C>
Capital lease obligations, noncurrent................. $ 737 $ 737
------- -------
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized, issuable in series; none issued and
outstanding......................................... -- --
Common Stock, $0.001 par value; 30,000,000 shares
authorized;
13,237,880 shares issued and outstanding, and
15,637,880 shares issued and outstanding as adjusted
(1)................................................. 13 15
Additional paid-in capital........................... 74,511 134,971
Notes receivable from stockholders................... (135) (135)
Deferred compensation................................ (890) (890)
Accumulated deficit.................................. (50,556) (50,556)
------- -------
Total stockholders' equity.......................... 22,943 83,405
------- -------
Total capitalization............................... $23,680 $84,142
======= =======
</TABLE>
- --------

(1) Excludes (i) 795,198 shares of Common Stock issuable upon exercise of
options outstanding as of June 30, 1997 at a weighted average exercise
price of approximately $4.14 per share, (ii) an aggregate of 1,132,354
shares reserved for future grants or purchases pursuant to the Company's
1996 Equity Incentive Plan, Employee Stock Purchase Plan and Non-Employee
Director Stock Option Plan, and (iii) 125,923 shares issuable upon
exercise of warrants outstanding as of June 30, 1997 at a weighted average
exercise price of $7.48 per share.

23
<PAGE>

DILUTION

The net tangible book value of the Company, as of June 30, 1997 was
$22,943,000 or $1.73 per share of Common Stock. Net tangible book value per
share is determined by dividing the net tangible book value (tangible assets
less total liabilities) of the Company by the number of shares of Common Stock
outstanding at that date. After giving effect to the receipt of the estimated
net proceeds from the sale of the 2,400,000 shares of Common Stock being
offered by the Company hereby, at an offering price of $27.00 per share, the
net tangible book value of the Company as of June 30, 1997, would have been
$83,405,000 or $5.33 per share. This represents an immediate increase in such
net tangible book value of $3.60 per share to existing stockholders and an
immediate dilution of $21.67 per share to new public investors. The following
table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Public offering price per share................................... $27.00
Net tangible book value before the Offering..................... $1.73
Increase attributable to new investors.......................... 3.60
-----
Net tangible book value after the Offering........................ 5.33
------
Dilution to new investors......................................... $21.67
======
</TABLE>

The following table summarizes, on a pro forma basis, as of June 30, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders and by the new investors purchasing shares in this
offering and before deducting underwriting discounts and estimated offering
expenses:

<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
------------------ -------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 13,237,880 84.7% $ 75,717,000 53.9% $ 5.72
New investors................... 2,400,000 15.3 64,800,000 46.1 27.00
---------- ----- ------------ -----
Total......................... 15,637,880 100.0% $140,517,000 100.0%
</TABLE>

The foregoing table excludes (i) 795,198 shares of Common Stock issuable
upon exercise of options outstanding as of June 30, 1997, at a weighted
average exercise price of approximately $4.14 per share, (ii) an aggregate of
1,132,354 shares reserved for future grants or purchases pursuant to the
Company's 1996 Equity Incentive Plan, Employee Stock Purchase Plan and Non-
Employee Director Stock Option Plan and (iii) 125,923 shares issuable upon
exercise of warrants outstanding as of June 30, 1997 at a weighted average
exercise price of $7.48 per share. Under an agreement with the University of
Michigan, the Company is obligated to issue a warrant to purchase shares of
Common Stock at an exercise price of $10.00 per share, for a number of shares
to be based on 1.25% of the Common Stock outstanding on the date, if any, of
the first commercial sale of its cold adapted intranasal influenza vaccine.
Investors will occur additional dilution to the extent this warrant is issued
and exercised.

24
<PAGE>

SELECTED FINANCIAL DATA

The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Financial Statements and Notes thereto included
elsewhere in this Prospectus. The statement of operations data for the years
ended December 31, 1994, 1995 and 1996, and the balance sheet data at December
31, 1995 and 1996, are derived from the financial statements of the Company
included elsewhere in this Prospectus which have been audited by Ernst & Young
LLP, independent auditors, whose report is included elsewhere in this
Prospectus. The statement of operations data for the period from April 15,
1992 (date of inception) to December 31, 1992 and for the year ended December
31, 1993, and the balance sheet data as of December 31, 1992, 1993 and 1994,
are derived from audited financial statements not included herein. Financial
data as of June 30, 1997 and for the six-month periods ended June 30, 1996 and
1997 are derived from unaudited financial statements included elsewhere
herein, and, in the opinion of management, include all normal recurring
adjustments that the Company considers necessary for a fair presentation of
its financial position and results of operations for such periods. The results
for the interim periods are not necessarily indicative of results to be
expected for any future period. The Company has not declared or paid cash
dividends on its Common Stock since inception and does not intend to pay any
cash dividends in the foreseeable future.

<TABLE>
<CAPTION>
PERIOD FROM
APRIL 15, 1992 SIX MONTHS ENDED
(DATE OF INCEPTION) YEAR ENDED DECEMBER 31, JUNE 30,
TO DECEMBER 31, ------------------------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- -------- -------- ------- --------
<CAPTION>
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues.......... $ -- $ -- $ -- $ 1,707 $ 1,625 $ 375 $ 414
Operating expenses:
Research and
development........... 320 2,073 4,216 10,220 14,997 6,333 8,897
General and
administrative........ 470 1,874 2,493 3,252 4,595 2,275 2,621
------ ------- ------- -------- -------- ------- --------
Total operating
expenses............ 790 3,947 6,709 13,472 19,592 8,608 11,518
------ ------- ------- -------- -------- ------- --------
Loss from operations.... (790) (3,947) (6,709) (11,765) (17,967) (8,233) (11,104)
Interest income, net of
interest expense....... 37 175 207 362 466 318 479
------ ------- ------- -------- -------- ------- --------
Net loss................ $ (753) $(3,772) $(6,502) $(11,403) $(17,501) $(7,915) $(10,625)
====== ======= ======= ======== ======== ======= ========
Net loss per share...... $ (0.86)
========
Shares used in computing
net loss per share..... 12,384
Pro forma net loss per
share (1).............. $ (1.24) $ (1.84) $ (0.86)
======== ======== =======
Shares used in computing
pro forma net loss per
share (1).............. 9,165 9,528 9,205
<CAPTION>
DECEMBER 31,
-------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------------------- ------- ------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments............ $1,492 $12,410 $ 6,449 $ 17,819 $ 17,872 $22,326
Working capital......... 1,355 12,155 5,877 16,775 16,411 21,242
Total assets............ 1,901 13,206 7,789 19,878 21,592 25,995
Capital lease
obligations,
noncurrent............. -- -- 750 618 871 737
Accumulated deficit..... (753) (4,525) (11,060) (22,444) (39,935) (50,556)
Total stockholders'
equity................. 1,722 12,893 6,362 17,537 17,947 22,943
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
method used to determine the number of shares used to compute per share
amounts.

25
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Since its inception in April 1992, Aviron has devoted substantially all of
its resources to its research and development programs. To date, Aviron has
not generated any revenues from the sale of products and does not expect to
generate any such revenues for at least several years, if at all. Aviron has
incurred cumulative net losses of approximately $50.6 million through June 30,
1997, and it expects to incur increasing operating losses for a number of
years.

Aviron has financed its operations through proceeds from private placements
of Preferred Stock, an initial public offering of Common Stock, a private
placement of Common Stock, revenue from its collaborative agreements,
including reimbursement of certain of Aviron's research and development
expenses, equipment lease financing and investment income earned on cash
balances and short-term investments.

The Company expects its research and development expenditures to increase
substantially over the next several years as the Company expands its research
and development efforts and preclinical testing and clinical trials with
respect to certain of its programs. In addition, general and administrative
expenses are expected to continue to increase as the Company expands its
operations and incurs the additional expenses associated with preparing to
market the cold adapted influenza vaccine.

In October 1995, the Company signed an agreement with SmithKline Beecham
defining a collaboration on the Company's EBV vaccine technology (the "SB
Agreement"). Under the terms of the SB Agreement, the Company granted
SmithKline Beecham an exclusive license to produce, use and sell EBV vaccines
incorporating the Company's technology for prophylactic and therapeutic uses
on a worldwide basis, except in South and North Korea (together, "Korea"). The
Company has retained the right to co-distribute a monovalent formulation of
the vaccine in certain markets in the United States and to have SmithKline
Beecham supply such vaccine. SmithKline Beecham has agreed to fund research
and development at the Company related to the EBV vaccine, in specified
minimum amounts, during the first two years of the SB Agreement. SmithKline
Beecham made an initial upfront payment to the Company and agreed to make
additional payments upon the achievement of certain product development
milestones. The Company is entitled to royalties from SmithKline Beecham based
on any net sales of the vaccine. No assurance can be given, however, that the
Company will receive any additional payments from SmithKline Beecham or that
SmithKline Beecham will not terminate its agreement with the Company. The
licensor of the technology underlying the SB Agreement has recently notified
the Company that it believes it is entitled to a one-half of the proceeds from
this collaboration. See "Business -- Collaborative Agreements."

In May 1995, the Company entered into a Development and License Agreement
with Sang-A. The Company granted to Sang-A exclusive clinical development,
manufacturing and marketing rights in Korea for specified products developed
by Aviron, including vaccines for influenza (cold adapted and recombinant),
EBV, CMV, HSV-2 and RSV. However, the Company is under no obligation to
develop any product. Sang-A also will make payments to the Company upon the
Company's meeting certain regulatory milestones for each product in Korea and
will pay a royalty to the Company on net sales of any such products in Korea.
No assurance can be given, however, that the Company will receive any payments
from Sang-A or that Sang-A will not terminate its agreement with the Company.
In January 1997, the Hanbo Group, the conglomerate that owns Sang-A, declared
bankruptcy. The Company is unable to predict what, if any, effect the
bankruptcy of the Hanbo Group will have on the Company's agreement with Sang-
A. See "Business-- Collaborative Agreements."

On July 1, 1996, Chiron filed a complaint against the Company alleging
misappropriation of trade secrets. The Company believes that the allegations
in the complaint are without merit and intends to defend itself vigorously
against such action. However, the Company expects that the legal costs
incurred in defending itself

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against this action could be substantial. There has been no discovery to date
in this matter. A trial date has been set in November 1997 in the Superior
Court of San Mateo County, California. See "Business -- Legal Proceedings" and
"Risk Factors -- Litigation with Chiron Corporation."

The Company currently is evaluating the costs and benefits of developing
internal manufacturing capabilities or continuing to contract with third-party
manufacturers. In April 1996, the Company completed construction of a pilot
manufacturing facility funded through its existing capital lease line of
credit. However, if the Company decides to establish its own commercial
manufacturing facility, it would require a significant amount of funds. In
April 1997, the Company entered into an agreement with Evans for the
commercial manufacture of the Company's live cold adapted influenza vaccine
until December 31, 2000. See "Business-- Manufacturing."

The Company's business is subject to significant risks, including but not
limited to the risks inherent in its research and development efforts,
including preclinical testing and clinical trials, uncertainties associated
both with obtaining and enforcing its patents and with the patent rights of
others, the lengthy, expensive and uncertain process of seeking regulatory
approvals, uncertainties regarding government reforms and product pricing and
reimbursement levels, technological change and competition, manufacturing
uncertainties and dependence on third parties. Even if the Company's product
candidates appear promising at an early stage of development, they may not
reach the market for numerous reasons. Such reasons include the possibilities
that the products will be found unsafe or ineffective during clinical trials,
will fail to receive necessary regulatory approvals, will be difficult to
manufacture on a large scale, will be uneconomical to market or will be
precluded from commercialization by proprietary rights of third parties.

RESULTS OF OPERATIONS

Six Months Ended June 30, 1997 and 1996

Revenues

The Company earned $414,000 in revenue for the six months ended June 30,
1997, compared to $375,000 for the six months ended June 30, 1996. The revenue
for both years resulted from research support payments due to the Company
under its license and development agreement with SmithKline Beecham.

Operating Expenses

Research and development expenses increased 40% to $8.9 million in the six
months ended June 30, 1997, from $6.3 million for the six months ended June
30, 1996. These increases were primarily due to increases in research and
development staffing, expenses associated with clinical trials of the
Company's cold adapted influenza vaccine and preclinical testing associated
with other programs.

General and administrative expenses increased 15% to $2.6 million in the six
months ended June 30, 1997, from $2.3 million for the six months ended June
30, 1996. These increases were incurred to support the Company's expanded
research and development activities, and to fund patent and legal expenses and
corporate development activities.

Years Ended December 31, 1996 and 1995

Revenues

Total revenue for the year ended December 31, 1996 was $1.6 million,
compared to $1.7 million for the year ended December 31, 1995. Revenues in
both years resulted primarily from reimbursement for contract research from
SmithKline Beecham.

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Operating Expenses

Research and development expenses increased 47% to $15.0 million in the year
ended December 31, 1996 from $10.2 million for the year ended December 31,
1995. Included in research and development expenses for the year ended
December 31, 1995 is a one-time charge of $1.6 million relating to Aviron's
agreement with the University of Michigan. Without the one-time charge,
research and development expenses increased 74% between the year ended
December 31, 1996 and 1995. These increases were primarily due to increases in
research and development staffing, expenses associated with clinical trials of
the Company's cold adapted influenza vaccine and preclinical testing
associated with other programs.

General and administrative expenses increased 41% to $4.6 million in the
year ended December 31, 1996 from $3.3 million for the year ended December 31,
1995. These increases were incurred to support the Company's expanded research
and development facilities, patent and legal expenses, its initial public
offering of Common Stock and corporate development activities.

Net Interest Income

The Company's net interest income increased to $466,000 in the year ended
December 31, 1996, from $362,000 in the year ended December 31, 1995. The
increase in interest income reflects the effects of the Company's changing
cash and short term investment balances.

Net Operating Loss Carryforward

As of December 31, 1996, the Company had a federal net operating loss
carryforward of approximately $37.7 million available to offset future taxable
income, if any. The net operating loss carryforward will expire at various
dates beginning from 2007 through 2011, if not utilized. Utilization of the
net operating losses and credits may be subject to substantial annual
limitation due to the "change in ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions. The annual limitation may result in
the expiration of net operating losses and credits before utilization. See
Note 8 of Notes to Financial Statements.

Years Ended December 31, 1995 and 1994

Revenues

Total revenue for 1995 was $1.7 million, and no revenue was earned in the
year ended December 31, 1994. Revenue in the year ended December 31, 1995
resulted primarily from the Company's license and development agreement with
SmithKline Beecham. See "Business -- Collaborative Agreements -- SmithKline
Beecham Biologicals S.A."

Operating Expenses

Research and development expenses increased 142% to $10.2 million in the
year ended December 31, 1995 from $4.2 million in the year ended December 31,
1994. These increases were primarily due to increases in research and
development staffing, licensing fees (including the one-time charge relating
to Aviron's agreement with the University of Michigan discussed above), and
expenses associated primarily with clinical trials of its cold adapted
influenza vaccine and preclinical testing associated with the herpes simplex
virus program. General and administrative expenses increased 30% to $3.3
million in the year ended December 31, 1995 from $2.5 million in the year
ended December 31, 1994. These increases were incurred to support the
Company's expanded research and development efforts and facilities, patent and
legal expenses, and corporate development activities.

Net Interest Income

The Company's net interest income increased 75% to $362,000 in the year
ended December 31, 1995, from $207,000 in the year ended December 31, 1994.
The increase in 1995 reflects the effect of the

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Company's higher average cash and cash equivalents and short-term investment
balances, offset by increased interest expense related to capital lease
obligations.

LIQUIDITY AND CAPITAL RESOURCES

Aviron had cash, cash equivalents and short-term investments at June 30,
1997 of approximately $22.3 million. In order to preserve principal and
maintain liquidity, the Company's funds are invested in United States Treasury
obligations, highly-rated corporate obligations and other short-term
investments.

The Company has financed its operations since inception primarily through
private placements of Preferred Stock, an initial public offering of Common
Stock in November 1996, and a $15 million private sale of Common Stock in
March 1997. Through June 30, 1997, the Company had raised approximately $71.8
million from such sales, net of offering expenses. Cash used in operations was
$6.1 million, $8.9 million, $16.0 million and $10.3 million in 1994, 1995,
1996 and the first six months of 1997, respectively. Cash expended for capital
additions and to repay lease financing arrangements amounted to approximately
$472,000, $622,000, $1,179,000 and $387,000 in 1994, 1995, 1996 and the first
six months of 1997, respectively. Capital expenditures increased in 1996
primarily as a result of the construction of a pilot manufacturing facility.
The Company expects expenditures for research and development, clinical trials
and general administrative expenditures to continue to increase as the Company
develops its potential products and expands its clinical trials.

The Company anticipates that the proceeds of this offering, together with
the interest thereon, revenues from existing collaborations, cash, cash
equivalents and short-term investments, will enable it to maintain its current
and planned operations at least through mid-1999. The Company's future cash
requirements will depend on numerous factors, including continued scientific
progress in the research and development of the Company's technology and
vaccine programs, the size and complexity of these programs, the ability of
the Company to establish and maintain collaborative arrangements, progress
with preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, the cost involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims, and product
commercialization activities. The Company is seeking additional collaborative
agreements with corporate partners and may seek additional funding through
public or private equity or debt financing. There can be no assurance,
however, that any such agreements will be entered into or that they will
reduce the Company's funding requirements or that additional funding will be
available. The Company expects that additional equity or debt financings will
be required to fund its operations. There can be no assurance that such funds
will be available on favorable terms, if at all. If adequate funds are not
available, the Company may be required to delay, reduce the scope of, or
eliminate one or more of its research or development programs or to obtain
funds through collaborative agreements with others that may require the
Company to relinquish rights to certain of its technologies, product
candidates or products that the Company would otherwise seek to develop or
commercialize itself, which would materially adversely affect the Company's
business, financial condition and results of operations.

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BUSINESS

OVERVIEW

Aviron is a biopharmaceutical company whose focus is the prevention of
disease through innovative vaccine technology. The Company's goal is to become
a leader in the discovery, development, manufacture and marketing of live
virus vaccines which are sufficiently cost effective to justify their use in
immunization programs targeting the general population. Live virus vaccines,
such as those for smallpox, polio, measles, mumps and rubella, have had a long
record of success in preventing, and in some cases eliminating, disease.

The Company's lead product candidate, a live cold adapted intranasal
influenza vaccine, was recently shown to provide a high protection rate
against influenza, with minimal adverse effects, in a pivotal Phase III
clinical trial in children. Aviron is developing this vaccine for
administration to children, healthy adults and the elderly and high risk
individuals. The Company recently filed an IND for a live intranasal vaccine
for PIV- 3 and the Company plans to initiate Phase II clinical trials for this
vaccine candidate by the end of 1997. The Company is also developing a subunit
vaccine for EBV, in collaboration with SmithKline Beecham, which is expected
to enter Phase I/II clinical trials in Europe by the end of 1997. In addition,
Aviron is also using its proprietary "Rational Vaccine Design" technology to
discover new live virus vaccines. Rational Vaccine Design involves the
deletion or modification of virulence proteins, the alteration of the virus'
genetic control signals to slow down its replication, or the addition of
antigenic information to enhance the virus' stimulation of the immune system.
The Company is applying this technology to develop vaccine candidates for the
prevention of influenza in elderly persons and diseases caused by CMV, HSV-2
and RSV.

In July 1997, the NIAID of the NIH and the Company announced the results of
an initial analysis of the first stage of a pivotal Phase III clinical trial
of Aviron's live cold adapted intranasal influenza vaccine involving 1,602
children. In this trial, the vaccine demonstrated a 93% protection rate
against culture-confirmed influenza in those children receiving two doses of
the vaccine, the primary endpoint of the study. Only 1% of the children who
received two doses experienced culture-confirmed influenza, compared to 18% of
those receiving placebo. These results were statistically significant. To
date, the data have not yet been peer-reviewed; however, the clinical
investigators intend to submit findings of this trial in 1997 for publication
in a peer-reviewed medical journal. The Company plans to conduct the second
stage of this Phase III clinical trial during the 1997/98 influenza season to
collect immunogenicity data, as well as additional safety and efficacy data.
In 1996, the Company completed a Phase II challenge study of this vaccine in
92 adults which demonstrated an 85% protection rate, compared to placebo,
against culture-confirmed influenza. These results were also statistically
significant. Previously, Aviron conducted Phase I/II clinical trials of this
vaccine in approximately 600 children and healthy adults. Prior to Aviron's
in-licensing of the cold adapted vaccine, formulations of this vaccine were
also tested in over 7,000 patients.

BACKGROUND

Prevention Technology in the Era of Managed Care and Cost Containment

Market-based changes already underway in the United States health care
system are dramatically altering prospects for technologies which can be used
to manage disease or lower the cost of health care for patients in managed
health plans. Medical cost-containment efforts and the reorganization of
United States health care delivery into managed care systems are changing the
basis of competition for producers of health care products. Health maintenance
organization enrollment was approximately 54 million in the United States in
1995 and is growing rapidly. Decision makers in the United States, such as HMO
medical directors, clinical practice committees, and government health
authorities, are increasingly evaluating whether preventive technologies are
more cost effective than treating disease once it is present. For example,
vaccinations are widely used by managed care organizations and in government
programs. In determining whether to use an FDA-approved vaccine, decision
makers consider whether it has been recommended by the Advisory Committee on
Immunization Practices (the "ACIP") of the CDC and whether it is cost
effective.

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Health care cost containment efforts are also evident in many of the
developed economies outside the United States. These efforts include physician
budgets in Germany and general practice schemes in the United Kingdom, where
doctors are given responsibility for the cost of their patients' overall care.

The Immune System and Vaccines

Infections occur when a pathogenic microorganism, such as a virus or
bacterium, invades body tissues and begins to replicate. The human immune
system responds with a battery of resources to contain and eliminate this
threat. The process begins when specialized cells recognize that molecules on
the surface of invading pathogens are foreign (antigens). Immune responses to
contain and eliminate the threat include:

. Antibodies: Antigens stimulate the immune system to produce specific
molecules (antibodies) which bind to and neutralize the virus or
bacterium.

. Cell-mediated response: An effective immune response typically also
leads to the multiplication of specific types of white blood cells (a
cell-mediated response) which have the ability to inactivate the
pathogen or to destroy infected cells, thereby limiting replication of
the virus or bacterium.

. Mucosal immunity: In addition to circulating antibodies and the cell-
mediated response, antibodies are produced in the mucous membranes, such
as those which line the nose and throat. Mucosal immunity is important
in protecting against pathogens which cause disease in the respiratory,
gastrointestinal and genitourinary systems, or which enter the body
through these portals.

Vaccines are designed to stimulate a person's immune system through one or
more of the above mechanisms to induce memory of specific antigens prior to
the invasion of a pathogen. This memory primes the immune system so that it
can inactivate the specific pathogen if encountered again. This may be
achieved through one of several techniques, including introduction of a live
attenuated (weakened) virus or bacterium, administration of an antigen
fragment (a subunit), or administration of an inactivated (killed) virus or
bacterium.

History of Vaccines

The first successful vaccine against an infectious disease was created by
Edward Jenner who, in 1796, demonstrated that introduction of infected
material from a diseased cow could be used to protect humans from the deadly
smallpox virus. Smallpox vaccination programs based on this live virus vaccine
were gradually adopted by industrialized countries, and a concerted global
effort by public health authorities in this century succeeded in eradicating
smallpox from the human population in the 1970s.

Vaccines against two life-threatening bacterial diseases, diphtheria and
tetanus, came into use early in this century. These vaccines consist of
bacterial toxins which have been chemically inactivated. These are often
administered in combination with an inactivated pertussis bacterium vaccine to
prevent whooping cough. This combination is known as the "DTP" vaccine. Just
prior to World War II, a live attenuated virus vaccine was developed against
yellow fever, used primarily in protecting military personnel and those
traveling to areas where this disease is endemic. In the years after the war
following several widespread polio epidemics, Jonas Salk created the first
successful polio vaccine by growing the wild-type virus and inactivating it
before injection. Salk's vaccine was introduced into widespread use in the
early 1950s, but was supplanted in the United States and many other countries
by the orally administered live attenuated polio virus vaccine developed by
Albert Sabin and first introduced in 1961. In the 1960s and 1970s, live
attenuated virus vaccines against measles, mumps and rubella (German measles)
were successfully developed and recommended by the ACIP to be included in
childhood immunization programs.

After a period of almost two decades during which no new vaccines came into
widespread use, a genetically engineered subunit vaccine for hepatitis B was
introduced in the mid-1980s and is now part of the ACIP-recommended childhood
immunization program. In 1990, a vaccine for bacterial meningitis was also

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added to this program. Two inactivated vaccines against the hepatitis A virus
were approved in the United States in 1995 and 1996. In 1995, the ACIP also
recommended that children be vaccinated against chicken pox, a virus belonging
to the herpes virus family, using an FDA-approved live virus vaccine.

Current challenges for vaccine innovation include providing effective
protection against the major infectious diseases for which no vaccines are
currently available and improving on current vaccines to achieve higher
efficacy or greater ease of administration.

Types of Vaccines

Live Virus Vaccines

Live virus vaccines expose the immune system to an attenuated form of the
virus which is sufficiently infectious to stimulate a lasting immune response
to the natural (or wild-type) virus. All of the live virus vaccines in use
today are strains derived from natural infections of humans. Attenuation of
live viruses, including polio, yellow fever, measles, mumps and rubella, and
chicken pox vaccines was accomplished by "passaging," or propagating, the
virus repeatedly in non-human cells. As a result of this process, viruses may
acquire mutations that decrease the ability of the virus to cause disease in
humans. After an arbitrary number of passages, the mutated strain is tested
for attenuation in animal models, if available, or directly in human subjects.
Following assessment of safety and immunogenicity (stimulation of an immune
response) in a limited number of human subjects, larger-scale trials are used
to demonstrate efficacy in preventing naturally acquired infections.

Live virus vaccines mimic the natural disease-causing infection and
therefore may activate the same protective mechanisms of the human immune
system as the disease itself. This process results in a balanced immune
response activating all parts of the immune system, including systemic and
local antibodies as well as cell-mediated immunity. As a result, live viruses
are often considered to be more effective than other types of vaccines in
providing immunity to natural variations in the wild-type viruses which cause
disease. For example, the live polio vaccine is believed to be more effective
in eliminating wild-type polio virus than inactivated polio vaccines. The
basis of these advantages is that live vaccines typically present all of the
surface and internal antigens associated with the natural pathogen. Live virus
vaccines may also be easier to administer through their natural route of
infection, intranasally or orally, as in the case of the oral polio vaccine.

However, an attenuated live vaccine could cause disease resembling natural
infection, as might occur in people with an immune system impaired by a
congenital disease, HIV infection or drug treatment for cancer or organ
transplantation. To date, the live virus vaccines in widespread use rarely
have been associated with significant adverse events. For example, the 19
million doses of live attenuated polio vaccine administered annually in the
United States are thought to be responsible for only eight to 10 cases of
clinical polio per year. To further reduce the number of these cases, the ACIP
is recommending that the inactivated polio vaccine may be given for the
initial two infant doses, now that wild-type polio has been virtually
eradicated in the United States.

Live virus strains can change as they replicate in human hosts, and it is
possible that a vaccine virus could revert to the wild-type characteristics.
This reversion potential is a small but recognized problem for some of the
current live vaccines, including polio. Finally, there are two theoretical
concerns regarding live attenuated viruses. First, an attenuated vaccine virus
may exchange genetic information with wild-type strains after immunization,
with the resulting strain being more dangerous than either alone. Second, the
DNA of a live virus vaccine could integrate into the genome of the host and
cause cancer or other problems in the future.

Inactivated and Subunit Virus Vaccines

Inactivated virus vaccines are produced by killing a virus using chemicals.
Some vaccines, such as the hepatitis A vaccine, are based on the whole,
inactivated virus. Other vaccines are the result of various degrees

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of purification to concentrate certain surface glycoproteins (subunits) most
responsible for producing immunity. A different approach is used to make the
current hepatitis B vaccine, the first successful recombinant subunit vaccine.
For this vaccine, the tools of molecular biology were applied to clone and
express the dominant hepatitis surface glycoprotein in a yeast production
system. Inactivated and subunit vaccines offer the advantage of little or no
risk of infection from the vaccine itself, assuming the virus has been
adequately inactivated. Good manufacturing techniques also minimize the
possibility of contamination with other viruses or fragments of DNA which
could integrate into the recipient's genes.

The principal disadvantage of inactivated and subunit vaccines for many
viruses has been a lack of success in creating protective immunity. A
successful subunit vaccine requires knowledge of which specific antigens are
responsible for providing protection. Subunit and inactivated vaccines may
produce reasonable levels of circulating antibodies, but are less able to
stimulate antibodies in the mucosal sites of viral entry, such as the lining
of the respiratory, gastrointestinal or genitourinary tracts. To improve
stimulation of the cellular components of the immune system, adjuvants (non-
specific immune stimulants) are typically added to inactivated or subunit
vaccines. Only alum (an aluminum salt preparation) is approved for use as an
adjuvant in the United States. Several new adjuvants are in clinical testing
and show promise for boosting the immune response to subunit antigens. The
mechanism by which adjuvants work is still poorly understood, so each vaccine-
adjuvant combination must be evaluated in a trial and error process in animal
models and clinical trials. Finally, certain inactivated vaccines in clinical
trials left recipients more vulnerable to disease after vaccination, due to an
unbalanced immune response. For example, in trials of experimental inactivated
vaccines against RSV and measles, some children were shown to experience more
severe, atypical disease when they later acquired the natural viral infection
following vaccination.

Emerging Vaccine Technologies

Several companies and academic scientists have reported that direct
injection of DNA encoding viral antigens can be used to stimulate an immune
response. Although at an early stage, this approach shows promise. However, it
is not clear whether the sustained expression of viral antigens obtainable by
this approach is advantageous in eliciting a better immune response. In
addition, it is possible that the administered DNA may integrate into the
genes of the recipient and cause potential unwanted effects.

Another new technology for vaccination is based on genetic engineering to
modify one virus so that it carries antigens which may stimulate an immune
response to protect against other pathogens. For example, pox virus vector
strains, related to the virus used successfully to eradicate smallpox, have
shown usefulness in protecting dogs and cats against rabies. Other pox virus
vectors are being evaluated in experimental models of human malaria and in a
hybrid regimen combining doses of a modified live virus with a subunit HIV
vaccine to protect high-risk individuals.

AVIRON'S TECHNOLOGY

Aviron's vaccine programs are based on both classical live virus vaccine
attenuation techniques and the Company's proprietary genetic engineering
technology.

Cold Adapted Influenza Technology

The Company is applying its expertise in the molecular biology of influenza
to develop a live virus vaccine discovered using classical cold-adaption
techniques. This cold adapted influenza vaccine technology was first developed
by Dr. H. F. Maassab at the University of Michigan in 1967. Dr. Maassab
created weakened influenza strains by propagating the virus in progressively
colder conditions until these strains had lost the ability to grow well at
human body temperature. The Company has obtained worldwide exclusive rights to
this cold adapted influenza vaccine technology.

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The cold adapted influenza vaccine technology includes the master strains
for influenza A and B, as well as techniques useful for updating the vaccine
each year according to recommendations of the CDC and the FDA. Updated strains
are made by mating the master strains with recent strains to obtain viruses
with the attenuated properties of the cold adapted master strain and the
antigenic properties of the current wild-type strain. This process is called
genetic reassortment. After cultured cells are infected with two different
strains of virus, the eight RNA genes of influenza mix at random in the cells
and it is possible to select the two genes for the antigens of the expected
epidemic strain and the six remaining genes from the cold adapted master donor
strain. The Company has received the technology for updating the cold adapted
master strains from the University of Michigan and has extended this approach
by the introduction of Aviron's proprietary techniques, including those of
reverse genetics, which may facilitate the annual process of creating a
reassorted vaccine.

Rational Vaccine Design

Since the Company's founding, its core vaccine discovery strategy has been
to apply genetic engineering techniques to create live attenuated virus
vaccine candidates for targets where traditional discovery techniques have
been inadequate. The Company believes that this "Rational Vaccine Design"
approach is more flexible and systematic than traditional methods of live
vaccine discovery and is a platform that can be applied to many viral targets
and, potentially, to the creation of viruses used in gene therapy and the
treatment of cancer. Furthermore, Aviron believes that a particular advantage
of Rational Vaccine Design is that engineered viruses can be designed so that
they are less likely to revert to wild-type characteristics than classically
derived vaccines. Three ways of implementing this approach are:

. Deleting or modifying specific viral genes which encode virulence
proteins. Virulence proteins are viral components thought to be
particularly important in the mechanism of disease, but which are not
required for the virus to replicate and stimulate a strong immune
response. An example of this strategy is the Company's program to create
a live attenuated vaccine against the HSV-2 virus which causes genital
herpes. One of the Company's founders, Dr. Bernard Roizman, discovered a
particular protein important in the ability of HSV-2 to grow in nerve
cells. Since nerve ganglia are the reservoir from which HSV-2 reseeds
itself to cause painful skin lesions, deletion of the gene encoding this
protein is the basis of the Company's Rational Vaccine Design program
for development of a vaccine for this target.

. Altering the genetic information used by the virus in controlling its
replication. An example of this strategy is work by Company scientists
to create live attenuated vaccine candidates for influenza. Until
recently, it was impossible to genetically engineer vaccine strains of
influenza because influenza genes are composed of negative-strand RNA
rather than DNA or positive-strand RNA. Dr. Peter Palese, one of the
Company's founders, discovered how to create recombinant negative-strand
RNA viruses using reverse genetics. Company scientists have employed
this reverse genetics technology to engineer mutations into a gene used
by the influenza virus to make copies of itself. The resulting strains
are attenuated in animal models and at least one strain has been
identified as a potential candidate for clinical trials.

. Adding antigenic information displayed by the vaccine virus. An example
of this strategy, is the Company's approach to the creation of a live
attenuated CMV vaccine, which begins with a vaccine candidate thought to
be over-attenuated and thus insufficiently immunogenic. Aviron
discovered genes for certain antigen structures present in wild-type CMV
viruses. These genes are being engineered into an over-attenuated
vaccine candidate to create a potentially more immunogenic vaccine. The
Company has identified several vaccine candidates using this approach.
The Company believes this technique of adding antigen structures may
enable the Company to create combination vaccines expressing antigens of
more than one virus in a single vaccine strain.

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BUSINESS STRATEGY

Aviron's objective is to become a leader in the discovery, development,
manufacture and marketing of live virus vaccines which are sufficiently cost
effective to justify their use in immunization programs targeting the general
population. The Company's strategy is to:

Address Infectious Diseases Which Merit Widespread Immunization
Programs. The concept of universal immunization is well established for
certain infectious diseases where safe and effective vaccines are already
available, including immunization against pathogens such as polio, measles,
mumps, rubella and hepatitis B. For each of its potential products, the
Company's objective is to produce vaccine strains which are sufficiently safe
and cost effective to obtain official recommendations for universal use in
childhood vaccine regimens or, in the case of influenza, annual use in the
general population.

Apply Rational Vaccine Design Technology to a Range of Viral Targets. Aviron
believes that its proprietary genetic engineering technologies may be used to
create live attenuated vaccines for a wide range of viral targets, such as
viruses related to influenza and herpes viruses.

Select Programs and Market Vaccines Based on Pharmacoeconomic Data. Public
health agencies and managed care systems are increasingly concerned with the
economic impact of potential new mandates for vaccines. In setting its
internal product development priorities, the Company considers the costs of
implementing widespread vaccine programs based on its products in relation to
potential cost savings to the government and managed health care systems and
intends to perform rigorous cost-effectiveness analyses on its products.

In-License Promising Vaccine Technology. Aviron evaluates in-licensing
opportunities and intends to add programs which complement the Company's core
technologies and capabilities. For example, the Company obtained exclusive
rights to the cold adapted influenza vaccine technology from the University of
Michigan and the NIH, and to the PIV-3 vaccine from the NIH.

Establish Collaborative Arrangements to Enhance Product Development
Efforts. Aviron intends to enter into collaborative arrangements to gain
access to specific technologies and skills which may accelerate product
development and provide additional financial resources to support its research
and development and commercialization efforts, particularly outside of the
United States. The Company has entered into collaborative arrangements with
SmithKline Beecham for development of an EBV vaccine and with Sang-A for
certain rights to the Company's products in Korea.

Establish Marketing and Sales Capabilities. The Company intends to market
and sell its cold adapted influenza vaccine product in the United States by
developing its own sales force. Aviron believes that, due to the concentrated
nature of the vaccine market, a small, dedicated sales force can be effective
in the marketing and sales of its cold adapted influenza vaccine. For
marketing and sales outside the United States, the Company intends to
establish collaborative relationships with companies having strong
capabilities in local markets.

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<PAGE>

VACCINE PRODUCTS UNDER DEVELOPMENT

The following table summarizes Aviron's most advanced potential products
under research and development. This table is qualified in its entirety, by
reference to the more detailed descriptions appearing elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
COMMERCIAL
PROGRAM VACCINE TYPE STATUS (1) RIGHTS (2)
------- ------------ --------- ----------
<S> <C> <C> <C>
Influenza
Children Cold adapted live Pivotal Phase III Aviron
virus Clinical Trial-
Stage 1 Completed,
Stage 2 Planned
Manufacturing
Consistency Lot Trial
Underway
Adults Cold adapted live Challenge Efficacy Aviron
virus Study Completed
Phase III Safety and
Effectiveness Trial
Planned
Elderly and High Risk Cold adapted live Clinical Trials Aviron
Adults virus Planned
(co-administered with
inactivated vaccine)
Genetically Preclinical Aviron
engineered
live virus
Parainfluenza Virus Type 3 Bovine live virus IND Supplement Filed Aviron

Epstein-Barr Virus Recombinant subunit Phase I/II Clinical SmithKline
glycoprotein Trial Planned Beecham/
Aviron (3)
Cytomegalovirus Genetically IND Filing Planned Aviron
engineered
live virus
Herpes Simplex Virus Type 2 Genetically Preclinical Aviron
engineered
live virus
Respiratory Syncytial Genetically Research Aviron
Virus engineered
live virus
</TABLE>
--------
(1) "Pivotal Phase III Clinical Trial-Stage 1 Completed, Stage 2 Planned"
means Aviron has completed a multi-center, double-blind, placebo-
controlled clinical trial for safety and efficacy. Stage 2 will enroll
the same patients to collect immunogenicity data as well as additional
safety and efficacy data.
"Manufacturing Consistency Lot Trial Underway" means Aviron is
conducting a clinical trial to demonstrate consistency across lots to
submit as part of a PLA.
"Challenge Efficacy Study Completed" means Aviron completed vaccination
of patients in a multi-center, double-blind, placebo-controlled clinical
trial for safety, immunogenicity and efficacy.
"Phase III Safety and Effectiveness Trial Planned" indicates that Aviron
intends to conduct a clinical trial to assess safety and effectiveness,
measured by utilization of health care services and absenteeism.
"Clinical Trials Planned" indicates that no clinical trial has been
conducted by Aviron to date, but Aviron intends to proceed directly to
Phase II clinical trials for safety to support a labeling claim to
include in or supplement its PLA filing.
"IND Filing Planned" means the Company has selected several vaccine
candidates for testing in clinical trials in preparation for preparing
an IND filing.
"Preclinical" includes assessment of specific vaccine candidates for
growth properties in cell culture and for attenuation and immunogenicity
in animal models.
"IND Supplement Filed" indicates that no clinical trials have been
conducted by Aviron to date, but the FDA has received the IND and
allowed the 30-day comment period to expire.
"Phase I/II Clinical Trial Planned" indicates that SmithKline Beecham is
preparing to conduct a Phase I/II clinical trial in Europe to
demonstrate safety and immunogenicity.
"Research" includes identification of vaccine candidates and approaches
to create new candidate strains. See "-- Government Regulation."
(2) Commercial rights for Korea for most listed programs are licensed to
Sang-A. See "-- Collaborative Agreements."
(3) Worldwide rights (except Korea) licensed to SmithKline Beecham; Aviron
retains certain United States co-promotion rights. See "--
Collaborative Agreements."

36
<PAGE>

Influenza

Every year in mid- to late-winter, influenza spreads across the globe,
infecting an average of approximately 10% to 20% of the United States
population. In the United States, 35 to 50 million cases of influenza occur
annually. Influenza cases are associated with symptoms lasting for at least
three to five days, an average of approximately three days of lost work or
missed school, and approximately 20,000 deaths each year. Field studies
indicate the attack rate ranges from a low of 10% in persons over age 65 to a
high of 36% in children aged one to 18. Children are also a major factor in
spreading influenza to other population segments, including those at high risk
of contracting the disease. At the peak of a typical epidemic, reportedly 9%
to 22% of all physician office visits are for flu-like symptoms. Over 90% of
influenza-related deaths occur in people over age 65, but children under age
five and women in the third trimester of pregnancy are also at higher risk for
serious complications. Several times this century, influenza has appeared as a
much more serious pandemic. These major pandemics occur when the influenza
virus undergoes "antigenic shift" in which one influenza subtype is replaced
by a different strain for which the population has not developed antibodies
and, therefore, for which it is extremely susceptible to infection.

The variability of certain components of the influenza virus requires that
the influenza vaccine be modified annually. The CDC and the World Health
Organization (the "WHO") maintain a global network which generates data
required to select strains for the coming influenza season's vaccine and
monitor the occurrence of especially severe epidemics. Based on these data,
the FDA and the CDC discuss circulating influenza strains which are candidates
for inclusion in the following season's influenza vaccine. A similar process
is undertaken in Europe by the WHO and various national authorities. Currently
available inactivated influenza vaccines contain three strains of influenza
virus (two strains of influenza A and one strain of influenza B) and are
therefore called trivalent vaccines. Typically one or sometimes two of the
strains in these trivalent vaccines are recommended for updating annually.
Current vaccines have been variously reported to be 60% to 90% effective in
preventing illness, pneumonia, hospitalization and death due to complications
from influenza.

The ACIP has identified the principal target groups for the current
influenza vaccine as those at increased risk for influenza-related
complications, including persons age 65 or older, residents of chronic-care
facilities, adults and children with chronic disorders of the pulmonary or
cardiovascular system, adults and children who have required regular medical
follow-up or hospitalization during the preceding year because of chronic
metabolic diseases or immunosuppression, children and teenagers receiving
long-term aspirin therapy and therefore at risk of developing Reye's syndrome,
and pregnant women. The next level of priority for vaccination identified by
the ACIP includes certain groups, such as health care personnel and household
members (including children), that may transmit influenza to high-risk
persons. Furthermore, the ACIP recommends that physicians administer influenza
vaccine to any person who wishes to reduce the chance of becoming ill with
influenza.

The FDA estimates that over approximately 75 million influenza vaccine doses
were manufactured for use in the United States in 1996. According to the CDC,
55% of the 34 million Americans over age 65 received the annual influenza
vaccine during the 1994 calendar year, up from less than approximately 25% a
few years earlier. The United States Department of Health and Human Services
has set a goal for administrating the influenza vaccine to at least 60% of
Americans over age 65, by the year 2000. The Company believes that a lower
percentage of high-risk individuals under age 65 were vaccinated in 1994, and
that the majority of influenza doses used in the United States are being
administered to healthy adults under age 65, many of whom participate in
voluntary work place immunization programs. Experts suggest that very few of
the 70 million children under age 18 receive the annual influenza vaccine.

In addition to the currently available vaccines, two oral drugs are
currently approved for use in the prevention and treatment of influenza A:
amantadine, which has been on the market for many years, and rimantidine, a
closely related compound which produces fewer side effects. Both agents have
been shown to be effective in reducing the severity of influenza A disease and
the number of days of disability, but are not

37
<PAGE>

effective against influenza B. Both are also recommended for daily use during
the influenza season by certain high-risk persons for whom the influenza
vaccine is contraindicated. However, there is a concern that widespread
prophylactic use could lead to emergence of drug-resistant strains.

Aviron's Cold Adapted Influenza Vaccine. The Company's most advanced program
is based on the live cold adapted influenza vaccine technology discovered by
Dr. H. F. Maassab, licensed from the University of Michigan and subject to a
Cooperative Research and Development Agreement ("CRADA") with the NIH. The
cold adapted influenza vaccine is currently undergoing extensive clinical
trials by Aviron, many of which are coordinated with NIH-sponsored
investigators. Prior to Company-initiated trials, at least 65 clinical trials
of the cold adapted influenza vaccine technology were performed since 1977,
involving more than 15,000 volunteers, of whom over 7,000 received the cold
adapted influenza vaccine. See "-- Influenza Clinical Trials."

The Company is developing a cold adapted influenza vaccine for widespread
annual use in children, adults, high-risk individuals and for co-
administration with the inactivated vaccine for improved protection in the
elderly. The quality of the immune response induced by cold adapted influenza
vaccine differs from that induced by inactivated influenza vaccines. The cold
adapted influenza vaccine elicits an immune response to multiple viral
proteins mimicking the natural immunobiology of influenza, whereas the
response to the classical inactivated vaccine is directed primarily to one
component of the virus. Because the cold adapted influenza vaccine is
delivered as a nasal spray, the Company believes it would provide the first
practical way to immunize children on an annual basis. Children are an
important target because, while the elderly experience the greatest mortality
from the annual influenza epidemic, much of the morbidity and illness occurs
in young children. Children are also thought to be important in the spread of
influenza in the population. In addition to its proposed use in physician's
offices, Aviron believes that the nasal spray delivery of this vaccine will
enable it to be administered by adults without special medical training, so
that it will be practical to consider delivery via pharmacies, schools, day
care centers, and possibly in the home. However, before delivery methods are
established in these settings, the Company will be required to formulate the
cold adapted influenza vaccine to ensure stability of the vaccine in such
settings. There can be no assurance that the Company will be able to do so or
that regulatory authorities will approve such delivery methods.

Aviron also is targeting healthy adults, many of whom are being offered
influenza prophylaxis by their employer and who may prefer Aviron's intranasal
administration to injection. The Company believes that many adults who
regularly receive the inactivated influenza vaccine will select the intranasal
vaccine if given the choice, and that people who have avoided "flu shots" in
the past will receive a vaccination if the intranasal alternative is
available. In addition, the Company is developing its vaccine for co-
administration by nasal spray with the inactivated influenza vaccine injection
for the elderly. While efficacy in the elderly has not been conclusively
demonstrated, nursing home studies suggest that simultaneous administration of
the intranasal cold adapted influenza vaccine with an injection of the
inactivated vaccine offers added protection compared to administration of the
inactivated vaccine alone. Aviron intends to seek recommendations from the
ACIP and the American Academy of Pediatrics and other medical advisory bodies
for use of the cold adapted influenza vaccine in the appropriate population.

Aviron's Next-Generation Genetically Engineered Influenza Vaccine. The
Company is using its proprietary reverse genetics technology to engineer
future generations of influenza vaccines which are designed to the needs of
various age groups in the population. The Company's next priority is to
develop strains which offer improved protection in the elderly compared to the
currently available inactivated vaccines. Since most elderly persons have had
experience with several influenza infections in their lifetime, pre-existing
antibodies may prevent the cold adapted virus from multiplying sufficiently to
be used as an alternative to the currently available vaccines in the elderly.
To address this problem, Aviron scientists have created new strains of
influenza vaccine candidates which have been evaluated and shown to be
attenuated in ferrets, an animal model for influenza. Vaccinated animals were
protected from subsequent challenge with a virulent strain of influenza. Some
of the Company's genetically engineered strains have been found to better
replicate in the upper respiratory tract of these animals than the cold
adapted influenza vaccine, while retaining the property

38
<PAGE>

of restricted growth in the lower respiratory tract. Work with the cold
adapted influenza vaccine has shown that these features are associated with
desirable characteristics of attenuation in humans. However, animal model
results are not necessarily predictive of results in humans. The Company
believes that these strains may be more immunogenic than the cold adapted
vaccine and, therefore, more suitable for use as a single-dose vaccine for the
elderly. No assurance can be given that the Company will be able to commence
or successfully complete clinical trials on a timely basis, if at all.

Parainfluenza Virus Type 3

PIV-3 is a common respiratory virus of childhood which causes croup, cough,
fever and pneumonia. Every year, primarily during the spring and summer
months, PIV-3 infects infants, children and adults. In the United States, at
least 60% of children are infected by the time they reach two years of age,
and 80% by four years of age. These cases are associated with symptoms lasting
from three to eight days and approximately 17,000 hospitalizations per year.
Children are also a major factor in introducing PIV-3 infection into the
family setting. PIV-3 frequently reoccurs and children typically experience
two to three infections of decreasing severity. Unlike influenza, PIV-3
undergoes only a very minor degree of variation in the surface proteins from
year to year; therefore, a PIV-3 vaccine will not require annual updates.

Both serum and nasal antibodies directed to PIV-3 surface proteins play a
role in protection against PIV-3 disease. It is thought that protection of the
lower respiratory tract from PIV-3 replication and disease requires high serum
antibody levels, whereas resistance to infection and protection against
disease in the upper respiratory tract requires mucosal antibodies in the
nose. There is currently no available vaccine to protect against PIV-3
infection, and no drug for treatment of PIV-3 disease.

Aviron's Live Parainfluenza Virus Type 3 Vaccine. The Company's live
intranasal vaccine program for PIV-3 utilizes bovine PIV-3 (bPIV-3) vaccine
technology licensed from the NIH. Use of bPIV-3 as a vaccine to protect humans
against human PIV-3 strains is based on the successful strategy first used by
Jenner for smallpox vaccination, in which an animal virus is used to protect
humans from the analogous human virus. It is thought that the attenuation of
bPIV-3 seen in primates is due to mutations sustained throughout its genome
during its long evolutionary adaptation to the bovine host.

Prior to the Company's in-licensing of the bPIV-3 vaccine, it had been
tested in Phase I clinical trials in over 100 adults, children and infants. In
all age groups, the bPIV-3 vaccine appeared satisfactorily attenuated, safe
and genetically stable. Eighty-five percent of seronegative infants and
children (six to 60 months of age) were infected by the tested dose, and 61%
of bPIV-3 recipients developed a level of antibody to PIV-3 previously
associated with protection from disease. The vaccine strain infected 92% of
infants younger than six months of age, even in the presence of maternally-
derived PIV-3 antibodies. Infection with the bPIV-3 vaccine stimulated an
immune response to PIV-3 in 42% of these young infants. The Company has filed
an IND for a Phase II clinical trial of bPIV-3 using the existing bPIV-3
vaccine supply produced and tested for the NIAID and expect that the trials
will begin by the end of 1997. There can be no assurance that this trial will
be commenced or, if commenced, will be successful, or that the Company will
develop successfully and receive FDA approval of its bPIV-3 vaccine.

Epstein-Barr Virus

Epstein-Barr virus, a herpes virus that causes infectious mononucleosis,
infects most people at some point in their lifetime. Infection at a young age
may cause mild symptoms, but the debilitating syndrome of infectious
mononucleosis is most common where infection first occurs in adolescence or
young adulthood via exchange of saliva. Sore throat and swollen neck glands
are followed by a period of fatigue and lethargy which can last for weeks or
even months. Approximately 10% of high school and college students become
infected with EBV each year in the United States, of which half or more may
develop infectious mononucleosis. The disease usually runs its course without
significant medical intervention; however, the long duration of infectious
mononucleosis can be a serious problem for high school and college students
and workers.

39
<PAGE>

Enlargement of the liver and spleen are also common, so doctors typically
prohibit participation in athletic activities to prevent serious injuries. EBV
is one of the viruses implicated as a contributing cause of cancer in humans,
including Hodgkin's disease, post-transplant and other lymphomas,
nasopharyngeal carcinoma (the most common head and neck cancer in large
regions of Asia) and Burkitt's lymphoma (a significant disease in Africa).

The Company is developing a subunit vaccine for EBV based on the single
surface antigen responsible for most of the neutralizing antibodies stimulated
by EBV infection. Quantities of this antigen have been expressed, purified and
evaluated in a rabbit model, where preliminary results indicate that the
antigen is immunogenic when combined with an adjuvant. In 1995, the Company
entered into a worldwide collaboration with SmithKline Beecham, excluding
Korea, whereby SmithKline Beecham will fund the development of Aviron's EBV
vaccine in exchange for certain marketing rights. The Company has delivered
clinical trial materials to SmithKline Beecham to begin a Phase I/II clinical
trial in Europe of the subunit vaccine by the end of 1997 to demonstrate
safety and immunogenicity. There can be no assurance that this trial will be
commenced or, if commenced, will be successful, or that FDA approval will be
obtained for any vaccine candidate. See "-- Collaborative Agreements."

Cytomegalovirus

Most people become infected with CMV, another member of the herpes virus
family, at some time in their life, and in the United States 40% to 60% of
infections occur in childhood. These infections are typically asymptomatic or
result in mild illness with sore throat, headache, fatigue and swollen glands.
CMV also can cause an infectious mononucleosis syndrome clinically
indistinguishable from that associated with EBV infection. More serious CMV
disease is also often associated with a weakened immune system, as is often
found in AIDS, cancer and transplant patients, which may be due to
reactivation of CMV acquired early in life or a primary, infection. In
addition, if a woman is first exposed to this virus early in pregnancy, the
resulting infection can cause serious fetal abnormalities. Approximately
40,000 infants in the United States are infected each year, resulting in
varying levels of brain damage or deafness in over 10% of these infants.
Congenital CMV syndrome results in significant expenditures for neonatal
intensive care and potentially lifelong custodial care.

No vaccine currently is available for CMV. Antibodies from persons with high
levels of immunity, are available in the form of hyperimmune globulins for
certain high-risk patients, but use of these products can be costly and of
limited efficacy. The Company believes that widespread vaccination of children
with a safe effective CMV vaccine is justified for the same reason that
children in the United States are vaccinated against rubella: to protect
unborn children from birth defects by reducing the risk that mothers are
exposed to infected children.

A live attenuated CMV vaccine candidate, known as the Towne strain, has been
tested by third parties in several hundred people. This strain was reported to
be well tolerated, but did not provide sufficient protection in pregnant
mothers of children in day care who were at risk for congenital CMV, or in
transplant recipients at risk of acquiring CMV from the donor organs. Aviron
scientists have discovered differences between the genome of the Towne strain
and that of wild-type CMV. Based on this knowledge, the Company has used its
Rational Vaccine Design approach to create new recombinant CMV vaccine
candidates in an attempt to strike the appropriate balance between attenuation
and protection. Some of these vaccine candidates have been made and tested by
Aviron in a specialized animal model. The Company has selected several vaccine
candidates for testing in clinical trials for the prevention of CMV disease.
However, no assurance can be given that clinical trials will be commenced or,
if commenced, will be successful, or that the Company will develop
successfully and receive FDA approval of its CMV vaccine candidate.

40
<PAGE>

Herpes Simplex Virus Type 2

It is estimated that HSV-2, the cause of genital herpes, infects one out of
five persons in the United States. Only one-third of those infected experience
symptoms, but a significant portion of new infections are caused by
transmission from asymptomatic individuals. Genital herpes is a non-lethal but
incurable disease that invades the body once and settles in for a lifetime,
often manifesting its presence several times a year with painful sores in the
genital area. It is estimated that there are over 700,000 new cases of genital
herpes per year in the United States, and that the disease is responsible for
over 500,000 physician visits per year.

Genital herpes also can be acquired by newborn babies as they pass through
the birth canal of infected mothers. Neonatal herpes simplex infection can
result in serious damage to the brain and many other organs. Even with
therapy, over 20% of the 1,500 infants infected each year in the United States
die, and many of the survivors are seriously impaired. In addition, efforts to
prevent neonatal herpes contribute significantly to the cost of the disease.
Thousands of women in the United States with a history of genital herpes are
advised to undergo a Cesarean section when prenatal cultures or examinations
suggest a recurrence near the time of delivery. HSV-2 infection can also lead
to serious and fatal complications in adults with impaired immune systems due
to AIDS or drug therapy for organ transplants.

The most widely used drug therapy for HSV-2 disease is acyclovir (Zovirax),
which has been shown to reduce the severity and duration of herpetic lesions,
although most patients treated still experience symptoms for several days.
When taken several times a day as a prophylaxis for HSV-2, acyclovir also has
been shown to reduce the frequency of recurrences. Several additional
therapeutics are available or are in the late stages of clinical trials, and
several prophylactic vaccines are in clinical trials; however, no vaccine
currently is available to prevent genital herpes. One company recently
reported a lack of efficacy in Phase III clinical trials of a subunit vaccine.
A second company is conducting a Phase III clinical trial of a different
subunit vaccine.

Aviron has used its Rational Vaccine Design approach to create injectable
live attenuated vaccine candidates intended to prevent HSV disease in
uninfected children and young adults. Two of the Company's founders, Dr.
Bernard Roizman and Dr. Richard Whitley, in collaboration with Pasteur Merieux
Serums et Vaccins, developed a prototype live herpes vaccine based on an oral
herpes virus (HSV-1) backbone. After extensive preclinical testing, the virus
was tested in humans; however, the immune response following vaccination was
deemed insufficient. This insufficiency was attributed to the use of the HSV-1
backbone from which too many important genes had been deleted, thus rendering
the virus over-attenuated. Aviron has licensed this technology, along with
patents covering strategies for more specific deletions, from ARCH Development
Corporation. Aviron has used this technology to create live vaccine candidates
using an HSV-2 backbone, which it has evaluated in preclinical models. Several
candidates have shown attenuation in various rodent models, as well as
efficacy in protecting guinea pigs and primates from challenge with a lethal
dose of wild-type HSV-2. The Company is developing additional vaccine
candidates and intends to use the results of further animal studies to select
one or more candidates for evaluation in clinical trials. There can be no
assurance, however, that the Company will commence or successfully complete
clinical trials on a timely basis, if at all.

In July 1996, Aviron licensed certain of its patent rights covering or
related to the use of HSV-2 for treatment of cancer and for gene therapy, but
excluding use for vaccines, to NeuroVir Research, Inc., a private Canadian
corporation ("NeuroVir"). In exchange, Aviron received shares of capital stock
and warrants to purchase shares of capital stock, representing in the
aggregate approximately 16% of the outstanding equity securities of NeuroVir
on a fully-diluted basis after the first round of financing. Aviron is under
no obligation to fund development of this technology.

Respiratory Syncytial Virus

RSV is the major cause of lower respiratory tract illness in the very young,
responsible for over 90,000 hospitalizations and more than 4,000 deaths a year
in the United States. Infection is manifested as cough and

41
<PAGE>

fever and, in some cases, pneumonia. While RSV infection can occur at any time
of year, epidemics generally occur in the winter. Most cases are in children
under age four, with the peak of severe illness under six months of age,
particularly in infants with pre-existing heart and lung disease. The only
prevention for RSV currently available is passive administration of polyclonal
antibodies, although certain third parties are testing a cold adapted live
attenuated RSV vaccine in infants. Available drug therapy is reserved for the
most serious cases as it has significant side effects. Aviron is developing a
genetically engineered live attenuated virus vaccine for RSV using its
proprietary reverse genetics technology. Aviron's objective is to use this
technology to create a number of live virus vaccine candidates which can be
tested in animal models before selecting a candidate for testing in humans.
However, no assurance can be given that the Company will be successful in
identifying a vaccine candidate.

INFLUENZA CLINICAL TRIALS

Clinical Trials Conducted by Aviron

The Company has conducted and continues to conduct clinical trials to
demonstrate safety and efficacy of its cold adapted influenza vaccine. To
date, the Company has tested the trivalent vaccine in over 2,300 children and
adults. While the Company believes that it can use previous trial data from
others to support its regulatory filings, the Company's use of the previous
data to establish safety and efficacy of its proposed vaccine is limited
because very few of the clinical trials involved a vaccine delivered through a
nasal spray. The Aviron clinical trials relate to the safety and efficacy of
the trivalent formulation as well as the safety of its delivery, by intranasal
spray. Aviron enrolled a total of 615 patients in Phase I/II clinical trials,
92 patients in a Phase II challenge study in adults in collaboration with the
NIH, and 1,602 children in a pivotal Phase III clinical trial.

Aviron conducted a safety and immunogenicity study involving 239 healthy
adults at three university research centers. Patients were randomly assigned
to receive either Aviron's live cold adapted influenza vaccine by nasal spray
or nose drops, or placebo by nasal spray or nose drops. No serious adverse
events attributable to Aviron's vaccine were seen in any subjects, and there
were no statistically significant differences in the occurrence of fever, sore
throat, runny nose, cough, headache or any other potential reaction assessed
in the study between the vaccine or placebo or between the different types of
administration. Statistically significant serum antibody responses to all
three strains in the vaccine were observed in the subjects receiving the live
cold adapted influenza vaccine compared to placebo. The magnitude of these
antibody responses was within the range of responses seen in previous trials
by others of the live cold adapted influenza vaccine, which are lower than the
serum responses typically observed following immunizations with the
inactivated influenza vaccine.

Two hundred thirty-eight children between the ages of 18 months and five
years were enrolled at four Vaccine Treatment Evaluation Units ("VTEUs") and
118 children were enrolled at the Center for Vaccine Development in Santiago,
Chile, in a Phase I/II double-blind, placebo-controlled safety, immunogenicity
and dose-escalation study. The study design and endpoints were similar to the
adult study, except that the initial phases used a dose lower than that given
to adults. No serious adverse events were seen in any subjects in any of the
three phases of the dose escalation, and there were no statistically
significant differences in the occurrences of fever, sore throat, runny nose,
cough, wheezing, or irritability assessed in the study between the vaccine or
placebo or between the different types of administration. Statistically
significant serum antibody responses to all of the three strains were observed
in the subjects receiving the higher dose of the live cold adapted influenza
vaccine compared to placebo. The magnitude of these antibody responses was
within the range of responses seen in previous trials by others of the
trivalent cold adapted influenza vaccine.

Aviron's intranasal spray formulation of the live cold adapted influenza
vaccine also has been tested in a double-blind, placebo-controlled Phase II
challenge study at two VTEUs involving 92 healthy young adults. Subjects were
randomized to receive either the live cold adapted intranasal vaccine, the
inactivated injectable vaccine or placebo. There were no serious adverse
events attributable to Aviron's vaccine seen in any subjects,

42
<PAGE>

and there were no statistically significant differences in the occurrence of
any potential reactions assessed in the study between either vaccine or
placebo. Following vaccination and subsequent intranasal administration of the
wild-type challenge virus, the incidence of laboratory-documented influenza, a
prospectively defined primary endpoint of the trial, was 7% in subjects
vaccinated with the live cold adapted intranasal influenza vaccine, 13% in
subjects vaccinated with the inactivated injectable influenza vaccine and 45%
in subjects who received placebo. The reduction in laboratory-documented
influenza compared to placebo was statistically significant for the live cold
adapted vaccine (p < 0.001) and the inactivated vaccine (p = 0.01). The other
prospectively defined primary endpoint of the study was the proportion of
subjects shedding the challenge virus after its administration. No significant
differences were seen between the two vaccines and placebo in viral shedding.

Of the recipients of the live cold adapted influenza vaccine, 10%
experienced moderate or severe respiratory symptoms following administration
of the wild-type influenza challenge virus, a statistically significant
reduction compared to 39% of placebo recipients (p = 0.01). The rate of
moderate or severe respiratory symptoms observed following challenge virus in
the inactivated injectable vaccine was 22% which was not statistically
significant compared to placebo. While the rate of respiratory illness seen in
the placebo group was consistent with previous influenza challenge efficacy
trials by others, the rate of febrile or systemic illness following challenge
was lower than in previous trials. These data have not been peer reviewed,
however, and no assurance can be given that the conclusions drawn from this
analysis will not change as a result of further study by the Company or during
the peer review process.

Based on trials by others which showed that a modest immune response in
young children to one or two of the strains after a single dose could be
boosted significantly by a second dose approximately two months later, the
Company initiated a two-year pivotal Phase III clinical trial to evaluate one-
and two-dose regimens in children. The Company's clinical trial data suggest
that a repeat or booster dose may be required in young children due to their
lack of previous exposure to influenza or influenza vaccines. Two doses of the
inactivated injectable influenza vaccine are recommended annually for young
children receiving influenza prophylaxis for the first time. The Company
enrolled 1,602 children at 10 clinical sites in the pivotal Phase III clinical
trial, of which 1,314 were vaccinated with a second dose 46 to 74 days after
initial vaccination. The primary endpoint of the first stage of the study was
defined as protection of children from culture-confirmed influenza during
naturally occurring epidemics of influenza.

The data were unblinded in July 1997 following a single year of patient
accrual due to the adequate incidence of influenza in the study population,
rather than continuing to collect efficacy data for a second influenza season.
The Company and NIAID announced that, based on an initial analysis of the
first stage of the Phase III trial, Aviron's live cold adapted intranasal
vaccine for influenza demonstrated a 93% protection rate against culture
confirmed influenza in those children receiving two doses, the primary
endpoint of the study. Only 1% of children receiving two doses experienced
culture-confirmed influenza, compared to 18% of those receiving the placebo.
These results were statistically significant. Although the data have not yet
been peer-reviewed, the clinical investigators intend to present the initial
findings of this trial at scientific conferences in fall 1997 and to submit
their findings in 1997 for publication in a peer-reviewed medical journal. The
Company intends to submit a PLA to the FDA based on the data from this trial
and prior studies, and will support its PLA with additional data from the
second stage of this Phase III clinical trial as well as other trials.

The Company plans to conduct the second stage of its pivotal Phase III
clinical trial during the 1997/98 influenza season in the same patients as the
first stage of this trial. The second stage of the clinical trial will collect
immunogenicity data, as well as additional safety and efficacy data. There can
be no assurance that the results of this trial will support the results of the
recently completed first stage of this trial. Failure to do so could have a
material adverse effect on the regulatory approval or labeling of the cold
adapted intranasal influenza vaccine and could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company also plans to conduct a clinical trial for use of the
vaccine in children with asthma during the 1997/98 influenza season.

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Aviron is currently conducting a manufacturing consistency lot trial in 500
children at the Center for Vaccine Development at the University of
California, Los Angeles. Approval to market vaccines typically requires
evidence from such a trial demonstrating that the product can be manufactured
consistently from lot to lot.

The Company has completed a Phase II challenge study in adults for its live
cold adapted intranasal vaccine for influenza. The Company intends to conduct
a Phase III trial in healthy adults during the 1997/98 influenza season to
determine safety and effectiveness, measured by utilization of health care
services and absenteeism. The Company intends to seek labeling claims for use
of this vaccine in healthy adults in future PLA supplements, based on prior
trials, as well as the Phase II challenge study and any additional data
available from the Phase III clinical trial for safety and effectiveness.
However, there can be no assurance that the Phase III trial will be successful
or that the Company's PLA filings will be approved for healthy adults.

The Company is also planning a Phase II clinical trial for safety in the
elderly and high risk adults for the use of an intranasal vaccine for
coadministration with the currently available injectable vaccine during the
1997/98 influenza season. The Company intends to use this data to support a
label claim for safety for such coadministration in high risk adults and the
elderly. In addition, the Company is planning to conduct an open label
clinical trial in adults and children who volunteer to participate in the
trial. The data from this trial is intended to support the safety and efficacy
of the Company's cold adapted influenza vaccine.

To date, none of the data announced by the Company from its clinical trials
have been submitted for publication in peer-reviewed journals. Moreover, the
data necessary to calculate the primary endpoints the first stage of the
Company's pivotal Phase III clinical trial only became available in July 1997.
There can be no assurance that the analysis of data regarding the primary
endpoint announced by the Company and the conclusions drawn from this analysis
will not change as a result of further study by the Company or its
collaborators of the primary endpoints or secondary endpoints or in the course
of peer review for publication or regulatory review for licensing. Such
changes could have an adverse effect on the Company's product development
efforts and its prospect for regulatory approvals of its live cold adapted
influenza vaccine candidate. Furthermore, there can be no assurance that the
Company will commence clinical trials as planned, or that if commenced, such
trials can be completed on a timely basis, or at all.

Clinical Trials Conducted by Others

The Company's most advanced vaccine product is based on the cold adapted
influenza vaccine technology licensed from the University of Michigan and the
NIH. The Company has obtained from the NIH and the University of Michigan
exclusive rights to trial results and data from the work at the VTEUs and
Wyeth-Ayerst. Aviron has reviewed the data from over 65 previous clinical
trials of influenza vaccine viruses derived from the University of Michigan
master strains. These studies, performed since 1976, involved more than 15,000
volunteers, of whom over 7,000 received the cold adapted influenza vaccine.
Most of these trials were conducted by academic investigators to explore the
biology of the vaccines and were not designed to support an application to the
FDA for approval to market a product. Each of the 15 vaccine strains that were
tested were derived from the master strains and typically corresponded to the
contemporaneous inactivated influenza vaccine for the year of testing.

Those who received the cold adapted vaccine ranged in age from two months to
over 80 years. More than 50 of these trials studied strains of influenza A
vaccine, involving more than 13,000 volunteers, and 15 of the trials studied
strains of influenza B vaccines, involving approximately 2,200 volunteers. In
the aggregate, these clinical trials involved over 2,000 children. Nearly all
of these trials used monovalent (one strain) or bivalent (two strains)
formulations, containing only one or two of the three strains usually found in
the current trivalent inactivated vaccine. These trials used either placebo or
an inactivated virus vaccine as controls. In these clinical trials, trivalent
formulations were administered to about 350 adults and 200 children. The cold
adapted influenza vaccine was given in most of these clinical trials as nose
drops, although in some instances it was given as a nasal spray.

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The effectiveness of the cold adapted influenza vaccine in preventing
influenza infection in adults and children has been evaluated in seven adult
and three pediatric challenge studies. Six of these adult challenge studies
were placebo-controlled and involved 254 seronegative (relatively low levels
of prior antibodies to the influenza strains used in the study) adults who
were challenged within six months of vaccination. A challenge study is a
clinical trial in which, typically, 20 to 30 adult volunteers are given wild-
type influenza by nose drops, one to two months following immunization with
the experimental or control vaccine preparation. Compared to placebo rates,
the cold adapted influenza strains resulted in significant reduction (66% to
100%) in systemic illness compared to the placebo group and a reduction (17%
to 100%) in infection as measured by evidence of challenge virus replication,
or virus shedding, in the nose of the recipient. Two of these six studies
included a comparison group of subjects treated with the inactivated virus
vaccines. While these studies did not have a sufficient number of patients to
detect a statistical difference between the cold adapted and inactivated
vaccines, the cold adapted vaccine protection rates were equal or better than
those seen for the inactivated vaccine in each of the five studies. In one
study where adults were challenged seven months after immunization, less
protection was seen as measured by infection or any illness for both
inactivated and cold adapted vaccines. However, protection rates against
systemic illness, such as fever, were 79% to 100% for the cold adapted vaccine
and 67% to 84% for the inactivated vaccine.

Children are challenged in such studies using the cold adapted influenza
vaccine as the challenge virus rather than virulent wild-type virus. The
endpoint measured in children is protection from infection, defined as vaccine
virus growth in the nose after challenge. Of the three placebo-controlled
studies in 86 children, prior immunization with the cold adapted influenza
vaccine was associated with a significant reduction (52%
to 100%) in the percent of children infected with the challenge virus compared
to placebo. In the only children's study that included a comparison to
inactivated vaccine, the cold adapted vaccine resulted in a 52% reduction in
virus shedding, whereas the inactivated vaccine reduced shedding by 6%
compared to the placebo.

Cold adapted influenza vaccines also have been tested in field trials where
children and adults were vaccinated before the influenza season, and are then
followed during the next six months in order to assess protection against
influenza disease. The largest study was conducted over four consecutive
influenza seasons. Approximately 5,200 children and adults from ages one to 65
were randomly assigned to each arm of this double-blind, placebo-controlled
study. This study design only allowed comparison of the inactivated and cold
adapted influenza A components. Both vaccines were considered to be well-
tolerated, with slightly increased redness and tenderness at the injection
site in those receiving the inactivated vaccine and slightly increased sore
throat or runny nose, lethargy and aches in those receiving the vaccine nose
drops. This study showed that both cold adapted and inactivated influenza
vaccines were well tolerated and reduced infection and morbidity due to
influenza A. The relative efficacy of the two vaccines differed from one
epidemic year to another and according to which measurement was used to assess
efficacy. As measured by rises in circulating antibodies during the influenza
season (seroconversion), the inactivated vaccine appeared more effective.
However, it is not clear how well this correlates with actual protection, as
the cold adapted and inactivated vaccines both protected recipients from
culture-positive disease at rates which did not differ by an amount which was
statistically significant.

ADDITIONAL RESEARCH PROGRAMS

Live Viruses as Vectors

Aviron believes that its virus engineering technology may be used to create
strains which carry "foreign" genes and are able to deliver genetic or
antigenic information to specific tissues in the host. For example, it is
possible to engineer antigens from other viruses into influenza, as has
already been demonstrated for small antigenic regions from agents such as HIV
and malaria. RSV and PIV-3 are two other important causes of childhood
infections which may be targeted by using the influenza virus as a vector to
deliver antigens.

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Members of the herpes virus family may also serve as vectors to deliver
antigens to make vaccines which protect against other viruses. Due to the
natural properties of this virus, it may be useful to deliver genetic
information to the central nervous system.

Modified Herpes Simplex Viruses to Treat Brain Cancer

The Company's proprietary technology to modify herpes simplex viruses has
been evaluated by others in animal models for the treatment of brain cancer.
Malignant glioma is the most lethal of the common tumors originating in the
brain. In spite of surgical therapy radiotherapy and chemotherapy, five-year
survival rates in humans of approximately 5% are seen. Many new therapies have
been investigated, including radiation, hyperthermia, phototherapy,
immunotherapy, novel drug delivery for chemotherapy and gene therapy. Two of
Aviron's founders, Dr. Richard Whitley and Dr. Bernard Roizman, modified the
herpes simplex virus using genetic engineering and have tested this virus in
an animal model of malignant glioma. Preliminary results show that tumor size
was reduced by the modified viruses, resulting in longer life and reduced
neurological deficit for the treated animals.

Aviron has entered into a collaboration with Neurovir to develop the
Company's proprietary technology for the use of herpes simplex virus to treat
brain cancer and as a vector for gene therapy for treatment of cancer and
neurological disease. No assurance can be given that Neurovir will be
successful in developing this technology.

PRODUCTION AND MANUFACTURING

The Company currently does not have facilities to manufacture the cold
adapted influenza vaccine and has no experience with clinical or commercial
manufacture of this potential product. All of the cold adapted vaccine
material used in the Company's clinical trials is being supplied by Evans
pursuant to a manufacturing and development agreement entered into in November
1995 (the "Evans Clinical Agreement"). Evans is one of four companies licensed
by the FDA to produce influenza vaccine for sale in the United States and
produces an injectable influenza vaccine that would compete with the Company's
cold adapted influenza vaccine. Under the Evans Clinical Agreement, Evans is
producing and supplying the Company with sufficient quantities of cold adapted
influenza vaccine to conduct its current clinical trials and those planned for
the 1997/98 influenza season, subject to certain limitations. Under the
agreement, Evans is also collaborating with Aviron to develop a formulation of
the cold adapted influenza vaccine requiring only refrigeration rather than
frozen storage. The Company also granted Evans a right of first negotiation
with respect to distribution rights for the vaccine in Europe. Either party
may terminate the Evans Clinical Agreement upon six months notice to the other
party.

The Company is currently conducting clinical trials to demonstrate lot-to-
lot consistency of the cold adapted vaccine being supplied by Evans.
Consistency information is necessary for the Company's FDA submission.

The Company plans to obtain initial commercial quantities of its cold
adapted influenza vaccine, if approved by the FDA, for its first two influenza
seasons of commercial production from Evans. Pursuant to an agreement entered
into in April 1997 (the "Evans Commercial Agreement"), Evans has agreed to
manufacture the Company's live cold adapted influenza vaccine until December
31, 2000, the expiration of the initial term of the Evans Commercial
Agreement. Thereafter, the Company will be required to either extend its
contract with Evans, contract with an alternative commercial supplier or
obtain a commercial manufacturing facility, which would require a significant
amount of funds. There can be no assurance that the Company will be able to
extend the term of the Evans Commercial Agreement or that an alternative
commercial supplier for the commercial manufacture of the cold adapted
influenza vaccine can be reached, or if reached, on terms satisfactory to the
Company and in time for the relevant influenza season. In addition, as part of
the regulatory approval process, before commercial launch of the cold adapted
influenza vaccine, the Company will need to obtain, in addition to an approval
of a PLA, an approval of an ELA for the Evans facility to manufacture the
Company's cold adapted influenza vaccine.

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In addition, to make the vaccine available for clinical trials or commercial
sales before each influenza season, the Company must successfully modify the
vaccine within a six-month period to include selected strains for a particular
year. If the Company were unable to develop an influenza vaccine for a
particular year that meets FDA and CDC guidelines and establish a
manufacturing process for the vaccine, its business, financial condition and
results of operations would be materially adversely affected. No assurance can
be given that delays in preparing vaccines for use in clinical trials or
commercial sales will not be encountered. In addition, there can be no
assurance that the Company's development efforts will be successful, that
required regulatory approvals, including those with respect to IND or PLA and
ELA applications, will be obtained or that any products, if introduced, will
be successfully marketed.

In April 1996, the Company completed construction of a pilot manufacturing
facility for its potential vaccine products other than the cold adapted
influenza vaccine. Funding was obtained through the Company's existing capital
lease line of credit. The Company currently does not have facilities to
manufacture any of its other potential products in commercial quantities and
has no experience with commercial manufacture of vaccine products. To
manufacture its other potential products for large-scale clinical trials or on
a commercial scale, the Company may be required to build a large-scale
manufacturing facility, which would require a significant amount of funds. The
scale-up of manufacturing for commercial production would require the Company
to develop advanced manufacturing techniques and rigorous process controls.
Furthermore, the Company would be required to register its facility with the
FDA and with the California Department of Health Services and would be subject
to state and federal inspections confirming the Company's compliance with cGMP
regulations established by the FDA. However, no assurance can be given as to
the ability of the Company to produce commercial quantities of its potential
products in compliance with applicable regulations or at an acceptable cost,
or at all.

MARKETING AND SALES

The current purchasers of vaccines are principally physicians, large HMOs
and state and federal government agencies. However, the United States health
care system is undergoing significant changes and

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the relative proportion that each group will represent in the future will
depend on factors such as legislative changes and the economy. The Company
intends to sell its products directly to HMOs, large employers and state and
federal health care agencies, and to other buyers outside the United States
through partners with strong capabilities in local markets. Outside the United
States, the Company plans to sell its potential products through collaborative
agreements with strategic partners. Aviron intends to use rigorous cost-
effectiveness analysis as a guide for its pricing strategy and in support of
its marketing plans.

The Company currently has no marketing, sales or distribution capabilities.
To market any products, Aviron must either obtain the assistance of a third
party with a suitable distribution system, develop a direct sales and
marketing staff of its own or combine the efforts of a third party with its
own efforts. Other than SmithKline Beecham and Sang-A, the Company to date has
no agreements for marketing or distributing its potential products.

The success and commercialization of the Company's products is dependent in
part upon the ability of the Company to maintain and enter into additional
collaborative agreements with corporate partners for the development, testing
and marketing of certain of its vaccines and upon the ability, of these third
parties to perform their responsibilities. Although Aviron believes that
parties to any such arrangements would have an economic motivation to succeed
in performing their contractual responsibilities, the amount and timing of
resources devoted to these activities will not be within the control of the
Company. There can be no assurance that any such agreements or arrangements
would be available on terms acceptable to the Company, if at all, that such
third parties would perform their obligations as expected, or that any revenue
would be derived from such arrangements. If Aviron is not able to enter into
such agreements or arrangements, it could encounter delays in introducing its
potential products into the market or be forced to limit the scope of its
commercialization activities. If the Company were to market products directly,
significant additional expenditures, management resources and time would be
required to develop a marketing and sales staff within the Company. In
addition, the Company would also be competing with other companies that
currently have experienced and well-funded marketing and sales operations.
There can be no assurance that the Company will be able to establish its own
marketing and sales force or that any such force, if established, would be
successful.

COLLABORATIVE AGREEMENTS

National Institute of Allergy and Infectious Diseases--Parainfluenza Virus
Type 3

In May 1996, the Company obtained exclusive rights from the NIAID of the NIH
to certain biological materials and clinical trial data for its PIV-3 program.
The NIH granted to the Company exclusive rights in specific strains of bovine
parainfluenza virus (the "Licensed Materials") to develop, test, manufacture,
use and sell products for vaccination against human parainfluenza virus and
other human and animal diseases ("Licensed Products"). In addition, the
Company obtained from the NIAID the right to reference an existing IND and
certain data relating to the Licensed Materials. The NIH retained certain
rights to the Licensed Materials on behalf of the United States Government to
conduct research and to grant research licenses to third parties under certain
circumstances. In return for the rights granted by NIH, the Company will make
payments to NIH on the achievement of specified milestones and will make
certain royalty payments to NIH. Unless otherwise terminated, the Agreement
will terminate on cessation of commercial sales of Licensed Products by the
Company or its sublicensee. The Company has the unilateral right to terminate
the Agreement in any country upon providing 60 days notice to NIH.

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SmithKline Beecham Biologicals S.A.

SmithKline Beecham has agreed to fund research and development at the
Company related to the EBV vaccine, in specified minimum amounts, during the
first two years of the SB Agreement. SmithKline Beecham made an initial
upfront payment to the Company and agreed to make additional payments upon the
achievement of certain product development milestones. The Company is entitled
to royalties from SmithKline Beecham based on net sales of the vaccine. Unless
otherwise terminated, the SmithKline Beecham Agreement will expire upon the
expiration or invalidation of the last remaining patent covered by the SB
Agreement or 10 years from the date of first commercial sale of the vaccine,
whichever is later. The SB Agreement may be terminated by SmithKline Beecham
with respect to any country at any time. See "Legal Proceedings."

Sang-A Pharm. Co., Ltd.

Sang-A also is obligated to establish a manufacturing facility with at least
enough capacity to meet demand for all Korean product requirements for each
product that reaches commercialization, if any. In the event that Sang-A's
manufacturing capabilities satisfy certain objective criteria and subject to
an obligation to cooperate with the Company's future corporate partners for
any given products, Sang-A has a right of first refusal to manufacture a
portion of the total requirements of the Company, its affiliates and
sublicensees for the specified products, with the exception of the EBV
vaccine, in specified countries, including the United States, provided that it
can do so at a competitive price, quality and timeline.

The term of this agreement extends, on a product-by-product basis, until 10
years from the date of first commercial sale of each product in Korea. At the
conclusion of the term, Sang-A has an option to extend the agreement on a
product-by-product basis, for the longer of an additional 10 years or the
expiration of the patents covering such product. During any such extension,
Sang-A will have either no royalty obligation to the Company or a reduced
royalty obligation, depending on the product.

In return for the rights granted to Sang-A, Sang-A made an equity investment
in the Company in May 1995 of approximately $4.0 million. Sang-A subsequently
made additional equity investments of approximately $1.6 million in the
Company's private placement of Series C Preferred Stock and $1.9 million in
the Company's initial public offering of Common Stock.

In January 1997, the Hanbo Group declared bankruptcy. Hanbo Group is the
conglomerate that owns Sang-A. The Company is unable to predict what, if any,
effect the bankruptcy of Hanbo Group will have on Hanbo Group subsidiaries,
including Sang-A.

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National Institute of Allergy and Infectious Diseases--Cold Adapted Influenza
Vaccine

Following a competitive application process, the Company entered into a
CRADA in March 1995 with the National Institute of Allergy and Infectious
Diseases of the NIH to conduct clinical trials of the Company's cold adapted
influenza vaccine. Wyeth-Ayerst licensed certain rights to the vaccine from
the NIH in 1991 and was developing it for sale in collaboration with the NIH
until relinquishing its rights in 1993. Aviron has obtained from the NIH and
the University of Michigan exclusive rights to trial results and data from the
work at the VTEUs and Wyeth-Ayerst. The NIH has agreed to support the trials
by enrolling subjects in its network of VTEUs. In addition, the Company
acquired exclusive commercial rights to data generated from all previous
clinical trials conducted by the NIH and Wyeth-Ayerst using the vaccine. The
term of the CRADA will not exceed five years without a written amendment by
the parties. Either party may terminate the CRADA for material breach.

University of Michigan

In February 1995, the Company entered into a materials transfer and
intellectual property agreement (the "Michigan Agreement") with the University
of Michigan. Pursuant to the Michigan Agreement, the University of Michigan
granted the Company exclusive worldwide rights to certain intellectual
property and technology, relating to a cold adapted influenza vaccine and
proprietary donor strains of influenza viruses useful in the production of
products for vaccination against influenza and potentially for gene therapy
and other uses (the "Master Strains"). Specifically, the Company obtained the
exclusive right to develop, manufacture, use, market and sell products
incorporating any such intellectual property or utilizing the Master Strains
worldwide. In consideration for the rights granted to the Company, the
Company: (i) made an initial cash payment to the University of Michigan; (ii)
agreed to pay a royalty to the University of Michigan on net sales of products
subject to the license; (iii) entered into a sponsored research agreement with
the University of Michigan for a period of at least two years; and (iv) issued
to the University of Michigan 1,323,734 shares of Series B Preferred Stock,
which automatically converted into 264,746 shares of the Company's Common
Stock at the time of the Company's initial public offering. In addition, in
the event that Aviron receives approval to commercially market a product based
on the University of Michigan technology, the Company has agreed to issue a
warrant to the University of Michigan to purchase shares of the Company's
Common Stock at a price of $10.00 per share, for a number of shares to be
based on 1.25% of the Common Stock outstanding on the date of the first
commercial sale of the product incorporating the University of Michigan
technology.

Pursuant to the Michigan Agreement, the Company is required to grant to the
University of Michigan an irrevocable, royalty-free license for research
purposes, or for transfer to a subsequent licensee should the Michigan
Agreement be terminated, to (i) all improvements developed by the Company, its
affiliates or sublicensees, whether or not patentable; relating to delivery
mechanisms and processes for administration and manufacturing of products, as
well as packaging storage and preservation processes for the Master Strains,
and (ii) all new technical information acquired by the Company, its affiliates
or sublicensees relating to the Master Strains and products.

The term of the Michigan Agreement is until the later of the last to expire
of the University of Michigan patents licensed to the Company or 20 years from
the date of first commercial sale of a product incorporating the Michigan
technology. The Company has the further right to terminate for any reason upon
12 months notice to the University of Michigan.

The Mount Sinai School of Medicine

In February 1993, the Company entered into a technology transfer agreement
with The Mount Sinai School of Medicine of the City University of New York
("Mount Sinai"). Under this agreement, Mount Sinai assigned to the Company all
of its rights, title and interest in and to certain patents and patent
applications, as well as all associated know-how and other technical
information relating to recombinant negative strand RNA

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virus expression systems and vaccines, attenuated influenza viruses and
certain other technology. Mount Sinai also granted the Company (i) an option
to acquire any improvements to the inventions disclosed in the assigned
patents and patent applications thereafter developed by Mount Sinai and (ii) a
right of first negotiation for a license or assignment to certain additional
related technology. In consideration for the rights granted to the Company,
the Company issued to Mount Sinai 35,000 shares of the Company's Common Stock.
The Company also issued to Mount Sinai four warrants to purchase up to a total
of 45,000 shares of the Company's Common Stock, each exercisable for a term of
five years commencing upon the occurrence of certain milestone events.
Warrants to purchase 9,000 shares are currently exercisable at a per share
exercise price of $4.50. Warrants to purchase 29,750 shares became exercisable
at the effective date of the Company's initial public offering at a per share
exercise price of $10.00. Warrants to purchase the remaining 6,250 shares were
terminated on the effective date of the Company's initial public offering
according to their terms. In 1996, warrants to purchase 3,124 shares were
distributed by Mount Sinai to certain inventors of the relevant technology.

ARCH Development Corporation

In July 1992, the Company entered into a license agreement with ARCH,
pursuant to which the Company obtained an exclusive, worldwide
commercialization license, with the right to sublicense, to certain patent
rights and related intellectual property and materials pertaining to the
herpes simplex viruses, EBV and various recombinant methods and materials. In
return for the rights granted to the Company under this agreement, the Company
will make payments to ARCH upon the achievement of certain milestones in the
development of products covered by the license and will pay royalties to ARCH
on net sales of such products. ARCH also granted the Company certain rights to
improvements and additional related technology. The term of this agreement
extends until the expiration of the last-to-expire patent rights covered under
the license. In connection with this agreement, ARCH purchased 40,000 shares
of the Company's Common Stock. Subsequent to this agreement, affiliates of
ARCH made equity investments in Aviron, purchasing shares of the Company's
Series A, B and C Preferred Stock, which automatically converted into a total
of 222,799 shares of the Company's Common Stock upon the closing of the
Company's initial public offering. ARCH has recently asserted an
interpretation of the financial terms of this agreement with the Company,
relating to the license by Aviron of its EBV technology to SmithKline Beecham,
which would require the Company to pay ARCH one-half of any future or past
payments (including sub-license fees and milestone payments) received by
Aviron under the SB Agreement. The Company disputes ARCH's interpretation of
the financial terms of the agreement. No assurance can be given, however, that
the Company's interpretation will prevail. Failure of the Company to prevail
could have a material adverse effect on the Company's business, financial
condition or results of operations.

PATENTS AND PROPRIETARY RIGHTS

Aviron believes that patent and trade secret protection is important to its
business and that its future will depend in part on its ability to maintain
its technology licenses, maintain trade secret protection, obtain patents and
operate without infringing the proprietary rights of others. The Company owns
or has licensed rights to United States and foreign patents and patent
applications covering aspects of technology relating to herpes viruses,
including EBV, CMV, and HSV-2 and negative strand RNA viruses, such as
influenza and RSV technologies. Aviron has acquired or licensed rights to over
a dozen patent applications pending in the United States, and nine issued
United States patents.

The Company has no issued patents on the technology directly related to its
cold adapted influenza vaccine. The Company's rights to this technology are
substantially based on an exclusive worldwide license of materials and know-
how from the University of Michigan, which owns the master strains from which
the vaccine is derived, and on an exclusive license of know-how and clinical
trial data from the NIH. Neither the University of Michigan nor the NIH rely
on patents for ownership of the rights licensed to Aviron. There can be no
assurance that a third party will not gain access to the University of
Michigan master strains, or reproduce the Company's cold adapted influenza
vaccine or develop another live-virus influenza vaccine which might be
comparable to Aviron's in terms of safety and efficacy.

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The Company also relies on trade secrets to protect its technology,
especially where patent protection is not believed to be appropriate or
obtainable. Certain of the Company's licensors also rely on trade secrets to
protect technology which has been licensed to Aviron, and as a result, the
Company is dependent on the efforts of these licensors to protect such trade
secrets. For example, the University of Michigan relies in part on trade
secrets to protect the master strains of the cold adapted influenza virus used
by the Company and the NIH relies in part on trade secrets to protect the
master strains of the bPIV-3 virus. Aviron protects its proprietary technology
and processes, in part, by confidentiality agreements or material transfer
agreements with its employees, consultants, collaborators and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets or those of its licensors will not otherwise become
known or be independently discovered by competitors. To the extent that Aviron
or its consultants or research collaborators use intellectual property owned by
others in their work for the Company, disputes may also arise as to the rights
in related or resulting know-how and inventions. On July 1, 1996, Chiron filed
a complaint against the Company in San Mateo County, California, Superior
Court, alleging that certain of Aviron's patent applications relating to its
EBV program are based on Chiron proprietary information which was improperly
conveyed to Aviron by a former Chiron employee, and that the Company has
engaged in unfair competition. There has been no discovery to date in this
matter. A trial date has been set for November 1997 in the Superior Court of
San Mateo County, California. See "--Legal Proceedings."

The Company's success also will depend in part on its ability to maintain its
technology licenses, maintain trade secrets, obtain patents and operate without
infringing the rights of others, both in the United States and in other
countries. Since patent applications in the United States are maintained in
secrecy until patents issue and since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, the
Company cannot be certain that it was the first to make the inventions covered
by each of its pending patent applications or that it was the first to file
patent applications for such inventions. The patent positions of biotechnology
and pharmaceutical companies can be highly uncertain and involve complex legal
and factual questions, and therefore the breadth of claims allowed in
biotechnology and pharmaceutical patents, or their enforceability, cannot be
predicted. There can be no assurance that any of the Company's or its
licensor's patents or patent applications will issue, or if issued, will not be
reexamined, reissued, opposed, challenged, invalidated or circumvented, or that
the rights granted thereunder will provide proprietary protection or
competitive advantages to the Company. In May 1996, American Cyanamid Company
filed an opposition to the grant of the Company's European patent with claims
directed to chimeric negative strand RNA viruses and to methods of engineering
these viruses to express foreign proteins and antigens. American Cyanamid
Company primarily challenges the breadth of the claims which the Company was
granted. While the Company is responding to the opposition, no assurance can be
given as to the scope of the claims, if any, which the European Patent Office
ultimately will find patentable. Failure of the Company to prevail in the
opposition would impede the Company's ability to prevent competitors from using
this technology in Europe.

The commercial success of Aviron additionally will depend, in part, upon the
Company's not infringing patents issued to others. A number of pharmaceutical
companies, biotechnology companies, universities and research institutions have
filed patent applications or received patents in the areas of the Company's
programs. Some of these applications or patents may limit the scope of claims
issuing from the Company's applications, prevent certain claims from being
issued, or conflict in certain respects with claims made under the Company's
applications.

The Company is aware of pending patent applications that have been filed by
others that may pertain to certain aspects of the Company's programs, including
the Company's influenza vaccine, or its issued or pending patent applications.
The Company is aware of a claim by a third party regarding inventorship of

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subject matter claimed in a United States patent which, along with its related
foreign counterpart patents and applications, is licensed to the Company and
which is directed to certain aspects of technology relating to herpes viruses.
This claim may also relate to a pending United States patent application,
which is a continuation of the licensed patent. It is presently unclear
whether this claim of inventorship is valid, and, if valid, it could affect
ownership of the subject United States patent and patent application as well
as their foreign counterparts. If patents have been or are issued to others
containing preclusive or conflicting claims and such claims are ultimately
determined to be valid, the Company may be required to obtain licenses to
these patents or to develop or obtain alternative technology. No assurance can
be given that patents have not been issued, or will not be issued, to third
parties that contain preclusive or conflicting claims with respect to the cold
adapted influenza vaccine or any of the Company's other programs. The
Company's breach of an existing license or failure to obtain a license to
technology required to commercialize its products may have a material adverse
effect on the Company's business, financial condition and results of
operations. Litigation, which could result in substantial costs to the
Company, may also be necessary to enforce any patents issued to the Company or
to determine the scope and validity of third-party proprietary rights. If
competitors of the Company prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may have
to participate in interference proceedings declared by the United States
Patent and Trademark Office to determine priority of invention, which could
result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company. An adverse outcome could subject the Company to
significant liabilities to third parties and require the Company to license
disputed rights from third parties or cease using such technology.

GOVERNMENT REGULATION

Regulation by government authorities in the United States and other
countries will be a significant factor in the manufacturing and marketing of
any products that may be developed by the Company. All of the Company's
products will require regulatory approval by government agencies prior to
commercialization. The Company's vaccine products are subject to rigorous
preclinical testing and clinical trial and other approval procedures by the
FDA and similar health authorities in foreign countries. Various federal
statutes and regulations also govern or influence the manufacturing, safety,
labeling, storage, record keeping and marketing of such products.

The Company believes that its vaccine products will be classified by the FDA
as "biologic products," as opposed to "drug products." The steps ordinarily
required before a drug or biological product may be marketed in the United
States include (a) preclinical testing and clinical trials; (b) the submission
to the FDA of an IND, which must become effective before clinical trials may
commence; (c) adequate and well-controlled clinical trials to establish the
safety and efficacy of the drug; (d) the submission to the FDA of a PLA; and
(e) FDA approval of the applications, including approval of all product
labeling.

Clinical trials involve the administration of the investigational product to
humans under the supervision of a qualified principal investigator. Clinical
trials must be conducted in accordance with GLP under protocols submitted to
the FDA as part of the IND. In addition, each clinical trial must be approved
and conducted under the auspice of an IRB and with patient informed consent.
The IRB will consider, among other things, ethical factors, the safety of
human subjects and the possible liability of the institution conducting the
clinical trial.

53
<PAGE>

Phase I clinical trials are generally performed in healthy human subjects.
The goal of the Phase I clinical trials is to establish initial data about
safety and tolerance of the vaccine in humans. Also, the data regarding the
immune response to a vaccine may be obtained. In Phase II clinical trials,
evidence is sought about the desired therapeutic efficacy of a drug or
antibody, or the immune response to a vaccine, in limited studies with small
numbers of carefully selected subjects. Efforts are made to evaluate the
effects of various dosages and to establish an optimal dosage level and dosage
schedule. Additional safety data are also gathered from these studies. The
Phase III clinical trial program consists of expanded, large-scale,
multicenter studies of persons who are susceptible to the disease. The goal of
these studies is to obtain definitive statistical evidence of the efficacy and
safety of the proposed product and dosage regimen.

All data obtained from this comprehensive development program are submitted
as a PLA to the FDA and the corresponding agencies in other countries for
review and approval. FDA approval of the PLA and the associated ELA is
required before marketing may begin in the United States. The FDA will present
to the Vaccine and Related Biological Products Advisory Committee
documentation on most of Aviron's potential products for review and
recommendation before PLA approval. Although the FDA's policy is to review
priority applications within 180 days of their filing, in practice longer
times may be required. The FDA frequently requests that additional information
be submitted requiring significant additional review time. All proposed
products of the Company will be subject to demanding and time-consuming PLA or
similar approval procedures in the countries where the Company intends to
market its products. These regulations define not only the form and content of
the development of safety and efficacy data regarding the proposed product,
but also impose specific requirements regarding manufacture of the product,
quality assurance, packaging, storage, documentation and record keeping,
labelling and advertising, and marketing procedures. Effective
commercialization also requires inclusion of the Company's products in
national, state, provincial, or institutional formularies or cost
reimbursement systems.

FDA approval of the Company's potential products, including a review of the
manufacturing processes and facilities used to produce such products, will be
required before such products may be marketed in the United States. The
process of obtaining approvals from the FDA can be costly, time consuming and
subject to unanticipated delays. The FDA may refuse to approve an application
if it believes that applicable regulatory criteria are not satisfied. The FDA
may also require additional testing for safety and efficacy of the drug.
Moreover, if regulatory approval of a drug product is granted, the approval
will be limited to specific indications. There can be no assurance that
approvals of the Company's proposed products, processes or facilities will be
granted on a timely basis, if at all. Any failure to obtain or delay in
obtaining such approvals would have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, even if
regulatory approval is granted, such approval may include significant
limitations on indicated uses for which a product could be marketed.

In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Nuclear Regulatory
Commission, the Resource Conservation and Recovery Act and other present and
potential future federal, state or local regulations. The Company's research
and development involves the controlled use of hazardous materials and
chemicals. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed
by state and federal regulations, there can be no assurance that accidental
contamination or injury from these materials will not occur. In the event of
such an accident, the Company could be held liable for any damages that result
and any such liability could exceed the resources of the Company.

Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities may be necessary in foreign countries prior
to the commencement of marketing of the product in such countries. The
approval procedure varies among countries, can involve additional testing, and
the time required may differ from that required for FDA approval. Although
there is now a centralized European Union approval mechanism in place, each
European country may nonetheless impose its own procedures and requirements,
many of which are time consuming and expensive. Thus, there can be substantial
delays in

54
<PAGE>

obtaining required approvals from both the FDA and foreign regulatory
authorities after the relevant applications are filed. The Company expects to
rely on corporate partners and licensees, along with Company expertise, to
obtain governmental approval in foreign countries of drug formulations
utilizing its candidates.

The Company believes that the approval process for vaccines may be longer
than for other therapeutic products, since vaccines are administered to
healthy individuals. In addition, regulatory scrutiny may be particularly
intense for products, such as Aviron's cold-attenuated influenza vaccine,
which are designed to be given to otherwise healthy children.

COMPETITION

The Company operates in a rapidly evolving field. Any product developed by
the Company would compete with existing and new drugs and vaccines being
created by pharmaceutical, biopharmaceutical and biotechnology companies. If
the Company were able to successfully develop its vaccines, it would be
competing with larger companies that have already introduced vaccines and have
significantly greater marketing, sales, manufacturing, financial and
managerial resources. For example, with respect to its cold adapted influenza
vaccine, the Company will be competing against larger companies such as
Pasteur Merieux Connaught, Wyeth-Ayerst, Parke-Davis and Evans, the supplier
of the Company's cold adapted influenza vaccine. Each of these companies sells
the inactivated injectable influenza vaccine in the United States, has
significantly greater financial resources than Aviron and has established
marketing and distribution channels for such products. The Company is also
aware of several companies that are marketing or are in late-stage development
of products to prevent HSV disease, including Glaxo, SmithKline Beecham and
Chiron Biocine Corporation. In addition, the Company is also aware of the use
in Russia of a cold adapted influenza vaccine, research programs by some of
the competitors listed above, among others, to develop more effective
influenza vaccines and a cold adapted PIV-3 vaccine developed with NIH support
which may be licensed to a large vaccine company.

New developments are expected to continue in both the pharmaceutical and
biotechnology industries and in academia. Other companies may succeed in
developing products that are safer, more effective or less costly than any
that may be developed by the Company. Such companies may also be more
effective than the Company in the production, marketing and sales of their
products. Furthermore, rapid technological development by competitors may
result in the Company's products becoming obsolete before the Company is able
to recover its research, development or commercialization expenses incurred in
connection with any such product. Many potential competitors have
substantially greater financial, technical and marketing resources than the
Company. Some of these companies also have considerable experience in
preclinical testing, clinical trials and other regulatory approval procedures.
Moreover, certain academic institutions, government agencies and other
research organizations are conducting research in areas in which the Company
is working. These institutions are becoming increasingly aware of the
commercial value of their findings and are becoming more active in seeking
patent protection and licensing arrangements to collect royalties for the use
of technology that they have developed. These institutions may also market
competitive commercial products on their own or through joint ventures.

PHARMACEUTICAL PRICING AND REIMBURSEMENT

55
<PAGE>

limitations on the growth of private health insurance premiums and Medicare
and Medicaid spending, the creation of large insurance purchasing groups,
price controls on pharmaceuticals and other fundamental changes to the health
care delivery system. Any such proposed or actual changes could cause the
Company or its collaborative partners to limit or eliminate spending on
development projects. Legislative debate is expected to continue in the
future, and market forces are expected to demand reduced costs. Aviron cannot
predict what impact the adoption of any federal or state health care reform
measures or future private sector reforms may have on its business.

Several of the Company's proposed vaccines are intended for use in children.
Widespread use of these proposed vaccines is unlikely without recommendations
for their use in childhood immunization programs from authorities such as the
ACIP, the American Academy of Pediatrics and the American College of
Physicians. The ACIP has a role in making recommendations which affect the
market for most, if not all, of the products Aviron intends to make. The CDC
develops epidemiologic data in support of the need for new vaccines and
monitors vaccine usage and changes in disease incidence. In addition, CDC
staff frequently act as key advisors to the FDA in their review process. There
can be no assurance that such authorities will recommend the use of the
Company's proposed products, which would have a material adverse effect on the
Company's business, financial condition and results of operations.

LEGAL PROCEEDINGS

On July 1, 1996, Chiron filed a complaint against the Company in San Mateo
County, California, Superior Court, alleging that certain of Aviron's patent
applications relating to its EBV program are based on Chiron proprietary
information which was improperly conveyed to Aviron by a former Chiron
employee, and that the Company has engaged in unfair competition. The
complaint seeks unspecified monetary damages and seeks to impose a
constructive trust, for Chiron's benefit, over the affected patent
applications, an exclusive assignment by the Company to Chiron of such patent
applications and an injunction against the Company from disclosing, using or
applying such alleged proprietary information. Aviron believes that the
allegations in the Chiron complaint are without merit and intends to
vigorously defend itself against such action. Aviron does not utilize the
alleged Chiron proprietary information in any of its potential products
currently under development. Even if Chiron were to prevail in this action,
the Company believes that it is uncertain that a court would grant a
constructive trust over the specified patent applications, which include many
claims (including certain rights the Company licensed to SmithKline Beecham)
not relating to the alleged Chiron proprietary technology. Were a court to
grant a constructive trust over such patent applications, it could adversely
impact the Company's agreement with SmithKline Beecham. There has been no
discovery to date in this matter. A trial date has been set in November 1997
in the Superior Court of San Mateo County, State of California. There can be
no assurance that Chiron will not ultimately prevail in this action or that it
will not obtain the remedies it is seeking. In addition, the Company expects
that the legal costs incurred in defending itself against this action could be
substantial.

56
<PAGE>

EMPLOYEES

As of June 30, 1997, the Company had 62 full-time employees. Thirty-five of
the Company's employees were in research and development, nine were in
regulatory affairs, quality assurance and quality control, six were in
clinical research and 12 were in administration. No Company employee is
represented by a labor union, and the Company has not experienced any work
stoppages. The Company considers its employee relations to be good.

FACILITIES

Aviron leases approximately 52,800 square feet of office and laboratory
space in Mountain View, California. The Company has leased this facility
through October 2005 and has two options to extend the lease for successive
five-year terms. The Company currently subleases approximately 13,000 square
feet of space to two subtenants. One sublease runs through March 1998 and may
be extended or renegotiated at Aviron's discretion; one sublease for 6,667
square feet runs through December 1997 and may be extended or renegotiated at
Aviron's discretion. The Company believes that this facility is adequate to
meet its needs for the foreseeable future.

SCIENTIFIC ADVISORY BOARD

Aviron's scientific advisors are consultants who each devote six to 20 days
per year to the Company. Some meet frequently with Company employees to
discuss specific projects and others participate primarily via the Company's
two annual meetings of the Scientific Advisory Board.

Ann Arvin, M.D., Professor of Pediatrics, Microbiology and Immunology at the
Stanford University School of Medicine, has been a member of the Company's
Scientific Advisory Board since 1992. Dr. Arvin has conducted research on the
epidemiology of maternal-to-infant transmission of HSV-2 and she directs one
of the leading laboratories in the study of the interaction of the human
immune system with the varicella zoster (chicken pox) virus in natural and
vaccine infections.

Harry Greenberg, M.D., Professor of Medicine, Microbiology and Immunology
and Chief of the Division of Gastroenterology and Associate Chairman for
Academic Affairs, Department of Medicine at the Stanford University School of
Medicine, has been a member of the Company's Scientific Advisory Board since
1992. Dr. Greenberg's research deals with the immunology and pathogenesis of
the principal viruses which cause infectious diarrhea and hepatitis.

Elliot Kieff, M.D., Ph.D., Albee Professor of Medicine, Microbiology and
Molecular Genetics and Chairman of the Virology Program at Harvard University,
and Director of Infectious Disease at the Brigham and Women's Hospital, has
been a member of the Company's Scientific Advisory Board since 1992. Dr.
Kieff's laboratory conducts research on the molecular mechanisms of how EBV is
a contributory cause of cancer in humans.

Joshua Lederberg, Ph.D., the Raymond and Beverly Sackler Foundation Scholar
and former President of The Rockefeller University, has been a member of the
Company's Scientific Advisory Board since 1992. He received the Nobel Prize in
Physiology or Medicine for his discovery of genetic recombination in bacteria.
His laboratory at the Rockefeller University studies molecular genetics and he
is active in formulation of national policy concerning emerging infections.

Hunein F. Maassab, Ph.D., Chairman of the Department of Epidemiology, School
of Public Health, at the University of Michigan, has been a member of the
Company's Scientific Advisory Board since 1995. He is the inventor of the cold
adapted influenza vaccine licensed to the Company by the University of
Michigan and has published numerous papers on this subject. His laboratory is
studying the molecular basis of influenza virus attenuation and is involved in
development of new vaccines for other respiratory viruses.

57
<PAGE>

Edward Mocarski, Jr., Ph.D., Professor and Chairman of the Department of
Microbiology and Immunology at the Stanford University School of Medicine, has
been a member of the Company's Scientific Advisory Board since 1992. His
laboratory engineered the first recombinant CMV providing the first
demonstration of this virus as a vector and is one of the leading groups
conducting research on CMV gene regulation.

Peter Palese, Ph.D., a founder of the Company and member of the Scientific
Advisory Board since 1992, is Professor and Chairman of the Department of
Microbiology at The Mount Sinai School of Medicine of the City University of
New York. His laboratory developed the first successful strategy for making
genetically engineered influenza viruses. This invention is the subject of a
United States patent issued in 1992 covering the genetic engineering of
negative strand RNA viruses rights to which patent have been acquired by the
Company. Dr. Palese's research group has been responsible for developing a
genetic map for influenza virus, elucidating the function of viral proteins,
and the creation of recombinant influenza strains which demonstrate the use of
this virus as a vector.

Gerald V. Quinnan, Jr., M.D., Professor of Preventive Medicine, Medicine and
Microbiology, Department of Preventive Medicine and Biometrics at the
Uniformed Services University of the Health Sciences in Bethesda, Maryland,
has been a member of the Company's Scientific Advisory Board since 1995. Dr.
Quinnan was employed by the FDA from 1977 until 1993. From 1980 to 1988, he
was Director of the Virology Division, subsequently serving as Deputy Director
and Acting Director, of the Center for Biologics Evaluation and Research. Dr.
Quinnan's research concerns aspects of HIV immunology related to vaccine
development.

Bernard Roizman, Sc.D., a founder and director of the Company and member of
the Scientific Advisory Board since 1992, is the Joseph Regenstein
Distinguished Service Professor of the Departments of Molecular Genetics and
Cell Biology and of Biochemistry and Molecular Biology at The University of
Chicago. His laboratory is a leading center of research on neurovirulence of
the herpes simplex viruses, created the first example of a large DNA virus
which had been genetically engineered and provided the first demonstration of
herpes simplex virus as a vector. Dr. Roizman is a member of the United States
National Academy of Sciences. The Company's HSV-2 vaccine program is based on
patented technology developed in his laboratory, licensed to Aviron.

John Skehel, Ph.D., FRS, Director of the National Institute of Medical
Research of the Medical Research Council and the WHO Influenza Surveillance
Center in Mill Hill near London, has been a member of the Company's Scientific
Advisory Board since 1992. His laboratory has contributed new knowledge on the
structure of the influenza virus as well as the molecular epidemiology of this
virus.

Richard Whitley, M.D., a founder of the Company and member of the Scientific
Advisory Board since 1992, is Professor of Pediatrics, Microbiology, and
Medicine and Vice Chairman of the Department of Pediatrics at the University
of Alabama School of Medicine in Birmingham. He has conducted pharmacologic
and clinical studies on many antiviral drugs and his laboratory is a leading
center of research on the mechanism by which herpes simplex virus causes
disease, and he is studying the use of modified herpes viruses to treat brain
cancer. Dr. Whitley is former Chairman of the NIH Data Monitoring and Safety
Committee for AIDS Therapy and a member of the Committee on Infectious Disease
of the American Academy of Pediatrics (The Redbook Committee).

58
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company as of July 18, 1997 are
set forth below:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- ---- --------
<S> <C> <C>
J. Leighton Read, M.D....... 46 Chairman and Chief Executive Officer
Vera Kallmeyer, M.D., 38 Chief Financial Officer and Vice President,
Ph.D....................... CorporateDevelopment
Martin L. Bryant, M.D., 48 Vice President, Research
Ph.D.......................
Victor A. Jegede, Ph.D...... 52 Vice President, Technical Affairs
Paul M. Mendelman, M.D...... 50 Vice President, Clinical Research
Eric J. Patzer, Ph.D........ 48 Vice President, Development
Reid W. Dennis (2).......... 71 Director
Paul H. Klingenstein 41 Director
(1)(2).....................
Bernard Roizman, Sc.D....... 68 Director
Jane E. Shaw, Ph.D. (1)..... 58 Director
L. James Strand, M.D. 55 Director
(1)(2).....................
</TABLE>
- --------
(1)Member of the Compensation Committee.
(2)Member of the Audit Committee.

J. Leighton Read, M.D., a founder of the Company, has been Chairman and
Chief Executive Officer of the Company since 1992 and was Chief Financial
Officer of the Company from 1992 until October 1996. In 1989, he co-founded
Affymax N.V. with Dr. Alejandro Zaffaroni, serving initially as its Executive
Vice President and Chief Operating Officer and later, from 1990 to 1991, as
President of the Pharma Division and as a Managing Director of the parent
company. From 1991 to 1993, Dr. Read was a principal with Interhealth Limited,
an investment partnership. Prior to 1989, Dr. Read held appointments at the
Harvard Medical School and School of Public Health, where his research dealt
with techniques for assessing the cost effectiveness of pharmaceutical
products. He has served on the boards of a number of private biotechnology
companies and is currently on the board of CV Therapeutics, Inc., a public
biotechnology company. Dr. Read holds a B.S. in Biology and Psychology from
Rice University and an M.D. from the University of Texas Health Science Center
at San Antonio.

Vera Kallmeyer, M.D., Ph.D., has been Vice President, Corporate Development
of the Company since 1994 and was elected Chief Financial Officer in October
1996. From 1993 to 1994, Dr. Kallmeyer was Vice President, Healthcare
Banking/Biotech at Flemings, a London-based merchant bank. From 1990 to 1993,
she was an Associate in Investment Banking at Wasserstein Perella and Company.
In 1994, she co-founded Pacific Futures, an investment advisory business
located in Hong Kong, for which she currently serves as Senior Advisor. Dr.
Kallmeyer holds an M.D. and a Ph.D. in Pediatric Cardiology from Ludwig-
Alexander University in Erlangen, Germany, and an M.B.A. from Stanford
University. She has also studied at the Harvard Medical School and the Royal
Postgraduate Medical School in London. Dr. Kallmeyer serves on the board of
directors of NeuroVir Research, Inc., a private biotechnology company, which
has licensed technology from the Company.

Martin L. Bryant, M.D., Ph.D., has been Vice President, Research of the
Company since 1995. Dr. Bryant also currently is Consulting Associate
Professor of Pediatrics at the Stanford University School of Medicine and
Adjunct Associate Professor of Molecular Microbiology at the Washington
University School of Medicine. From 1991 to 1995, he was Director, Infectious
Disease Research for G. D. Searle &

59
<PAGE>

Co./Monsanto, a pharmaceutical company. From 1990 to 1991, he was an
Instructor in Pediatric Infectious Diseases at the Washington University
School of Medicine. Dr. Bryant holds a B.A. in Chemistry from Duke University,
an M.S. in Chemistry from San Diego State University, and an M.D. and a Ph.D.
from the University of Southern California.

Victor A. Jegede, Ph.D., has been Vice President, Technical Affairs of the
Company since 1995. From 1992 to 1994, Dr. Jegede was Vice President,
Regulatory Affairs and Quality for Creative BioMolecules, Inc., a
biopharmaceuticals company, and from 1989 to 1992, he was Director, Regulatory
Affairs and Quality for WelGen Manufacturing Partnership (BW Manufacturing,
Inc.), a division of Burroughs Welcome Manufacturing, Inc., a pharmaceutical
manufacturer. Dr. Jegede holds a B.S. and an M.S. in Biology and a Ph.D. in
Bacteriology from Boston College.

Paul M. Mendelman, M.D., has been Vice President, Clinical Research of the
Company since 1996. Prior to joining the Company, Dr. Mendelman was Director,
Clinical Research, Infectious Diseases for Merck Research Laboratories, a
pharmaceutical company, since September 1991. From 1983 to 1991, Dr. Mendelman
was Clinical Instructor, Assistant Professor and then Associate Professor of
Pediatrics at the University of Washington. Dr. Mendelman holds a B.S. and an
M.D. from Ohio State University and is a fellow of the American Academy of
Pediatrics.

Eric J. Patzer, Ph.D., has been Vice President, Development of the Company
since 1996. Prior to joining the Company, Dr. Patzer had held various
positions with Genentech, Inc., a pharmaceutical company, since 1981, most
recently as Vice President, Development. Dr. Patzer holds a B.S. in Mechanical
Engineering from The Pennsylvania State University and a Ph.D. in Microbiology
from the University of Virginia.

Reid W. Dennis has been a director of the Company since 1992. Mr. Dennis has
been active in venture capital investments since 1952. He founded
Institutional Venture Partners ("IVP"), a venture capital firm, in 1980 and
has acted as a General Partner of IVP since that time. He is currently a
director of Collagen Corporation, as well as several private companies. Mr.
Dennis holds a B.S. in Electrical Engineering and an M.B.A. from Stanford
University.

Paul H. Klingenstein has been a director of the Company since 1993. Mr.
Klingenstein has been associated with Accel Partners, a venture capital firm,
since 1986, where he has been a General Partner since 1988. He is a director
of Xomed Surgical Products Inc. and several private health care and
biopharmaceutical companies. Mr. Klingenstein holds an A.B. from Harvard
University and an M.B.A. from Stanford University.

Bernard Roizman, Sc.D., has been a director of the Company since 1992. Dr.
Roizman has been the Joseph Regenstein Distinguished Service Professor of
Virology at The University of Chicago since 1984. He holds B.A. and M.S.
degrees from Temple University and an Sc.D. from The Johns Hopkins University.
Dr. Roizman is also a member of the Company's Scientific Advisory Board.

Jane E. Shaw, Ph.D., has been a director of the Company since 1996. Dr. Shaw
has been associated with The Stable Network, a biopharmaceutical consulting
company, since she founded it in 1995. From 1987 to 1994, Dr. Shaw was
President and Chief Operating Officer of ALZA Corporation, a pharmaceutical
company, where she began her career as a research scientist in 1970. Dr. Shaw
is also a director of Intel Corporation, McKesson Corporation and Boise
Cascade Corporation. Dr. Shaw holds a B.Sc. and a Ph.D. in Physiology from
Birmingham University, England, and an honorary Sc.D. from the Worcester
Polytechnic Institute.

L. James Strand, M.D., has been a director of the Company since 1992. Dr.
Strand began consulting for IVP, a venture capital firm, in 1986, was named
Life Sciences Venture Partner of IVP in 1993, and a General Partner in 1994.
From 1983 to 1993, Dr. Strand was President of Advanced Marketing Decisions, a
biomedical marketing and product development consulting company. Dr. Strand is
a director of Microcide Pharmaceuticals, Inc. and several privately-held
health care and biomedical companies. He holds B.S., M.A.

60
<PAGE>

and M.D. degrees from the University of California at San Francisco and an
M.B.A. from Santa Clara University and is a fellow of the American College of
Physicians.

The Board of Directors has an Audit Committee which consists of Mr. Dennis,
Mr. Klingenstein and Dr. Strand. The Audit Committee makes recommendations to
the Board regarding the selection of independent accountants, reviews the
results and scope of the audit and other services provided by the Company's
independent accountants, and reviews and evaluates the Company's control
functions. The Board of Directors has a Compensation Committee which consists
of Mr. Klingenstein, Dr. Strand and Dr. Shaw. The Compensation Committee makes
recommendations to the Board concerning salaries and incentive compensation
for employees and consultants of the Company.

The Board of Directors presently consists of six members and is divided into
three classes of equal size. One class of directors is elected annually and
its members hold office for a three-year term or until their successors are
duly elected and qualified, or until their earlier removal or resignation. The
number of directors may be changed by a resolution of the Board of Directors.
Executive officers are elected by the Board of Directors. There are no family
relationships among any of the directors and executive officers of the
Company.

DIRECTOR COMPENSATION

Directors currently receive no cash compensation from the Company for their
services as members of the Board of Directors. They are reimbursed for certain
expenses in connection with attendance at Board and Committee meetings.

All of Aviron's non-employee directors are entitled to receive non-
discretionary annual stock option grants under the Company's 1996 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"). Each option granted
pursuant to the Directors' Plan has an exercise price equal to the fair market
value of the Common Stock on the date of grant, and is subject to three-year
vesting in equal annual installments. The Directors' Plan provides for initial
grants of options to purchase 15,000 shares for each non-employee director who
joins the Board following the initial public offering, plus annual grants of
options to purchase 3,000 shares.

61
<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth certain compensation awarded or paid by the
Company for the fiscal years ended December 31, 1996 and December 31, 1995 to
its Chief Executive Officer and five of the Company's other executive officers
who earned more than $100,000 during the year ended December 31, 1996
(collectively, the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
--------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION OPTIONS COMPENSATION
POSITION YEAR ($) ($) ($) (#) ($)(1)
- ------------------------ ---- ------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
J. Leighton Read, M.D... 1996 230,000 -- 78,420(2) 50,000 1,427
President and Chief Ex-
ecutive Officer........ 1995 210,000 -- -- 100,000 743
Vera Kallmeyer, M.D.,
Ph.D................... 1996 168,750 -- 21,360(3) 16,000 383
Vice President, Corpo-
rate................... 1995 148,167 -- -- 44,000 304
Development and Chief
Financial Officer
Martin L. Bryant, M.D.,
Ph.D................... 1996 169,833 -- 60,585(4) 26,000 1,009
Vice President, Re-
search................. 1995 153,333 -- 120,411(5) 24,000 940
Victor A. Jegede,
Ph.D................... 1996 169,583 -- 60,585(6) 26,000 1,670
Vice President, Techni-
cal Affairs............ 1995 156,667 -- 92,639(7) 24,000 1,555
Paul M. Mendelman,
M.D.(10)............... 1996 115,032 25,000 53,022(8) 40,000 742
Vice President, Clinical
Research............... 1995 -- -- -- -- --
Eric J. Patzer,
Ph.D.(11).............. 1996 169,583 25,000 21,425(9) 40,000 1,021
Vice President, Develop-
ment................... 1995 -- -- -- -- --
</TABLE>
- --------
(1) Includes group term life insurance paid by the Company.
(2) Includes reimbursement by the Company of $62,500 in connection with the
early exercise of stock options.
(3) Includes loan forgiveness of $21,050 in connection with the early
exercise of stock options.
(4) Includes loan forgiveness of $34,207 in connection with the early
exercise of stock options, loan forgiveness of $13,875 in connection with
a promissory note for the purchase of a principal residence, and $12,000
in monthly housing assistance.
(5) Includes reimbursement of expense incurred in connection with relocating
to California as follows: $45,308 in direct reimbursement, $16,000 in
relocation assistance, $8,000 in monthly housing assistance, $25,953 in
federal income tax gross-up; and $25,000 as reimbursement for a bonus
forfeited by Dr. Bryant upon leaving his former employer.
(6) Includes loan forgiveness of $34,207 in connection with the early
exercise of stock options, loan forgiveness of $13,875 in connection with
a promissory note for the purchase of a principal residence, and $12,000
in monthly housing assistance.
(7) Includes reimbursement of expense incurred in connection with relocating
to California as follows: $47,042 in direct reimbursement, $16,000 in
relocation assistance, $6,500 in monthly housing assistance, and $23,097
in federal income tax gross-up.
(8) Includes reimbursement of expenses incurred in connection with relocating
to California as follows: $28,278 in direct reimbursement and $24,744 in
federal income tax gross-up.
(9) Includes loan forgiveness of $21,114 in connection with the early
exercise of stock options.
(10) Dr. Mendelman joined the Company in April 1996.
(11) Dr. Patzer joined the Company in February 1996.

62
<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS(4) REALIZABLE VALUE
------------------------- AT ASSUMED ANNUAL
% RATES OF STOCK
NUMBER OF OF TOTAL PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM (3)
OPTIONS EMPLOYEES IN PER EXPIRATION -----------------
NAME GRANTED FISCAL YEAR(1) SHARE(2) DATE 5% 10%
- ---- ---------- -------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
J. Leighton Read, M.D... 50,000 7.81 $1.25 1/26/06 $508,000 $844,000
Vera Kallmeyer, M.D.,
Ph.D................... 16,000 2.50 1.25 1/26/06 162,560 270,080
Martin L. Bryant, M.D.,
Ph.D................... 26,000 4.06 1.25 1/26/06 264,160 438,880
Victor A. Jegede,
Ph.D................... 26,000 4.06 1.25 1/26/06 264,160 438,880
Paul M. Mendelman,
M.D.................... 40,000 6.25 1.25 8/01/06 406,400 675,200
Eric J. Patzer, Ph.D.... 40,000 6.25 1.25 1/02/06 406,400 675,200
</TABLE>
- --------
(1) Based on an aggregate of 640,080 options granted to employees and
directors of the Company in fiscal 1996, including the Named Executive
Officers set forth in the "Summary Compensation Table" above and directors
set forth in "Director Compensation" above.
(2) The exercise price is equal to 100% of the fair market value of the Common
Stock on the date of grant, as determined by the Board of Directors.
(3) The potential realizable value is calculated based on the term of the
option at the time of grant (ten years). Stock price appreciation of 5%
and 10% is assumed pursuant to rules promulgated by the Securities and
Exchange Commission and does not represent the Company's prediction of its
stock price performance. The potential realizable value at 5% and 10%
appreciation is calculated by assuming that the closing price of the
Company's Common Stock ($7.00) on December 31, 1996 as reported on the
Nasdaq National Market, less the exercise price appreciates at the
indicated rate for the entire term of the option and that the option is
exercised at the exercise price and sold on the last day of its term at
the appreciated price.
(4) Each of the options listed in the table was granted outside of the 1996
Equity Incentive Plan and was immediately exercisable. The shares
purchasable thereunder are subject to repurchase by the Company at the
original exercise price paid per share upon the optionee's cessation of
service prior to vesting in such shares. The repurchase right lapses and
the optionee vests in the shares subject to, or issued upon exercise of,
the options in monthly installments over the fifty months beginning on the
date of grant, with the exception of the options granted to Dr. Patzer and
Dr. Mendelman which will vest with respect to 24% of such shares on the
one year anniversary date of the vesting start date, and 2% per month for
thirty-eight months thereafter. With the exception of Dr. Mendelman, in
consideration for the repricing of such options, the vesting start date
was changed to three months after the date of grant.

63
<PAGE>

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONSAT
SHARES AT DECEMBER 31, 1996 DECEMBER 31, 1996(2)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Leighton Read, M.D... 90,000 $532,500 -- -- $ -- $ --
Vera Kallmeyer, M.D.,
Ph.D................... 16,000 92,000 34,153 29,847 218,395 182,606
Martin L. Bryant, M.D.,
Ph.D................... 26,000 149,500 11,040 12,960 71,760 84,240
Victor A. Jegede,
Ph.D................... 26,000 149,500 11,040 12,960 71,760 84,240
Paul M. Mendelman,
M.D.................... -- -- -- 40,000 -- 230,000
Eric J. Patzer, Ph.D.... 40,000 230,000 -- -- -- --
</TABLE>
- --------

(1) Value realized is based on the closing price of the Company's Common Stock
($7.00) on December 31, 1996 as reported on the Nasdaq National Market,
less the exercise price, without taking into account any taxes that may be
payable in connection with the transaction, multiplied by the number of
shares underlying the option. Certain shares acquired on exercise remain
subject to a right of repurchase by the Company.
(2) Based on the closing price of the Company's Common Stock ($7.00) on
December 31, 1996 as reported on the Nasdaq National Market, less the
exercise price, without taking into account any taxes that may be payable
in connection with the transaction, multiplied by the number of shares
underlying the option.

EXECUTIVE OFFICER AND EMPLOYMENT ARRANGEMENTS

The Company's offer of employment to Martin L. Bryant, M.D., Ph.D., the
Company's Vice President, Research, in December 1994, provided for an initial
annual salary of $160,000 and payment of $25,000 as reimbursement for a bonus
forfeited by Dr. Bryant when he left his previous employer. The Company also
agreed to pay certain relocation expenses and to loan Dr. Bryant up to $50,000
in aggregate principal amount due in five years, at 7.75% simple interest, to
assist him in the purchase of a home. Interest on this loan will be forgiven
annually, and principal will be forgiven annually at the rate of 20% per year
as long as Dr. Bryant remains with the Company.

The Company's offer of employment to Victor A. Jegede, Ph.D., the Company's
Vice President, Technical Affairs, in December 1994, provided for an initial
annual salary of $160,000. The Company also agreed to pay certain relocation
expenses and to loan Dr. Jegede up to $50,000 in aggregate principal amount
due in five years, at 7.75% simple interest, to assist him in the purchase of
a home. Interest on this loan will be forgiven annually, and principal will be
forgiven annually at the rate of 20% per year as long as Dr. Jegede remains
with the Company.

The Company's offer of employment to Eric J. Patzer, Ph.D., the Company's
Vice President, Development, in December 1995, provided for an initial annual
salary of $185,000 and a bonus payment of $25,000 upon signing of the
agreement and $25,000 after the completion of one year of service. The Company
also agreed to pay certain relocation expenses and to loan Dr. Patzer up to
$100,000 in aggregate principal amount due in five years, at 7.75% simple
interest, to assist him in the purchase of a home. Principal will be forgiven
annually at the rate of 20% per year as long as Dr. Patzer remains with the
Company and interest will be forgiven in full upon satisfaction of the
promissory note.

The Company's offer of employment to Paul M. Mendelman, M.D., the Company's
Vice President, Clinical Research, in April 1996, provided for an initial
annual salary of $185,000 and a bonus payment of $25,000 upon Dr. Mendelman's
acceptance of the offer. The Company also agreed to reimburse Dr. Mendelman
for certain relocation expenses and to loan Dr. Mendelman up to $100,000 in
aggregate principal amount due in five years, at 7.75% simple interest, to
assist him in the purchase of a home. Principal will be

64
<PAGE>

forgiven annually at the rate of 20% per year as long as Dr. Mendelman remains
with the Company and interest will be forgiven in full upon satisfaction of
the promissory note.

Francis R. Cano, Ph.D. resigned as director, President and Chief Operating
Officer of the Company effective April 19, 1996. Pursuant to an agreement
between Dr. Cano and the Company, Dr. Cano will be employed as a consultant by
the Company until April 18, 1998. In consideration for Dr. Cano's consulting
services, the Company paid Dr. Cano's salary and benefits until April 18,
1997, and will pay on a day-to-day basis as services are rendered thereafter.

STOCK OPTION PLANS

Equity Incentive Plan. In March 1996, the Board adopted the 1996 Equity
Incentive Plan (the "Incentive Plan") as an amendment and restatement of its
1992 Stock Option Plan and increased the number of shares reserved for
issuance under the Incentive Plan to 1,750,000 shares. The Incentive Plan
provides for grants of incentive stock options to employees (including
officers and employee directors) and nonstatutory stock options, restricted
stock purchase awards, stock bonuses and stock appreciation rights to
employees (including officers and employee directors) and consultants of the
Company. It is intended that the Incentive Plan will be administered by the
Compensation Committee, which determines recipients and types of awards to be
granted, including the exercise price, number of shares subject to the award
and the exercisability thereof.

The term of a stock option granted under the Incentive Plan generally may
not exceed 10 years. The exercise price of options granted under the Incentive
Plan is determined by the Board of Directors, but, in the case of an incentive
stock option, cannot be less than 100% of the fair market value of the Common
Stock on the date of grant or, in the case of 10% stockholders, not less than
110% of the fair market value of the Common Stock on the date of grant. No
option may be transferred by the optionee other than by will or the laws of
descent or distribution or, in certain limited instances, pursuant to a
qualified domestic relations order. An optionee whose relationship with the
Company or any related corporation ceases for any reason (other than by death
or permanent and total disability) may exercise options in the three-month
period following such cessation (unless such options terminate or expire
sooner by their terms) or in such longer period as may be determined by the
Board of Directors.

Shares subject to options which have lapsed or terminated may again be
subject to options granted under the Incentive Plan. Furthermore, the Board of
Directors may offer to exchange new options for existing options, with the
shares subject to the existing options again becoming available for grant
under the Incentive Plan. In the event of a decline in the value of the
Company's Common Stock, the Board of Directors has the authority to offer
optionees the opportunity to replace outstanding higher priced options with
new lower priced options.

Restricted stock purchase awards granted under the Incentive Plan may be
granted pursuant to a repurchase option in favor of the Company in accordance
with a vesting schedule determined by the Board. The purchase price of such
awards will be at least 85% of the fair market value of the Common Stock on
the date of grant. Stock bonuses may be awarded in consideration for past
services without a purchase payment. Stock appreciation rights authorized for
issuance under the Incentive Plan may be tandem stock appreciation rights,
concurrent stock appreciation rights or independent stock appreciation rights.

Upon any merger or consolidation in which the Company is not the surviving
corporation, all outstanding awards under the Incentive Plan shall either be
assumed or substituted by the surviving entity. If the surviving entity
determines not to assume or substitute such awards, the time during which such
awards may be exercised shall be accelerated and the awards terminated if not
exercised prior to the merger or consolidation.

As of June 30, 1997, options to purchase 661,423 shares were outstanding
under the Incentive Plan, with 724,576 shares reserved for future grants or
purchases. The Incentive Plan will terminate in January 2006, unless
terminated sooner by the Board of Directors. See Note 7 of Notes to Financial
Statements.

65
<PAGE>

Employee Stock Purchase Plan. In March 1996, the Board adopted the Employee
Stock Purchase Plan (the "Purchase Plan") covering an aggregate of 250,000
shares of Common Stock. The Purchase Plan is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the Code.
Under the Purchase Plan, the Board of Directors may authorize participation by
eligible employees, including officers, in periodic offerings following the
adoption of the Purchase Plan. The offering period for any offering will be no
more than 27 months.

Employees are eligible to participate if they are employed by the Company,
or an affiliate of the Company designated by the Board of Directors, for at
least 20 hours per week and are employed by the Company, or an affiliate of
the Company designated by the Board, for at least five months per calendar
year. Employees who participate in an offering can have up to 15% of their
earnings withheld pursuant to the Purchase Plan. The amount withheld will then
be used to purchase shares of the Common Stock on specified dates determined
by the Board of Directors. The price of Common Stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair market value of
the Common Stock on the commencement date of each offering period or on the
specified purchase date. Employees may end their participation in the offering
at any time during the offering period. Participation ends automatically on
termination of employment with the Company.

In the event of a merger, reorganization, consolidation or liquidation
involving the Company, in which the Company is not the surviving corporation,
the Board of Directors has discretion to provide that each right to purchase
Common Stock will be assumed or an equivalent right substituted by the
successor corporation, or the Board may shorten the offering period and
provide for all sums collected by payroll deductions to be applied to purchase
stock immediately prior to such merger or other transaction. The Purchase Plan
will terminate at the Board's discretion. The Board has the authority to amend
or terminate the Purchase Plan, subject to the limitation that no such action
may adversely affect any outstanding rights to purchase Common Stock. See Note
7 of Notes to Financial Statements.

1996 Non-Employee Directors' Stock Option Plan. In March 1996, the Board
adopted the 1996 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") to provide for the automatic grant of options to purchase shares of
Common Stock to non-employee directors of the Company. The Directors' Plan is
administered by the Board of Directors, unless the Board delegates
administration to a committee comprised of members of the Board.

The maximum number of shares of Common Stock that may be issued pursuant to
options granted under the Directors' Plan is 200,000. Pursuant to the terms of
the Directors' Plan, each director of the Company not otherwise employed by
the Company and who is first elected as a non-employee director after the
completion of this offering automatically will be granted an option to
purchase 15,000 shares of Common Stock upon such election. Finally, each
director who continues to serve as a non-employee director of the Company will
be granted an additional option to purchase 3,000 shares of Common Stock on
December 31 of each year. All such options vest one-third on the first
anniversary of the date of grant and one-third per year thereafter.

In the event of a merger, consolidation, reverse reorganization,
dissolution, sale of substantially all of the assets of the Company, or
certain changes in the beneficial ownership of the Company's securities
representing at least a 50% change of such ownership, then options outstanding
under the Directors' Plan will automatically become fully vested and will
terminate if not exercised prior to such event.

No option granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. The exercise price of
options under the Directors' Plan will equal the fair market value of the
Common Stock on the date of grant. The Directors' Plan will terminate in March
2006, unless earlier terminated by the Board. See Note 7 of Notes to Financial
Statements.

66
<PAGE>

CERTAIN TRANSACTIONS

In May 1995, Sang-A Pharm. Co., Ltd., a 5% stockholder of the Company,
purchased 2,941,863 shares of Series C Preferred Stock at $1.35 per share. The
Series C Preferred Stock is convertible into Common Stock of the Company at
the rate of one share of Common Stock for each five shares of Series C
Preferred Stock owned.

From July through November 1995, 66 investors purchased an aggregate of
13,099,707 shares of the Company's Series C Preferred Stock at a per share
price of $1.35. Dr. Bernard Roizman purchased 20,000 shares of Series C
Preferred Stock. Institutional Venture Partners V and Institutional Venture
Management V purchased 653,332 and 13,335 shares, respectively, of Series C
Preferred Stock. Various entities affiliated with Accel Partners purchased
shares of Series C Preferred Stock as follows: Accel Investors '93 L.P.,
41,112 shares; Accel IV L.P., 930,000 shares; Accel Japan L.P., 88,890 shares;
Accel Keiretsu L.P., 20,000 shares; Ellmore C. Patterson Partners, 24,444
shares; and Prosper Partners, 6,666 shares. Sang-A Pharm. Co., Ltd. purchased
1,187,295 shares of Series C Preferred Stock. Orefund, whose investment in the
Company is controlled by Zesiger Capital Group LLC, purchased 1,481,400 shares
of Series C Preferred Stock. Sally Whitley, wife of Richard Whitley purchased
10,000 shares of Series C Preferred Stock. The Series C Preferred shares
purchased by the 5% stockholders of the Company and their affiliates and by
Dr. Roizman and Mrs. Whitley were purchased on the same terms and conditions
as Series C Preferred shares purchased by other investors. The Series C
Preferred Stock is convertible into Common Stock of the Company at the rate of
one share of Common Stock for each five shares of Series C Preferred Stock
owned.

In March 1996, Sang-A Pharm Co., Ltd. purchased 136,326 shares of Series C
Preferred Stock, at a price of $1.35 per share. The Series C Preferred Stock
is convertible into Common Stock of the Company at the rate of one share of
Common Stock for each five shares of Series C Preferred Stock owned.

Vera Kallmeyer, M.D., Ph.D., Chief Financial Officer and Vice President,
Corporate Development of the Company, is a founder, Senior Advisor and 15%
shareholder of Pacific Futures (formerly Pacific Century), a Hong Kong-based
investment advisory business. Pacific Futures received a sales commission on
the sale of Series C Preferred Stock to Sang-A, in an aggregate amount of
$334,462 during 1995. Dr. Kallmeyer received no portion of such sales
commission, and is currently receiving no salary from Pacific Futures. An
additional $125,858 in sales commissions was paid in 1997 related to the sale
of Common Stock to Sang-A at the time of the initial public offering.

Pursuant to certain offer letters to certain of its senior officers, the
Company made loans to these officers to facilitate home purchases and certain
other commitments. As of June 30, 1997, the amounts outstanding for principal
and interest on these loans was $30,484 to Dr. Bryant, $30,484 to Dr. Jegede,
$81,292 to Dr. Patzer and $100,000 to Dr. Mendelman. See "Management --
Employment Contracts."

In January 1996, the Company extended loans to certain senior officers to
facilitate the early exercise of options to purchase shares of Common Stock,
including loans of $70,000 to Dr. Patzer; $65,000 to Dr. Bryant; $65,000 to
Dr. Jegede; $70,000 to Dr. Cano; and $40,000 to Dr. Kallmeyer. The loans bear
simple interest at a rate of 5.73% per year. Principal on each loan is due on
the earlier of 50 months from the date of the underlying option grant or the
date of employment termination. In April 1996, the Company repurchased 19,200
of Dr. Cano's option shares, in connection with his resignation, by canceling
$48,000 of his promissory note. In October 1996, consistent with the August
1996 repricing of certain stock options, the Company agreed to forgive one-
half the principal amount of the outstanding loans to Drs. Patzer, Bryant,
Jegede and Kallmeyer, and to reimburse them for any tax resulting from such
forgiveness. See Note 7 of Notes to Financial Statements.

In October 1996, consistent with the August 1996 repricing of certain stock
options, the Board of Directors approved the repayment of $62,500 to Dr. Read
(plus reimbursement of any tax liability resulting

67
<PAGE>

to Dr. Read from such payment) upon the completion of the public offering,
which was one-half the amount paid by Dr. Read for the early exercise of his
options in January 1996.

In November 1996, Sang-A purchased 222,222 shares of the Company's Common
Stock in a private placement. In December 1996, Sang-A purchased an additional
16,978 shares of the Company's Common Stock.

In March 1997, Biotech Target, S.A., a 5% stockholder of the Company,
purchased 1,714,286 shares of the Company's Common Stock for a purchase price
of $15,000,000 in a private placement. The Company is obligated to register
the shares as soon as reasonably practicable after November 5, 1997.

The Company has entered into indemnity agreements with certain officers and
directors which provide, among other things, that the Company will indemnify
such officer or director, under the circumstances and to the extent provided
for therein, for expenses, damages, judgments, fines and settlements he may be
required to pay in actions or proceedings which he is or may be made a party
by reason of his position as a director, officer or other agent of the
Company, and otherwise to the full extent permitted under Delaware law and the
Company's By-laws.

See also "Management -- Executive Officer and Employment Arrangements."

68
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of July 18, 1997 held by (i) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director and Named Executive
Officer of the Company, and (iii) all directors and executive officers of the
Company as a group. Unless otherwise indicated below, to the knowledge of the
Company, all persons listed below have sole voting and investment power with
respect to their shares of Common Stock, except to the extent authority is
shared by spouses under applicable law. Except as otherwise noted below, the
address of each person listed below is c/o the Company, 297 North Bernardo
Avenue, Mountain View, California 94043.

PERCENTAGE OF SHARES
BENEFICIALLY OWNED (1)
SHARES --------------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNERS OWNED(1) OFFERING OFFERING
- ----------------- ------------ ----------- -----------
<S> <C> <C> <C>
Biotech Target, S.A................... 2,314,286 17.48% 14.79%
Swiss Bank Tower
Panama 5
Republic of Panama
Sang-A Pharm. Co., Ltd................ 1,092,296 8.25% 6.98%
640-9 Deung Chon Dung
Kangseo-Ku
Seoul, South Korea
Entities controlled by Zesiger Capital 714,380 5.39% 4.57%
Group LLC (2)........................
320 Park Avenue
New York, NY 10022
J. Leighton Read, M.D. (3)............ 401,753 3.03% 2.57%
Martin L. Bryant, M.D., Ph.D. (4)..... 43,508 * *
Victor A. Jegede, Ph.D. (5)........... 36,858 * *
Vera Kallmeyer, M.D., Ph.D. (6)....... 68,291 * *
Paul M. Mendelman (7)................. 14,900 * *
Eric J. Patzer, Ph.D. (8)............. 48,254 * *
Reid W. Dennis (9).................... 43,349 * *
Paul H. Klingenstein (10)............. 500,605 3.78% 3.20%
Bernard Roizman, Sc.D. (11)........... 177,000 * *
Jane E. Shaw, Ph.D. (12).............. 24,596 * *
L. James Strand, M.D. (13)............ 11,080 * *
All directors and executive officers
as a group
(11 persons) (14).................... 1,370,194 10.35% 8.70%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of the Company's Common Stock.

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Beneficial ownership also
includes shares of stock subject to options and warrants currently
exercisable or convertible, or exercisable or convertible within 60 days
of the date of this table. Percentage of beneficial ownership is based on
13,243,129 shares of Common Stock outstanding as of July 18, 1997, and
15,643,129 shares of Common Stock outstanding after completion of this
offering.
(2) Shares are held in discretionary accounts which Zesiger Capital Group LLC
manages. No single account holds more than five percent (5%) of the
Company's Common Stock. Zesiger Capital Group LLC disclaims beneficial
ownership of all of such shares.

69
<PAGE>

(3) Includes an aggregate of 110,000 shares acquired pursuant to an early
exercise of stock options, of which an aggregate of 26,800 will be subject
to repurchase by the Company 60 days from July 18, 1997. Also includes an
aggregate of 32,000 shares held by The Travis Read 1993 Trust and The Haley
Read 1993 Trust (the "Trusts") of which Robert Fitzwilson is the trustee.
Also includes 3,500 shares Dr. Read has the right to acquire pursuant to
options exercisable within 60 days of July 18, 1997. Dr. Read disclaims
beneficial ownership of the shares held by the Trusts.

(4) Includes 26,000 shares acquired pursuant to an early exercise of stock
options, of which 17,680 will be subject to repurchase by the Company 60
days from July 18, 1997. Also includes 15,930 shares Dr. Bryant has the
right to acquire pursuant to options exercisable within 60 days of July 18,
1997.

(5) Includes 26,000 shares acquired pursuant to an early exercise of stock
options, of which 17,680 will be subject to repurchase by the Company 60
days from July 18, 1997. Also includes 9,910 shares Dr. Jegede has the
right to acquire pursuant to options exercisable within 60 days of July 18,
1997.

(6) Includes 16,000 shares acquired pursuant to an early exercise of stock
options, of which 5,600 will be subject to repurchase by the Company 60
days from July 18, 1997. Also includes 49,973 shares Dr. Kallmeyer has the
right to acquire pursuant to options exercisable within 60 days of July 18,
1997.

(7) Represents 14,900 shares Dr. Mendelman has the right to acquire pursuant to
options exercisable within 60 days of July 18, 1997.

(8) Includes 40,000 shares acquired pursuant to an early exercise of stock
options, 27,200 which will be subject to repurchase by the Company 60 days
from July 18, 1997. Also includes 2,100 shares Dr. Patzer has the right to
acquire pursuant to options exercisable within 60 days of July 18, 1997.

(9) Includes 7,924 shares held by Institutional Venture Management V, of which
Mr. Dennis, a director of the Company is a general partner. Mr. Dennis
disclaims beneficial ownership of the shares held by Institutional Venture
Management V, except to the extent of his pecuniary interests therein.

(10) Includes 390,600 shares held by Accel IV, L.P., 74,666 shares held by
Accel Japan, L.P., 17,266 shares held by Accel Investors '93, L.P., and
8,400 shares held by Accel Keiretsu, L.P. Mr. Klingenstein, a director of
the Company is a general partner of Accel Partners. Mr. Klingenstein
disclaims beneficial ownership of the shares held by Accel IV, L.P.,
Accel Japan, L.P., Accel Investors '93, L.P., and Accel Keiretsu, L.P.,
except to the extent of his pecuniary interests therein.

(11) Includes 3,000 shares Dr. Roizman has the right to acquire pursuant to
options exercisable within 60 days of July 18, 1997.

(12) Includes 2,000 shares held by Peter F. Carpenter and Jane Elizabeth
Carpenter Trustees of the Carpenter 1983 Family Trust and 1,600 shares
held by Peter Frederick and Jane Elizabeth Carpenter Trustees of the
Carpenter 1985 Irrevocable Trust. Also includes 14,996 shares Dr. Shaw
has the right to acquire pursuant to options exercisable within 60 days
of July 18, 1997.

(13) Includes 5,000 shares Dr. Strand has the right to acquire pursuant to
options exercisable within 60 days of July 18, 1997.

(14) Includes 498,856 shares held by entities affiliated with certain
directors of the Company as described in footnotes 2 and 4 above and
119,309 shares subject to options exercisable within 60 days of July 18,
1997.

70
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a
summary and is qualified in its entirety by the provisions of the Certificate
of Incorporation and Bylaws, which have been incorporated by reference in the
Company's Registration Statement, of which this Prospectus is a part.

The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, par value $0.001 and 5,000,000 shares of Preferred Stock, par
value $0.001.

COMMON STOCK

Upon completion of this offering, based on the number of shares outstanding
on June 30, 1997, there will be 15,637,880 shares of Common Stock outstanding
(plus up to 125,923 shares that may be issued upon exercise of outstanding
warrants). The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. The
holders of Common Stock are not entitled to cumulative voting rights with
respect to the election of directors, and as a consequence, minority
stockholders will not be able to elect directors on the basis of their votes
alone.

Subject to preferences that may be applicable to any then outstanding shares
of Preferred Stock, holders of Common Stock are entitled to receive ratably
such dividends as may be declared by the Board of Directors out of funds
legally available therefore. See "Dividend Policy." In the event of
liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding shares of
Preferred Stock. Holders of Common Stock have no preemptive rights and no
right to convert their Common Stock into any other securities. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and all shares of Common Stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.

PREFERRED STOCK

The Board of Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series, without any
further vote or action by the stockholders. The issuance of Preferred Stock
could adversely affect the voting power of holders of Common Stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation may have the effect of delaying, deferring or preventing a change
in control of the Company, which could have a depressive effect on the market
price of the Company's Common Stock. The Company has no present plan to issue
any shares of Preferred Stock.

WARRANTS

In February 1993, the Company entered into an agreement with The Mount Sinai
School of Medicine of the City University of New York ("Mount Sinai"), under
which Mount Sinai transferred to the Company rights to certain patents, patent
applications, and associated know-how and other technical information. Mount
Sinai also granted the Company (i) an option to acquire any improvements to
the inventions disclosed in the licensed patents and patent applications
thereafter developed by Mount Sinai and (ii) a right of first negotiation for
a license or assignment to certain related technology. In connection with
these agreements, the Company issued to Mount Sinai warrants (the "Mount Sinai
Warrants") to purchase, in the aggregate, up to 45,000 shares of Common Stock.
Each Mount Sinai Warrant is exercisable for a period of five years commencing
upon the occurrence of specified milestone events. Warrants to purchase 9,000
shares are exercisable at a per share exercise price of $4.50. Warrants to
purchase 29,750 shares became exercisable upon

71
<PAGE>

the effective date of the Company's initial public offering, at a per share
exercise price of $10.00. Warrants to purchase the remaining 6,250 shares are
not exercisable and terminated automatically on the effective date of the
Company's initial public offering, according to their terms. In 1996, Warrants
to purchase 3,124 Shares of Common Stock were distributed by Mount Sinai to
certain inventors of the relevant technology, of which 1,874 were exercised on
July 30, 1997. See "Business -- Collaborative Agreements -- The Mount Sinai
School of Medicine of the City University of New York."

In connection with an agreement entered into in February 1995 with the
University of Michigan ("Michigan"), under which Michigan transferred to the
Company certain intellectual property rights and technology (the "Michigan
Technology"), the Company agreed to issue to Michigan a warrant (the "Michigan
Warrant") to purchase shares of its Common Stock upon the first commercial
sale of a product incorporating the Michigan Technology, for a number of
shares equal to 1.25% of the total issued and outstanding shares of the
Company's Common Stock as of the date of such first commercial sale (excluding
shares of the Company's Common Stock issued by the Company in connection with
its acquisition of another company, in connection with any corporate
partnering transaction, issued in connection with other technology transfers
not involving the Michigan Technology, or unvested employee or director option
shares), at a per share exercise price of $10.00. See "Business --
Collaborative Agreements -- University of Michigan."

In connection with a private placement of Series C Preferred Stock, the
Company issued to the placement agent a warrant to purchase 70,507 shares of
its Common Stock at a per share exercise price of $8.10, exercisable at any
time through November 9, 2000, which was exercised on July 28, 1997.

In January 1997, the Company issued to Cooley Godward LLP a warrant to
purchase 16,666 shares of its Common Stock at an exercise price of $2.00 per
share, exercisable at any time through January 24, 2000, in lieu of payment of
a portion of legal fees.

REGISTRATION RIGHTS

The holders (or their permitted transferees) ("Holders") of approximately
5,726,764 shares of Common Stock and warrants to purchase approximately 36,876
shares of Common Stock are entitled to certain rights with respect to the
registration of such shares under the Securities Act. If the Company proposes
to register any of its securities under the Securities Act, either for its own
account or for the account of other security holders, the Holders are entitled
to notice of the registration and are entitled to include, at the Company's
expense, such shares therein. Certain of the Holders may require the Company
at its expense on not more than two occasions at any time beginning
approximately six months from the date of this Prospectus to file a
Registration Statement under the Securities Act, with respect to their shares
of Common Stock, and the Company is required to use its best efforts to effect
the registration, subject to certain conditions and limitations. The Holders
may require the Company at its expense to register their shares on Form S-3
when such form becomes available to the Company, subject to certain conditions
and limitations. In addition, the Company is obligated to register 1,714,286
shares of Common Stock sold in a private placement transaction for resale as
soon as reasonably practicable after November 5, 1997.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an anti-takeover law. In
general, the statute prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. A "business combination" includes a merger, asset sale
or other transaction resulting in a financial benefit to the stockholder. For
purposes of Section 203, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior, did own)
15% or more of the corporation's voting stock.

72
<PAGE>

The Company's Certificate of Incorporation provides that each director will
serve for a three-year term, with approximately one-third of the directors to
be elected annually. Candidates for director may be nominated only by the
Board of Directors or by a stockholder who gives written notice to the Company
no later than 60 days prior nor earlier than 90 days prior to the first
anniversary of the last annual meeting of stockholders. The number of
authorized directors of the Company may be determined from time to time to
pursuant to a resolution of the Board. Currently the Board consists of six
members. Between stockholder meetings, the Board may appoint new directors to
fill vacancies or newly created directorships. The Certificate does not
provide for cumulative voting at stockholder meetings for election of
directors. As a result, stockholders controlling more than 50% of the
outstanding Common Stock can elect the entire Board of Directors, while
stockholders controlling 49% of the outstanding Common Stock may not be able
to elect any directors. A director may be removed from office only for cause
by the affirmative vote of a majority of the combined voting power of the then
outstanding shares of stock entitled to vote generally in the election of
directors.

The Company's Certificate of Incorporation requires that any action required
or permitted to be taken by stockholders of the Company must be effected at a
duly called annual or special meeting of stockholders and may not be effected
by a consent in writing. The Company's Certificate of Incorporation also
provides that the authorized number of directors may be changed only by
resolution of the Board of Directors. See "Management -- Directors and
Executive Officers." Delaware Law and these charter provisions may have the
effect of deterring hostile takeovers or delaying changes in control or
management of the Company, which could have a depressive effect on the market
price of the Company's Common Stock.

LIMITATION OF LIABILITY AND INDEMNIFICATION

The Company's Certificate of Incorporation contains certain provisions
permitted under Delaware Law relating to the liability of directors. These
provisions eliminate a director's personal liability for monetary damages
resulting from a breach of fiduciary duty, except in certain circumstances
involving certain wrongful acts, such as (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derives an improper
personal benefit. These provisions do not limit or eliminate the rights of the
Company or any stockholder to seek non-monetary relief, such as an injunction
or rescission, in the event of a breach of director's fiduciary duty. These
provisions will not alter a directors liability under federal securities laws.
The Company's Certificate of Incorporation also contains provisions
indemnifying the directors and officers of the Company to the fullest extent
permitted by Delaware General Corporation Law. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.

TRANSFER AGENT

The transfer agent for the Common Stock of the Company is The First National
Bank of Boston.

73
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Further sales of substantial amounts of Common Stock in the open market may
adversely affect the market price of the Common Stock offered hereby.

Upon completion of this offering, based on the number of shares outstanding
as of June 30, 1997, the Company will have outstanding an aggregate of
15,637,880 shares of Common Stock assuming (i) the issuance by the Company of
2,400,000 shares of Common Stock offered hereby, (ii) no issuance of 125,923
shares of Common Stock relating to outstanding warrants to purchase Common
Stock, (iii) no exercise of outstanding options exercisable to purchase
259,632 shares of Common Stock and (iv) no exercise of the Underwriters' over
allotment option to purchase 360,000 shares of Common Stock. Of such shares
outstanding, approximately 11,019,224 shares, including the 2,400,000 shares
offered hereby, will be freely tradable without restriction or further
registration under the Securities Act, except for shares subject to agreements
not to sell or purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act.

The remaining approximately 4,618,656 shares of Common Stock outstanding
upon completion of this offering are "restricted securities" as that term is
defined in Rule 144, and may be sold under Rule 144 subject to the holding
period, volume limitations and other restrictions under Rule 144. As a result
of lock-up agreements between certain securityholders and the representatives
of the Underwriters as described below, approximately 1,811,754 shares and
2,314,286 shares of the Company's restricted Common Stock may not be sold for
a period of 90 days and 30 days, respectively, from the date of this
Prospectus.

Each officer and director and certain stockholders of the Company have
agreed with the representatives of the Underwriters for 90 days (in the case
of officers, directors and a certain stockholder) or 30 days (in the case of
certain other stockholders) after the effective date of this Prospectus (the
"Lock-Up Period"), subject to certain exceptions, not to offer to sell,
contract to sell, or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock, or any securities convertible into or
exchangeable for shares of Common Stock owned as of the date of this
Prospectus or thereafter acquired directly by such holders or with respect to
which they have or hereafter acquire the power of disposition, without the
prior written consent of Robertson, Stephens & Company. However, Robertson,
Stephens & Company may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements. In
addition, the Company has agreed that during the 90-day Lock-Up Period, the
Company will not, without the prior written consent of Robertson, Stephens &
Company, subject to certain exceptions, issue, sell, contract to sell, or
otherwise dispose of, any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned shares for at least one year is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock (approximately 156,378 shares
outstanding immediately after this offering) or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding
such sale, subject to the filing of a Form 144 with respect to such sale and
certain other limitations and restrictions. In addition, a person who is not
deemed to have been an affiliate of the Company at any time during the three
months preceding a sale, and who has beneficially owned the shares proposed to
be sold for at least two years, would be entitled to sell such shares under
Rule 144(k) without regard to the requirements described above. To the extent
that shares were acquired from an affiliate of the Company, such stockholder's
holding period for the purpose of effecting a sale under Rule 144 commences on
the date of transfer from the affiliate.

The Company sold 1,714,286 shares of Common Stock in a private placement
transaction in March 1997. The Company is obligated to register those shares
for resale as soon as reasonably practical after November 5, 1997.

74
<PAGE>

UNDERWRITING

The Underwriters named below, acting through their representatives
Robertson, Stephens & Company LLC, Bear, Stearns & Co. Inc., and Hambrecht &
Quist LLC (the "Representatives"), have severally agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase from the Company the
number of shares of Common Stock set forth opposite their names below. The
Underwriters are committed to purchase and pay for all such shares, if any are
purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Robertson, Stephens & Company LLC............................... 784,000
Bear, Stearns & Co. Inc......................................... 588,000
Hambrecht & Quist LLC........................................... 588,000
Morgan Stanley & Co. Incorporated............................... 100,000
Raymond James & Associates, Inc. ............................... 100,000
Genesis Merchant Group Securities............................... 80,000
Gerard Klauer Mattison & Co., LLC............................... 80,000
Sands Brothers & Co., Ltd. ..................................... 80,000
---------
Total....................................................... 2,400,000
=========
</TABLE>

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the price to the public
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession of not more than $0.92 per share, of which $0.10 may
be reallowed to other dealers. After the public offering, the public offering
price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 360,000
additional shares of Common Stock at the same price per share as the Company
will receive for the 2,400,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage of such additional shares that the number of shares of Common
Stock to be purchased by it shown in the above table represents as a
percentage of the 2,400,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those
on which the 2,400,000 shares are being sold.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.

Each executive officer and director and certain other stockholders of the
Company have agreed with the Representatives for the Lock-Up Period not to
offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge
or grant any rights with respect to any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock, or any securities convertible
into or exchangeable for shares of Common Stock owned as of the date of this
Prospectus or thereafter acquired directly by such holders for with respect to
which they have or hereinafter acquire the power of disposition, without the
prior written consent of Robertson, Stephens & Company LLC. However,
Robertson, Stephens & Company LLC may, in its sole discretion at any time or
from time to time, without notice, release all or any portion of the
securities subject

75
<PAGE>

to the lock-up agreements. Approximately 1,811,754 shares and 3,314,286 shares
of the Company's Common Stock are subject to the lock-up agreements for a
period of 90 days and 30 days, respectively, from the date of this Prospectus.
In addition, the Company has agreed that during the 90-day Lock-Up Period, it
will not, without the period written consent or Robertson, Stephens & Company
LLC, issue, sell, contract to sell or otherwise dispose of any shares of
Common Stock, any options or warrants to purchase any shares of Common Stock
or any securities convertible into, exercisable for or exchangeable for shares
of Common Stock, other than the issuance of Common Stock upon the exercise of
outstanding options and warrants and under the Company's existing employee
stock purchase plan, the Company's issuance of options under existing employee
stock option plans and certain other conditions. See "Shares Eligible For
Future Sale."

The offering price for the Common Stock has been determined by negotiations
among the Company and the Representatives of the Underwriters, based largely
upon the market price for the Common Stock as reported on the Nasdaq National
Market.

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority in excess of 5% of the number of shares
of Common Stock offered hereby.

The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or the purchase of
the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with the offering. A "penalty bid"
is an arrangement permitting the Representatives to reclaim the selling
concession otherwise accruing to an Underwriter or syndicate member in
connection with the offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed
by such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, Palo Alto, California. GC&H
Investments, an entity affiliated with Cooley Godward LLP, beneficially owns
56 shares of the Company's Common Stock. Cooley Godward LLP possesses a
warrant for 16,666 shares of the Company's Common Stock. Certain attorneys at
Cooley Godward LLP who have performed services for the Company own an
aggregate of 1,780 shares of Common Stock. Certain legal matters will be
passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Palo
Alto, California.

EXPERTS

The financial statements of Aviron as of December 31, 1995 and 1996 and for
each of the three years in the period ended December 31, 1996 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.

76
<PAGE>

ADDITIONAL INFORMATION

A Registration Statement on Form S-1 relating to the Common Stock offered
hereby has been filed by the Company with the Securities and Exchange
Commission. This Prospectus does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to such
Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office located at 450 Fifth Street, N.W., Washington, D.C. 20549, the
New York Regional Office located at 7 World Trade Center, 13th Floor, New York,
New York 10048, and the Chicago Regional Office located at Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661-2511, and copies of
all or any part thereof may be obtained from the Public Reference Branch of the
Commission upon the payment of certain fees prescribed by the Commission. The
Commission maintains a World-Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web site is
http://www.sec.gov.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and at 500 West Madison St.,
Suite 1400, Chicago, Illinois 60661. Copies may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Common Stock of the Company is
traded on the Nasdaq National Market. Reports and other information concerning
the Company may be inspected at the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.

77
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Audited Financial Statements
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statement of Stockholders' Equity........................................ F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors
Aviron

We have audited the accompanying balance sheets of Aviron as of December 31,
1995 and 1996, and the related statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aviron at December 31,
1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.

Ernst & Young LLP

Palo Alto, California
February 14, 1997

F-2
<PAGE>

AVIRON

BALANCE SHEETS
(in thousands, except per share data)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................... $ 11,532 $ 12,166 $ 13,305
Short-term investments....................... 6,287 5,706 9,021
Accounts receivable.......................... -- 500 424
Prepaid expenses and other current assets.... 679 813 807
-------- -------- --------
Total Current Assets....................... 18,498 19,185 23,557
Property and equipment, net.................... 1,275 2,319 2,214
Deposits and other assets...................... 105 88 224
-------- -------- --------
Total Assets............................... $ 19,878 $ 21,592 $ 25,995
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................. $ 312 $ 695 $ 1,115
Accrued compensation......................... 130 138 173
Accrued clinical trial costs................. 545 752 430
Accrued offering costs....................... -- 474 --
Deferred revenue............................. 208 -- --
Accrued expenses and other liabilities....... 108 143 70
Current portion of capital lease
obligations................................. 420 572 527
-------- -------- --------
Total Current Liabilities...................... 1,723 2,774 2,315
Capital lease obligations, noncurrent.......... 618 871 737
Commitments
Stockholders' Equity:
Preferred stock, $0.001 par value; 43,000,000
shares authorized at December 31, 1995;
5,000,000 shares authorized at December 31,
1996 and June 30, 1997, respectively;
issuable in series; 39,031,971 issued and
outstanding at December 31, 1995; none
issued and outstanding at December 31, 1996
and June 30, 1997........................... 39,844 -- --
Common stock, $0.001 par value; 53,000,000
shares authorized at December 31, 1995;
30,000,000 shares authorized at December 31,
1996 and June 30, 1997; 758,306, 11,452,033
and 13,237,880 shares issued and outstanding
at December 31, 1995 and 1996, and June 30,
1997, respectively.......................... 317 11 13
Additional paid-in capital................... -- 59,127 74,511
Notes receivable from stockholders........... -- (157) (135)
Deferred compensation........................ (180) (1,099) (890)
Accumulated deficit.......................... (22,444) (39,935) (50,556)
-------- -------- --------
Total Stockholders' Equity..................... 17,537 17,947 22,943
-------- -------- --------
Total Liabilities and Stockholders' Equity..... $ 19,878 $ 21,592 $ 25,995
======== ======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE>

AVIRON

STATEMENTS OF OPERATIONS
(in thousands, except per share data)

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- -------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
License revenue.............. $ -- $ 1,500 $ -- $ -- $ --
Contract revenue............. -- 207 1,625 375 414
------- -------- -------- ------- --------
Total revenue................. -- 1,707 1,625 375 414
Operating expenses:
Research and development..... 4,216 10,220 14,997 6,333 8,897
General and administrative... 2,493 3,252 4,595 2,275 2,621
------- -------- -------- ------- --------
Total operating expenses...... 6,709 13,472 19,592 8,608 11,518
------- -------- -------- ------- --------
Loss from operations.......... (6,709) (11,765) (17,967) (8,233) (11,104)
Other income/(expense):
Interest income.............. 306 520 658 398 577
Interest expense............. (99) (158) (192) (80) (98)
------- -------- -------- ------- --------
Total other income, net....... 207 362 466 318 479
------- -------- -------- ------- --------
Net Loss...................... $(6,502) $(11,403) $(17,501) $(7,915) $(10,625)
======= ======== ======== ======= ========
Net loss per share............ $ (0.86)
========
Shares used in computing net
loss per share............... 12,384
Pro forma net loss per share.. $ (1.24) $ (1.84) $ (0.86)
======== ======== =======
Shares used in calculating pro
forma net loss per share..... 9,165 9,528 9,205
</TABLE>

See accompanying notes.

F-4
<PAGE>

AVIRON

STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)

PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
-------------------- ----------------- PAID-IN NOTES DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION DEFICIT EQUITY
----------- ------- ---------- ------ ---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31,
1993............. 21,666,667 $17,406 685,550 $ 13 -- -- -- $ (4,525) $ 12,894
Exercise of stock
options.......... -- -- 9,864 3 -- -- -- -- 3
Net unrealized
loss on
available-for-
sale
investments...... (33) (33)
Net loss.......... -- -- -- -- -- -- -- (6,502) (6,502)
----------- ------- ---------- ---- ------- ----- ------ -------- --------
BALANCE AT
DECEMBER 31,
1994............. 21,666,667 17,406 695,414 16 -- -- -- (11,060) 6,362
Issuance of Series
B convertible
preferred stock
at $1.20 per
share for certain
in-process
technology....... 1,323,734 1,588 -- -- -- -- -- -- 1,588
Issuance of Series
C convertible
preferred stock
at $1.35 per
share net of
issuance costs of
$807............. 16,041,570 20,850 -- -- -- -- -- -- 20,850
Exercise of stock
options.......... -- -- 62,892 31 -- -- -- -- 31
Deferred
compensation
related to the
grant of certain
stock options.... -- -- -- 270 -- -- (270) -- --
Amortization of
deferred
compensation..... -- -- -- -- -- -- 90 -- 90
Change in net
unrealized loss
on available-for-
sale
investments...... -- -- -- -- -- -- -- 19 19
Net loss.......... -- -- -- -- -- -- -- (11,403) (11,403)
----------- ------- ---------- ---- ------- ----- ------ -------- --------
BALANCE AT
DECEMBER 31,
1995............. 39,031,971 39,844 758,306 317 -- -- (180) (22,444) 17,537
Issuance of Series
C convertible
preferred stock
at $1.35 per
share............ 136,326 184 -- -- -- -- -- -- 184
Conversion of
preferred stock
to common stock
in conjunction
with Initial
Public Offering.. (39,168,297) (40,028) 7,833,633 (309) 40,337 -- -- -- --
Issuance of common
stock in Initial
Public Offering
net of offering
costs of $2,319.. -- -- 2,152,800 2 14,902 14,904
Issuance of common
stock in private
placement........ -- -- 239,200 -- 1,914 -- -- -- 1,914
Exercise of stock
options and
warrants, net of
cancellations.... -- -- 468,094 1 335 (262) 48 -- 122
Forgiveness of
notes receivable
from
stockholders..... -- -- -- -- -- 105 -- -- 105
Deferred
compensation
related to the
grant of certain
stock options.... -- -- -- -- 1,639 -- (1,639) -- --
Amortization of
deferred
compensation..... -- -- -- -- -- -- 672 -- 672
Change in net
unrealized loss
on available-for-
sale
investments...... -- -- -- -- -- -- -- 10 10
Net loss.......... -- -- -- -- (17,501) (17,501)
----------- ------- ---------- ---- ------- ----- ------ -------- --------
BALANCE AT
DECEMBER 31,
1996............. -- -- 11,452,033 11 59,127 (157) (1,099) (39,935) 17,947
Issuance of common
stock in private
placement, net of
offering costs of
$59 (unaudited).. -- -- 1,714,286 2 14,939 -- -- -- 14,941
Exercise of stock
options and
purchase of
shares through
employee stock
purchase plan,
net of
repurchases
(unaudited)...... 71,561 -- 220 -- -- -- 220
Deferred
compensation
recorded relating
to stock options
granted to
consultants
(unaudited)...... -- -- -- -- 125 -- (125) -- --
Issuance of
warrants in lieu
of a cash payment
for services
rendered
(unaudited)...... -- -- -- -- 100 -- -- -- 100
Amortization of
deferred
compensation
(unaudited)...... -- -- -- -- -- -- 334 -- 334
Change in net
unrealized loss
on available-for-
sale investments
(unaudited)...... -- -- -- -- -- -- -- 4 4
Forgiveness of
note receivable
(unaudited)...... -- -- -- -- -- 22 -- -- 22
Net loss
(unaudited)...... -- -- -- -- -- -- -- (10,625) (10,625)
----------- ------- ---------- ---- ------- ----- ------ -------- --------
BALANCE AT JUNE
30, 1997
(UNAUDITED)...... -- -- 13,237,880 $ 13 $74,511 $(135) $ (890) $(50,556) $ 22,943
=========== ======= ========== ==== ======= ===== ====== ======== ========
</TABLE>
See accompanying notes.

F-5
<PAGE>

AVIRON

STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- -------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss...................... $(6,502) $(11,403) $(17,501) $(7,915) $(10,625)
Adjustment to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................ 416 544 541 240 313
Acquired technology and
patent rights............... -- 1,588 -- -- --
Amortization of deferred
compensation................ -- 90 672 248 334
Changes in assets and
liabilities:
Accounts receivable.......... -- -- (500) -- 76
Prepaid expenses and other
current assets.............. (46) (574) (134) (191) 6
Deposits and other assets.... (4) (86) 17 13 (136)
Accounts payable............. (39) 211 383 (75) 442
Accrued expenses and other
liabilities................. 96 514 724 250 (734)
Deferred revenue............. -- 208 (208) 42 --
------- -------- -------- ------- --------
Net cash used in operating
activities................. (6,079) (8,908) (16,006) (7,388) (10,324)
------- -------- -------- ------- --------
Cash flows from investing
activities:
Purchases of short-term
investments.................. (9,755) (9,493) (10,342) (5,281) (9,534)
Maturities of short-term
investments.................. 11,579 8,722 10,933 7,076 6,223
Expenditures for property and
equipment.................... (260) (238) (651) (509) (56)
------- -------- -------- ------- --------
Net cash provided by (used
in) investing activities... 1,564 (1,009) (60) 1,286 (3,367)
------- -------- -------- ------- --------
Cash flows from financing
activities:
Proceeds from capital lease
line of credit............... 620 -- -- -- --
Principal payments on capital
lease obligation............. (212) (384) (528) (264) (331)
Proceeds from issuance of:
Series C convertible
preferred stock............. -- 20,850 184 184 --
Common stock, net............ 3 31 17,044 189 15,161
------- -------- -------- ------- --------
Net cash provided by
financing activities....... 411 20,497 16,700 109 14,830
------- -------- -------- ------- --------
Net increase/(decrease) in cash
and cash equivalents.......... (4,104) 10,580 634 (5,993) 1,139
Cash and cash equivalents at
beginning of period........... 5,056 952 11,532 11,532 12,166
------- -------- -------- ------- --------
Cash and cash equivalents at
end of period................. $ 952 $ 11,532 $ 12,166 $ 5,539 $ 13,305
======= ======== ======== ======= ========
Supplemental schedule of non-
cash financing and investing
activities:
Issuance of common stock for
certain technology and patent
rights....................... $ -- $ 1,588 $ -- $ -- $ --
Forgiveness of notes
receivable .................. -- -- 105 -- 22
Equipment acquired under line
of credit ................... 648 365 933 758 152
Deferred compensation related
to grant of certain stock
options, less cancellations.. -- 270 1,591 1,199 125
Warrant issued in lieu of
payment for services ........ -- -- -- -- 100
Common stock issued in
exchange for notes
receivable, less
cancellations................ -- -- 262 262 --
</TABLE>

See accompanying notes.

F-6
<PAGE>

AVIRON

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Information at June 30, 1997 and for the six-month periods ended
June 30, 1996 and 1997 is unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

Aviron (the "Company") was incorporated in the State of California on April
15, 1992 and was reincorporated in the State of Delaware in November 1996. The
Company was organized to develop and commercialize cost-effective forms of
disease prevention and treatment based on innovative vaccine technology. Prior
to October 1995, the Company was considered to be in the development stage.

The Company anticipates working on a number of long-term development
projects which will involve experimental and unproven technology. The projects
may require many years and substantial expenditures to complete, and may
ultimately be unsuccessful. Therefore, the Company will need to obtain
additional funds from outside sources to continue its research and development
activities, fund operating expenses, pursue regulatory approvals and build
production, sales and marketing capabilities, as necessary. Management
believes sufficient capital is available to achieve planned business
objectives including supporting preclinical development and clinical testing,
through at least 1997. For periods thereafter, the Company intends to raise
additional capital through the issuance of equity or debt securities or
through additional alliances with corporate partners. If adequate funds are
not available, the Company may be required to delay, reduce the scope of, or
eliminate one or more of its development programs or obtain funds through
collaborative arrangements with others that may require the Company to
relinquish rights to certain of its technologies, product candidates or
products that the Company would otherwise seek to develop or commercialize
itself.

Interim Financial Information

The financial information at June 30, 1997, for the six months ended June
30, 1996 and 1997 is unaudited but includes all adjustments (consisting only
of normal recurring adjustments) which the Company considers necessary for a
fair presentation of the financial position at such date and of the operating
results and cash flows for those periods. Results of the 1997 period are not
necessarily indicative of results expected for the entire year.

Use of Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. Cash equivalents include
$5,181,000, $4,668,000 and $4,163,000 in money market funds at December 31,
1995 and 1996 and June 30, 1997, respectively.

Short-Term Investments

The Company's entire short-term investment portfolio is currently classified
as available-for-sale and is carried at fair value based on quoted market
prices with the unrealized gains and losses included in stockholders' equity.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest

F-7
<PAGE>

AVIRON

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information at June 30, 1997 and for the six-month periods ended
June 30, 1996 and 1997 is unaudited)

income. Realized gains or losses and declines in value judged to be other-
than-temporary are included in other income. The cost of securities sold is
based on the specific identification method. The Company has not experienced
any significant realized gains or losses on its investments.

Property and Equipment

Property and equipment is stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the respective assets
which range from three to seven years. Leasehold improvements are amortized on
a straight-line basis over the shorter of their useful lives or the term of
the lease.

Revenue Recognition

Collaborative research revenue earned is based on research expenses
incurred. Amounts received in advance of services to be performed are recorded
as deferred revenue until the related expenses are incurred. Milestone
payments are recognized as revenue in the period earned.

Stock Compensation

The Company accounts for stock options granted to employees using the
intrinsic-value method and thus recognizes no compensation expense for options
granted with exercise prices equal to the fair value of the Company's common
stock on the date of the grant.

Net Loss per Share

Except as noted below, historical net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
are excluded from the computation as their effect is antidilutive, except
that, pursuant to the Securities and Exchange Commission Staff Accounting
Bulletins, common and common equivalent shares issued during the period
beginning 12 months prior to the initial filing of the proposed public
offering at prices substantially below the assumed public offering price have
been included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method and the assumed public offering
price for stock options and warrants and the if-converted method for
convertible preferred stock). Net loss per share calculated on this basis for
periods prior to the Company's initial public offering is as follows:
<TABLE>
<CAPTION>

YEARS ENDED DECEMBER 31,
------------------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1996
--------- --------- --------- ----------------
<S> <C> <C> <C> <C>
Net loss per share....... $ (1.41) $ (2.48) $ (3.29) $ (1.72)
Shares used in
calculating net loss per
share................... 4,597,207 4,607,021 5,312,826 4,607,253
</TABLE>

The pro forma net loss per share has been computed as described above and
also gives effect to the conversion of convertible preferred shares that
occurred automatically upon completion of the Company's initial public
offering from the original date of issuance.

Reverse Stock Split

In May 1996, the Company filed restated Articles of Incorporation in
California to effect a one-for-five reverse stock split of all outstanding
shares of common stock, common stock options and warrants. The conversion
ratio of all outstanding shares of convertible preferred stock were adjusted
such that each preferred share converted into .20 shares of common stock. All
common share and per share data in the accompanying financial statements has
been adjusted retroactively to give effect to the reverse stock split.

F-8
<PAGE>

AVIRON

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information at June 30, 1997 and for the six-month periods ended
June 30, 1996 and 1997 is unaudited)

2. LICENSE AGREEMENTS

ARCH Development Corporation

On July 1, 1992, the Company entered into an exclusive license agreement
with ARCH Development Corporation ("ARCH") to acquire the rights to use or
sublicense certain technology and make, use or sell certain licensed products.
The agreement calls for the Company to make certain payments to ARCH totaling
as much as $2.6 million as certain milestones are met. No benchmark payments
were made or were due through 1996. If commercialization is achieved, the
Company will be required to pay ARCH royalties based on net sales of the
licensed products. Further, if the Company were to sublicense the technology,
it would be required to pay ARCH royalties on net sales of the sublicensee
and, under certain circumstances, up to 50% of the License fee paid by the
sublicensee. In conjunction with this license agreement, the Company sold
40,000 shares of common stock to ARCH at $0.005 per share in 1992. Subsequent
to this agreement, affiliates of ARCH purchased shares of the Company's Series
A, B and C preferred stock, which were automatically converted to 222,799
shares of common stock upon the closing of the Company's initial public
offering.

The Mount Sinai School of Medicine

In 1993, the Company entered into a technology transfer agreement with The
Mount Sinai School of Medicine of the City University of New York ("Mount
Sinai") to acquire certain patent rights and technical information. Pursuant
to the agreement, the Company issued to Mount Sinai 35,000 shares of common
stock which resulted in a charge to research and development expense of
$8,750, and warrants to purchase, in the aggregate, 225,000 shares of Series A
preferred stock. The warrants become exercisable upon the occurrence of
specific milestones and expire five years from such date or on the day
preceeding the sale of the Company. Upon the closing of the Company's initial
public offering, warrants previously exercisable for 45,000 shares of Series A
preferred stock became exercisable for 9,000 shares of common stock at $4.50
per share. Upon the closing of the initial public offering, warrants covering
an additional 148,750 shares of Series A preferred stock became exercisable
for 29,750 shares of common stock at $10.00 per share. The remaining warrants
were canceled. The Company is also required to reimburse Mount Sinai for costs
incurred in connection with the maintenance and protection of certain patents.

University of Michigan

In February 1995, the Company signed a license agreement with the University
of Michigan. The license agreement gives the Company a worldwide license to
the University of Michigan's inventions and discoveries related to a cold
adapted influenza vaccine, including the ability to develop, use, sublicense,
manufacture and sell products and processes claimed in the patent rights.
Under the arrangement, the Company paid the University of Michigan and
expensed a $100,000 fee and issued shares of Series B preferred stock which
converted into 264,746 shares of common stock upon the closing of the
Company's initial public offering, resulting in a charge to research and
development expense of $1,588,481. Upon commercialization of the vaccine
product, the license agreement provides that the Company will pay royalties
based on net revenues as well as issuing warrants to purchase 1.25% of the
Company's then total outstanding common stock at an exercise price equal to
$10.00 per share. The warrant will be exercisable for five years after its
issuance date. In conjunction with the license agreement, the Company signed a
research agreement with the University of Michigan which obligates the Company
to fund approximately $530,000 of specific research projects. As of December
31, 1996, the Company had funded $441,000 for research under this agreement.
The Company had also paid the University of Michigan $110,000 for other
research services.

F-9
<PAGE>

AVIRON

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information at June 30, 1997 and for the six-month periods ended
June 30, 1996 and 1997 is unaudited)

NeuroVir Research, Inc.

In July 1996, the Company licensed certain of its patent rights covering or
relating to the use of HSV-2 for treatment of cancer and for gene therapy, but
excluding use of vaccines, to NeuroVir Research, Inc. ("NeuroVir"), a private
Canadian corporation. In exchange, the Company received 458,334 shares of
common stock, 3,208,332 shares of preferred stock and a warrant to purchase
1,000,000 share of common stock. At December 31, 1996, the Company owned 27%
of NeuroVir's outstanding capital stock. The Company's investment has a
carrying value of zero and Aviron is under no obligation to provide any
funding to NeuroVir. As no market exists for NeuroVir's capital stock, it is
not practicable to determine the fair value of shares held by the Company.

3. DEVELOPMENT AGREEMENTS

SmithKline Beecham Biologicals S.A.

In October 1995, the Company signed an agreement with SmithKline Beecham
Biologicals S.A. ("SmithKline Beecham") which grants SmithKline Beecham
exclusive worldwide (excluding South and North Korea) rights to produce and
market any prophylactic and therapeutic Epstein-Barr Virus ("EBV") vaccines
under the Company's patents. Under the Agreement, SmithKline Beecham paid the
Company a $1,500,000 nonrefundable licensing fee which was recognized as
revenue in 1995 and is required to make additional benchmark payments as
certain milestones are met. Upon commercialization, SmithKline Beecham will
pay the Company a royalty based on net sales (by country). In conjunction with
the licensing rights, SmithKline Beecham will fund the Company's development
of the EBV vaccine for a minimum of two years based on approved budgeted
amounts. For the years ended December 31, 1995 and 1996, the Company
recognized $125,000 and $1,625,000 respectively of development revenue
pursuant to the agreement. Research costs incurred in 1995 and 1996 under this
arrangement approximated development revenue recognized.

Sang-A Pharm. Co., Ltd.

In May 1995, the Company signed a development and licensing agreement with
Sang-A Pharm. Co., Ltd. ("Sang-A"), a Korean pharmaceutical company. The
agreement covers a wide range of vaccine products and grants Sang-A the
exclusive rights and licenses to such products in South and North Korea
("Korea"). Under the terms of the agreement, Sang-A will conduct all clinical
development work necessary for approval in Korea at its expense, and is
required to make payments based on certain milestones and, upon
commercialization of each product, to pay royalties based on net revenues. The
agreement also gives Sang-A the first right of refusal to supply a percentage
of Aviron's products in selected countries.

In connection with this agreement, Sang-A purchased shares of Series C
preferred stock which converted into 853,096 shares of common stock upon the
closing of the Company's initial public offering. In connection with the
initial public offering, Sang-A purchased an additional 239,200 shares of
common stock.

F-10
<PAGE>

AVIRON

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information at June 30, 1997 and for the six-month periods ended
June 30, 1996 and 1997 is unaudited)

4. INVESTMENTS

At December 31, 1995 and 1996, the Company's short-term investments
consisted of the following debt securities, all of which had maturities of one
year or less (in thousands) and are classified as available for sale:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
As of December 31, 1995:
U.S. Treasury securities and
obligations of U.S. government
agencies............................ $ 1,025 $ 2 $ (4) $ 1,023
U.S. corporate commercial paper...... 3,705 -- -- 3,705
U.S. corporate obligations........... 1,571 -- (12) 1,559
------- --- ---- -------
$ 6,301 $ 2 $(16) $ 6,287
======= === ==== =======
As of December 31, 1996:
U.S. Municipal Bonds................. $ 999 $-- $ -- $ 999
U.S. government agency obligation.... 1,001 -- -- 1,001
U.S. corporate commercial paper...... 8,087 -- (2) 8,085
U.S. corporate obligations........... 2,001 1 -- 2,002
Foreign Government Securities........ 933 (3) 930
------- --- ---- -------
$13,021 $ 1 $ (5) $13,017
======= === ==== =======
</TABLE>

Included in the above table as of December 31, 1996 are U.S. corporate
obligations, commercial paper and U.S. government agency obligations with a
fair value of $7,311,000 which are classified as cash equivalents in the
accompanying balance sheet.

5. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31
---------------
1995 1996
------- ------
<S> <C> <C>
Laboratory equipment........................................ $ 1,512 $1,984
Computer equipment.......................................... 323 459
Office equipment............................................ 90 157
Leasehold improvements...................................... 62 971
------- ------
$ 1,987 $3,571
Less accumulated depreciation and amortization.............. (712) (1,252)
------- ------
$ 1,275 $2,319
======= ======
</TABLE>

6. LEASE ARRANGEMENTS

In April 1994, the Company entered into a lease line of credit that bears
interest based on an average of the three-year and five-year indices of U.S.
Treasury bonds (14% at December 31, 1996). Outstanding balances under the line
are secured by the related equipment purchased. On June 30, 1997 the lease
line was increased by $350,000. The extension will expire January 31, 1998. At
December 31, 1996, $194,000 of the line was available.

F-11
<PAGE>

AVIRON

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information at June 30, 1997 and for the six-month periods ended
June 30, 1996 and 1997 is unaudited)

In connection with this financing arrangement, the Company issued warrants
to purchase shares of the Company's Series B preferred stock. These warrants
were exercised in exchange for 34,513 shares of common stock prior to the
initial public offering of the Company's common stock.

Included in property and equipment at December 31, 1995 and 1996 are assets
with a cost of $1,826,000 and $2,806,000, respectively, and accumulated
amortization of $689,000 and $1,106,000, respectively, which have been
financed pursuant to the lease line of credit.

The Company has entered into an operating lease agreement for office and
research facilities which expires in 2005 and includes an option allowing the
Company to extend the lease for two additional five-year terms. The agreement
requires the Company to pay operating costs, including property taxes,
utilities, insurance and maintenance. Rent expense for the year ended December
31, 1994, 1995 and 1996 was $168,000, $413,000, and $728,000, respectively.

At December 31, 1996, the Company's aggregate commitments under such
arrangements are as follows (in thousands):

<TABLE>
<CAPTION>
CAPITAL LEASE OPERATING
OBLIGATIONS LEASE
------------- ---------
<S> <C> <C>
Years ending December 31,
1997............................................... $ 735 $ 866
1998............................................... 536 919
1999............................................... 406 924
2000............................................... 61 950
2001............................................... -- 961
Thereafter......................................... -- 3,949
------ ------
1,738 $8,569
Less amounts representing interest................... (295)
------
1,443
Less current portion................................. (572)
------
$ 871
======
</TABLE>

7. STOCKHOLDERS' EQUITY

Common Stock

During June and July 1992, 648,000 shares of common stock were issued to the
Company's founders, consultants and a licensor of technology at $0.005 per
share. These shares are subject to certain transfer restrictions. Certain of
these shares, until vested, are subject to repurchase at $0.005 per share
(adjusted to reflect any stock splits or stock dividends) on termination of
employment. In addition, certain shares of common stock issued to members of
management in 1995 and 1996 through exercises of stock options are subject to
repurchase by the Company at $0.50-$2.50 per share. The above shares vest over
periods specified by the Board of Directors. At December 31, 1995 and 1996,
101,700 and 186,220 shares remain subject to the Company's right of
repurchase, respectively.

Preferred Stock

Concurrent with the closing of the Company's initial public offering in
November 1996, all outstanding shares of preferred stock converted into
7,833,633 shares of common stock of the Company.

F-12
<PAGE>

AVIRON

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information at June 30, 1997 and for the six-month periods ended
June 30, 1996 and 1997 is unaudited)

Warrants

In November 1995, in conjunction with the private placement of Series C
preferred stock, the Company issued to the placement agent warrants to
purchase 352,536 shares of the Company's Series C preferred stock. These
warrants have an exercise price of $1.62 per share and will expire in November
2000. As of the closing of the initial public offering of the Company's common
stock, the warrant became exercisable for 70,507 shares of common stock with
an exercise price of $8.10 per share. As of December 31, 1996, none of the
warrants had been exercised.

In addition to the warrants to purchase 38,750 shares of common stock issued
to Mount Sinai (see Note 2), in December 1996, the Company's Board of
Directors approved the issuance of a warrant to purchase 16,666 shares of
common stock to the Company's attorneys, at an exercise price of $2.00 per
share, in lieu of $100,000 of legal fees, which were included in accrued
offering costs at December 31, 1996. The warrant was issued by the Company in
January 1997. The Company has reserved shares of common stock for issuance
upon exercise of these warrants.

Stock Options

On September 15, 1992, the board of directors adopted the 1992 Stock Option
Plan (the "1992 Plan"). In March 1996, the Company amended and restated the
1992 Plan as the 1996 Equity Incentive Plan (the "1996 Plan"). Total shares of
common stock reserved for future issuance under the 1996 Plan were increased
to 1,750,000. The 1996 Plan provides for the grant of incentive and
nonstatutory stock options to employees and consultants of the Company and
became effective in November 1996 upon the closing of the initial public
offering.

In March 1996, the Company adopted the 1996 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") under which 200,000 shares of common stock
are reserved for issuance pursuant to nonstatutory stock options. The
Directors' Plan became effective upon the closing of the initial public
offering. At December 31, 1996 and June 30, 1997, the Company had granted
13,775 options to directors at $7.00 per share in accordance with the terms of
the Directors' Plan. The Directors' Plan and the 1996 Plan are hereinafter
collectively referred to as the "Company's Plans".

The Company's Plans have 1,147,977 and 910,801 shares available to grant
options to employees and directors at December 31, 1996 and June 30, 1997,
respectively. All options granted have 10 year terms and vest and become fully
exercisable at the end of 50 months of continued employment.

In addition, the Company has issued non-qualified stock options outside of
the 1992 Plan.

F-13
<PAGE>

AVIRON

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information at June 30, 1997 and for the six-month periods ended
June 30, 1996 and 1997 is unaudited)

A summary of the Company's stock option activity, and related information as
follows:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------------------------------- -----------------------
1994 1995 1996 1997
---------------------- ---------------------- ----------------------- -----------------------
WEIGHTED AVE. WEIGHTED AVE. WEIGHTED AVE.
EXERCISE EXERCISE EXERCISE WEIGHTED AVE.
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS EXERCISE PRICE
------- ------------- ------- ------------- -------- ------------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year................... 337,917 $0.48 369,287 $0.50 613,038 $0.50 611,936 $ 1.60
Granted................. 71,230 $0.50 309,000 $0.67 640,080 $2.73 238,500 $10.01
Exercised............... (9,864) $0.25 (62,892) $0.50 (452,781) $1.13 (53,914) $ 0.61
Forfeited............... (29,996) $0.37 (2,357) $0.50 (188,401) $2.97 (1,324) $ 3.43
------- ------- -------- -------
Outstanding-end of
period................. 369,287 $0.50 613,038 $0.50 611,936 $1.60 795,198 $ 4.14
======= ======= ======== =======
Exercisable at end of
period................. 347,893 $0.67 216,030 $0.59 259,632 $ 1.46
Weighted-average fair
value of options
granted during year.... $ 0.29 $ 1.38
</TABLE>

During the year ended December 31, 1996, officers of the Company exercised
options granted outside the Company's Plans for 168,000 shares by signing
promissory notes amounting to $310,000 which bear interest at 5.73% subject to
the Company's right of repurchase which lapses over fifty months. In April
1996, due to an executive's termination, the Company repurchased 19,200
unvested common shares by canceling a promissory note amounting to $48,000.

For certain options granted during 1995 and 1996, the Company recognized as
deferred compensation the excess of the deemed value for financial reporting
purposes of the common stock issuable upon the exercise of such options over
the aggregate exercise price of such options. Total deferred compensation of
$1,862,000 (less cancellations) recorded through December 31, 1996 is being
amortized over the vesting period of such options on an accelerated basis. A
portion of these options vested immediately upon grant. During the year ended
December 31, 1996, the Company granted options (including options outside the
Company's Plans) with exercise prices of $1.75 to $2.50 and recorded related
deferred compensation of approximately $1,591,000.

In August 1996, as a result of uncertainty about the Company's ability to
complete its initial public offering as anticipated, the Board of Directors
agreed to cancel all outstanding options which had been granted previously
with exercise prices of $2.50 per share, and issue new options to these
optionholders with exercise prices of $1.25 per share in exchange for a three
month delay in the vesting of such options. As a result of this transaction,
the Company recognized an additional $311,000 of deferred compensation for
financial reporting purposes. For those employees who had early exercised
their options at $2.50 per share in exchange for notes receivable, the Board
of Directors agreed to forgive one-half of the notes receivable amount such
that the effective exercise price for these options was $1.25 per share, and
to reimburse such employees for any tax resulting from such forgiveness.

F-14
<PAGE>

AVIRON

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information at June 30, 1997 and for the six-month periods ended
June 30, 1996 and 1997 is unaudited)

The options outstanding at December 31, 1996 have been segregated into three
ranges for additional disclosure as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
WEIGHTED- WEIGHTED- OPTIONS WEIGHTED-
OPTIONS AVERAGE AVERAGE CURRENTLY AVERAGE
OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE
RANGE OF EXERCISE PRICES DEC. 31, 1996 CONTRACTUAL LIFE PRICE DEC. 31, 1996 PRICE
------------------------ -------------- ---------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.25-$1.00............. 273,736 8.5 $0.46 186,448 $0.43
$1.00-$5.00............. 267,475 9.8 1.25 28,094 1.25
$5.00-$7.50............. 70,725 9.8 7.35 1,488 7.50
</TABLE>

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.

Pro forma information regarding net loss and net loss per share is required
by Statement 123, which also requires that the information be determined as if
the Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair market value method of that statement. The
fair value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions
for 1995 and 1996; risk free interest rate of 6.07% for 1995 and 5.94% for
1996, volatility factors of the expected market price of the Company's common
stock of .7327; no expected dividends and a weighted-average expected life of
the option of 1.5 years from the vested date.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options and employee stock purchase plans
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair market value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options and the employee stock purchase plan.

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

<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Pro forma net loss................................... $(11,418) $(17,595)
Pro forma net loss per share......................... $ (1.25) $ (1.91)
</TABLE>

Since Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflective until
1999.

F-15
<PAGE>

AVIRON

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information at June 30, 1997 and for the six-month periods ended
June 30, 1996 and 1997 is unaudited)

Employee Stock Purchase Plan

In March 1996, the Company also adopted the Employee Stock Purchase Plan
(the "Purchase Plan"). A total of 250,000 shares of common stock are reserved
for issuance under the Purchase Plan. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions at a price equal
to the lower of 85% of the fair market value of the Company's common stock at
the beginning or end of the applicable, offering period. The Purchase Plan
became effective in November 1996 upon the closing of the initial public
offering. No shares and 28,447 shares had been issued under the Purchase Plan
at December 31, 1996 and June 30, 1997, respectively.

8. INCOME TAXES

As of December 31, 1996, the Company had a federal net operating loss
carryforward of approximately $37,700,000. The net operating loss carryforward
will expire at various dates beginning from 2007 through 2011, if not
utilized. Utilization of the net operating losses and credits may be subject
to a substantial annual limitation due to the "ownership change" provisions of
the Internal Revenue Code of 1986.

Significant components of the Company's deferred tax assets as of December
31 are as follows (in thousands):

<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Net operating loss carryforward........................... $ 7,100 $ 13,200
Capitalized research and development expenses............. 1,060 1,100
Research tax (expire 2007-2011) credit.................... 550 1,100
Other-Net................................................. 140 500
------- --------
Net deferred tax assets................................... 8,850 15,900
Valuation allowance....................................... (8,850) (15,900)
------- --------
$ -- $ --
======= ========
</TABLE>

Because of the Company's lack of earnings history, the net deferred tax
asset has been fully offset by a valuation allowance. The valuation allowance
increased by approximately $2,600,000 and $4,450,000 in 1994 and 1995,
respectively.

9. RELATED PARTY TRANSACTIONS

In 1995, the Company made unsecured loans to officers totalling $100,000
which bear interest at 7.75% and are due in April 2000. As of December 31,
1996, the unpaid balance was $80,000.

An officer of the Company is a shareholder in an investment advisory
business which was paid a commission by the Company of approximately $334,000
during 1995 and earned an additional $115,000 commission as of December 31,
1996, both in connection with the Sang-A transaction (see Note 3). The officer
received no direct compensation from the transaction.

F-16
<PAGE>

AVIRON

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(Information at June 30, 1997 and for the six-month periods ended
June 30, 1996 and 1997 is unaudited)

10. LITIGATION

On July 1, 1996, Chiron Corporation ("Chiron") filed a complaint against the
Company in San Mateo County, California, Superior Court, alleging that certain
of Aviron's patent applications relating to its EBV program are based on
Chiron proprietary information which was improperly conveyed to Aviron by a
former Chiron employee, and that the Company has engaged in unfair
competition. The complaint seeks unspecified monetary damages and seeks to
impose a constructive trust, for Chiron's benefit, over the affected patent
applications, an exclusive assignment by the Company to Chiron of such patent
applications and an injunction against the Company from disclosing, using or
applying such alleged proprietary information. A trial date has been set for
November 1997. Aviron believes that the allegations in the Chiron complaint
are without merit and intends to vigorously defend itself against such action.
Aviron does not utilize the alleged Chiron proprietary information in any of
its potential products currently under development. Even if Chiron were to
prevail in this action, the Company believes that it is uncertain that a court
would grant a constructive trust over the specified patent applications, which
include many claims (including certain rights the Company licensed to
SmithKline Beecham) not relating to the alleged Chiron proprietary technology.
Were a court to grant a constructive trust over such patent applications, it
could adversely impact the Company's agreement with SmithKline Beecham. There
can be no assurance that Chiron will not ultimately prevail in this action or
that it will not obtain the remedies it is seeking. In addition, the Company
expects that the legal costs incurred in defending itself against this action
could be substantial.

11. SUBSEQUENT EVENTS

On July 24, 1997, the Board of Directors of the Company authorized the sale
of up to 2,875,000 shares of common stock in a public offering.

ARCH has asserted an interpretation of the financial terms of its agreement
with the Company relating to the license by Aviron of its EBV technology to
SmithKline Beecham which would require the Company to pay ARCH one-half of any
future or past payments (including sub-license fees and milestone payments)
received by Aviron under its agreement with SmithKline Beecham. The Company
disputes ARCH's interpretation of the financial terms of the agreement. No
assurance can be given, however, that the Company's interpretation will
prevail. Failure of the Company to prevail could have a material adverse
effect on the Company's business, financial condition or results of
operations.

F-17
<PAGE>

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