----------------
                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ----------------------

                                    FORM 10-K
(MARK ONE)
   ( )             Annual Report Pursuant to Section 13 or 15(d)
            of the Securities and Exchange Act of 1934 (Fee Required)
                   For the Fiscal Year Ended -----------------

                                       Or

   (X)            Transition Report Pursuant to Section 13 or 15(d)
            of the Securities Exchange Act of 1934 (No Fee Required)
      For the transition period from February 1, 2001 to December 31, 2001

                           Commission File No. 0-19122
                                ----------------

                               APHTON CORPORATION
                         80 SW Eighth Street, Suite 2160
                              Miami, Florida 33130
                                 (305) 374-7338
Incorporated in                                                  I.R.S. Employer
Delaware                                                         Identification
                                                                  No. 95-3640931

           Securities Registered pursuant to Section 12(g) of the Act:
                         Common Stock ($.001 par value)
                           -------------------------
                               Title of Each Class

               Number of shares of Common Stock ($.001 par value)
                  Outstanding as of March 26, 2002: 20,101,639

            Aggregate market value of Common Stock ($.001 par value)
                    held by non-affiliates on March 26, 2002
          based on the last sale price on March 26, 2002: $206,674,858

            Indicate by check mark if disclosure of delinquent filers
         pursuant to Item 405 of Regulation S-K is not contained herein
            and will not be contained to the best of the registrant's
            knowledge, in definitive proxy or information statements
           incorporated by reference in Part III of this Form 10-K or
                      any amendment to this Form 10-K. (X)

                       Documents Incorporated by Reference

                         Document                       Part of Form 10-K
                         --------                       -----------------
           Proxy Statement for the 2002 Annual                Part III
                  Meeting of Stockholders


<PAGE>


                                     PART I

Item 1.  Business

                                   The Company

Aphton  Corporation  is a  biopharmaceutical  company in one phase III and three
phase II clinical trials. We apply our innovative technology-platform to develop
products for  neutralizing,  and removing from  circulation,  hormones and other
molecules that participate in  gastrointestinal  system and reproductive  system
cancer and non-cancer  diseases.  We also are developing  products to neutralize
hormones to prevent pregnancy.  We have strategic alliances with Aventis Pasteur
(NYSE: AVE),  GlaxoSmithKline  (NYSE: GSK), Schering Plough Animal Health (NYSE:
SGP) and the World Health Organization (WHO).

Aphton is engaged in the research  and  development  and clinical  trials of its
products,  both independently and through various strategic  alliances.  We have
financed  our  operations  since  inception  through  the  sale  of  our  equity
securities and, to a lesser extent,  using  operating  revenues from R&D limited
partnerships to conduct research and  development.  These funds provided us with
the  resources  to  acquire  staff,   construct  our  research  and  development
facilities,  acquire  capital  equipment  and  finance  technology  and  product
development,  manufacturing and clinical trials. Aphton Corporation,  a Delaware
corporation,  was  incorporated  in 1981.  The  Common  Stock of Aphton has been
trading on Nasdaq's  National Market System since June 2, 1994.  Aphton had been
traded in the Nasdaq Small-Cap Issues (formerly  over-the-counter)  market since
April 1, 1991,  the date of Aphton's  initial  public  offering.  The  Company's
Common Stock is traded under the symbol "APHT."

Aphton's  primary  development  efforts  to  date  are  for  products  to  treat
gastrointestinal  system cancers and reproductive  system cancers.  In 1997, the
Company entered into a strategic  alliance with Pasteur Merieux  Connaught,  now
Aventis  Pasteur,  for products that treat  gastrointestinal  cancers,  in North
America,  Mexico and  Europe.  In 1998,  the  Company  entered  into a strategic
alliance with SmithKline Beecham, now  GlaxoSmithKline,  for products that treat
reproductive system cancers and non-cancer diseases, worldwide.


                                Basis of Approach

Aphton's  approach  to the  treatment  of major  diseases  is to  employ  (anti)
"hormone therapy." Aphton's hormone therapy involves neutralizing,  or blocking,
targeted hormones which play a critical role in diseases of the gastrointestinal
and  reproduction  systems.  Aphton has selected the strategy of hormone therapy
because it has proved,  over many years,  to be  efficacious in the treatment of
major diseases,  both malignant and  non-malignant.  In short,  this risk-averse
strategy has been proven to be effective in humans.  Well-documented examples of
such efficacy in humans are blocking  gastrin  (Proglumide) or blocking  another
hormone  stimulated by gastrin,  namely histamine (Zantac,  Tagamet),  to reduce
stomach  acid.  These treat GERD  (gastroesophageal  reflux  disease,  or "heart
burn"),  ulcerations of the esophagus and peptic ulcers. Additional examples are
blocking  estrogen  (Tamoxifen),  for breast  cancer  therapy and  blocking  the
production of testosterone (Lupron, Zoladex) for prostate cancer therapy.


                               Results and Status

The status of our products under  research and  development is summarized in the
following table.

<TABLE>

<CAPTION>

      Product           Indication(s)             Product Description                  Status*          Strategic
                                                                                                        Alliances
      -------           -------------             --------------------                 -------          ---------
<S>                   <C>                 <C>                                   <C>                    <C>


Anti-Gastrin 17 for   Advanced            The vaccine, containing a portion     Phase III clinical     Aventis
Gastrointestinal      pancreatic          of the hormone gastrin 17 (G17),      trial: G17DT           Pasteur
Cancers               cancers             and diphtheria toxoid (DT),           administered with
                                          chemically bound together to form     Gemcitabine, a
                                          G17DT, neutralizes both G17 and the   chemotherapy
                                          hormone Gly-G17 to treat advanced
                                          pancreatic cancer.

                                      -2-

<PAGE>

Anti-Gastrin 17 for   Advanced stomach    The vaccine, containing a portion     Phase II clinical      Aventis
Gastric and Gastro-   cancer and/or       of the hormone gastrin 17 (G17),      trial: G17DT           Pasteur
Esophageal Cancers    esophagus cancers   and diphtheria toxoid (DT),           administered with
                                          chemically bound together to form     Cisplatin, a
                                          G17DT, neutralizes both G17 and the   chemotherapy
                                          hormone Gly-G17 to treat
                                          advanced stomach cancer and/or
                                          esophagus cancer.

Anti-Gastrin 17 for   Colorectal cancers  The vaccine, containing a portion     Phase II clinical      Aventis
Chemo-refractory                          of the hormone gastrin 17 (G17),      trial: G17DT           Pasteur
Colorectial Cancers                       and diphtheria toxoid (DT),           administered with
                                          chemically bound together to form     Irinotecan, a
                                          G17DT, neutralizes both G17 and the   chemotherapy
                                          hormone Gly-G17 to treat
                                          chemo-failed or chemo-resistant
                                          patients with colorectal cancer.

GnRH Pharmaccine      Reproductive        A vaccine that neutralizes the GnRH   Phase II clinical      GlaxoSmith
                      system cancers      hormone for hormone-failed or         trial: GnRH            Kline
                      (including          hormone-resistant patients with       pharmaccine
                      prostate cancer)    prostate cancer.                      administered with
                                                                                Taxotere, a
                                                                                chemotherapy

Anti-Gastrin 17       Gastro-intestinal   An anti-gastrin vaccine, that         Phase II clinical      None
(G17eDT) for          ulcerations and     neutralizes G17 to treat GERD and     trial
Gastro-Esophageal     GERD                gastro-intestinal ulcerations.
Reflux Disease
(GERD)

Immuno-               Prevent pregnancy   A prophylactic (contraceptive)        Phase II clinical      World Health
Contraception         in women            vaccine that neutralizes a female     trial                  Organization
                                          hormone known as hCG.

</TABLE>

*Clinical  trials  of a new drug are  typically  conducted  in three  sequential
phases.  Phase I studies typically test the product for safety tolerance.  Phase
II studies involve limited trials to determine the optimal dose and frequency of
administration and an indication of efficacy for defined  indications.  When the
product has been found safe and shows  promise of efficacy,  further  trials are
undertaken in Phase III to fully evaluate  clinical efficacy and to further test
for safety typically using a large number of patients at geographically  diverse
medical centers.



We obtain  some of the key  components,  including  Diphtheria  Toxoid  (DT) and
Tetanus Toxoid (TT), through a supply contract with Aventis Pasteur,  one of our
strategic  collaborators.  We believe that this supply of  components  under the
supply  contract  is  sufficient  to  support  the  research,   development  and
commercialization of our anti-gastrin products. The supply contract is discussed
more fully under Strategic Alliances.

                                      -3-

<PAGE>

Anti-Gastrin  Immunogen
Aphton's current  anti-gastrin  immunogen,  or vaccine,  clinical programs treat
several human gastrointestinal  system  adenocarcinomas,  including those of the
esophagus,  stomach,  pancreas,  liver,  colon and rectum.  These cancers of the
gastrointestinal system are stimulated to grow, proliferate and metastasize,  by
the hormones gastrin 17 and  glycine-extended  gastrin 17. Aphton's  proprietary
anti-gastrin immunogen induces antibodies in the patient that neutralize both of
them. The company knows of no other vaccine or drug that  selectively  blocks or
neutralizes  both gastrin 17 and  glycine-extended  gastrin 17. Aphton  believes
that its  anti-gastrin  vaccine can extend  survival in patients  suffering from
adenocarcinomas  of the  gastrointestinal  system,  without adding toxicity to a
therapy regimen.

Aphton has successfully  completed Phase I/II safety and dose ranging trials and
has reported on the results  through  news  releases  and in  publications  with
collaborating scientists in the US and abroad, in peer-reviewed journals.

The  results  from two Phase II  clinical  trials of  Aphton's  anti-gastrin  17
immunogen (vaccine) were presented by the principal  investigators at the annual
meeting of the American Society of Clinical Oncology (ASCO) in San Francisco, CA
in May, 2001.

In the first trial, conducted at the Royal Free Hospital,  University College in
London,  UK,  30  patients  with  histologically   proven  locally  advanced  or
metastatic  pancreatic  cancer were  immunized  with  Aphton's  anti-gastrin  17
immunogen,  at different  doses. Of the patients  immunized with the lower dose,
46%  responded  with  antibodies  to gastrin,  while 82% responded at the higher
dose.  Median survival (50%) for all patients,  both lower and higher doses, was
187 days and median  survival  for  patients  responding  with  anti-gastrin  17
antibodies was 217 days. For comparison,  median survival for patients receiving
best supportive care is approximately 130 days.

In a larger, second trial conducted at the Queens Medical Center,  University of
Nottingham,  UK, 37 patients  immunized  with  anti-gastrin  17  immunogen  were
compared with 37 patients  receiving best supportive care. In this larger study,
the patients received only the higher dose. Median survival was 297 days, or 9.9
months,  as compared to the control  group,  which had a median  survival of 109
days,  or 3.6 months.  This  represents a factor of 2.75,  or a 175% increase in
median survival.  Moreover,  more than a third of the immunized  patients gained
weight,  which is highly unusual for patients with advanced  pancreatic  cancer.
For  further  comparison,   the  patients  receiving  Aphton's  anti-gastrin  17
immunogen  had a median  survival  of 9.9 months,  whereas the  chemotherapeutic
gemcitabine,  the only  approved  drug for  pancreatic  cancer in the US,  had a
median survival of approximately 5.5 months, in the pivotal trial upon which its
approval was based.

In  addition,  it was  reported  that  Aphton's  anti-gastrin  therapy  was well
tolerated  with no  systemic  toxicity,  consistent  with  all  previous  Aphton
clinical trials.

In a special  symposium  on  gastrin  at the same  annual  meeting  of the ASCO,
investigators presented highlights from several clinical trials and studies with
Aphton's  anti-gastrin  17 immunogen.  These  included:  A)  impressive  interim
results from a Phase II clinical  trial with  patients with  metastatic  stomach
cancer;  and B) results  from  trials  with  colorectal  and  pancreatic  cancer
patients,  in addition to the molecular and cell biology studies and preclinical
trials,  which together  establish the scientific  foundation for gastrin as the
central growth factor fueling gastrointestinal cancers.

The first  results  from a Phase II  clinical  trial at the MD  Anderson  Cancer
Center in Houston, Texas, in treating patients with advanced, metastatic stomach
cancer with Aphton's anti-gastrin 17 immunogen,  were presented by the principal
investigator,   Jaffer   Ajani,   MD.  Dr.   Ajani,   a  leading   authority  on
gastrointestinal  cancers,  began the  discussion  by  describing  the worldwide
incidence, stage of disease and expected (short) survival time at detection, and
very high death rate statistics for stomach cancer (the highest annual number of
deaths  worldwide of all cancers after lung  cancer).  He noted that there is no
approved therapy  currently  available;  chemotherapy is considered  palliative,
only.  Dr. Ajani then proceeded  directly to provide the interim  results of the
trial  with  patients  with  metastatic  stomach  cancer who were  treated  with
Aphton's anti-gastrin 17 immunogen and chemotherapy with cisplatin and 5FU.

                                      -4-
<PAGE>

Of the six reported evaluable patients:

     1)   The first patient had six large liver metastases. After treatment with
          Aphton's immunogen and the chemos,  all of the metastases  disappeared
          completely  (unexpectedly),  as  shown  by  repeated  CAT  scans.  The
          "before" and "after" photos were dramatic.  This is termed a "complete
          response."

     2)   Two of the patients  had tumor  volume  shrinkage of greater than 50%.
          This is termed a  "partial  response."

     3)   Three of the patients had tumor volume  shrinkage  less than 50%. This
          is a "moderate response."

Thus,  50% of the  patients  were  partial or  greater  responses,  including  a
complete response.  Since the remaining 50% were moderate  responses,  none even
had to be termed "stable" (as yet),  which is the cytostatic state hoped for and
to be expected from depriving cells of the growth factor gastrin 17.

In June, 2001, scientists in collaboration with Aphton published a peer-reviewed
article  with the new  findings  that the  genes  for both the  gastrointestinal
hormone  gastrin and its receptor are  "switched  on" at the earliest  stages of
pre-malignancy  in stomach cells,  helping to fuel their  progression to cancer.
Thus,  gastrin is now  established as an important  growth factor in pushing the
progression  of  the  pre-malignant  stomach  cells  from  the  earliest  stage,
metaplasia,  through  dysplasia and on to  adenocarcinomas.  The article titled:
"Expression  of Gastrin in Developing  gastric  Adenocarcinoma"  appeared in the
recent issue of British Journal of Surgery, 2001 Volume 88.

The  progression  leading to cancer in stomach  cells can be seen through  their
morphological  changes,  from  normal to  metaplasia  to  dysplasia  and then to
carcinoma. The progression leading to cancer in colon cells can be seen from the
development of polyps and their  morphological  changes.  The very early role of
gastrin in fueling the progression to cancer has now been  established by Aphton
and its collaborating scientists, for both the stomach and the colon.

In February,  2001, Aphton's scientific  collaborator,  Dr. J. Ajani,  announced
interim  results of the gastric  cancer  Phase II clinical  trial with  Aphton's
immunogen,  G17DT, in a symposium titled "G17DT: A NEW APPROACH TO GROWTH FACTOR
NEUTRALIZATION" at the 12th International Congress on Anti-Cancer Treatment held
in Paris,  France.  The  symposium  was chaired by  Professor J. Ajani of the MD
Anderson Cancer Center in Houston TX.

Dr. Ajani,  the principal  investigator  of Aphton's Phase II clinical trial for
patients with  metastatic  gastric  cancer,  in which G17DT in combination  with
chemotherapy  (cisplatin plus 5FU/Leucovorin),  presented an interim analysis of
the first 30 patients on whom  results  where  available.  No side  effects were
attributed to the immunogen. When administered with G17DT the patients completed
on  average  5.5 cycles of  chemotherapy,  compared  to a normal  average of 2.5
cycles completion before side effects force discontinuation. Of the 30 patients,
15 had a partial tumor response (tumor  shrinkage by 50% or more) for an overall
response  rate of 50%.  One  patient  had a  complete  response  (no  detectable
residual tumor) and 14 had a partial  response.  These results compare favorably
with reported response rates of chemotherapy with cisplatin plus 5 FU/Leucovorin
in large,  controlled  clinical  trials for  patients  with  metastatic  gastric
cancer.

Aphton is currently in late-stage  clinical  trials in both the US and in Europe
to  treat   patients   with   advanced   pancreatic,   colorectal   and  gastric
(stomach)/esophageal adenocarcinomas.

These include:

     a)   a Phase III clinical  trial in the US and Europe for the  treatment of
          metastatic pancreatic cancer, with a combination  immuno-chemo therapy
          regimen  of  Aphton's   anti-gastrin   17  immunogen  and  gemcitabine
          (Gemzar), versus gemcitabine.  Gemcitabine, a chemotherapeutic, is the
          current standard of care for treatment of pancreatic cancer in the US;

     b)   a phase II clinical  trial in the US and on the  continent  of Europe,
          with  patients  who have failed the approved  chemotherapy  regimen of
          5-FU and  irinotecan,  for the treatment of colorectal  cancer,  stage
          Dukes' D. These  "chemo-refractive"  patients are being treated with a
          combination regimen of Aphton's anti-G17 immunogen and irinotecan;

                                      -5-
<PAGE>



     c)   a phase II clinical  trial in the US and on the  continent  of Europe,
          for the  treatment of  metastatic  gastric  (stomach)  cancer,  with a
          combination  immuno-chemo therapy regimen of Aphton's  anti-gastrin 17
          immunogen and 5-FU plus cisplatin.

Anti-Gastrin Immunogen Alliance
In 1997 Aphton signed an agreement  with Pasteur  Merieux  Connaught (now called
Aventis Pasteur),  for a strategic alliance for all human cancer applications of
its anti-gastrin immunogen product,  including  stomach/esophageal,  colorectal,
and pancreatic cancers. Under the terms of the twenty-year agreement,  Aphton is
responsible  for product  development,  clinical  trials and  regulatory  agency
approvals,  and Aventis  Pasteur is responsible for and will fund the promotion,
advertising,  marketing, distribution and sales of Aphton's anti-gastrin vaccine
in North America,  Mexico and Europe.  In addition,  Aphton and Aventis  Pasteur
have entered into agreements  providing for the supply of certain  components of
the  anti-gastrin  immunogen  (as well as other  Aphton  products)  from Aventis
Pasteur to Aphton.  See our full  discussion of the Aventis  Pasteur  agreements
under Strategic Alliances in this Section.

GnRH pharmaccine

Overview
Aphton has developed a second  anti-hormone  immunogen,  GnRH  pharmaccine,  for
human cancer indications, one that targets the reproductive hormone Gonadotropin
Releasing  Hormone (GnRH).  By successfully  neutralizing  (blocking)  GnRH, the
immunogen  shuts down the production of estrogen and  progesterone  (in females)
and  testosterone  (in males),  which are normally  produced in their respective
gonadal  organs.  Estrogen fuels breast cancer and  testosterone  fuels prostate
cancer.  It has been known for decades that biological  blockage,  like physical
castration,  is  efficacious  in the  treatment of prostate and breast  cancers.
Aphton's anti-GnRH immunogen induces biological blockage.

Aphton  successfully  completed a pilot Phase I/II safety and dose ranging trial
and has reported on the results through a news release and in a publication with
collaborating scientists in the UK, in a peer-reviewed journal.

The  primary  purpose of the safety and dose  ranging  trial was to  demonstrate
safety;  the  secondary  purpose  was to  gather  data  using  various  doses of
immunogen  and to show  that a  biological  castration  could  be  induced  with
Aphton's immunogen.

Aphton's GnRH  pharmaccine  reduced,  in some patients at the lowest dose level,
gonadal testosterone to levels achieved by surgical castration.  This biological
castration  demonstrated  "proof of concept' in man. In  addition,  the prostate
cancer  "progression"  marker,  Prostate  Specific  Antigen  (PSA),  was reduced
markedly in these patients to very low levels,  in some cases from  triple-digit
to single-digit.

Aphton is now in a Phase II clinical  trial in the US to treat  prostate  cancer
patients who have failed hormone therapy (called hormone  refractory  patients),
with a combination immuno-chemo therapy regimen comprised of Aphton's immunogen,
called GnRH pharmaccine,  and the chemotherapeutic  taxotere. Such patients will
likely  have been  treated  with a GnRH  agonist  drug (to  achieve  a  chemical
castration) or an orchiectomy (a surgical castration), following therapy for the
primary tumor, but will have metastases, relapsed and have a rising PSA.

Strategic Alliance
In June 1998,  Aphton and  GlaxoSmithKline  signed a  Collaboration  and License
agreement,  granting  GlaxoSmithKline  exclusive  rights  worldwide  to Aphton's
GnRH-related  patents  and  proprietary  technology.  The  agreement  covers the
diagnosis,  treatment and prevention of GnRH-related  cancers and other diseases
in humans.  Human cancer  indications  for the  anti-GnRH  product are prostate,
breast,  ovarian and endometrial cancer.  Additional medical indications for the
anti-GnRH  product are  endometriosis,  polycystic  ovaries,  uterine  fibroids,
contraception, infertility and precocious puberty. Under terms of the agreement,
Aphton and  GlaxoSmithKline  are  collaborating  in a joint product  development
program,  with  GlaxoSmithKline  responsible  for phase III clinical  trials and
regulatory  approvals,  and for worldwide marketing and distribution of approved
products.  The agreement uses a royalty  mechanism  based on product  sales,  in
dollars,  worldwide to determine Aphton's  revenues.  See our full discussion of
the GlaxoSmithKline license agreement under Strategic Alliances in this Section.

                                      -6-

<PAGE>

GERD
Aphton is also in late-stage product development with its anti-Gastrin immunogen
approach for the treatment of gastroesophageal reflux disease (GERD), also known
as  "severe  heartburn."  GERD  affects  more than 20% of the adult  population.
Prescription  drugs to treat  this  problem  have  annual  revenues  of over $13
billion.  Aphton believes its therapy for GERD,  which is not yet partnered with
any drug company,  will obviate major risks  associated  with current  therapies
while still providing their benefits. As a preliminary to conducting a Phase III
trial for  GERD,  Aphton  has  conducted  a limited  Phase II trial in Europe to
optimize the product, given the different  performance-profile  desired for this
major, non-cancer application.

Immunocontraceptive
Aphton's anti-hCG  immunocontraceptive  product,  which prevents pregnancy,  has
been in a Phase II trial, funded by the World Health Organization (WHO). See our
discussion  of the WHO  strategic  alliance  under  Strategic  Alliances in this
Section.

Equine Anti-Gastrin Immunogen
A product  development  and analysis  study is being  conducted  using  Aphton's
Equine  (horse)  anti-gastrin  immunogen to reduce  stomach acid and heal peptic
ulcers in horses.  In 1997, the Company  entered into a strategic  alliance with
Schering-Plough  Animal Health  covering all animal health  applications  of our
anti-gastrin immunogen.  See our discussion of the Schering-Plough Animal Health
agreement under Strategic Alliances in this Section.

                                   Technology

Aphton's  approach  to the  treatment  of major  diseases  is to  employ  (anti)
"hormone therapy." Aphton's hormone therapy involves neutralizing,  or blocking,
certain  hormones  that  play  a  critical  role  in  these  diseases.  This  is
accomplished by immunizing the patients with a product called, appropriately, an
"immunogen,"   that  induces  in  them  a  directed   antibody   response  which
neutralizes, and removes from circulation, the targeted hormone.

Aphton  has  developed  an  innovative  and  proprietary   active   immunization
technology  platform  to  create  effective   immunogens,   which  are  products
administered like vaccines.  They harness and direct the body's immune system to
generate antibodies, which bind to specific peptide portions of the administered
immunogen.  These antibodies  cross-react (bind) with targeted "self" molecules,
such as hormones,  when they  encounter  that  portion of the hormone,  which is
similar to the peptide portion of the administered  immunogen.  Because diseases
involving hormones are not pathogen  (microorganism)  driven, they have not been
viewed  traditionally  as being  susceptible  to treatment  with  immunogens  to
activate the body's  immune  system  against  targeted  hormones.  Instead,  the
traditional  pharmaceutical  industry approach to controlling these diseases has
been to treat them with synthetic  drugs.  Unfortunately,  these drugs typically
must be  administered  in  relatively  large  quantities  and on a daily or more
frequent  basis,  giving  rise to patient  compliance  problems,  and often have
adverse side effects.

More recently,  drugs based on passive immunization using monoclonal antibodies,
derived from mouse  antibodies,  have been introduced to treat certain  cancers.
Aphton's active immunization technology platform can be targeted to give rise to
a polyclonal  antibody  response,  derived from the patient's own immune system,
against any  hormone,  molecule,  cell  receptor  or surface  antigen to which a
monoclonal antibody can be targeted.  Moreover, Aphton's technology platform has
significant  advantages over passive  immunization  with  monoclonal  antibodies
(humanized or human). These include: a) the patient needs only a booster shot at
approximately six month intervals after the initial  immunization  protocol with
Aphton's  immunogens,  rather than having to infuse the patient with  monoclonal
antibodies  on a weekly  basis,  for one to two  hours  each  time;  b)  passive
immunization with monoclonal antibodies requires thousands of fold more material
to be administered,  at much higher costs, than Aphton's active immunization; c)
Aphton's  immunogens  are  formulated  and  composed  of  ingredients  that  are
manufactured  using low-cost,  proven,  organic  chemistry and classical vaccine
technology,  while monoclonal antibody  manufacturing  plants are limited,  more
complex, more expensive and of limited production capacity for years to come; d)
active  immunization and the ensuing  polyclonal  antibodies induced by Aphton's
immunogens  avoid or greatly  mitigate  the  problems of mutation and changes in
receptor  or other  antigen  configurations,  as the cancer  progresses;  e) the
binding  affinity of  monoclonal  antibodies  is  normally  lower than the mouse
antibody from which they had been derived, and lower than polyclonal  antibodies
resulting  from Aphton's  active  immunization.  Furthermore,  while


                                      -7-
<PAGE>


monoclonal   antibodies'  affinity  remains  static,  the  binding  affinity  of
polyclonal  antibodies  progressively  rises  through a dynamic  process  called
clonal selection.

In contrast to either drugs or monoclonal antibodies, Aphton's immunogens create
a  strong  antibody  response  from  the  patient's  own  immune  system  (which
effectively  becomes a "drug factory") and have a more potent and longer-lasting
therapeutic  effect.  Aphton's  technology  enables it to specifically  target a
small  sequence  within  the  hormone to be  neutralized,  in order to achieve a
specific desired  biological and physiological  response.  This approach directs
all of the immunogen-induced antibodies to the targeted hormone sequence. At the
same time it minimizes the possibility of undesired  physiological  consequences
through  cross-reactivity  of the  immunogen  with any self  molecule or portion
thereof, other than the specifically-targeted  hormone sequence. This avoids the
possibility of autoimmune  disease where the antibody  production is not "turned
off." This is because the  antibody  production  can only be "turned on and kept
on" in the  presence of the foreign,  "carrier"  portion of the  immunogen  (see
below). Indeed,  without a "booster shot" of the immunogen,  the antibodies wane
(diminish)  and are cleared by the body,  over time.  Aphton"s  products  may be
administered  in much  smaller  dosages and on a much less  frequent  basis than
pharmaceutical  drugs;  typically  twice a year.  This virtually  eliminates the
problem of patient compliance, which is associated with pharmaceutical drugs.

Aphton's anti-gastrin immunogen product, for example, consists of:

     (a)  A  synthetic  peptide,  which is similar  to a portion of the  hormone
          gastrin  17 which is  targeted  to be  neutralized  (i.e.,  blocked or
          prevented from reaching and binding to its receptor).

     (b)  A "carrier,"  Diphtheria Toxoid (DT),  foreign to the body, to which a
          number  of  the  synthetic   peptides  in  (a)  are  chemically  bound
          (conjugated).  This  makes  them  available  to be both  bound to and,
          together  with the DT,  internalized  by  "B-cells."  DT contains  the
          structures  (epitopes)  which,  when  internalized  and "presented" on
          B-cells  and  Macrophages,  are bound to by  "T-cells."  By binding to
          these foreign epitopes,  these T-cells in turn, proliferate and signal
          the  B-cells,  which bind to the peptides  (a) to  proliferate  and to
          "mass  produce"  the  desired  antibodies  (all of  which  bind to the
          peptide (a)).

     (c)  A proprietary,  slow-release  "suspender"  which contains (a) and (b).
          This "delivery  vehicle" is designed to enable the achievement of four
          objectives,  concurrently:  i) a high  antibody  response;  ii) a long
          antibody  response;  iii) no  systemic  toxicity;  and  iv)  long-term
          stability, or "shelf-life."

The anti-gastrin product, which is administered by injection, with booster shots
at approximately  six-month  intervals,  thus induces  antibodies in the patient
which  bind  with  peptide  (a) and  which  also  bind  (cross-react)  with  and
neutralize  gastrin 17 (when they  encounter that portion on gastrin 17 which is
similar to  peptide  (a)).  Gastrin  17 is known to drive (or fuel)  colorectal,
stomach, liver and pancreatic cancer.  Neutralizing gastrin 17 inhibits both the
growth and metastasis (spread) of these  gastrointestinal  cancers. In addition,
the anti-gastrin product uniquely neutralizes glycine-extended gastrin 17, which
has  also  been  shown   recently   to  be   secreted   by  and  to  fuel  these
gastrointestinal system cancers.

Gastrin 17 is also  responsible  for the  production of the bulk of stomach acid
(approximately  90% in  humans),  the  reduction  of  which is  therapeutic  for
gastroesophageal  reflux  disease  (GERD) and for both  peptic  ulcers and NSAID
-induced ulcers (NSAID examples include aspirin and ibuprofen).

Aphton's anti-GnRH product is similarly constructed. In this case, the synthetic
peptide  sequence in (a)  represents  the hormone GnRH,  which is targeted to be
neutralized. Neutralizing GnRH inhibits the production of estrogen, progesterone
and  testosterone.  Inhibiting  estrogen (and  progesterone)  is therapeutic for
women with breast cancer,  endometrial cancer, ovarian cancer and endometriosis.
Inhibiting testosterone is therapeutic for men with prostate cancer.

Aphton's  immunocontraceptive  product,  which prevents  pregnancy in humans, is
also similarly  constructed.  In this case, the so-called  "C-terminal"  peptide
portion of the hormone hCG (which is targeted to be neutralized) is synthesized.
A  second,  unique  epitope  (peptide),  located  on the  hormone  hCG,  is also
conjugated to the  immunogen,  which  enhances  efficacy.  By not using a larger
portion of the hCG molecule, Aphton avoids inducing

                                      -8-

<PAGE>


unwanted  antibodies  against  other  hormones in the woman (LH and FSH),  which
share domains with some  portions of the hormone hCG.  Pregnancy is prevented by
immunizing the woman; this induces antibodies which bind to and neutralize hCG.


                               Strategic Alliances

Aventis Pasteur
In February  1997, we signed an agreement  with Pasteur  Merieux  Connaught (now
called  Aventis  Pasteur),  a leader in medical  science  and  research  and the
world's largest vaccine manufacturer and marketer,  for a strategic alliance for
all human cancer  applications of our anti-gastrin  immunogen  product including
stomach, colorectal,  liver and pancreatic cancer applications.  Under the terms
of the twenty-year  license and co-promotion  agreement,  we are responsible for
product development,  clinical trials and regulatory approvals.  Aventis Pasteur
was granted an exclusive  license to promote,  market,  distribute  and sell the
anti-gastrin  immunogen product in the United States,  Canada, Europe (including
the  Commonwealth of Independent  States  countries) and Mexico,  subject to our
right to co-promote the product either  independently or in  collaboration  with
Aventis Pasteur.

In  addition  to  the  license  and  co-promotion  agreement,  we  entered  into
agreements  with Aventis  Pasteur  providing for the supply of the  anti-gastrin
immunogen  product  from us to  Aventis  Pasteur  for  distribution  and sale by
Aventis Pasteur pursuant to the license and co-promotion  agreement,  as well as
the supply of Diphtheria Toxoid and/or Tetanus Toxoid from Aventis Pasteur to us
for  use  in the  anti-gastrin  immunogen  product  (as  well  as  other  Aphton
products).   Aventis  Pasteur  will  fund  the  costs  associated  with  product
introduction,  promotion,  advertising  and marketing  throughout  the territory
covered by the  agreement.  Under the terms of the  agreement,  in  addition  to
upfront consideration  aggregating $10 million,  including $1 million cash and a
supply commitment (of Diphtheria Toxoid and/or Tetanus Toxoid suitable for human
use) of $9 million,  we will  receive the  majority of the profits from sales of
the  anti-gastrin  immunogen  product.  Diphtheria  Toxoid and/or Tetanus Toxoid
suitable for human use is not readily  obtained on the open market in such large
quantities as will be supplied to us as part of the upfront  consideration.  The
$10 million upfront  consideration  has been classified as a license payment and
has been deferred and will be recognized  for financial  statement  (accounting)
purposes as revenue within the twenty-year period of the agreement.  The revenue
recognition will begin once regulatory agency approval to market the product has
been  received and will be recognized  ratably over the remaining  period of the
contract,  which ends  February 13, 2017.  We do not  speculate on the timing of
regulatory approvals.

Either party may  terminate  the  agreement  for,  among other  things,  uncured
material  breach or certain events of bankruptcy or insolvency.  Aventis Pasteur
has the right to terminate  the  agreement,  following  completion  of Phase III
clinical  trials in the event that it  determines  that for safety and  efficacy
reasons it does not wish to co-promote, market or sell the product. In the event
that the agreement is terminated  due to a material  breach by Aventis  Pasteur,
all  rights of Aventis  Pasteur  granted by the  agreement  will be  terminated.
However,  Aventis  Pasteur's  obligations with regard to the $10 million upfront
consideration,  both  the  cash  and  our  rights  to the  full  $9  million  in
unconditional supply commitment,  survive termination of the agreement. There is
no provision under the agreement for the  unconditional  supply commitment to be
satisfied  by  Aventis  Pasteur  with a cash  payment.  In the  event  that  the
agreement is  terminated  due to a material  breach by us, we will,  among other
things,  grant Aventis  Pasteur a  co-exclusive  license,  under our patents and
know-how in North  America and Europe and the  product  trademarks,  to make and
sell the anti-gastrin  immunogen product in exchange for royalty payments to the
other party at a royalty rate based on a percentage of net sales.

GlaxoSmithKline
In June 1998, we signed a  collaboration  and license  agreement with SmithKline
Beecham, now called  GlaxoSmithKline,  granting it exclusive rights worldwide to
our GnRH-related patents and proprietary  technology.  The twenty-year agreement
covers the diagnosis, treatment and prevention of gonadotropin,  gonadal steroid
hormone and  GnRH-related  cancers and other  diseases in humans.  Human  cancer
indications for the anti-GnRH  product  include  prostate,  breast,  ovarian and
endometrial   cancer,  in  each  case,  either  alone  or  in  combination  with
chemotherapy.  Additional medical  indications for the anti-GnRH product include
endometriosis, polycystic ovaries, uterine fibroids, contraception,  infertility
and  precocious  puberty.  The agreement uses a royalty  mechanism  based on net
sales of the product, worldwide, to determine our revenues.


                                      -9-
<PAGE>


Under terms of the agreement,  we are collaborating  with  GlaxoSmithKline  in a
joint  product  development  program,   with  GlaxoSmithKline   responsible  for
worldwide  marketing and distribution of approved products.  Under the agreement
as amended, we are responsible for the initial cost of product development prior
to the  acceptance  of the  anti-GnRH  product  by  both  parties.  Our  product
development work is reviewed on an ongoing basis with  GlaxoSmithKline and after
the acceptance of the product by both parties for  development,  GlaxoSmithKline
is responsible for the funding of the development costs of the accepted product,
clinical trials and approvals for worldwide  marketing and distribution up to an
agreed amount.  We believe that this product will be accepted in 2002,  although
there can be no assurance that we will achieve our goal.

As part of the agreement,  GlaxoSmithKline  made an equity investment in 1998 of
$5,000,000 for 237,867 shares of newly issued Aphton common stock.  Either party
may terminate the agreement for, among other things,  uncured material breach or
certain events of bankruptcy or insolvency.  Under the agreement as amended,  if
the  anti-GnRH  product has not been formally  accepted by both parties,  either
party may terminate  the  agreement in 2002.  Once the product has been accepted
for further  development,  GlaxoSmithKline  may only terminate the agreement for
safety,  efficacy or economical reasons and Aphton may terminate for the reasons
stated above. During the term of the agreement,  GlaxoSmithKline  will have full
access to all matters  encompassed  within our patents and know-how  relating to
the  anti-GnRH  product.  Upon  termination  or  expiration  of  the  agreement,
GlaxoSmithKline  will  cease  to have the  right  to use or sell  the  anti-GnRH
product, and all registrations and intellectual property rights in the anti-GnRH
product will be fully  transferred  to us. Until the  agreement is terminated or
otherwise  expires,  any invention or discovery made jointly by  GlaxoSmithKline
and us during the  development  program will be jointly  owned,  and the product
trademarks and any intellectual  property developed by  GlaxoSmithKline  will be
owned by them.

The  Schering-Plough  Animal Health agreement and the World Health  Organization
(WHO) agreement  described below together account for less than 1% of our recent
research and development efforts and expenditures.

Schering-Plough Animal Health
In August 1997, we completed a strategic  alliance with  Schering-Plough  Animal
Health covering all animal health  applications of our  anti-gastrin  immunogen.
Schering-Plough,  in  terms  of  annual  sales,  is one of  the  largest  animal
healthcare  companies in the world.  Equine  (horse)  ulcers was selected as the
first  indication  to be  pursued  under  the  alliance.  Under the terms of the
ten-year agreement,  we have granted Schering-Plough an exclusive license in the
US to promote,  distribute and sell the anti-gastrin immunogen product under our
patents and know-how.  Schering-Plough will work closely with our scientists and
management  to bring  the  anti-gastrin  immunogen  product  to  market.  We are
currently  responsible  for  developing  the  costs of the  product  and for the
manufacture  and  supply of the  product.  Schering-Plough  is  responsible  for
certain  current and future  capital costs and financial  requirements,  product
development costs and clinical trial costs, and product introduction,  promotion
and marketing.

The  agreement  provides  that we  will  share  equally  all  net  profits  with
Schering-Plough,  initially taking into account certain research and development
costs of Schering-Plough in determining net profits.  Either party may terminate
the agreement for, among other things, uncured material breach or certain events
of  bankruptcy  or  insolvency.  Upon prior  notice to us,  Schering-Plough  may
terminate the  agreement for safety or efficacy  reasons.  Upon  termination  or
expiration of the agreement, Schering-Plough will cease to have the right to use
or  sell  the  anti-gastrin   immunogen   product  and  all   registrations  and
intellectual property rights in the anti-gastrin immunogen product will be fully
transferred to us. Until the agreement is terminated or otherwise  expires,  any
intellectual  property  developed  jointly  by  Schering-Plough  and us  will be
jointly  owned,  and  the  product  trademarks  and  any  intellectual  property
developed by Schering-Plough will be owned by them.

World Health Organization
In January  1995,  we  announced a  relationship  with WHO and another  research
party, for the development and testing of an immunocontraceptive  product (which
prevents   pregnancy),   under  which  we  received  exclusive  rights  for  the
manufacture,   distribution  and  supply  of  the  immunocontraceptive   product
worldwide,  for the term of the applicable patents on a patent-by-patent  basis.
In exchange for these rights,  we make payments to support  certain  research by
the research party.

In the event that a safe and effective product is developed,  we have undertaken
to WHO to  dedicate  a portion of our  production  capacity  for the  product to
produce and supply the product to public sector agencies in developing countries
only, according to a cost-related pricing structure.  Either party may terminate
the agreement for uncured

                                      -10-
<PAGE>

material  breach  by the  other  party.  In the event  that we have  ceased  and
continue  to cease to  perform  our  obligations  under  the  contract,  WHO may
terminate the agreement and we will grant WHO an exclusive, royalty-free license
to  our  technology  to  develop,  manufacture  and  supply  immunocontraceptive
products to public sector  agencies in developing  countries  only, as well as a
non-exclusive,  royalty-bearing  license  to  develop,  manufacture  and  supply
immunocontraceptive  products in developed  countries and to the private  sector
generally.   Once  the   immunocontraceptive   product  has  reached  a  certain
development stage and subject to certain consequences,  WHO may be released from
its obligations  under the agreement for lack of funds or after an assessment of
safety and  efficacy of the product  and the Company  will be released  from its
obligations.

                           Manufacturing and Marketing

Absent  or  together   with  a  strategic   alliance  or  corporate   partnering
relationship (such as those with Aventis Pasteur and GlaxoSmithKline)  which may
impact on the following, Aphton plans to commercialize its products by executing
long-term   contracts  with  third  parties,   including  major   pharmaceutical
companies,  to  manufacture  its products and by  contracting  with similar drug
companies to market, sell and distribute its products.

The contract  (outsourcing)  manufacturing  approach  leverages on the large and
available manufacturing  resources of pharmaceutical industry companies.  Aphton
has  contracted  with drug  manufacturing  sources which are providing  Aphton's
immunogens for toxicology studies and clinical trials.  Aphton's  outsourcing of
marketing,  distribution  and sales,  as  exemplified  by the  Aventis  Pasteur,
GlaxoSmithKline   and  Schering-Plough   Animal  Health  agreements,   similarly
leverages on the large and  effective  sales forces of the major  pharmaceutical
companies.  Aphton's  capital  formation,  personnel  and  plant  and  equipment
requirements,  together with  associated  risks,  are clearly greatly reduced by
such  a  commercialization  strategy,  which  Aphton  pioneered.  In  fact,  the
outsourcing of non-core  functions has now been adopted by major drug companies.
This strategy  significantly  enhances  Aphton's ability to achieve rapid market
penetration  and growth and to exploit  the  benefits  of the patent life of its
products.

                              Strategy and Earnings

It should be noted  that  Aphton's  product  development  and  commercialization
strategy differs  significantly from the normal "licensing" of products to third
parties.  In the  former,  Aphton can retain a  significantly  larger  degree of
control,  share of profits and thus  earnings.  Under  typical  licensing  (with
royalty payments which are generally a small percentage of sales),  the opposite
would be the case. By avoiding the industry norm of "corporate  partnering" with
drug companies in its earlier  development  stages,  and by both undertaking and
overcoming the associated  risks during product  development,  Aphton has earned
and  retained   its  options  and  the  ability  to  optimally   carry  out  its
commercialization  approach.  This  strategy  was  successfully  validated  with
Aphton's  agreements with Aventis Pasteur,  GlaxoSmithKline  and Schering-Plough
Animal Health.


                            Patents and Trade Secrets

Proprietary  protection  for  Aphton's  products  is  central  to the  Company's
business.  Aphton's  policy is to protect its technology by, among other things,
filing patent  applications in worldwide  markets of interest for products which
it considers  important and intends to market. In that regard,  Aphton has filed
patent applications and has continued to receive patents for its products,  both
domestic  and  foreign.  As of December  31, 2001 we held 24 issued  patents and
approximately 5 licenses.  Additional patent  applications are in preparation or
being filed or are pending in the US and in other  countries.  Aphton intends to
continue filing  additional  patent  applications  relating to its products and,
when  appropriate,  improvements  in its technology and other specific  products
that it develops.

                                   Competition

The biotechnology and pharmaceutical industries are subject to rapid and intense
technological change. Our competitors include major pharmaceutical companies and
specialized   biotechnology   firms  supported  by  universities   and  research
institutions.  Our  current  competitive  position  with  respect to each of our
products is summarized in the following table.

                                      -11-
<PAGE>



<TABLE>
<CAPTION>

        Product           Indication(s)                                 Competition
        -------           ------------                                  -----------
<S>                           <C>            <C>

Anti-Gastrin 17 for       Advanced           The only FDA-approved drug currently available for pancreatic cancer
Gastrointestinal Cancers  pancreatic         is Gemcitabine manufactured by Eli Lily.  Our anti-Gastrin 17 product
                          cancers            is intended to be an additive or complementary therapy administered
                                             with Gemcitabine.  We believe two other pharmaceutical companies,
                                             Pharmacia & Upjohn and AstraZeneca, are also developing pancreatic
                                             cancer therapy.

Anti-Gastrin 17 for       Advanced stomach   There is currently no FDA-approved drug available for gastric cancer
Gastric and               cancer and/or      or gastro-esophageal cancer.  FDA-approved chemotherapies used to
Gastro-Esophageal         esophagus cancers  treat cancer in other indications, as well as experimental cancer
Cancers                                      drugs in clinical trials, are currently being tried on patients with
                                             advanced gastric cancer or gastro-esophageal cancer.  Roche
                                             Laboratories and Bristol-Myers Squibb are among our competitors in
                                             this market.

Anti-Gastrin 17 for       Colorectal         There is currently no FDA-approved drug available for this stage of
Chemo-refractory          cancers            disease.  Imclone, a biotechnology company, is developing a
Colorectal Cancers                           monoclonal antibody therapy for chemo-refractory colorectal cancer.
                                             This potentially competitive and/or complementary therapy employs a
                                             different mechanism of action on and within the cancer cell.

GnRH Pharmaccine          Reproductive       There is currently no FDA-approved drug for advanced prostate cancer
                          system cancers     patients who have failed the GnRH agonists, Leuprolide or Goserelin.
                                             We believe several other pharmaceutical companies, including
                                             Pharmacia Upjohn, Immunex and AstraZeneca, are conducting clinical
                                             trials for this class of patients.

Anti-Gastrin 17           Gastro-intestinal  Unlike G17eDT, none of the products currently available a) inhibits
(G17eDT) for              ulcerations and    the effects of gastrin on the lower esophageal sphincter causing
Gastro-Esophageal         GERD               abnormal transient LES relaxations typically associated with GERD,"
Reflux Disease (GERD)                        or b) treats hyper-gastrinemia, which results from standard of care
                                             therapy using Proton Pump Inhibitors (PPIs).

Immuno-Contraception      Prevent            The use of a contraceptive vaccine eliminates patient compliance
                          pregnancy in       problems that are inherent with oral medications and intrusive
                          humans             devices made by our competitors in the current birth control market.

</TABLE>


Our  competitive  position  depends on the safety and efficacy of products,  the
timing of regulatory approval and commercial introduction, and the effectiveness
of marketing and sales efforts.  Our success also depends on our ability to form
strategic  alliance  relationships  with other companies with greater  marketing
resources  than  ours,  attract  and  retain  qualified  personnel,  and  secure
sufficient   capital  resources  for  the  often   substantial   period  between
technological conception and commercial sales.

Some of our competitors have far greater  financial  resources,  larger research
staffs and more extensive  physical  facilities.  These  competitors may develop
products that are more effective than ours and may be more successful than us at
producing  and  marketing  their  products.   In  addition,   many   specialized
biotechnology firms have formed collaborations with large, established companies
to support the research,  development and commercialization of products that may
be competitive with ours.

                                      -12-
<PAGE>


                                   Regulation

Government  regulation in the US and other countries is a significant  factor in
the  development  and  marketing  of all of the  Company's  products  and in the
Company's  ongoing  research  and  development   activities.   Clinical  trials,
manufacture  and  marketing  of the  Company's  products are expected to undergo
extensive  testing and approval  processes  by the Food and Drug  Administration
(FDA) and equivalent  foreign  regulatory  authorities,  including the Medicines
Control Agency (MCA) in the United Kingdom.

Aphton conducts human clinical trials with the objective of obtaining regulatory
approvals in the key markets,  worldwide. The regulatory requirements and status
of each of our products are summarized in the following table.



<TABLE>

<CAPTION>

         Product              Trial Stage      Regulatory Requirements                Regulatory Status
         -------              -----------      -----------------------                -----------------
<S>                           <C>                 <C>                      <C>

Anti-Gastrin 17 for        Clinical Trial -   FDA, MCA and other          Amended Investigational New Drug
Gastrointestinal Cancers   Phase III          countries' approvals.       application (IND) filed with FDA and
                                                                          European countries; received permission
                                                                          to proceed with clinical trials in the
                                                                          US and in Europe.

Anti-Gastrin 17 for        Clinical Trial -   FDA, MCA and other          Investigational New Drug application
Gastric and                Phase II           countries' approvals.       (IND) filed with FDA and European
Gastro-Esophageal                                                         countries; received permission to
Cancers                                                                   proceed with clinical trials in the US
                                                                          and in Europe.

Anti-Gastrin 17 for        Clinical Trial -   FDA, MCA and other          Amended Investigational New Drug
Chemo-refractory           Phase II           countries' approvals.       application (IND) filed with FDA;
Colorectal Cancers                                                        received permission from FDA to proceed
                                                                          with clinical trials in the US.

GnRH Pharmaccine           Clinical Trial -   FDA, MCA and other          Investigational New Drug application
                           Phase II           countries' approvals.       (IND) filed with FDA; received
                                                                          permission to proceed with clinical
                                                                          trials in the US and Europe.

Anti-Gastrin 17            Clinical Trial -   FDA, MCA and other          Amended Investigational New Drug
(G17eDT) for               Phase II           countries' approvals.       application (IND) filed in Europe;
Gastro-esophageal Reflux                                                  received permission to proceed with
Disease (GERD)                                                            clinical trial.

Immuno-Contraception       Clinical Trial -   FDA, MCA and other          Investigational New Drug application
                           Phase II           countries' approvals.       (IND) filed in Europe; received
                                                                          permission to proceed with clinical
                                                                          trial.
</TABLE>


                        Directors and Executive Officers

The directors and executive officers of the Company are set forth below:

<TABLE>
<CAPTION>

Name:                              Position(s):
----                               ------------
<S>                                <C>
Philip C. Gevas                    Chairman of the Board of Directors, President and Chief Executive Officer

William A. Hasler                  Vice Chairman of the Board, Director and Co-Chief Executive Officer

Robert S. Basso                    Chairman of Compensation and Audit Committees and Director

Georges Hibon                      Director

Nicholas John Stathis, Esq.        Director

</TABLE>


                                      -13-


<PAGE>

Philip C. Gevas - 68,  Chairman of the Board of  Directors,  President and Chief
Executive  Officer.  Mr.  Gevas has  served  as  Director,  President  and Chief
Executive  Officer since  co-founding  Aphton in 1981.  Mr. Gevas  conceived and
directed the development of Aphton's  inventions which have resulted in numerous
patents  for  Aphton  for  the  treatment  of  colorectal,   pancreatic,  liver,
esophageal  and stomach  cancers,  and GERD.  After serving as an officer in the
United States Air Force,  Mr. Gevas had  experience  in the defense  industry in
management, science and engineering. Mr. Gevas has the degrees of M.E., and M.S.
Mathematics   (Stevens  Institute  of  Technology)  and  M.S.E.E.   (Ohio  State
University).

William A.  Hasler - 60,  Vice  Chairman  of the Board,  Director  and  Co-Chief
Executive Officer.  Mr. Hasler has served as Director of the Company since 1991.
Mr. Hasler's expertise and experience in management are focused both on strategy
and on the execution of plans and programs. Prior to his appointment as Aphton's
Co-Chief  Executive  Officer  in July  1998,  Mr.  Hasler  was  Dean of both the
Graduate  School and  Undergraduate  School of  Business  at the  University  of
California,  Berkeley  for more than five years.  Earlier,  Mr.  Hasler was Vice
Chairman of KPMG Peat Marwick,  responsible for management consulting worldwide.
He is currently  also a director of Solectron  Corporation,  Walker  Interactive
Systems,  Tenera,  Inc., TCSI  Corporation and is Public Governor of the Pacific
Exchange.

Robert S. Basso - 57, Director.  Mr. Basso is Chairman of Correspondent Services
Corporation  (CSC) and a Managing  Director of UBS PaineWebber Inc.  Previously,
Mr. Basso was President of Broadcort Capital Corporation and a Managing Director
of Merrill Lynch, Pierce, Fenner & Smith.

Georges Hibon - 64,  Director.  For the past ten years,  Mr. Hibon has served as
Chairman and Chief  Executive  Officer of Pasteur  Merieux  Connaught,  NA and a
member of its Board of Directors.  Previously,  Mr. Hibon was President of Merck
France.  The French  Government  awarded Mr. Hibon the honor of "Chevalier de la
Legion d'Honor," created in 1802 by Napoleon Bonaparte to recognize  outstanding
military and civilian accomplishments.

Nicholas John Stathis,  Esq. - 78, Director.  Mr. Stathis was counsel at White &
Case LLP.  Prior to that,  Mr.  Stathis  was a partner at Botein,  Hays & Sklar;
Watson, Leavenworth,  Kelton & Taggart; and Hopgood, Calimafde, Kalil, Blaustein
& Judlowe. Mr. Stathis practiced in all phases of patent,  trademark,  copyright
and unfair competition law.

The  Company's  Bylaws  authorize  the Board of  Directors  to fix the number of
directors from time to time by vote.  All directors  currently hold office until
the next annual meeting of  shareholders  and until their  successors  have been
elected.  Officers are elected to serve,  subject to the discretion of the Board
of Directors, until their successors are appointed. Directors do not receive any
fees for service on the Board.  Board members are  reimbursed for their expenses
for each meeting  attended.  There are no family  relationships  among executive
officers or directors of the Company.

The Company's Audit Committee is composed of Messrs.  Basso,  Hibon and Stathis.
The  Compensation  Committee is composed of Messrs.  Basso and Stathis.  Messrs.
Basso, Hibon and Stathis are non-executive Board Members.

                   Executive and Principal Scientific Officers

In addition to the Company's  executive  officers Philip C. Gevas and William A.
Hasler, Aphton's principal scientific officers are:

Dov Michaeli, M.D. (University of California, San Francisco),  Ph.D. (University
of  California,  Berkeley)  - 66,  Senior  Vice  President,  Director of Medical
Science and Chief Medical  Officer.  Dr. Michaeli is a senior member of Aphton's
management  team with extensive  experience in clinical  medicine and scientific
research.  Previously,  Dr.  Michaeli  was a  professor  at  the  University  of
California,  San  Francisco  (Departments  of  Biochemistry  and  Surgery).  Dr.
Michaeli  has  numerous  patents  and over  fifty  published  articles  and book
chapters.

Paul Broome, MB., Ch.B., MFPM (University of Sheffield Medical School, UK) - 52,
Vice President and Medical Director for Clinical Trials and Regulatory  Affairs,
Europe - Asia. Dr Broome has been with the Company for more than five years. His
years of clinical  experience  includes the responsibility at Glaxo for clinical
trials  which  provided  data for US  (FDA)  and UK  (MCA)  registration  of the
indication for  ranitidine  (Zantac) as  maintenance

                                      -14-

<PAGE>

therapy,  which became the world's  largest-selling  drug. Later, Dr. Broome was
Medical Director of a leading company in the UK which provides  services ranging
from  consulting and R&D through  clinical  trials,  regulatory  affairs and the
registration  of  drugs  for  marketing  approval  from  government   regulatory
agencies.

William D. Perkins, Ph.D. - 64, Vice President, Director for Clinical Trials and
Regulatory Affairs,  North America. Prior to joining Aphton Corporation in 2000,
Dr. Perkins had years of experience in the medical  field.  He has been actively
involved in oncology/immunology  clinical trials, including directing all phases
of clinical  trial  development,  from Phase I through  post-marketing  approval
(Phase IV). Dr.  Perkins has been a major  contributor  to the  formulation  and
writing  of both  investigational  new drug (IND)  applications  and of new drug
application  (NDA)   submissions  to  the  FDA.  Previous  senior   professional
responsibilities  in clinical trials and medical  affairs  include  affiliations
with ILEX Oncology (NASDAQ: ILXO), Elan Corporation PLC (NYSE: ELN) and Novartis
(NYSE: NVS).

Richard Ascione, Ph.D. (Princeton University) - 65, Vice President,  Director of
Aphton's Laboratory of Molecular Medicine. Dr. Ascione has been with the Company
for more than five  years.  Dr.  Ascione  directs  R&D in the area of  Molecular
Biology and works closely with Aphton's  Laboratory of Immunobiology in research
and  product  development.  Previously,  Dr.  Ascione  was a  professor  in  the
Department of  Experimental  Oncology and  Associate  Director of the Center for
Molecular and Structural  Biology at the Hollings  Cancer Center and the Medical
University of South  Carolina,  respectively,  in  Charleston,  South  Carolina.
Earlier,  Dr.  Ascione  was  with the  National  Cancer  Institute  (NCI) of the
National  Institutes of Health  (NIH),  where he served as Deputy Chief of NCI's
Laboratory of Molecular  Oncology.  Dr.  Ascione has published  over  sixty-five
peer-reviewed  papers,  several  book  chapters  and  articles  related  to  the
molecular  biology  and  gene  regulation  of  cancer,  human  retroviruses  and
HIV/AIDS.

Theo  de  Roij,  Ph.D.,  D.V.M.  - 52,  Vice  President,  Business  and  Product
Development.  Prior to joining the Company in 1998,  Dr. de Roij served for more
than one year as Director of Business Development at GlaxoSmithKline Biologicals
S.A., responsible for its worldwide business development activities. Previously,
Dr. de Roij was employed by the Animal Health Division of Solvay, S.A., where he
held several senior positions,  including  responsibility for worldwide business
development and strategic planning.

Peter  Blackburn,   Ph.D.  -  52,  Vice  President,   Program   Development  and
Manufacturing.  Dr. Blackburn has been with the Company since 1997.  Previously,
Dr.  Blackburn  was Executive  Vice  President  and Chief  Operating  Officer of
Applied  Microbiology,  Inc.  Earlier,  he was involved in academic  research in
protein chemistry at Rockefeller University, New York, working in the laboratory
of two recipients of the Nobel Prize for Chemistry.  Dr. Blackburn has published
numerous papers in peer-reviewed journals and is the inventor on numerous US and
foreign patents.

                       Administrative and Scientific Staff

Frederick W. Jacobs - Vice President,  Treasurer,  Chief Accounting  Officer and
Principal Financial Officer.  Previously, Mr. Jacobs, a CPA, was Chief Financial
Officer of a Health Maintenance Organization and before that served on the staff
of  PricewaterhouseCoopers  (then  Coopers & Lybrand),  providing  audit and tax
services.

Donald   Henderson  -  Vice  President  and  Managing   Director,   Finance  and
Administration,  Europe. Previously, Mr. Henderson, a chartered accountant, held
financial management positions at a number of pharmaceutical companies.

Jeannette L. Whitmore - Vice President,  Director, Investor and Media Relations,
Corporate  Communications.  Previously,  Ms. Whitmore held positions in business
administration in the medical and healthcare fields.

Stephen L. Karr, Jr., Ph.D.,  University of California,  Davis,  Dr. Karr joined
the Company  soon after its  founding in 1981 and serves as Vice  President  and
General  Manager of the Laboratory of  Immunobiology.  He is responsible for the
Laboratory's  daily  operations,   including  program  planning,  budgeting  and
control. As Project Manager, Dr. Karr is responsible for the experimental design
and   implementation   of  special   projects.   Dr.   Karr,   who  is  also  an
immunoparasitologist,  is an inventor of numerous Aphton  patents.  Dr. Karr has
sixteen  publications  and had  presented  twenty  papers  prior to joining  the
Company.

                                      -15-
<PAGE>


Stephen  Grimes,  Ph.D.,  University  of  California  -  Vice  President  of the
Laboratory of Immunology.  Dr. Grimes joined the Company  immediately  after its
founding and is responsible  for research and  development in immunology and for
the experimental design and implementation of immunology-based projects. He also
serves as the principal  scientific  deputy for Aphton's  clinical  trials.  Dr.
Grimes is a co-inventor of numerous issued patents of the Company and additional
patents in preparation and pending. Dr. Grimes joined the Company upon finishing
his doctoral dissertation at the University of California, Davis.

None of our directors or officers is involved, or has ever been involved, in any
litigation,  administrative  or  governmental  proceeding in the past five years
that are material to an  evaluation of their  ability and their  integrity.  The
Company has  approximately 50 employees,  of which 40 work primarily in Research
and Development.

                            Scientific Advisory Board

The  members  of  the  company's  Scientific  Advisory  Board,  which  functions
primarily as a review board for  research  projects and for product  development
programs, in addition to its senior staff members, are:

     Robert J.  Scibienski,  Ph.D.,  University of  California,  Los Angeles.  A
     co-founder of the Company,  Dr.  Scibienski  focuses on  immunology-related
     basic  technology  at  the  Company,  currently  addressing  immune  system
     regulation, antigen presentation and gene interactions. Dr. Scibienski is a
     co-inventor of issued Aphton patents and a number of patent applications of
     the Company. Dr. Scibienski is Associate  Professor,  Department of Medical
     Microbiology  and  Immunology  and  Director  of  the  campus-wide  Central
     Hybridoma  Facility at the University of California,  Davis. Dr. Scibienski
     has over thirty publications.

     Demosthenes  Pappagianis,   M.D.  (Stanford  School  of  Medicine),   Ph.D.
     (University  of  California,  Berkeley).  A co-founder of the Company,  Dr.
     Pappagianis  is its  principal  resource on the  mechanisms of infection of
     pathogens and of host defenses.  Professor and Chairman  (1967-1985) in the
     Department of Medical  Microbiology  and  Immunology  at the  University of
     California,  Davis,  Dr.  Pappagianis is widely  recognized in the field of
     infectious  diseases.  He is a Diplomate of the  National  Board of Medical
     Examiners and Diplomate of the American Board of Medical  Microbiology.  In
     addition,  he is a Fellow of the Infectious Diseases Society of America and
     an  Associate  Member  of  the  Armed  Forces  Epidemiological  Board.  Dr.
     Pappagianis has over one hundred publications.

     Vernon C. Stevens,  Ph.D.  Professor of  Reproductive  Biology,  Ohio State
     University.  Dr. Stevens is recognized  worldwide as one of the pre-eminent
     authorities  on  vaccines,   contraception   and  synthetic  peptide  based
     immunogen  formulations.  He pioneered the development of synthetic peptide
     immunogens  for human use,  particularly  for Aphton's  immunocontraceptive
     product, which prevents pregnancy,  under development with the World Health
     Organization (WHO).

     Richard L. Littenberg,  M.D. A co-founder of the Company, Dr. Littenberg is
     an  emeritus  member  of  Aphton's  Scientific  Advisory  Board  and  is  a
     co-inventor  of  three  Aphton  patent  filings.  Dr.  Littenberg  is Board
     Certified in both Internal Medicine and Nuclear Medicine and a Diplomate of
     the  National  Board  of  Medical  Examiners  and is  President  and  Chief
     Executive Officer of HMG. Dr. Littenberg  received his M.D. degree from the
     State  University  of New  York.  He has  practiced  internal  and  nuclear
     medicine for over twenty years. He has  participated in clinical trials for
     major pharmaceutical companies and has engaged in gastrointestinal,  cancer
     and cardiovascular research.

     Eliezer Benjamini, Ph.D., University of California,  Berkeley. A co-founder
     of the  Company,  Dr.  Benjamini  is an emeritus  member of the  Scientific
     Advisory Board and is a co-inventor of two Aphton  patents.  Dr.  Benjamini
     retired as a full Professor in the Department of Medical  Microbiology  and
     Immunology at the University of California, Davis, where he holds the title
     of Professor  Emeritus.  Dr. Benjamini is widely recognized in the field of
     immunology.  He has received  awards from industry and academia,  including
     the Distinguished  Scientists Award in Virology and Immunology (1984) which
     was given for his pioneering work in the  development of synthetic  peptide
     vaccines. Dr. Benjamini has over one hundred publications and is co-author,
     with Dr. Sidney  Leskowitz,  of Immunology:  A Short Course, a textbook for
     medical students.

     Other scientists  (consultants)  participate when their expertise is needed
     on a specific project.

                                      -16-
<PAGE>

                           Glossary of Selected Terms

<TABLE>
<S>                                     <C>

                        Adenocarcinoma:cancer that originates in glandular epithelial cells that line certain internal
                                       organs.
                    Adjuvant Treatment:an ancillary treatment that is given to patients in addition to a primary treatment
                                       to enhance the effectiveness of the primary treatment. For example, in colon
                                       cancer, chemotherapy often is given as an adjuvant treatment following surgery to
                                       remove the primary cancer from the colon.
                              Antibody:a protein produced by certain white blood cells as part of an immune response.
                                       These proteins, called antibodies, bind in a specific manner to a separate molecule
                                       and neutralize or inhibit its biological activity.
                               Antigen:any substance that can induce antibodies (B-cells) or activate T-cells, which bind
                                       to it.
                        Cancer Vaccine:technically a misnomer: a large weakly-antigenic molecule derived from the surface
                                       of cancer cells, which when combined with a foreign molecule (e.g., virus) induces
                                       a stronger immune response against it and, then, where located on the surface of
                                       the cancer cells.
                         Control Group:the patient group (or arm) of a clinical trial that receives the placebo or a
                                       standard treatment for a disease, against which the experimental drug is compared.
                               Gastrin:a hormone produced in the stomach that regulates stomach acid secretion and
                                       stimulates the proliferation of gastrointestinal cells and adenocarcinomas of the
                                       gastrointestinal tract. It occurs in the body in several forms, including gastrin
                                       17 (a 17 amino acid peptide) and gastrin 34 (a 34 amino acid peptide).
 Gonadotropin Releasing Hormone (GnRH):a hormone secreted in the hypothalmus that stimulates the release of other
                                       reproductive hormones (including ultimately, testosterone, estrogen and
                                       progesterone).
                               Hapten: a small molecule (peptide), not antigenic by itself, that can be bound to by
                                       antibodies. It can be made antigenic and elicit such antibodies when joined to a
                                       foreign molecule (carrier).
                               Hormone:a chemical substance produced by an organ or cells of an organ in one part of the
                                       body, and carried in the blood to another organ or part of the body; and which has
                                       a specific regulatory effect on the activity of the body including growth,
                                       metabolism and reproduction.
    human Chorionic Gonadotropin (hCG):a female hormone secreted by a fertilized egg necessary to start pregnancy.
                         Immune System:the complex group of organs and cells which has the ability to fight infection and
                                       disease.
                             Immunogen:any molecule capable of inducing the immune system to produce an antibody response
                                       against it.
                            Metastasis:a process by which cancer cells spread from the primary tumor to distant sites such
                                       as the lung, liver, bone, or brain. A cancer that has spread is said to be
                                       metastatic, and the distant tumors are called metastases.
                               Peptide:a molecule composed of amino acids that are linked to each other in a sequence.
                               Placebo:an inert non-drug substance that is given to the control group for comparison to a
                                       new experimental drug, usually in a randomized clinical trial.
             Randomized Clinical Trial:a clinical trial with at least two arms, in which the decision as to which arm a
                                       new patient is assigned is, by design, made by chance.
                    Standard Treatment:a currently accepted treatment for a given disease. The drug treatment often given
                                       to one group (or arm) of patients in a clinical trial. The standard treatment can
                                       serve as the control arm, in place of a placebo, for comparison to a new
                                       experimental drug treatment.
                       Treatment Group:the patient group, or arm, of a clinical trial that receives the new experimental
                                       drug treatment.
                               Vaccine:an immunogen consisting of an attenuated or killed microorganism, administered to
                                       induce the immune system to produce antibodies to fight an infectious disease.
                        Vaccine - Like:an immunogen consisting of a synthetic hapten (peptide) joined together with a
                                       foreign molecule, administered to induce the immune system to produce antibodies
                                       against the peptide.

</TABLE>


                                      -17-

<PAGE>


Item 2.  Properties

The  Company  does not own any  real  property.  The  Company  presently  leases
research  and  development   facilities  in  Yolo  County,   California  and  in
Leicestershire   County,  United  Kingdom.  The  Company  leases  its  corporate
headquarters in Miami,  Florida.  The Company believes that these facilities are
suitable for its operations for the foreseeable  future.  These leases expire at
various dates through December 31, 2002. The minimum rental  commitments for the
year ending December 31, 2002 is $22,000 and none thereafter. The leases provide
various options to renew,  but the Company may or may not choose to renew any of
the  leases.  The  Company  may or may not  relocate  one or more of the Company
facilities based on strategic planning.

Item 3.  Legal Proceedings

The Company is not involved,  and has never been  involved,  in any  litigation,
administrative or governmental  proceeding and none is believed by the Company's
management to be threatened.

Item 4.  Submission of Matters to a Vote of Security Holders.

Not applicable.


                                      -18-

<PAGE>

                                     PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

The Common Stock of Aphton has been trading on Nasdaq's  National  Market System
since  June 2,  1994.  Aphton had been  traded in the  Nasdaq  Small-Cap  Issues
(formerly  over-the-counter)  market  since April 1, 1991,  the date of Aphton's
initial  public  offering.  The  following  table  sets forth high and low price
information,  provided by Nasdaq Historical Research  Department,  for each full
quarter  beginning after January 31, 1999. The Company's  Common Stock is traded
under the symbol "APHT."

<TABLE>

<S>                                                     <C>

For The Year Ended January 31, 2001:
         1st Quarter                                   $45.00                    $21.50
         2nd Quarter                                   $34.00                    $16.00
         3rd Quarter                                   $31.91                    $22.00
         4th Quarter                                   $30.00                    $15.75
For The Eleven Months Ended December 31, 2001:
         Two Months Ended March 31, 2001               $22.56                    $12.13
         2nd Quarter                                   $24.81                    $14.41
         3rd Quarter                                   $21.98                    $ 6.95
         4th Quarter                                   $18.59                    $ 9.02

</TABLE>


We have never paid any cash dividends on our common stock. Although there are no
restrictions  that currently limit our ability to pay cash dividends,  we intend
to retain all future earnings,  if any, until the Company  generates  sufficient
revenues to allow for the payment of dividends. We do not expect to pay any cash
dividends in the foreseeable future.

In August 2001,  we closed a $14.25  million  financing of  unregistered  equity
securities with several institutional  investors.  Aphton sold approximately 1.2
million  shares  of  common  stock  at  $12.00  per  share.  These  shares  were
subsequently  registered in September,  2001. UBS Warburg acted as the placement
agent on the transaction  and Miller Johnson  Steichen  Kinnard  assisted in the
transaction.

Subsequent to year end, on March 21, 2002, the Company sold 1,200,000  shares of
registered  common  stock at $10.50 per share and received net proceeds of $11.8
million. Subsequent to year end, on February 7, 2002, the Company sold 1,345,000
shares of registered  common stock at $12.70 per share and received net proceeds
of $16.1 million.

As of December 31, 2001, Aphton had approximately 300 shareholders of record and
approximately 5,000 beneficial holders of its Common Stock.


Item 6.  Selected Financial Data

                         SELECTED FINANCIAL INFORMATION

The  selected  financial  data set forth  below with  respect  to the  Company's
statements of operations and balance sheets for the eleven months ended December
31, 2001, the years ended January 31, 2001, 2000 and 1999, the nine months ended
January 31, 1998 and the year ended April 30,  1997,  are derived  from  audited
financial  statements and should be read together with the financial  statements
and related notes  included in this Annual Report.  All selected  financial data
are not covered by the independent accountants' report. The data presented below
should be read together with the financial statements,  related notes, and other
financial information included herein.

                                      -19-
<PAGE>



<TABLE>

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

Statement of Operations       Eleven Months                                           Nine Months
Data:                             Ended                                                 Ended         Year Ended
(In thousands,                 December 31,           Year Ended January 31,          January 31,       April 30,
except per share data)            2001           2001        2000         1999         1998              1997
                                  ----           ----        ----         ----         ----              ----
Research & development
  expenditures                  $28,676         $15,302      $10,821      $9,454        $4,963          $5,206
Net loss                        $(31,264)       $(16,397)    $(11,193)    $(9,757)      $(6,605)        $(5,629)
Net loss per share              $(1.87)         $(1.02)      $(0.76)      $(0.68)       $(0.48)         $(0.44)
Weighted average shares
  outstanding                   16,739          16,100       14,731       14,431        13,733          12,913

</TABLE>

<TABLE>

<CAPTION>

Balance Sheet Data:           December 31,                        January 31,                          April 30,
                                 2001             2001        2000        1999          1998            1997
                                 ----             ----        ----        ----          ----            ----
<S>                           <C>                 <C>            <C>       <C>            <C>            <C>

Cash and current
  investments                  $ 6,323          $18,664       $19,179     $10,555       $14,226         $8,846
Total assets                   $13,983          $27,364       $28,192     $19,891       $23,580         $18,362
Total liabilities              $20,715          $16,208       $16,132     $13,339       $12,273         $15,851
Accumulated deficit            $(100,615)       $(69,351)     $(52,954)   $(41,760)     $(32,004)       $(25,399)
Total stockholders'            $(6,733)         $11,157       $12,060     $  6,552      $11,307         $  2,511
(deficit) equity

</TABLE>


     In 1998, we changed our fiscal year-end from April 30 to January 31. In May
     2000, we changed  accountants  from  PricewaterhouseCoopers  LLP to Ernst &
     Young LLP. The change is discussed in Item 9 of this Report. In March 2001,
     we changed our fiscal year-end from January 31 to December 31.


Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations


                             Results of Operations

            Eleven Months Ended December 31, 2001 and the Years Ended
                            January 31, 2001 and 2000

During the eleven  months ended  December 31, 2001,  the Company  reported a net
loss of  $31,264,455.  During this period the Company had no contract  revenues.
The investment  earnings on cash and current  investments  for the eleven months
ended December 31, 2001 was $393,768,  compared to $1,554,661 for the year ended
January 31,  2001.  This  significant  decrease  was due to lower  average  cash
balances  and  interest  rates.  Total  research  and  development  expenditures
increased $13,374,272 in the eleven months ended December 31, 2001 over the year
ended January 31, 2001. This 87% increase was a result of the increased clinical
trial costs  associated  with the development of the Company's  products.  These
costs included the costs of establishing  centers where patients are treated and
monitored.  Research and  development  expenses  were  reduced by  approximately
$660,000.  This reduction  corresponds with an adjustment of the same amount for
unrealized loss on investment  securities.  The Company allows certain employees
to defer a portion of compensation,  and the Company  transfers this amount into
an  investment  account that the employee  then  directs the  investment  of the
funds.  The  related  investment  securities  are held by the  Company,  and are
subject to the general  creditors of the  Company.  These  employees  direct the
investment  of the  funds,  and the  changes in value in these  investments  are
recognized as unrealized  gains and losses in the statement of operations with a
corresponding  increase  or  decrease to the  carrying  value of the  investment
account.  The same amount is used to adjust research and development expense and
the   corresponding   liability  for  employees'  wages  and  benefits  payable.
Unrealized holding losses on trading  securities and the corresponding  decrease
in research and development expense totaled approximately $660,000 in the eleven
month period ending December 31, 2001 and approximately  $1,000,000 for the year
ended January 31, 2001.  Unrealized  holding gains on trading securities and the
corresponding increase in research and development expense totaled approximately
$1,000,000 in the year ended January 31, 2000.

                                      -20-

<PAGE>

The Company does not accumulate cost information by major  development  product.
Many costs are  applicable to more than one product.  We receive  reimbursements
from our strategic  partners for some of our research and  development  expenses
and these  expenses are not included in our costs.  We estimate  that 93% of our
research and development  costs are spent on  gastrointestinal  and reproductive
system cancers.  There are no payment or penalty milestones  associated with any
of the  projects,  all of  which  are in Phase II or III  clinical  trials.  The
Company does not speculate on the timing of approvals by regulatory authorities.

During the year ended  January  31,  2001,  the  Company  reported a net loss of
$16,397,139.  During  this period the  Company  had no  contract  revenues.  The
investment earnings on cash and current investments for the year was $1,554,611.
This  significant  increase  was due to  higher  average  cash  balances.  Total
research  and  development  expenditures  increased  $4,480,822.   Research  and
development cash expenditures were approximately  $5,468,000 greater in the year
ended  January 31, 2001 than in the year ended  January 31, 2000.  This increase
was a  result  of  the  increased  clinical  trial  costs  associated  with  the
development of the Company's products.

During the year ended  January  31,  2000,  the  Company  reported a net loss of
$11,193,296. During this period the Company had no contract revenues. Investment
earnings on cash and  current  investments  for twelve  months was less than the
$547,000  earned in the year ended  January 31, 1999 due to lower  average  cash
balances.  Although ending cash and investments  were  approximately  $9,000,000
greater than at January 31,  1999,  most of the funds were  received  during the
period from  October,  1999 to January,  2000.  Total  research and  development
expenditures increased approximately  $1,400,000.  Research and development cash
expenditures were approximately  $800,000 greater than in the year ended January
31, 1999.  Non-cash research and development  expenses  increased  approximately
$600,000  and were  related to a Company  plan  whereby  individuals  may forego
immediate receipt of wages, as described above.

In June 1998, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
133,  "Accounting for Derivative  Instruments and Hedging  Activities." SFAS No.
133 establishes  accounting and reporting  standards for derivative  instruments
and hedging  activities.  SFAS No. 133 requires  recognition  of all  derivative
instruments  in  the  statement  of  financial  position  as  either  assets  or
liabilities and the measurement of derivative instruments at fair value. In June
1999, the FASB issued SFAS No. 137,  "Accounting for Derivative  Instruments and
Hedging  Activities - Deferral of the Effective Date of FASB Statement No. 133."
The original  effective date for SFAS No. 133 was for all fiscal years beginning
after June 15, 1999.  As a result of the issuance of SFAS No. 137, the effective
date for SFAS No. 133 is for all fiscal  quarters of all fiscal years  beginning
after June 15, 2000.  The adoption of SFAS No. 133, as amended and  interpreted,
did not have an impact on the financial statements.

In June 2001,  the Financial  Accounting  Standards  Board issued  Statements of
Financial  Accounting  Standards No. 141, "Business  Combinations," and No. 142,
"Goodwill and Other  Intangible  Assets,"  effective for fiscal years  beginning
after December 15, 2001.  Under the new rules,  goodwill and  intangible  assets
deemed to have indefinite  lives will no longer be amortized but will be subject
to annual  impairment tests in accordance with the Statements.  Other intangible
assets will  continue  to be  amortized  over their  useful  lives.  The Company
believes the adoption of these  statements  will have no impact on its financial
position or results from operations.

In August 2001, the Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No. 144,  "Accounting  for the  Impairment  or
Disposal of Long-Lived Assets" (SFAS No. 144). SFAS 144 superseded  Statement of
Financial  Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of
Long-Lived  Assets  and  for  Long-Lived  Assets  to be  Disposed  Of,"  and the
accounting and reporting  provisions of Accounting  Principles Board Opinion No.
30, "Reporting the Results of Operations-Reporting  the Effects of Disposal of a
Segment of a Business,  and  Extraordinary,  Unusual and Infrequently  Occurring
Events and Transactions," for the disposal of a segment of a business.  SFAS No.
144 also amended Accounting  Research Bulletin No. 51,  "Consolidated  Financial
Statements,"  to eliminate the exception to  consolidation  for a subsidiary for
which  control is likely to be temporary.  The Company  believes the adoption of
this  statement  will have no impact on its  financial  position or results from
operations.

Inflation and changing  prices have not had a  significant  effect on continuing
operations and are not expected to have any material  effect in the  foreseeable
future.  Dividend,  interest  and  other  income  were  primarily  derived  from
money-market accounts.

                                      -21-
<PAGE>

                        Liquidity and Capital Resources

The Company has financed its operations since inception  through the sale of its
equity securities and, to a lesser extent,  operating  revenues from R&D limited
partnerships  to conduct  research  and  development.  These funds  provided the
Company  with the  resources  to  acquire  staff,  construct  its  research  and
development  facility,  acquire capital equipment and to finance  technology and
product development, manufacturing and clinical trials.

Subsequent to year end, on March 21, 2002, the Company sold 1,200,000  shares of
registered  common  stock at $10.50 per share and received net proceeds of $11.8
million. Subsequent to year end, on February 7, 2002, the Company sold 1,345,000
shares of registered  common stock at $12.70 per share and received net proceeds
of $16.1 million.

The selected pro forma financial  information  summarized below shows the effect
of the net proceeds from equity financing  transactions  received on February 7,
2002 and March 21, 2002 as if the closing of those  transactions  had  occurred,
and the net proceeds from those  transactions  had taken place,  on December 31,
2001.

<TABLE>

<CAPTION>

         Balance Sheet Data:                                 Pro Forma December 31              December 31,
                                                                      2001                          2001
                                                                      ----                          ----
<S>                                                              <C>                                <C>

         Cash and current investments                              $ 34,223                      $  6,323
         Total assets                                              $ 41,883                      $ 13,983
         Total stockholders' equity (deficit)                      $ 21,167                      $ (6,733)
         Weighted average shares outstanding                         17,045                        16,739

</TABLE>

The unaudited pro forma financial  information is not necessarily  indicative of
the Company's  future results of operations.  The unaudited pro forma  financial
information   should  be  read  in  conjunction  with  this  section   captioned
"Management's  Discussion  and Analysis of Financial  Conditions  and Results of
Operations" and with our financial statements and related notes included in this
report.

During the eleven months ended December 31, 2001, the Company received  proceeds
of approximately  $13.3 million net of approximately $1.0 million offering costs
from the closing of a private  financing with several funds.  The Company issued
1,187,503  shares of common stock and there were no warrants or options included
with this private  placement.  Approximately  170,000  additional shares will be
issued subsequent to December 31, 2001 due to an anti-dilution provision for the
sale of securities less than $12.00 per share prior to October, 2002.

During the year ended  January 31,  2001,  the Company  received net proceeds of
$15.5 million from the closing of a private financing with several international
biotechnology/healthcare  funds.  The Company  issued  491,509  shares of common
stock  and  there  were no  warrants  or  options  included  with  this  private
placement.  The Company has not performed any research for third parties and has
no sources of income from operations.  Cash flows from investing  activities are
not anticipated to be significant. The Company has no short or long term debt or
lines of credit established. The Company anticipates that the sale of its equity
securities will continue to finance operations for the foreseeable future.

During the year ended January 31, 2000, in a private  placement the Company sold
800,000  shares of common stock for  $11,200,000,  net of expenses.  The Company
also  issued  359,000  shares  through  the  exercise  of  outstanding  purchase
warrants, resulting in net proceeds of $5,502,250.

The Company  anticipates that its existing capital  resources which are composed
primarily of cash and short-term cash investments, including the proceeds of its
private  placements  and  interest  thereon,  would  enable it to  maintain  its
currently  planned  operations  through the year ending  December 31, 2002.  The
Company's  working  capital and capital  requirements  will depend upon numerous
factors,  including the  following:  the progress of the Company's  research and
development  program,  preclinical  testing and clinical trials;  the timing and
cost of obtaining regulatory approvals; the levels of resources that the Company
devotes  to  product  development,  manufacturing  and  marketing  capabilities;
technological advances; competition; and collaborative arrangements or strategic
alliances  with  other  drug  companies,   including  the  further  development,
manufacturing and marketing of certain of the Company's products and the ability
of the  Company to obtain  funds  from such  strategic  alliances  or from other
sources.

                                      -22-

<PAGE>

                          Critical Accounting Policies

The SEC has recently  issued  Financial  Reporting  Release No. 60,  "Cautionary
Advice  Regarding  Disclosure  About  Critical  Accounting  Policies"  (FRR 60),
suggesting  companies to provide  additional  disclosure and commentary on those
accounting  policies  considered  most critical.  FRR 60 considers an accounting
policy to be critical if it is important to the  Company's  financial  condition
and results,  and  requires  significant  judgment and  estimates on the part of
management  in its  application.  Aphton  believes the  following  represent the
critical  accounting  policies of the Company as  contemplated  by FRR 60. For a
summary of all the  Company's  significant  accounting  policies,  including the
critical  accounting  policies  discussed  below, see Note 2 to the accompanying
financial statements.

Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States  requires  management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosures  of contingent  assets and  liabilities at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  period.  Actual  results could differ from those  estimates,  however
management believes such differences are unlikely to be significant.

Research and Development Expenses
Research and  development  costs are expensed as incurred.  These costs  include
internal  research and development  costs, the salaries of dedicated  personnel,
the allocated  salaries of personnel who also perform general and administrative
tasks,  the costs of the dedicated  research and development  facilities and the
costs of  contracted  researchers.  There  is no  allocation  of  administrative
expense or corporate costs to research and development costs.

Income Taxes
The Company  accounts  for income  taxes  pursuant  to  Statement  of  Financial
Accounting  Standards  (SFAS) No.  109,  "Accounting  for Income  Taxes,"  which
requires an asset and liability  approach in accounting for income taxes.  Under
this method,  the amount of deferred tax asset or  liability  is  calculated  by
applying the  provisions of enacted tax laws to the  differences in the bases of
assets and liabilities for financial and income tax purposes. Income tax expense
is the tax payable  for the period and the change  during the period in deferred
tax assets and  liabilities.  The Company  regularly  reviews its  deferred  tax
assets for  recoverability  and  establishes  a valuation  allowance  based upon
historical  losses,  projected  future taxable income and the expected timing of
the reversals of existing temporary differences. As a result of this review, the
Company has  established  a full  valuation  allowance  against its deferred tax
assets.

Investment Securities
Investment  securities  consist  principally of debt securities issued by the US
Treasury and other US Government  agencies and  corporations  and  investment in
other securities, including mutual funds.

Investment  securities are classified into three categories and accounted for as
follows:  (1)  Held-to-maturity  securities are debt securities that the Company
has the positive  intent and ability to hold to maturity.  These  securities are
reported at amortized  cost. (2) Trading  securities  are  securities  which are
bought and held  principally  for the purpose of selling  them in the near term.
These  securities are reported at fair value,  with unrealized  gains and losses
included in current  earnings.  (3)  Available-for-sale  securities are debt and
equity  securities  not  classified  as  either   held-to-maturity   or  trading
securities. The Company does not have available-for-sale  securities.  Gains and
losses realized on the sales of investment  securities are determined  using the
specific identification method.

The Company's trading securities consist of mutual funds and relate to a Company
plan whereby  certain  individuals  may forego  immediate  receipt of wages.  In
connection therewith,  the Company establishes a liability for accrued wages and
records the related compensation expense as services are performed. Further, the
Company  segregates  an  amount  of funds in  investment  accounts  equal to the
liability for accrued wages. The investment accounts (trading securities) remain
assets of the Company,  and are subject to the general creditors of the Company.
Upon transfer of the funds to the investment accounts,  the employees direct the
specific  investment  of the  funds.  The  changes  in value  in the  investment
accounts  (trading  securities) are recognized as unrealized gains and losses in
the  statements  of  operations,  with a  corresponding  increase or decrease to
research and  development  expense and the  liability for  employees'  wages and
benefits.

                                      -23-
<PAGE>

Unconditional Supply Commitment
The  Company  has  the  unconditional   right  to  receive  supplies  originally
aggregating $9 million from Aventis  Pasteur.  The Company's policy is to review
the current  market  prices of available  supplies,  if any, to assure that they
remain above the stated Aventis Pasteur contract price of the materials and that
the right to receive the supplies remains unimpaired.  Aventis Pasteur is one of
the  largest  pharmaceutical  vaccine  manufacturers  in the world.  The Company
monitors the financial  performance of Aventis  Pasteur to assure that they will
continue to be able to perform  under the  contract,  wherein the special  order
supplies are to be provided from  supplies  manufactured  by Aventis  Pasteur in
large quantities and sold to many customers,  including the U.S. Government,  as
part of Aventis  Pasteur's basic franchise  (business).  The contract allows for
inflation  based  increases  in the per unit  costs of the  supplies  which  the
Company and Aventis  Pasteur believe are sufficient to assure that there will be
no future financial hardship incurred by Aventis Pasteur in the execution of the
agreement.


Item 7a.  Quantitative and Qualitative Disclosures About Market Risk.
Aphton's  market  risks  are  all  immaterial.   Investment  securities  consist
principally of debt securities issued by the US Treasury and other US Government
agencies and corporations and investment in other  securities,  including mutual
funds.

Item 8.  Financial Statements and Supplementary Data.
Financial Statements are set forth in this report beginning at page 17.

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure.
The registrant changed  accountants from  PricewaterhouseCoopers  LLP to Ernst &
Young  LLP,  effective  May 19,  2000,  for the year  ended  January  31,  2001.
PricewaterhouseCoopers  LLP was dismissed effective May 19, 2000. The reports of
PricewaterhouseCoopers LLP on the financial statements of the registrant for the
past two years contained no adverse  opinion or other  disclaimer of opinion and
were not  qualified  or modified as to  uncertainty,  audit scope or  accounting
principle.

                                      -24-
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.
The  information  required  for this item is  incorporated  by  reference to the
section  captioned  "Election of Directors" in the Company's Proxy Statement for
the Annual Meeting of Stockholders.


Item 11.  Executive Compensation
The  information  required  for this item is  incorporated  by  reference to the
section captioned "Executive  Compensation" in the Company's Proxy Statement for
the Annual Meeting of Stockholders.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.
The  information  required  for this item is  incorporated  by  reference to the
section  captioned  "Election of Directors" of the Company's Proxy Statement for
the Annual Meeting of Stockholders.

Item 13.  Certain Relationships and Related Transactions.
Not applicable.

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

(a)  Documents filed as part of this Form 10-K


(i)  Financial  Statements:

     Reports of Independent Certified Public Accountants

     Balance Sheets as of December 31, 2001 and January 31, 2001

     Statements of Operations  for the eleven months ended December 31, 2001 and
     for the years ended January 31, 2001 and 2000

     Statements of  Stockholders'  (Deficit)  Equity for the eleven months ended
     December 31, 2001 and for the years ended January 31, 2001 and 2000

     Statements of Cash Flows for the eleven months ended  December 31, 2001 and
     for the years ended January 31, 2001 and 2000

     Notes to the Financial Statements

(ii) Financial Statements  Schedules:
     Financial  Statement  Schedules  are  omitted  because  they are either not
     required,  not applicable,  or the information is included in the Financial
     Statements or Notes thereto.

(b)     Exhibits

          Exhibit Number                     Description
          --------------                     -----------


          3.1  Certificate  of  Incorporation   (Incorporated  by  reference  to
               Exhibit B of the  Registrant's  Definitive  Proxy Statement filed
               October 8, 1997)

          3.3  By-Laws   (Incorporated   by   reference  to  Exhibit  C  of  the
               Registrant's Definitive Proxy Statement filed October 8, 1997)


                                      -25-
<PAGE>


          23.1 Consent  of  Ernst  & Young  LLP,  Independent  Certified  Public
               Accountants.

          23.2 Consent  of  PricewaterhouseCoopers  LLP,  Independent  Certified
               Public Accountants.

(c)  Reports on Form 8-K

     During the three-month period ending December 31, 2001, the Company did not
     file any reports on Form 8-K.

     Subsequent to year end, the Company filed the following  current reports on
     Form 8-K:

          -    on  January  23,  2002,  announcing  the  completion  of  patient
               recruitment for the Company's gastric cancer clinical trial;

          -    on  January  31,  2002,   announcing  the   effectiveness   of  a
               registration  statement on Form S-3 to sell  1,500,000  shares of
               the Company's common stock;

          -    on February 5, 2002,  disclosing the existence of an underwriting
               agreement among the Company,  UBS Warburg LLC and Morgan Keegan &
               Co., Inc.;

          -    on February 5, 2002,  announcing the sale of 1,345,000  shares of
               the Company's common stock;

          -    on February 7, 2002, announcing the closing of the offer and sale
               of 1,345,000 shares of the Company's common stock;

          -    on February 11, 2002,  disclosing that a scientific  collaborator
               of the Company had announced  interim results of a gastric cancer
               Phase II  clinical  trial at the 12th  International  Congress in
               Paris on anti-cancer treatment;

          -    on March  18,  2002,  disclosing  certain  preliminary  unaudited
               summary financial information of the Company for the period ended
               December 31, 2001;

          -    on March 18, 2002,  disclosing  the existence of an  underwriting
               agreement between the Company and Morgan Keegan & Co., Inc.;

          -    on March 21, 2002,  announcing  the closing of the offer and sale
               of 1,200,000 shares of the Company's common stock.


                                      -26-
<PAGE>




Dated:  March 29, 2002                      APHTON CORPORATION


                                            By:    PHILIP C. GEVAS
                                                   Chairman of the Board, Chief
                                                   Executive Officer,
                                                   and President

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


<TABLE>
<S>                                           <C>                                  <C>
   Signatures                                      Title                                Date

  /s/ Philip C. Gevas
---------------------------           Chairman of the Board, Chief Executive       March 29, 2002
    PHILIP C. GEVAS                               Officer  and President


  /s/ William A. Hasler
---------------------------           Vice Chairman of the Board, Director and     March 29, 2002
  WILLIAM A. HASLER                           Co-Chief Executive Officer


  /s/ Nicholas John Stathis
---------------------------                         Director                       March 29, 2002
   NICHOLAS JOHN STATHIS


  /s/ Frederick W. Jacobs
 ---------------------------          Vice President, Treasurer, Chief             March 29, 2002
   FREDERICK W. JACOBS                Accounting Officer and Principal
                                              Financial Officer



</TABLE>
<PAGE>

                                      -27-



<TABLE>
<CAPTION>
                        INDEX TO FINANCIAL STATEMENTS

                              FINANCIAL STATEMENTS


<S>                                                                                               <C>
                                                                                                      Page
                                                                                                      ----

Reports of Independent Certified Public Accountants                                                     29

Balance Sheets - December 31, and January 31, 2001                                                      30

Statements of Operations -                                                                              31
  for the eleven months ended December 31, 2001 and the years ended January 31, 2001 and 2000

Statements of Stockholders' (Deficit) Equity -                                                          31
  for the eleven months ended December 31, 2001 and the years ended January 31, 2001 and 2000

Statements of Cash Flows -                                                                              32
  for the eleven months ended December 31, 2001 and the years ended January 31, 2001 and 2000

Notes to the Financial Statements                                                                       33

</TABLE>
<PAGE>
                                  -28-




               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors and Stockholders
Aphton Corporation

We have audited the  accompanying  balance  sheets of Aphton  Corporation  as of
December 31, 2001 and January 31, 2001 and the related statements of operations,
stockholders'  (deficit)  equity  and cash  flows for the  eleven  months  ended
December  31,  2001  and the  year  ended  January  31,  2001.  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 auditing standards generally accepted
in the United States. 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 Aphton  Corporation  as of
December 31, 2001 and January 31, 2001,  and the results of its  operations  and
its cash flows for the eleven months ended  December 31, 2001 and the year ended
January 31, 2001, in conformity with accounting principles generally accepted in
the United States.

                                       /s/ Ernst & Young LLP
Miami, Florida
March 21, 2002



                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders
Aphton Corporation

In our opinion,  the  statements of  operations,  stockholders'  equity and cash
flows for the year ended  January  31,  2000  present  fairly,  in all  material
respects,  the results of operations and cash flows of Aphton  Corporation  (the
"Company")  for the year ended January 31, 2000, in conformity  with  accounting
principles  generally accepted in the United States of America.  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  audit.  We  conducted  our audit of these  statements  in  accordance  with
auditing  standards  generally  accepted in the United States of America,  which
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,  assessing the  accounting  principles
used and  significant  estimates made by  management,  as well as evaluating the
overall financial statement  presentation.  We believe that our audit provides a
reasonable basis for our opinion.

                                         /s/ PricewaterhouseCoopers LLP
Honolulu, Hawaii
April 24, 2000


                                      -29-

<PAGE>


                               APHTON CORPORATION


<TABLE>
                  Balance Sheets - December 31, and January 31, 2001


Assets                                                          December 31,      January 31,
                                                                   2001             2001
<S>                                                          <C>              <C>
Current Assets:
Cash and current investments:
     Cash and short-term cash investments                        $3,176,717      $3,508,577
     Investment securities-trading                                1,147,417       1,653,180
     Investment securities-held-to-maturity                       1,999,006      13,502,695
                                                                 ----------     -----------
         Total cash and current investments                       6,323,140      18,664,452
Other assets (including current portion of
     unconditional supply commitment)                               595,390         733,323
                                                                 ----------     -----------
         Total current assets                                     6,918,530      19,397,775
Equipment and improvements, at cost,
     net of accumulated depreciation and amortization               188,597         166,437
Unconditional supply commitment                                   6,875,515       7,800,000
                                                                 ----------     -----------
        Total assets                                            $13,982,642     $27,364,212
                                                                ===========     ===========

       Liabilities and Stockholders' (Deficit) Equity

Liabilities:
Current liabilities:
     Accounts payable and other                                 $10,715,430      $6,207,569
                                                                -----------     -----------
         Total current liabilities                               10,715,430       6,207,569
     Deferred revenue                                            10,000,000      10,000,000
                                                                -----------     -----------
         Total liabilities                                       20,715,430      16,207,569
                                                                -----------     -----------
Commitments

Stockholders' (Deficit) Equity:
     Preferred stock, $0.001 par value -
      Authorized:  2,000,000 shares
      Issued and outstanding:  none                                      -                -
     Common stock, $0.001 par value -
      Authorized:  30,000,000 shares
      Issued and outstanding:17,386,996 shares at
      December 31, 2001 and 16,199,493 shares
      at January 31, 2001                                           17,387           16,199
     Additional paid in capital                                 93,566,314       80,292,478
     Purchase warrants                                             298,900          198,900
     Accumulated deficit                                      (100,615,389)     (69,350,934)
                                                              --------------    -------------
         Total stockholders' (deficit) equity                   (6,732,788)      11,156,643
                                                              --------------    -------------
         Total liabilities and stockholders'(deficit) equity   $13,982,642      $27,364,212
                                                              ==============    =============



          The accompanying notes are an integral part of the financial statements.

</TABLE>

                                      -30-

<PAGE>



<TABLE>
                                                  APHTON CORPORATION
                                              Statements of Operations
                 for the eleven months ended December 31, 2001 and the years ended January 31, 2001 and 2000

<S>                                              <C>                 <C>                 <C>
                                                      December 31,       January 31,        January 31,
                                                          2001               2001               2000
Revenue:                                             $          -       $         -          $       -
                                                     ------------       -----------          ---------
Costs and Expenses:
     General and administrative                         2,319,539         1,661,910           1,775,652
     Research and development                          28,676,455        15,302,183          10,821,361
                                                     ------------       ------------        ------------
         Total costs and expenses                      30,995,994        16,964,093          12,597,013
                                                     ------------       ------------        ------------
         Loss from operations                          30,995,994        16,964,093          12,597,013
Other Income (expense):                             ------------       ------------        ------------
     Dividend and interest income                         393,768         1,554,611             444,980
     Unrealized (losses) gains from investments          (662,229)         (987,657)            958,737
                                                     ------------       ------------        ------------
     Net loss                                        $(31,264,455)     $(16,397,139)       $(11,193,296)
Per share data                                       ------------      --------------      --------------
     Basic and diluted loss per common share               $(1.87)           $(1.02)             $(0.76)
     Weighted average number of                      -------------     --------------      --------------
         common shares outstanding                     16,739,267        16,100,108          14,731,301
                                                     =============     ==============      ==============


          The accompanying notes are an integral part of the financial statements.

</TABLE>



                               APHTON CORPORATION
                   Statements of Stockholders' (Deficit) Equity
                  for the eleven months ended December 31, 2001
                  and the years ended January 31, 2001 and 2000


<TABLE>
<S>                                <C>       <C>          <C>                 <C>         <C>                <C>
                                                             Additional
                                       Common    Stock         Paid in          Purchase    Accumulated
                                       Shares    Amount        Capital          Warrants      Deficit            Total

Balance, January 31, 1999         14,433,984    $14,434     $47,960,689        $336,904    $(41,760,499)      $6,551,528
                                   ----------    -------     ----------         --------    -------------      ----------
     Exercise of purchase
        warrants                     359,000        359       5,639,895         (138,004)              -        5,502,250
     Sale of stock, net              800,000        800      11,199,200                -               -       11,200,000
     Net loss                              -          -               -                -     (11,193,296)     (11,193,296)
                                  ------------   ------      ----------         --------    --------------    ------------
  Balance, January 31, 2000       15,592,984     15,593      64,799,784          198,900     (52,953,795)      12,060,482
                                  ------------   ------      ----------         --------    --------------    ------------
     Exercise of purchase
        warrants                     115,000        115         246,385                                -          246,500
     Sale of stock, net              491,509        491      15,246,309                -               -       15,246,800
     Net loss                              -          -               -                -     (16,397,139)     (16,397,139)
                                  -----------    ------      ----------          -------     ------------     ------------
Balance, January 31, 2001         16,199,493     16,199      80,292,478          198,900     (69,350,934)      11,156,643
                                  -----------    ------      ----------          -------     ------------      -----------
     Sale of stock, net            1,187,503      1,188      13,273,836                -               -       13,275,024
     Issuance of warrants                  -          -               -          100,000               -          100,000
     Net loss                              -          -               -                -     (31,264,455)     (31,264,455)
                                  -----------   -------     -----------         --------   --------------     ------------
Balance, December 31, 2001        17,386,996    $17,387     $93,566,314         $298,900   $(100,615,389)     $(6,732,788)
                                  ===========   =======     ===========         ========   =============      ============


          The accompanying notes are an integral part of the financial statements.

</TABLE>


                                      -31-

<PAGE>
<TABLE>


                                                          APHTON CORPORATION
                                                       Statements of Cash Flows
                    for the eleven months ended December 31, 2001 and for the years ended January 31, 2001 and 2000

<S>                                                 <C>                  <C>                 <C>
                                                          December 31,        January 31,        January 31,
                                                              2001                2001               2000
Cash flows from operating activities:
     Cash paid to suppliers and employees               $(24,593,507)      $(15,467,013)        $(9,446,861)
     Purchase of trading securities                         (156,467)          (259,957)         (2,201,968)
     Proceeds (losses) from trading securities              (662,229)          (987,657)          1,987,611
     Interest and dividends received                         393,768          1,554,611             444,980
                                                       ---------------    ---------------      ---------------
       Net cash used in operating activities             (25,018,435)       (15,160,016)         (9,216,238)
Cash flows from investing activities:                  ---------------    ---------------      ---------------
  Purchase of held to maturity securities                (15,311,311)       (59,471,854)        (10,438,097)
  Proceeds from maturity of held to
            maturity securities                           26,815,000         52,788,000           3,560,000
  Capital expenditures                                       (92,138)           (61,116)            (34,986)
                                                       ---------------    ---------------     ---------------
    Net cash used in investing activities                 11,411,551         (6,744,970)         (6,913,083)
Cash flows from financing activities:                  ---------------    ---------------     ---------------
  Sales of stock                                          13,275,024         15,493,300          16,702,250
                                                       ---------------    ---------------     ---------------
    Cash received from financing activities               13,275,024         15,493,300          16,702,250
                                                       ---------------    ---------------     ---------------
       Net (decrease) increase in cash and
         short-term cash investments                        (331,860)        (6,411,686)            572,929
Cash and short-term cash investments:
     Beginning of period                                   3,508,577          9,920,263           9,347,334
                                                       ---------------    ---------------     ---------------
     End of period                                        $3,176,717         $3,508,577          $9,920,263
                                                       ===============    ===============     ===============
        Reconciliation of net loss to net cash
             used in operating activities
Net loss                                                $(31,264,455)      $(16,397,139)       $(11,193,296)
Adjustments to reconcile net loss to net cash used in
operating activities:
  Stock purchase warrants                                    100,000               -                  -
  Depreciation and amortization                               69,978             68,029              77,236
  Net (increase) decrease in investment
    securities-trading                                      (156,466)           379,581            (214,357)
Unrealized (gains) losses from investments                   662,229            987,657            (958,737)
  (Decrease) increase in accrued employee benefits          (662,229)          (987,657)            958,737
     Changes in -
       Other assets                                          188,269             45,311              75,148
     Unconditional supply commitment                         874,149            820,000             205,000
       Accounts payable and other                          5,170,090            (75,798)          1,834,031
                                                       ---------------    ---------------      ---------------
Net cash used in operating activities:                  $(25,018,435)      $(15,160,016)          $(9,216,238)
                                                       ===============    ===============     ================
</TABLE>


    The accompanying notes are an integral part of the financial statements.

                                      -32-
<PAGE>

                               APHTON CORPORATION
                        Notes to the Financial Statements

1.   Organization and Operations

Aphton Corporation is a biopharmaceutical  company in late-stage clinical trials
for four cancer indications.  Aphton is developing products using its innovative
vaccine-like   technology  for   neutralizing   hormones  that   participate  in
gastrointestinal  system and reproductive system cancer and non-cancer diseases;
and for the prevention of pregnancy. Aphton has strategic alliances with Aventis
Pasteur (NYSE: AVE),  GlaxoSmithKline (NYSE: GSK), Schering Plough Animal Health
(NYSE: SGP), and the World Health Organization (WHO).

Aphton's fiscal year end was changed in March,  2001 from January 31 to December
31, effective for the 11 month period ending December 31, 2001.

2.   Summary of Significant Accounting Policies

Use of Estimates in the Preparation of Financial Statements
     The  preparation  of financial  statements  in conformity  with  accounting
     principles   generally  accepted  in  the  United  States  (U.S.)  requires
     management  to make  estimates  and  assumptions  that affect the  reported
     amounts of assets and liabilities and disclosures of contingent  assets and
     liabilities  at the  date of the  financial  statements  and  the  reported
     amounts of  revenues  and  expenses  during the  reporting  period.  Actual
     results could differ from those estimates, however management believes such
     differences are unlikely to be significant.

Research and Development Expenses
     Research  and  development  costs are  expensed  as  incurred.  These costs
     include internal research and development  costs, the salaries of dedicated
     personnel, the allocated salaries of personnel who also perform general and
     administrative  tasks, the costs of the dedicated  research and development
     facilities and the costs of contracted researchers.  There is no allocation
     of  administrative  expense or corporate  costs to research and development
     costs.

General and Administrative Expenses
     General and administrative  expenses represent expenses not clearly related
     to  research  and  development  expense.  A  significant  portion  of these
     expenses  are  related  to  intellectual  property/patent  legal  costs and
     salaries,  which are  typically  excluded  from  research  and  development
     according to Statement of Financial  Accounting Standards No. 2 "Accounting
     for Research and Development Costs."

Equipment and Improvements
     Equipment and improvements are depreciated using  accelerated  methods over
     the estimated  economic lives (5-7 years) of the assets.  Improvements  are
     amortized over the term of the lease,  or the life of the asset,  whichever
     is shorter, using the straight-line method.  Betterments that substantially
     extend the useful life of  equipment  and  furniture  generally  reduce the
     accumulated depreciation of the respective asset.

Income Taxes
     The Company  accounts for income  taxes  pursuant to Statement of Financial
     Accounting  Standards (SFAS) No. 109,  "Accounting for Income Taxes," which
     requires an asset and liability  approach in  accounting  for income taxes.
     Under  this  method,  the  amount of  deferred  tax asset or  liability  is
     calculated  by  applying  the   provisions  of  enacted  tax  laws  to  the
     differences in the bases of assets and liabilities for financial and income
     tax purposes.  Income tax expense is the tax payable for the period and the
     change during the period in deferred tax assets and liabilities.

                                      -33-
<PAGE>

Per Share Data
    The  Company  complies  with  SFAS No.  128,  "Earnings  per  Share,"  which
    specifies the  computation,  presentation  and disclosure  requirements  for
    earnings per share. The Company's basic loss per common share was calculated
    by  dividing  net loss by the  weighted  average  number  of  common  shares
    outstanding.  The Company's  potential common shares are anti-dilutive,  and
    accordingly,  basic and diluted loss per share are the same.  Such potential
    common  shares  consist  of  purchase   warrants  (See  Note  7)  and  could
    potentially dilute basic earnings per share in the future.

Cash Equivalents
    For purposes of the  statements  of cash flows,  the Company  considers  all
    highly liquid debt instruments,  including  short-term cash investments with
    initial or remaining maturity from date of purchase of three months or less,
    to be cash equivalents.

Investment Securities
    Investment  securities consist  principally of debt securities issued by the
    U.S.  Treasury  and other U.S.  Government  agencies  and  corporations  and
    investment in other securities, including mutual funds.

    Investment securities are classified into three categories and accounted for
    as follows:  (1)  Held-to-maturity  securities are debt  securities that the
    Company  has the  positive  intent and  ability to hold to  maturity.  These
    securities  are  reported at  amortized  cost.  (2) Trading  securities  are
    securities  which are bought and held principally for the purpose of selling
    them in the near term.  These  securities  are reported at fair value,  with
    unrealized   gains  and   losses   included   in   current   earnings.   (3)
    Available-for-sale  securities are debt and equity securities not classified
    as either held-to-maturity or trading securities.  The Company does not have
    available-for-sale  securities.  Gains and losses  realized  on the sales of
    investment  securities  are  determined  using the  specific  identification
    method.

Concentrations of Credit Risk
    The Company's  short-term  cash  investments  are held in several  financial
    institutions  and consist  principally of insured money market  accounts and
    cash  management  accounts  that are  collateralized  by or invested in U.S.
    Government and U.S. Government agency securities.

    The  Companys   held-to-maturity   securities  consist  of  marketable  debt
    securities.  These  securities  are  issued by a  diversified  selection  of
    corporate  and U.S.  government  agencies with strong  credit  ratings.  The
    Company's  investment  policy limits the amount of credit  exposure with any
    one institution.  Other than asset-backed securities,  these debt securities
    are  generally  not  collateralized.  The  Company has not  experienced  any
    material  losses due to credit  impairment on investments in marketable debt
    securities in any year.

Impairment of the Unconditional Supply Commitment
    As discussed in Note 3, the Company has the  unconditional  right to receive
    supplies  originally  aggregating  $9  million  from  Aventis  Pasteur.  The
    Company's  policy is to  review  the  current  market  prices  of  available
    supplies,  if any,  to assure  that they  remain  above the  stated  Aventis
    Pasteur  contract  price of the  materials and that the right to receive the
    supplies  remains  unimpaired.   Aventis  Pasteur  is  one  of  the  largest
    pharmaceutical  vaccine manufacturers in the world. The Company monitors the
    financial  performance of Aventis  Pasteur to assure that they will continue
    to be able to perform under the contract, wherein the special order supplies
    are to be provided from supplies  manufactured  by Aventis  Pasteur in large
    quantities and sold to many  customers,  including the U.S.  Government,  as
    part of Aventis  Pasteur's basic franchise  (business).  The contract allows
    for inflation  based  increases in the per unit costs of the supplies  which
    the Company and Aventis  Pasteur believe are sufficient to assure that there
    will be no future  financial  hardship  incurred  by Aventis  Pasteur in the
    execution of the agreement.

New Accounting Pronouncements
    On February 1, 2002 the Company adopted SFAS 133, "Accounting for Derivative
    Instruments and Hedging  Activities," as amended and interpreted,  which had
    no impact on the Company's financial condition or its results of operations.

                                      -34-

<PAGE>

In June 2001,  the Financial  Accounting  Standards  Board issued  Statements of
Financial  Accounting  Standards No. 141, "Business  Combinations," and No. 142,
"Goodwill and Other  Intangible  Assets,"  effective for fiscal years  beginning
after December 15, 2001.  Under the new rules,  goodwill and  intangible  assets
deemed to have indefinite  lives will no longer be amortized but will be subject
to annual  impairment tests in accordance with the Statements.  Other intangible
assets will  continue  to be  amortized  over their  useful  lives.  The Company
believes the adoption of these  statements  will have no impact on its financial
position or results from operations.

In August 2001, the Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No. 144,  "Accounting  for the  Impairment  or
Disposal of Long-Lived Assets" (SFAS No. 144). SFAS 144 superseded  Statement of
Financial  Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of
Long-Lived  Assets  and  for  Long-Lived  Assets  to be  Disposed  Of,"  and the
accounting and reporting  provisions of Accounting  Principles Board Opinion No.
30, "Reporting the Results of Operations-Reporting  the Effects of Disposal of a
Segment of a Business,  and  Extraordinary,  Unusual and Infrequently  Occurring
Events and Transactions," for the disposal of a segment of a business.  SFAS No.
144 also amended Accounting  Research Bulletin No. 51,  "Consolidated  Financial
Statements,"  to eliminate the exception to  consolidation  for a subsidiary for
which  control is likely to be temporary.  The Company  believes the adoption of
this  statement  will have no impact on its  financial  position or results from
operations.

Comprehensive Income
    The Company complies with SFAS No. 130,  "Reporting  Comprehensive  Income,"
    which established  standards for reporting  comprehensive income (defined to
    include  net  income,  unrealized  gains and  losses  on  available-for-sale
    investment securities,  foreign currency adjustments and certain other items
    not included in the income statement). The Company does not have elements of
    other comprehensive income other than net loss.

3.  License and Co-Promotion Agreements

In June 1998,  Aphton and  SmithKline  Beecham  (now  GlaxoSmithKline)  signed a
Collaboration and License agreement,  granting GlaxoSmithKline  exclusive rights
worldwide  to Aphton's  GnRH-related  patents and  proprietary  technology.  The
agreement covers the diagnosis, treatment and prevention of GnRH-related cancers
and other diseases in humans. Human cancer indications for the anti-GnRH product
are  prostate,  breast,  ovarian  and  endometrial  cancer.  Additional  medical
indications for the anti-GnRH  product are  endometriosis,  polycystic  ovaries,
uterine fibroids, contraception, infertility and precocious puberty. Under terms
of the  agreement,  Aphton  and  GlaxoSmithKline  are  collaborating  in a joint
product  development  program,  with  GlaxoSmithKline  responsible  for clinical
trials and regulatory approvals, and for worldwide marketing and distribution of
approved  products.  The  agreement  uses a royalty  mechanism  based on product
sales,  in dollars,  worldwide to determine  Aphton's  revenues.  As part of the
Agreement,  GlaxoSmithKline  made an equity investment of $5,000,000 for 237,867
shares of newly issued Aphton common stock.

On February 14, 1997 Aphton signed an agreement with Pasteur  Merieux  Connaught
(Rhone-Poulenc Group) which is now known as Aventis Pasteur, a leader in medical
science and research and one of the world's  largest vaccine  manufacturers  and
marketers,  for a strategic  alliance for all human cancer  applications  of the
Company's  anti-gastrin immunogen product including stomach,  colorectal,  liver
and  pancreatic  cancers.  Under  the  terms  of  the  twenty-year  license  and
co-promotion  agreement,  Aphton will be  responsible  for product  development,
clinical  trials and regulatory  agency  approvals,  and Aventis Pasteur will be
responsible for promotion, advertising, marketing, distribution and sales of the
anti-gastrin  immunogen product in the United States,  Canada, Europe (including
the C.I.S.  countries)  and Mexico.  In  addition,  Aphton and  Aventis  Pasteur
entered  into  agreements  providing  for:  (a) the  supply of the  anti-gastrin
immunogen product from Aphton to Aventis Pasteur;  and (b) the supply of certain
components  of the  anti-gastrin  immunogen  product  (as well as  other  Aphton
products) from Aventis  Pasteur to Aphton.  Aventis  Pasteur will fund the costs
associated  with product  introduction,  promotion,  advertising  and  marketing
throughout  the  territory  covered  by the  agreement.  Under  the terms of the
agreement,  in  addition  to  upfront  consideration   aggregating  $10  million
including $1 million cash and the supply  commitment  (of material  suitable for
human use) of $9 million,  Aphton will  receive the majority of the profits from
sales of the  anti-gastrin  immunogen  product with the balance of profits to be
retained by Aventis Pasteur.

                                      -35-
<PAGE>


The supply commitment of materials suitable for human use consists of Diphtheria
Toxoid and/or Tetanus  Toxoid.  Aphton may use some or all of the  unconditional
supply  commitment  in the product  under  development  with Aventis  Pasteur or
Aphton may use some or all of the supply  commitment  on other  current  product
lines or on research and development. The supply commitment of material suitable
for  human  use is not  readily  obtained  on the  open  market  in  such  large
quantities.  By  comparison  to lower  quality  material  available  in  smaller
quantities  management  estimates  that  the  market  value of the  supplies  is
substantially  greater than the carrying  value of $9 million,  if they could be
obtained.  The carrying value of the supplies is based on the negotiated License
Fee.  The amount of  material to be  received  is based on  negotiated  per unit
costs,  which  are well  below  the per unit  costs of lower  quality  materials
available in smaller quantities.

The $10 million upfront  consideration  has been classified as a license payment
and  has  been  deferred  and  will  be  recognized   for  financial   statement
(accounting) purposes as revenue within the twenty-year period of the agreement.
The revenue recognition will begin once regulatory agency approval to market the
product has been  received and will be  recognized  ratably  over the  remaining
period of the  contract,  which ends  February  13,  2017.  The Company does not
speculate on the timing of regulatory approvals.

Under the agreement,  Aventis Pasteur shall have the right to terminate upon one
hundred  eighty  (180)  days  prior  notice  to  Aphton,  in the  event  that it
determines,   following   completion  of  Phase  III  clinical   trials  of  the
gastrointestinal  cancer product (and receipt by Aventis  Pasteur of the results
and  supporting  data  obtained in such  trials),  that for safety and  efficacy
reasons it does not wish to co-promote, market or sell the Product. In addition,
either  party may  terminate  the  agreement  by (a) mutual  agreement,  (b) for
uncured material breach and (c) due to liquidation,  insolvency,  etc.  Further,
under the agreement, none of the aggregate $10 million consideration, either the
cash or the  Company's  rights to the full $9  million in  unconditional  supply
commitment,  is refundable to Aventis Pasteur under any conditions.  There is no
provision  under the agreement  for the  unconditional  supply  commitment to be
satisfied  by Aventis  Pasteur  with a cash  payment.  (The $10 million  license
payment was recognized for tax purposes in the year ended April 30, 1997.)


4.  Equipment and Improvements

At December 31, 2001 and January 31, 2001, equipment and improvements  consisted
of the following:


                                                  December 31,     January 31,
                                                     2001             2001
                                                 ------------     -----------
Laboratory equipment                               $546,158         $502,607
Leasehold improvements                              398,232          349,646
Office and laboratory furniture and fixtures        232,980          232,980
                                                 ------------     ------------
                                                  1,177,370        1,085,233
Less accumulated depreciation and amortization     (988,773)        (918,796)
                                                 ------------      -----------
                                                   $188,597         $166,437
                                                 ============     ============

5.  Accounts Payable and Other

At  December  31,  2001 and January  31,  2001,  accounts  payable and other was
composed of:


                                   December 31,        January 31,
                                       2001               2001
                                   -------------      -------------
Trade accounts payable             $9,316,764          $4,276,270
Accrued wages payable               1,147,417           1,653,180
Employee benefits payable             251,249             278,119
                                   -------------      -------------
                                   $10,715,430         $6,207,569
See related Note 6.


                                      -36-
<PAGE>

6.  Investment Securities

Securities  classified as trading and  held-to-maturity at December 31, 2001 and
January 31, 2001 are summarized  below.  Estimated fair value is based on quoted
market prices for these or similar investments.

<TABLE>


<S>                                                   <C>
                       December 31,                                     Unrealized     Unrealized
                           2001                                Cost        Gains         Losses       Fair Value
                       -------------                           ----     -----------    -----------    -----------
Trading securities (carried at fair value):                 $1,809,646                  $662,229      $1,147,417
                                                                           $--

Securities held to maturity (carried at amortized cost):    $1,999,006     $--             $-         $1,999,006


                       January 31,
                          2001
                      -------------
Trading securities (carried at fair value):                 $2,640,837     $--          $987,657      $1,653,180


Securities held to maturity (carried at amortized cost):   $13,502,695    $13,270         $--        $13,515,965
</TABLE>

The Company held no  available-for-sale  investment  securities  at December 31,
2001 and January 31, 2001.

The  carrying  values of all  investment  securities  held at  December  31, and
January 31, 2001 are summarized below:

<TABLE>
<S>                                                       <C>              <C>
Security                                                      December 31,      January 31,
--------                                                           2001             2001
                                                               ------------     -----------
Trading securities                                               $1,147,417      $1,653,180
Securities held-to-maturity maturing within one year              1,999,006      13,502,695
                                                              -------------     -----------
     Total short-term investments                                $3,146,423     $15,155,875
                                                              =============    =============
</TABLE>

The Company's trading securities consist of mutual funds and relate to a Company
plan whereby  certain  individuals  may forego  immediate  receipt of wages.  In
connection therewith,  the Company establishes a liability for accrued wages and
records the related compensation expense as services are performed. Further, the
Company  segregates  an  amount  of funds in  investment  accounts  equal to the
liability for accrued wages. The investment accounts (trading securities) remain
assets of the Company,  and are subject to the general creditors of the Company.
Upon transfer of the funds to the investment accounts,  the employees direct the
specific  investment  of the  funds.  The  changes  in value  in the  investment
accounts  (trading  securities) are recognized as unrealized gains and losses in
the  statements  of  operations,  with a  corresponding  increase or decrease to
research and  development  expense and the  liability for  employees'  wages and
benefits.  Unrealized holding losses on trading securities and the corresponding
decrease in research and development  expense totaled  approximately $.6 million
in the eleven month period ended December 31, 2001. Unrealized holding losses on
trading  securities and the  corresponding  decrease in research and development
expense totaled  approximately  $1.0 million in the year ended January 31, 2001.
Unrealized holding gains on trading securities and the corresponding increase in
research and development expense totaled approximately $1.0 million in 2000.

7.  Common Stock, Preferred Stock and Purchase Warrants

Common Stock -

    During the eleven month period ended December 31, 2001, the Company received
    proceeds of approximately  $13.3 million net of  approximately  $1.0 million
    offering  costs from the closing of a private  financing with several funds.
    The  Company  issued  1,187,503  shares  of common  stock and there  were no
    warrants or options  included  with this  private  placement.

    During the year ended  January 31, 2001,  the Company  received  proceeds of
    approximately $15.5 million net of approximately $1.0 million offering costs
    from  the  closing  of  a  private  financing  with  several   international

                                      -37-
<PAGE>


    biotechnology/healthcare  funds. The Company issued 491,509 shares of common
    stock and there were no  warrants  or  options  included  with this  private
    placement.

Preferred Stock -

    The Company has 2,000,000  shares of  authorized  preferred  stock,  none of
    which has ever been issued.

Purchase Warrants -

    Each warrant  described  below is exercisable  for one share of common stock
    and is subject to the restrictive holding  requirements of SEC Rule 144. The
    term of the warrants ranges from 8 to 23 years. In December, 1999 there were
    1,000,000 warrants with an exercise price of $14.75 reserved for future use.

    The Company accounts for stock-based awards to employees using the intrinsic
    value method as prescribed by Accounting  Principles  Board Opinion  ("APB")
    No.  25,  "Accounting  for  Stock  Issued  to  Employees,"  as  amended  and
    interpreted.  Accordingly,  no compensation expense is recorded for warrants
    issued to employees in fixed amounts and with fixed exercise prices at least
    equal to the fair market value of the Company's  common stock at the date of
    grant.  The Company has adopted the provisions of SFAS No. 123,  "Accounting
    for  Stock-Based  Compensation,"  through  disclosure  only. All stock-based
    awards to  nonemployees  are accounted for at their fair value in accordance
    with EITF 96-18, "Accounting for Equity Instruments That Are Issued to Other
    Than  Employees for  Acquiring,  or in  Conjunction  with Selling,  Goods or
    Services".  There were 800,360  employee stock purchase  warrants granted in
    the eleven  month period ended  December 31, 2001,  which expire  October 1,
    2021.  Based on  Black-Scholes  values,  for the eleven  month  period ended
    December 31, 2001, the pro forma net loss would be approximately $34 million
    and the pro forma loss per common share would be approximately  $2.05. There
    were 10,000 stock purchase warrants granted in the eleven month period ended
    December 31, 2001, which expire October 1, 2021, to a non-employee. Based on
    Black-Scholes  values,  for the period ended December 31, 2001, the net loss
    was increased by approximately $100,000.

    There were 36,000 employee stock purchase warrants granted in the year ended
    January 31, 2001. Based on Black-Scholes  values, for the year ended January
    31, 2001, the pro forma net loss would be $16,908,699 and the pro forma loss
    per common share would be $1.05.  There were 150,000 employee stock purchase
    warrants granted in 2000. Based on Black-Scholes  values, for the year ended
    January 31, 2000,  the pro forma net loss would be  $13,231,796  and the pro
    forma loss per common share would be $.90.

    The following  assumptions  were used in the  Black-Scholes  option  pricing
    model for the 800,360  and 10,000  purchase  warrants  granted in the eleven
    month  period  ended  December  31,  2001 to  employees  and  non-employees,
    respectively.  The  stock  price  and  exercise  price of these  twenty-year
    warrants were set at $14.75 on the date of grant, which was October 1, 2001.
    The risk-free rate of return used was 7.0%. The expected dividend yield used
    was 0%. The expected  time to exercise  used was 19.75  years.  The expected
    volatility used was 100%.

    The following  assumptions  were used in the  Black-Scholes  option  pricing
    model for the 36,000 and 150,000  purchase  warrants granted to employees in
    the years ended January 31, 2001 and 2000, respectively. The stock price and
    exercise  price were set at $14.75 on the date of grant,  which was May 2000
    and 1999,  respectively.  The  risk-free  rate of return used was 7.0%.  The
    expected  dividend yield used was 0%. The expected time to exercise used was
    10 years. The expected volatility used was 100%.

                                      -38-
<PAGE>




The following table summarizes purchase warrant activity over the past three
fiscal periods:
                                                              Weighted-Average
                                        Number of Shares       Exercise  Price
                                        ----------------      -----------------

Outstanding  at January 31, 1999           2,013,400                $13.76
      Granted                                150,000                $14.75
      Exercised                             (359,000)               $15.33
                                         -------------
Outstanding at January 31, 2000            1,804,400                $13.58
                                         -------------
      Granted                                 36,000                $14.75
      Exercised                             (115,000)                $2.14
                                         -------------
Outstanding at January 31, 2001            1,725,400                $14.37
      Granted                                810,360                $14.75
      Exercised                                    -                   N/A
                                         -------------
Outstanding at December 31, 2001           2,535,760                $14.49
                                         =============

Exercisable at January 31, 2000            1,804,400                $13.58
Exercisable at January 31, 2001            1,725,400                $14.37
Exercisable at December 31, 2001           2,029,400                $14.43

For warrants  outstanding  and warrants  outstanding and exercisable at December
31, 2001, the exercise price ranges and average remaining lives were:

          Warrants Outstanding and Warrants Outstanding and Exercisable
<TABLE>
                                                                   Number
<S>                  <C>           <C>          <C>         <C>               <C>          <C>
 Range of Exercise        Number       Average     Average     Outstanding and    Average     Average
       Prices           Outstanding   Period (1)  Price (2)     Exercisable      Period (1)   Price (2)
 -----------------      -----------   ----------  ---------    ---------------   ----------   ---------
 $.25  to  $14.00           532,400      13.9       $11.38           532,400         13.9       $11.38
$14.01  to  $14.99        1,580,360      16.9       $14.75         1,074,000         15.6       $14.75
$15.00  to  $24.00          423,000      13.9       $17.42           423,000         13.9       $17.42
                         -----------                              -----------
                          2,535,760      14.9       $14.49         2,029,400         14.8       $14.43
                         ===========                              ===========
</TABLE>
(1) Weighted average remaining years
(2) Weighted average exercise price



8.  Income Taxes

Gross  deferred tax assets result from net operating  loss and income tax credit
carryforwards. Realization of these assets is dependent on the Company's ability
to generate  sufficient  future taxable  income,  prior to the expiration of the
carryforwards,  which is dependent on the completion of research and development
activities and successful  marketing of the Company's various  products.  Due to
the uncertainties related to the above and in accordance with guidance contained
in SFAS No. 109, a valuation  allowance has been provided for these deferred tax
assets.  Accordingly,  these assets do not appear in the Company's balance sheet
at  December  31,  2001 and  January  31,  2001.  The  changes in the  valuation
allowance in the eleven month period ended  December 31, 2001 and the year ended
January 31, 2001 were $13,611,000 and $5,553,000, respectively.

<TABLE>
<S>                                         <C>                          <C>
 Deferred tax assets consisted of:               December 31, 2001          January 31, 2001
                                                 -----------------          -----------------
   Net operating losses                             31,990,000                  18,292,000
   Deferred license payment revenues                 3,800,000                   3,800,000
   Expenses deductible in future periods               531,000                   1,017,000
   Federal and State tax credits                     3,124,000                   2,725,000
                                                 -----------------          -----------------
   Total deferred tax assets                        39,445,000                  25,834,000
   Valuation allowance                             (39,445,000)                (25,834,000)
                                                 -----------------          -----------------
   Net deferred tax assets                        $        --                 $         --
                                                 =================          =================
</TABLE>


                                      -39-

<PAGE>


At December  31,  2001,  for Federal  income tax  purposes,  the Company had net
operating loss carryforwards of approximately $84,186,000 and various income tax
credit  carryforwards,  primarily  research  and  experimentation,   aggregating
$2,570,000, which expire at various dates through 2022.

At December  31,  2001,  for  California  income tax  purposes,  the Company had
various income tax credit carryforwards, primarily research and experimentation,
aggregating $554,000, which expire at various dates through 2014.

For financial reporting  purposes,  a valuation allowance has been recognized to
offset the deferred tax assets related to these carryforwards.

The  reconciliation  of income tax computed at the U.S.  federal  statutory rate
applied to the Company's net loss is as follows:

<TABLE>

<S>                                             <C>                     <C>            <C>
                                                    Eleven months ended      Year ended              Year ended
                                                     December 31, 2001     January 31, 2001       January 31, 2000
                                                    --------------------   ----------------       ----------------
   Tax at U.S. statutory rate                             (34.00)%            (34.00)%                 (34.00)%
   State taxes, net of federal benefit                    ( 4.00)%            ( 4.00)%                 ( 4.00)%
   Non-deductible items and other                            0.65%              1.09%                    1.47%
   Change in valuation allowance                            37.35%             36.91%                   36.53%
                                                         ----------          ----------               ---------
                                                               - %                 - %                      - %
                                                         ==========          ==========               =========

</TABLE>


9.  Commitments

The Company  has  noncancelable  facilities  leases  expiring  at various  dates
through  December 31, 2002. The leases  provide  various  options to renew.  The
minimum rental  commitment for the year ending  December 31, 2002 is $22,000 and
none  thereafter.  Rental  expense for these  leases for the eleven month period
ended  December  31,  2001 was  approximately  $73,000  and for the years  ended
January  31,  2001  and  2000  were   approximately   $103,000   and   $101,000,
respectively.  Rental  expense is allocated  between  research  and  development
expense  and  general  and  administrative   expense,   based  on  use,  in  the
accompanying statements of operations.


10. Selected Quarterly Financial Data (unaudited)

Selected unaudited quarterly financial data for the eleven months ended December
31, 2001 and the year ended January 31, 2001 are summarized below.
<TABLE>



<S>                                         <C>                   <C>            <C>    <C>    <C>    <C>
     Statement of Operations Data: For the     Two Months
     eleven months ended December 31, 2001     Ended March        Second            Third            Fourth
                                                31, 2001          Quarter          Quarter           Quarter
                                               ------------       --------         --------          --------
   Research and development expenditures        $3,306,175       $5,648,381       $7,550,430        $ 12,171,469
   Dividend and interest income                 $  136,561       $  123,611       $   79,620        $     53,976
   Net loss                                    $(3,475,187)     $(6,453,059)     $(8,139,156)       $(13,197,053)
   Basic and diluted net loss per share             $(0.21)          $(0.40)          $(0.48)             $(0.76)
   Weighted average shares outstanding          16,199,493       16,199,493       16,991,161          17,386,996


         Statement of Operations Data:              First            Second            Third           Fourth
      For the year ended January 31, 2001          Quarter           Quarter          Quarter          Quarter
                                                  ---------         ---------        ---------        ---------
   Research and development expenditures        $2,949,508       $3,647,340       $3,790,199          $4,915,136
   Dividend and interest income                $   329,904       $  546,612          372,125         $   305,970
   Net loss                                    $(3,237,514)    $ (3,705,035)     $(4,088,111)        $(5,366,479)
   Basic and diluted net loss per share             $(0.20)          $(0.23)          $(0.25)             $(0.33)
   Weighted average shares outstanding          15,804,954       16,199,493       16,199,493           16,199,493

</TABLE>

                                      -40-
<PAGE>

The sum of the quarterly basic and diluted net loss per share does not equal the
basic and diluted net loss per share for the eleven  months  ended  December 31,
2001 and year ended January 31, 2001 as a result of rounding.


11. Subsequent Events

On March 21, 2002, the Company sold 1,200,000 shares of registered  common stock
at $10.50 per share and received net proceeds of $11.8  million.  As a result of
this  transaction,  approximately  170,000  additional  shares  will  be  issued
subsequent to December 31, 2001 due to an  anti-dilution  provision for the sale
of  securities  less than  $12.00 per share prior to  October,  2002  granted to
purchasers of the Company's common stock in August, 2001.

On February 7, 2002,  the Company sold  1,345,000  shares of  registered  common
stock at $12.70 per share and received net proceeds of $16.1 million.

                                      -41-