UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)
|X|  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                  For the Quarterly Period Ended March 31, 2002

                                       OR

|_|  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

                         Commission File Number 0-26483

                                  VaxGen, Inc.
             (Exact name of Registrant as Specified in its Charter)

                                    Delaware
         (State or other jurisdiction of incorporation or organization)

                                   94-3236309
                     (I.R.S. Employer Identification Number)

                          1000 Marina Blvd., Suite 200
                           Brisbane, California 94005
            (Address of Principal Administrative Offices) (Zip Code)

                                 (650) 624-1000
               (Registrants Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days. Yes |X| No |_|

The issuer has one class of common stock with 14,343,731  shares  outstanding as
of April 30, 2002.

<PAGE>

                                  VaxGen, Inc.

                                    Form 10-Q

                      For the Quarter Ended March 31, 2002

                                Table of Contents

Part I. Financial Information                                               Page

Item 1  Financial Statements:
        Condensed Balance Sheets ..........................................  1
        Condensed Statements of Operations ................................  2
        Condensed Statements of Cash Flows ................................  3
        Notes to Condensed Financial Statements ...........................  4

Item 2  Management's Discussion and Analysis of Financial Condition and
        Results of Operations:
        Overview ..........................................................  8
        Results of Operations .............................................  9
        Liquidity and Capital Resources ................................... 10
        Risk Factors ...................................................... 12

Item 3  Quantitative and Qualitative Disclosure about Market Risk ......... 20

Part II. Other Information

Item 5  Other Information ................................................. 21
Item 6  Exhibits and Reports on Form 8-K .................................. 21
        Signature ......................................................... 22

<PAGE>

PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

                                  VaxGen, Inc.
                        (A Development Stage Enterprise)
                            CONDENSED BALANCE SHEETS
                                   (Unaudited)
                                     ASSETS

<TABLE>
<CAPTION>
                                                                       March 31,      December 31,
                                                                         2002             2001
                                                                     -------------    -------------
<S>                                                                  <C>              <C>
Current assets:
Cash and cash equivalents                                            $   2,542,000    $   7,499,000
Investment securities                                                   39,360,000       40,911,000
Interest receivable                                                        488,000          620,000
Prepaid expenses and other current assets                                1,322,000        1,156,000
                                                                     -------------    -------------
Total current assets                                                    43,712,000       50,186,000

Property and equipment, net                                              2,968,000        2,987,000
Other assets                                                               199,000          199,000
                                                                     -------------    -------------
Total assets                                                         $  46,879,000    $  53,372,000
                                                                     =============    =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Payable to Genentech                                                 $   2,850,000    $   2,250,000
Accounts payable                                                           167,000          557,000
Accrued liabilities                                                      2,461,000        2,106,000
Dividends payable                                                          300,000               --
Current portion of long-term obligations                                    31,000           31,000
                                                                     -------------    -------------
Total current liabilities                                                5,809,000        4,944,000

Long-term obligations                                                       13,000           22,000

Redeemable convertible preferred stock, $0.01 par
value, 20,500 shares authorized:
   Series A 6% cumulative, $0.01 par
   value, 20,000 shares issued and outstanding at
   March 31, 2002 and December 31, 2001 (liquidation
   preference of $20,000,000 at March 31, 2002)                         16,279,000       15,845,000

Commitments and contingencies

Stockholders' equity:
Preferred stock, $0.01 par value, 19,979,500 shares
   authorized; none issued or outstanding                                       --               --
Common stock, $0.01 par value, 40,000,000 shares
   authorized; 14,331,713 and 14,300,600 shares issued
   and outstanding at March 31, 2002 and
   December 31, 2001, respectively                                         143,000          143,000
Additional paid-in capital                                             128,627,000      128,387,000
Deferred stock compensation                                               (381,000)        (516,000)
Accumulated other comprehensive income
   unrealized gain on investment securities                                418,000          877,000
Deficit accumulated during the development stage                      (104,029,000)     (96,330,000)
                                                                     -------------    -------------
Total stockholders' equity                                              24,778,000       32,561,000
                                                                     -------------    -------------
Total liabilities and stockholders' equity                           $  46,879,000    $  53,372,000
                                                                     =============    =============
</TABLE>

           See accompanying notes to condensed financial statements.

<PAGE>

                                  VaxGen, Inc.
                        (A Development Stage Enterprise)
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                           Period
                                                                            from
                                                                          Inception
                                                                        (November 27,
                                                                            1995)
                                      For the quarter ended March 31,      through
                                      -------------------------------      March 31,
                                           2002             2001             2002
                                      -------------    --------------   -------------
<S>                                   <C>              <C>              <C>
Revenue:
Contract revenue                      $      18,000    $      75,000    $   1,188,000

Operating expenses:
Research and development:
Genentech charges                           606,000          395,000       12,384,000
Other                                     4,051,000        4,114,000       57,153,000
                                      -------------    -------------    -------------
Total research and development            4,657,000        4,509,000       69,537,000

General and administrative expenses       2,928,000        2,342,000       44,238,000
                                      -------------    -------------    -------------

Loss from operations                     (7,567,000)      (6,776,000)    (112,587,000)
                                      -------------    -------------    -------------
Other income (expense):
Investment income                           604,000          852,000       11,866,000
Interest expense                             (2,000)          (7,000)         (90,000)
                                      -------------    -------------    -------------
Total other income, net                     602,000          845,000       11,776,000
                                      -------------    -------------    -------------
Net loss                                 (6,965,000)      (5,931,000)    (100,811,000)
Charges attributed to convertible
preferred stock:

Dividends                                  (300,000)              --       (1,040,000)
Accretion of redemption value              (434,000)              --       (1,444,000)
Beneficial conversion charge                     --               --         (734,000)
                                      -------------    -------------    -------------
Net loss applicable to common
stockholders                          $  (7,699,000)   $  (5,931,000)   $(104,029,000)
                                      -------------    -------------    -------------
Basic and diluted loss per share
applicable to common stockholders     $       (0.54)   $       (0.42)
                                      -------------    -------------
Weighted average shares used in
  computing basic and diluted
  loss per share                         14,318,000       14,061,000
                                      -------------    -------------
</TABLE>

           See accompanying notes to condensed financial statements.


                                       -2-
<PAGE>

                                  VaxGen, Inc.
                        (A Development Stage Enterprise)
                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                      Period
                                                                                                       from
                                                                                                     Inception
                                                                                                    (November 27,
                                                                                                       1995)
                                                              For the quarter  ended March 31,         through
                                                              --------------------------------        March 31,
                                                                  2002               2001               2002
                                                              -------------      -------------      -------------
<S>                                                           <C>                <C>                <C>
Cash flows from operating activities:
Net loss                                                      $  (6,965,000)     $  (5,931,000)     $(100,811,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization                                       226,000            222,000          2,484,000
Amortization of premiums and
   discounts on investment securities                                56,000            (22,000)          (774,000)
Stock compensation expense                                          192,000            196,000         14,749,000
Note receivable allowance                                                --                 --            487,000
Warrants issued to consultants                                           --                 --            228,000
   Changes in assets and liabilities:
     Interest receivable                                            132,000            174,000           (488,000)
     Prepaid expenses and other current assets                     (166,000)            58,000         (2,215,000
     Other assets                                                        --            (50,000)           (88,000)
     Payable to Genentech                                           600,000         (1,389,000)         2,850,000
     Accounts payable, accrued liabilities
       and other long-term obligations                              (48,000)          (274,000)         2,961,000
                                                              -------------      -------------      -------------
Net cash used in operating activities                            (5,973,000)        (7,016,000)       (80,617,000)
                                                              -------------      -------------      -------------

Cash flows from investing activities:
Purchase of investment securities                                (2,502,000)        (3,021,000)      (168,009,000)
Proceeds form sale and maturities of
   investment securities                                          3,538,000          6,021,000        129,841,000
Purchase of property and equipment                                 (207,000)           (65,000)        (5,305,000)
Long-term lease deposits                                                 --                 --           (120,000)
                                                              -------------      -------------      -------------
Net cash provided by (used in)
  investing activities                                              829,000          2,935,000        (43,593,000)
                                                              -------------      -------------      -------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock                                --                 --         18,342,000
Payments under capital lease obligations                             (9,000)            (8,000)           (94,000)
Stock issued to Genentech                                                --                 --          1,025,000
Stock issued to other founders                                           --                 --             20,000
Stock issued in private placements                                       --                 --         65,164,000
Stock issued in initial public offering                                  --                 --         46,345,000
Issuance costs of private placements                                     --                 --         (4,208,000)
Issuance costs of initial public offering                                --                 --         (4,386,000)
Exercise of employee stock options                                  142,000            225,000          3,388,000
Employee stock purchase plan                                         54,000                 --            156,000
Loans from Genentech                                                     --                 --          1,000,000
                                                              -------------      -------------      -------------
Net cash provided by financing activities                           187,000            217,000        126,752,000
                                                              -------------      -------------      -------------
Increase (decrease) in cash and equivalents                      (4,957,000)        (3,864,000)         2,542,000
Cash and cash equivalents at beginning of
  period                                                          7,499,000          5,426,000                 --
                                                              -------------      -------------      -------------
Cash and cash equivalents at end
  of period                                                   $   2,542,000      $   1,562,000      $   2,542,000
                                                              -------------      -------------      -------------
Supplemental schedule of non cash
  investing and financing activities:
Stock dividend on redeemable convertible preferred
  stock                                                       $     300,000      $          --      $   1,040,000
Accretion of redemption value of redeemable
  convertible preferred stock                                       434,000                 --          1,444,000
Recognition of beneficial conversion feature
  of redeemable convertible preferred stock                              --                 --            734,000
Recognition of fair value of common stock warrants issued
  with redeemable convertible preferred stock                            --                 --          3,507,000
Equipment acquired through capital leases                                --                 --            138,000
Issuance of stock through conversion of
  Genentech note payable                                                 --                 --          1,000,000
Note receivable partially settled by
  severance obligation                                                   --                 --            406,000
                                                              -------------      -------------      -------------
</TABLE>

           See accompanying notes to condensed financial statements.


                                       -3-
<PAGE>

1. Basis of Presentation

The unaudited  condensed  financial  statements of VaxGen,  Inc. (the "Company")
included  herein have been  prepared  by the  Company  pursuant to the rules and
regulations of the Securities and Exchange  Commission.  Certain  information or
footnote  disclosure  normally  included  in  financial  statements  prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted  pursuant to such rules and  regulations.
In the opinion of the  management  of the Company,  the  accompanying  unaudited
condensed  financial  statements  contain all  adjustments,  consisting  only of
normal  recurring  adjustments,   necessary  to  present  fairly  the  financial
information included herein. While the Company believes that the disclosures are
adequate to make the  information  not  misleading,  it is suggested  that these
financial  statements  should be read in conjunction with the Company's  audited
financial  statements  contained in its Annual  Report on Form 10-K for the year
ended December 31, 2001.

2. Non-Cash Compensation

On April 1, 1999, the  stockholders  of the Company  approved an increase in the
number of shares  reserved for grant under the Company's  1996 Stock Option Plan
to 1,750,000  shares.  This  represents the  measurement  date for stock options
granted to employees  earlier in 1999 and in 1998, which were granted subject to
stockholder  approval of the plan amendment.  As a result,  the Company recorded
deferred  compensation in the amount of $3,223,000,  representing  the excess of
fair market value of the common shares on April 1, 1999,  $13.00 per share, over
the exercise price of the options on the date stockholder approval was obtained.
The balance of deferred  compensation  is being  amortized  to expense  over the
remaining  vesting period of the options.  Total non-cash  compensation  for the
three  months  ended March 31, 2002 was $192,000 as compared to $196,000 for the
comparable period in 2001.

3. Loss per Share

Basic loss per share is computed as net loss  applicable to common  stockholders
divided by the weighted  average  number of common  shares  outstanding  for the
period.  Diluted loss per share reflects the potential dilution that could occur
from  common  shares to be issued  through  stock  options,  warrants  and other
convertible  securities.  The potential  dilutive effects of 2,509,772 shares of
common stock subject to  outstanding  stock  options,  717,265  shares of common
stock  subject  to  outstanding  warrants  and  861,383  shares of common  stock
reserved for  conversion  of the Series A Preferred  Stock are excluded from the
diluted earnings per share  calculation for the period ended March 31, 2002, and
1,871,678  shares of common  stock  subject to  outstanding  stock  options  and
411,088 shares of common stock subject to outstanding warrants are excluded from
the diluted earnings per share  calculation for the period ended March 31, 2001,
because the representative share increments would be antidilutive.

4. New Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 141,  "Business  Combinations."  SFAS No.
141  requires  the  purchase  method of  accounting  for  business  combinations
initiated  after June 30, 2001 and eliminates the  pooling-of-interests  method.
The adoption of SFAS No. 141 did not have a significant  impact on the Company's
financial statements.

In July 2001,  the FASB  issued  SFAS No. 142,  "Goodwill  and Other  Intangible
Assets," which is effective for fiscal years  beginning after December 15, 2001.
SFAS No. 142  requires,  among  other  things,  the  discontinuance  of goodwill
amortization.  In addition,  the standard includes  provisions upon adoption for
the  reclassification  of certain existing  recognized  intangibles as goodwill,
reassessment   of  the  useful   lives  of  existing   recognized   intangibles,
reclassification  of certain intangibles out of previously reported goodwill and
the testing for  impairment  of existing  goodwill  and other  intangibles.  The
adoption  of SFAS No.  142 did not have a  significant  impact on the  Company's
financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal  of  Long-Lived  Assets."  SFAS No. 144  addresses  significant  issues
relating to the implementation of SFAS No.


                                       -4-
<PAGE>

121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets to Be Disposed Of," and develops a single  accounting  method under which
long-lived  assets that are to be disposed of by sale are  measured at the lower
of book  value or fair  value  less  cost to sell.  Additionally,  SFAS No.  144
expands the scope of  discontinued  operations  to include all  components of an
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be  eliminated  from the  ongoing  operations  of the  entity  in a
disposal transaction.  SFAS No. 144 is effective for financial statements issued
for fiscal years  beginning after December 15, 2001 and its provisions are to be
applied  prospectively.  As the  adoption  of SFAS No. 144 is  prospective,  the
Company can not predict the impact on its financial statements.

5. Redeemable Convertible Preferred Stock Financing

The Company  entered into a Securities  Purchase  Agreement  dated as of May 23,
2001 with four investors, whereby the Company received approximately $20,000,000
in  consideration  for the sale of 20,000  shares of the  Company's  Series A 6%
Cumulative  Convertible  Preferred Stock ("Preferred Stock") and the issuance of
Common  Stock  Purchase  Warrants  described  below.  Expenses  relating  to the
transaction  were  approximately  $1,700,000,   resulting  in  net  proceeds  of
approximately $18,300,000.  These proceeds will be used to prepare the Company's
HIV/AIDS vaccine, AIDSVAX(R) ("AIDSVAX"), for commercial-scale  manufacturing if
it proves  effective,  the  potential  development  of new adjuvants and general
corporate purposes.

A summary of the  significant  terms of the  Preferred  Stock  financing  are as
follows:

Conversion

Each share of  Preferred  Stock can be  converted at the option of the holder at
any time after issuance  according to a conversion ratio,  subject to adjustment
for dilution or certain  equity  adjustments.  The initial  conversion  ratio is
determined  by dividing  the  liquidation  value  ($1,000 per share plus accrued
dividends)  by  the  original  conversion  price  of  $23.2185  per  share  then
multiplied by the number of shares to be  converted.  The Company may also force
conversion of the Preferred  Stock into common stock,  if, at any time after May
23, 2002, the weighted  average price of the Company's stock for at least 20 out
of 30 consecutive  trading days equals or exceeds 175% of the  conversion  price
(175% of $23.2185 or $40.63).

Redemption

In the event that there is no earlier  conversion,  the Company  must redeem the
Preferred Stock for cash on May 23, 2004, at a redemption  price equal to $1,000
per share plus all accrued and unpaid dividends. The Company may, within certain
limits, pay up to 50% of such redemption price in shares of the Company's common
stock.

The  Company  accounts  for  the  difference  between  the  carrying  amount  of
redeemable  preferred stock and the redemption amount by increasing the carrying
amount  for  periodic  accretion,  so that the  carrying  amount  will equal the
redemption  amount  at the  scheduled  redemption  date.  The  accretion  of the
redemption  value of the  Preferred  Stock for the three  months ended March 31,
2002  amounted  to  $434,000,  which is  comprised  of  $292,000  related to the
accretion of the fair value of the Common Stock  Purchase  Warrants and $142,000
related to the accretion of offering costs  associated  with the issuance of the
Preferred Stock.

Dividends

Each share of  Preferred  Stock is entitled to receive  annual  dividends of 6%,
payable on June 30 and December 31,  beginning on December 31, 2001. If not paid
within five days of either such date, the dividend will accumulate and compound.
Each share will be entitled to a dividend of approximately  $37.00 per preferred
share.  Payment on December 31, 2001 was made in 65,253  shares of common stock.
Net loss applicable to common  shareholders for the three months ended March 31,
2002 includes a non-cash charge of $300,000 for Preferred Stock dividends.


                                       -5-
<PAGE>

Voting

Each share of Preferred  Stock has voting  rights equal to the common stock into
which it is convertible on the record date of the vote.

Liquidation

In the event of  liquidation,  dissolution or winding up of the Company,  either
voluntary  or  involuntary,  each  holder of shares of  Preferred  Stock will be
entitled to receive, out of the assets of the Company available for distribution
to stockholders and prior to any distribution to holders of common stock, $1,000
per preferred share plus accrued dividends.

Common Stock Purchase Warrants

In connection  with the Preferred  Stock  financing,  the Company  issued Common
Stock  Purchase  Warrants  ("Warrants")  for the  purchase of 297,177  shares of
common stock to the Preferred Stock investors. The Warrants, which expire on May
23, 2006, have an exercise price of $25.2375 per share. However, effective as of
May 23, 2002,  the  exercise  price shall be  automatically  adjusted to a price
equal to the lesser of (a) the original  exercise  price of $25.2375 and (b) the
average of the closing bid prices for the  Company's  common stock on The Nasdaq
Stock Market(R) during the twenty consecutive trading days immediately preceding
May 23,  2002,  provided  that the  exercise  price  shall not be adjusted to an
amount less than $14.133.

The Company has valued the  Warrants  at $11.80 per share  resulting  in a total
value of approximately $3,500,000.  This amount was accounted for as a reduction
in the carrying value of the Preferred  Stock until the scheduled  redemption of
the Preferred Stock, and an increase to additional  paid-in-capital.  The charge
is being  amortized  over  three  years,  and  accordingly  net  loss to  common
stockholders  for the three  months  ended  March 31,  2002  reflects a non-cash
charge of approximately  $292,000. The fair value of the Warrants was calculated
using the Black-Scholes method.

Effect of Beneficial Conversion Feature

The Company's  Preferred Stock was issued with a beneficial  conversion feature,
which  was  valued  at  $734,000.  The  beneficial  conversion  amount  has been
accounted  for  as  an  increase  in  additional   paid-in  capital  and  as  an
in-substance  dividend to the preferred  stockholders,  which  increases the net
loss applicable to common stockholders.

6. Celltrion Joint Venture

In February  2002, the Company and a group of South Korean  investors  announced
the formation of a joint  venture,  which  intends to raise up to  approximately
$120  million,  consisting  of up to  approximately  $92  million in cash and an
in-kind investment of cell culture technology and production support valued at a
minimum of $30 million, to build and operate a facility in Incheon, South Korea,
to manufacture AIDSVAX. The joint venture also intends to fund construction of a
smaller  facility  in the  South  San  Francisco,  California  area  to  support
licensure and  commercial  launch of AIDSVAX.  We believe that both  facilities,
once constructed would be designed for commercial  manufacture of AIDSVAX, if it
proves  safe  and   effective  and  is  licensed  by  the  U.S.  Food  and  Drug
Administration.  The South Korean investors  participating in the joint venture,
known as Celltrion Inc., are Nexol Corp.,  Nexol Biotech Co. Ltd., Korea Tobacco
& Ginseng Corp., and J. Stephen & Co. Ventures Ltd.

The Company provided mammalian cell culture technology and biologics  production
expertise  to  Celltrion  in exchange  for an initial 52%  interest in the joint
venture.  After three planned rounds of financing,  our fully diluted  ownership
will be approximately 44%. The South Korean partners plan to provide the funding
we believe necessary to design and construct both facilities and to validate and
operate the


                                       -6-
<PAGE>

Incheon  facility.  The  Company  intends to provide the  funding  necessary  to
validate and operate a South San Francisco area facility.  The Incheon  facility
is  being  designed  to be  built on  approximately  26  acres  of land  sold to
Celltrion by the city of Incheon at a discount to prevailing market rates.

In its first phase of development,  expected to be completed by 2005, we believe
the Incheon  facility  will be capable of producing  up to 200 million  doses of
AIDSVAX  annually.  A smaller  facility  in the South San  Francisco  area could
produce up to 10 million doses of the AIDS vaccine annually and may also be used
to develop other  pharmaceutical  products when it is licensed and  operational,
which the Company  believes  will occur in 2004.  Celltrion  expects to complete
construction  of the  smaller  facility  by the  middle of 2003 and the  Incheon
facility by the end of 2004.  Additional  time will be required to validate  and
license each facility.  If AIDSVAX proves to be safe and effective,  the Company
intends  to  use  the  South  San  Francisco   area  facility  to  validate  its
manufacturing  process,  which  would  be a  key  component  of  its  subsequent
regulatory submission to the FDA. This facility,  which will be located near the
Company's  research  and  development  facility,  is  expected  to be  used  for
commercial  manufacturing  of  AIDSVAX  at least  through  commissioning  of the
Incheon facility.

7. Comprehensive Loss

                                             Three Months Ended
                                                    March 31,
                                          ----------------------------
                                              2002             2001
                                          -----------      -----------

        Net loss                          $(6,965,000)     $(5,931,000)
        Net unrealized gain/(loss) on
           investment securities             (459,000)         340,000
                                          -----------      -----------

        Comprehensive loss                $(7,424,000)     $(5,591,000)
                                          ===========      ===========


                                       -7-
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

This  discussion and analysis  should be read in conjunction  with our condensed
financial  statements  and related  notes  thereto  appearing  in Item 1 of this
report.   In  addition  to   historical   information,   this  report   contains
"forward-looking  statements" within the meaning of the federal securities laws.
These forward-looking statements include without limitation statements regarding
our  expectations  and  beliefs  about the  market and  industry;  uncertainties
related to the  progress,  costs and results of our Phase III  clinical  trials;
domestic and foreign regulatory approvals of AIDSVAX; the ability to manufacture
AIDSVAX;  our  ability  to  commercialize  AIDSVAX;  our  ability  to manage our
Celltrion  manufacturing joint venture; the timing, and announcement of results,
of  either  of  our  Phase  III  clinical  trials,   including  the  timing  and
announcement  of results  from any interim  analyses;  our intent to continue to
invest   resources   in  research  and   development;   our  intent  to  develop
relationships and strategic alliances;  our beliefs regarding the future success
of AIDSVAX and other  products  currently  under  development  or proposed to be
developed;  our beliefs  regarding  period to period results of operations;  our
beliefs regarding future growth and financial performance; our beliefs regarding
the term, or termination,  of our license agreement with Genentech;  our beliefs
regarding  our  revenues  and  revenue  growth;   our   expectations   regarding
fluctuations in revenues and operating results;  our intent to use all available
funds for the development of vaccines; our intent not to declare or pay any cash
dividends;  our beliefs  regarding  our  liquidity  and capital  resources;  the
ability of our Celltrion joint venture to raise necessary  funding for execution
of its business plan; and our beliefs  regarding the impact of recent accounting
pronouncements and revenue recognition matters.  Reference should be made to the
section of this report entitled "Risk Factors,  and to our Annual Report on Form
10-K,  filed with the Securities and Exchange  Commission on April 1, 2002 under
the heading "Business," for a more detailed description of such factors. Readers
are cautioned not to place undue reliance on these  forward-looking  statements,
which  speak  only as of the date of this  report.  The  Company  undertakes  no
obligation   to  publicly   release  the  results  of  any  revisions  to  these
forward-looking  statements that may be made to reflect events or  circumstances
after the date of this  report  or to  reflect  the  occurrence  of  anticipated
events.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We currently  believe  that none of our  accounting  policies or  estimates  are
critical.  However,  as the nature and scope of our business  operations mature,
certain of our accounting policies and estimates may become critical. You should
understand that generally accepted accounting  principles require our management
to make  estimates  and  assumptions  that  affect  the  amounts  of assets  and
liabilities  and disclosure of contingent  assets and liabilities at the date of
our financial statements, as well as the amounts of revenues and expenses during
the periods  covered by our  financial  statement,  the actual  amounts of these
items could differ materially from those estimates. For example, we estimate the
fair value of stock options and warrants issued to non-employees using an option
valuation method that considers market indicators.

OVERVIEW

In November 1995, VaxGen was formed to continue  development of AIDSVAX. At that
time, Genentech,  Inc. ("Genentech") licensed to us the technology necessary for
completing  development and commercialization of AIDSVAX.  Currently,  Genentech
owns approximately 11% of VaxGen common stock.

Since our  formation,  we have  focused on  developing  and testing  AIDSVAX,  a
vaccine  designed to prevent  infection by HIV,  the virus that causes AIDS.  We
have developed formulations of AIDSVAX that focus on the predominant HIV subtype
in North  America,  Europe,  the  Caribbean,  and Australia  (subtype B) and the
predominant HIV subtype in Southeast Asia and parts of East Asia (subtype E). We
have  commenced two Phase III clinical  trials,  one in North America and Europe
and one in Thailand,  to determine the efficacy of AIDSVAX.  In October 1999, we
completed  the  enrollment  of  over  5,400  trial   volunteers  for  the  North
American/European  Phase III  clinical  trial,  which is being  conducted  in 59
clinical  centers.  In August 2000,  we completed  the  enrollment of over 2,500
volunteers for the Thai Phase III clinical trial, which is being conducted in 17
clinical centers in Bangkok.


                                       -8-
<PAGE>

To date, we have  generated  $1,188,000 in revenue from grants from the National
Institutes of Health ("NIH") for research and  development of HIV vaccines along
with funds received through a collaborative  agreement with BBI Biotech Research
Laboratories, Inc. ("BBI Biotech"), which is funded by the National Institute of
Allergy  and  Infectious  Diseases  ("NIAID"),  to  obtain  and  store  clinical
specimens  from  our  North  American/European  Phase  III  clinical  trial.  We
anticipate only modest revenues from other governmental agencies or other grants
or from collaborations with other entities over the next three to four years. We
have incurred losses since inception as a result of research and development and
general and  administrative  expenses in support of our operations.  As of March
31,  2002,  we  had a  deficit  accumulated  during  the  development  stage  of
$104,029,000.  We anticipate incurring substantial losses over at least the next
three to four years as we complete our  clinical  trials,  apply for  regulatory
approvals, continue development of our technology and expand our operations.

As part of our Phase III trial design, an interim efficacy analysis is performed
in each clinical trial. In our North American/European trial, the DSMB conducted
the interim  analysis in the fourth  quarter of 2001. The results of the interim
analysis  from this  trial  were  inconclusive,  and the DSMB  instructed  us to
proceed to the scheduled  endpoint of the trial at the end of 2002.  During this
time, we will be gathering  additional  statistical  power that will improve our
ability to determine the vaccine's effectiveness. We anticipate that the interim
analysis for the Thai clinical trial will be conducted during the fourth quarter
of  2002.  If there is  conclusive  evidence  indicating  that  the  vaccine  is
efficacious,  the DSMB  could  recommend  that the trial be halted  early and we
would begin the process of applying for a license to market the vaccine.  If the
analysis from this trial were inconclusive,  we believe the DSMB would recommend
that we continue the trial to its scheduled conclusion in 2003.

Our  strategy is to develop,  test and obtain  regulatory  approval  for various
formulations  of AIDSVAX.  The first two  approvals we plan to obtain are in the
United   States/Europe   for  the   formulation   being  tested  in  the  United
States/Europe trial and in Thailand for the formulation being tested in the Thai
trial.  We  intend  to  use  Genentech,  or  with  Genentech's  verbal  consent,
Celltrion,  a South  Korean  manufacturing  joint  venture  in  which  we hold a
significant  interest,   and/or  other  third  parties  as  our  partner(s)  for
manufacturing and  distribution.  Genentech has exclusive options to manufacture
and market AIDSVAX  products,  and has verbally  consented to our  manufacturing
relationship with Celltrion. If Genentech does not exercise its options, we have
the right to pursue  third party  arrangements,  with  Genentech  providing  the
transfer of technology necessary for manufacturing the vaccine.

RESULTS OF OPERATIONS

Three months  ended March 31, 2002  compared to the three months ended March 31,
2001

Contract Revenue

There was $18,000 in contract revenue for the three months ended March 31, 2002,
compared to $75,000 for the three months ended March 31, 2001.  Contract revenue
in 2002 consisted of funds received as  reimbursement  of costs incurred related
to a grant from the NIH for research and  development of HIV vaccines.  Research
contract  revenue  earned in one period is not  indicative of research  contract
revenue to be earned in future periods.

Research and Development Expenses

Research and  development  expenses  increased 3%, from $4,509,000 for the three
months ended March 31, 2001 to  $4,657,000  for the three months ended March 31,
2002.  The increase is mainly  attributable  to a $211,000  increase in expenses
accrued to Genentech for clinical material along with higher salaries related to
additional personnel hired in our Regulatory Affairs and Quality Assurance group
in preparation for the upcoming  Biologics License  Application  offset by lower
clinical site costs and fees paid to third parties  associated  with  conducting
the clinical trials.


                                      -9-
<PAGE>

General and Administrative Expenses

General and administrative expenses increased 25%, from $2,342,000 for the three
months ended March 31, 2001 to  $2,928,000  for the three months ended March 31,
2002. The increase was primarily due to higher infrastructure  costs,  including
an increase in salaries and related benefits expense along with higher occupancy
costs offset by a decrease in legal fees.

Other Income, Net

Other income, net, consisting primarily of interest income,  decreased 29%, from
$845,000  for the three  months  ended March 31, 2001 to $602,000  for the three
months ended March 31, 2002.  This was primarily  attributable  to lower average
balances of cash, cash equivalents and investment  securities,  along with lower
yields.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash  equivalents and investment  securities were $41,902,000 at March 31,
2002. We have financed our operations since inception through private placements
of common stock and preferred  stock,  our initial public  offering  ("IPO") and
capital  provided by Genentech.  Genentech  has no obligation to provide  future
funding to the Company.

We completed  our initial  public  offering in July 1999, in which we issued and
sold 3,565,000 shares of common stock for aggregate proceeds to us in the amount
of   $46,345,000.   Of  the  aggregate   proceeds   received  in  the  offering,
approximately  $4,386,000 was used to pay underwriting discounts and commissions
and  expenses  related  to the  offering,  resulting  in net  proceeds  to us of
approximately $41,959,000. In early 1999, we received net proceeds of $5,273,000
from private placement financing  activities,  which were completed prior to our
initial public offering.

In December  1999, we completed a private  placement of common stock with Vulcan
Ventures,  Inc. The funds from the private  placement  help support our on-going
operations along with our current clinical  trials.  This private  placement has
also  enabled us to commence  development  of a  formulation  of  AIDSVAX,  that
focuses on the  predominant  HIV type found in  Africa,  China,  India and South
America (subtype C). Currently,  we have developed formulations of AIDSVAX, that
focus on the  predominant HIV type in North America,  Europe,  the Caribbean and
Australia (subtype B) and the predominant HIV subtype in Southeast Asia and East
Asia (subtype E). The private  placement  consisted of  approximately  2,174,000
shares of common stock,  which resulted in proceeds,  net of expenses,  to us of
approximately $24,100,000.

On May 23, 2001 we  completed a preferred  stock  financing  through  which four
investors paid us an aggregate of approximately $20,000,000 in consideration for
20,000 shares of our Series A Cumulative Convertible Preferred Stock ("Preferred
Stock") at a price of $1,000 per share,  convertible  into  shares of our common
stock, at an initial  conversion  price of $23.2185 per share. In the event that
there is no earlier  conversion,  we must redeem the Preferred Stock for cash on
May 23, 2004,  at a redemption  price equal to $1,000 per share plus all accrued
and unpaid dividends.  Expenses  relating to the transaction were  approximately
$1,700,000,  resulting in net  proceeds of  $18,300,000.  The proceeds  from the
preferred stock financing will be used to prepare our HIV/AIDS vaccine, AIDSVAX,
for  commercial-scale  manufacturing  if  it  proves  effective,  the  potential
development of new adjuvants and general corporate purposes.

In connection  with the preferred  stock  financing,  we issued warrants for the
purchase of 297,177 shares of our common stock to our Preferred Stock investors.
The warrants,  which expire on May 23, 2006,  have an exercise price of $25.2375
per share,  subject to a one-time possible downward  adjustment on May 23, 2002,
but not below $14.133 per share.

Since our  inception,  investing  activities,  other than purchases and sales of
investment  securities,  have consisted  entirely of equipment  acquisitions and
leasehold  improvements.  From  inception  through  March  31,  2002,  our gross
investment in equipment and leasehold improvements was $5,305,000.  The increase
in  equipment  and  leasehold   improvements  has  been  primarily  due  to  the
development of our research and development laboratory and the


                                      -10-
<PAGE>

establishment of larger office facilities. Net cash used in operating activities
for  the  three  months  ended  March  31,  2002  was  $5,973,000,  representing
expenditures for research and development  costs and general and  administrative
expenses.

In October  1999,  we entered into  collaboration  with the federal  Centers for
Disease  Control  and  Prevention  ("CDC") to support  research at six of the 54
clinics in the United States  currently  conducting Phase III clinical trials of
our AIDSVAX  vaccine.  The  participating  sites will  continue to implement our
Phase III protocol,  as well as conduct  epidemiological,  social and behavioral
research,  which will be shared by the  Company  and the CDC.  The sites will be
compensated  directly by the CDC for the clinical  costs,  which would have been
incurred by the Company, and for conducting the additional research. The CDC has
agreed to contribute  approximately $8,000,000 to the participating sites over a
four-year period.

In 2001, we finalized a collaborative agreement with BBI Biotech, which is being
funded by the NIAID,  an agency  within the National  Institutes  of Health,  to
obtain and store clinical specimens from our North  American/European  Phase III
clinical  trial.  The  project is being  funded  under a  contract,  which NIAID
awarded BBI Biotech for seven years.  Under a subcontract  with BBI Biotech,  we
will  receive  a  gross  amount  of  approximately  $1,730,000  to  support  the
establishment of the sample collection. We recognized approximately $780,000 for
the year ended December 31, 2001. If AIDSVAX proves  successful in our Phase III
clinical trials,  the samples will be used to determine if the vaccine induced a
cellular immune response in the volunteers who received the active vaccine.

Also in 2001,  we were awarded a grant from the NIH to continue the  development
of a vaccine designed to prevent infection by HIV subtype C, the most widespread
form of the virus.  The Small  Business  Innovation  Research  Fast Track grant,
which is split into two phases,  provides up to $1,131,000  for the  development
program. We received  approximately $18,000 for the three months ended March 31,
2002 as part of the second  phase of the grant.  We had  received  an  aggregate
amount of $150,000 in 2000 and 2001 related to the first phase of the grant. The
NIH grant will allow us to create and  conduct  laboratory  tests of a subtype C
vaccine  that could be used alone in Southern  Africa and India,  or it could be
combined  with a vaccine  against the B and E subtypes for regions of the world,
such as China, where all three subtypes are in circulation.

In  February  2002,  we and a group  of South  Korean  investors  announced  the
formation of a joint  venture,  named  Celltrion,  which  intends to raise up to
approximately  $122 million,  consisting of up to  approximately  $92 million in
cash and an in-kind investment of cell culture technology and production support
valued at a minimum of $30 million,  to build and operate a facility in Incheon,
South Korea,  to  manufacture  AIDSVAX.  The joint  venture also intends to fund
construction of a smaller  facility in the South San Francisco,  California area
to support  licensure  and  commercial  launch of AIDSVAX.  We believe that both
facilities,  once constructed,  would be designed for commercial  manufacture of
AIDSVAX, if it proves safe and effective and is approved by the FDA.

We provided mammalian cell culture technology and biologics production expertise
to the joint  venture,  in  exchange  for an initial  52%  interest in the joint
venture. We currently are Celltrion's  single-largest  shareholder.  After three
planned rounds of financing,  our fully diluted  ownership will be approximately
44%. The South Korean partners will provide the funding  necessary to design and
construct both facilities and to validate and operate the Incheon  facility.  We
will  provide  the  funding  necessary  to  validate  and  operate the South San
Francisco area facility.

We  believe  that  our  existing  cash  and  cash   equivalents  and  investment
securities,  together  with  investment  income  along  with  funds  from  other
potential  collaborative  arrangements,  will  enable us to meet our  forecasted
expenditures through the anticipated  completion of our North  American/European
Phase III clinical trial and into the second half of 2003.  However, we may need
to raise  additional  funds to complete the Thai Phase III clinical trial and we
would need to raise additional funds to support the necessary  manufacturing and
development programs if we apply for regulatory approval of the vaccine.

We will also need to raise  additional  capital if the Phase III clinical trials
are delayed or more costly than currently anticipated, or to continue operations
if the Phase III clinical trials are not successful,  or if commercialization is
delayed for any other reason. Our future capital requirements are also dependent
on several other factors, including:

     o    the progress of other internal research and development projects;


                                      -11-
<PAGE>

     o    the need for leasehold  improvements to facilities and the purchase of
          additional capital equipment;

     o    the   ability   to  attract   and   negotiate   business   development
          opportunities; and

     o    the timing of revenue, if any, from AIDSVAX.

We cannot  assure you that we will be able to raise funds when  needed,  or that
such funds will be available on  satisfactory  terms. We expect that our ability
to raise  additional  capital  will be  adversely  affected if AIDSVAX  does not
achieve clinical success.

                                  Risk Factors

                         Risks Relating to Our Business

If we are unable to commercialize our sole product candidate,  AIDSVAX,  we will
not have revenues to continue operations.

AIDSVAX is our only  product  candidate.  We do not know  whether the current or
planned  formulations  of AIDSVAX will be effective in preventing HIV infection.
The overall  scientific  knowledge of HIV is limited.  Although our research has
indicated  that  AIDSVAX  contains a protein  that is critical in the  infection
process,  other  proteins  and elements may be necessary to develop an effective
vaccine.

Our success will depend  entirely on the success of AIDSVAX.  In particular,  we
must be able to:

     o    establish  the  safety,  purity,  potency  and  efficacy of AIDSVAX in
          humans;

     o    obtain  regulatory  approvals  for  AIDSVAX,  including a  preapproval
          inspection of a manufacturing facility; and

     o    successfully     commercialize     AIDSVAX    through    collaborative
          relationships.

If we are unable to  commercialize  AIDSVAX,  we do not have other products from
which to derive revenue.

We may not be able to obtain regulatory approval to market AIDSVAX in the United
States or abroad on a timely basis, or at all.

Clinical testing is a long,  expensive and uncertain  process.  We cannot assure
you that the data  collected  from our  clinical  trials will be  sufficient  to
support  approval of AIDSVAX by the FDA or any foreign  regulatory  authorities,
that the clinical  trials will be completed on schedule or, even if the clinical
trials are successfully  completed and on schedule,  that the FDA or any foreign
regulatory authorities will ultimately approve AIDSVAX for commercial sale.

To gain FDA regulatory approval for the sale of AIDSVAX in the United States, we
believe,  based  on  discussions  with  the FDA and the  recommendations  of its
Vaccine and Related Biological Products Advisory Committee, that we will need to
demonstrate  that the AIDSVAX  vaccine  reduces the level of HIV infection by at
least 30% at a 95%  confidence  level of statistical  significance.  While these
discussions and the vote of the Vaccine and Related Biological Products Advisory
Committee are not binding on the FDA, they are generally followed.  A confidence
level of 95% means that if the clinical trial were repeated, 95 times out of 100
we would see at least a 30% greater reduction in HIV infections among volunteers
who received  AIDSVAX  compared with  volunteers who received a placebo.  In the
context of our North American/European  clinical trial, which represents a small
sampling  from the entire  population,  this means that, in order to establish a
30% efficacy at a  statistically  significant  level,  there must be an observed
reduction in the incidence of HIV in the group receiving the vaccine compared to
the  control  group of between  45% to 65%,  or  possibly  a higher  percentage,
depending  on  various  factors  that  will have a  bearing  on the  statistical
significance of the clinical trial results.  These factors include the number of
patients  ultimately  retained in the study,  the rate of HIV  infection  in the
control group and the length of time associated with the clinical


                                      -12-
<PAGE>

observation   period.  We  anticipate  that  the  efficacy  required  to  obtain
regulatory  approval to market  AIDSVAX in foreign  countries will vary from one
country to another and may differ significantly from that required by the FDA.

Delay in completing our clinical  trials could  jeopardize our ability to obtain
regulatory approval to market AIDSVAX in the United States or abroad on a timely
basis.

     Our clinical trials could be delayed for a variety of reasons, including:

     o    lower-than-anticipated retention rate of volunteers in the trial;

     o    serious adverse events related to the vaccine; or

     o    different  interpretations of our preclinical and clinical data, which
          can lead initially to inconclusive results.

Our  inability  to  complete  our  clinical  trials  in a  timely  manner  could
jeopardize our ability to obtain domestic or foreign regulatory approval.

If we fail to comply with extensive regulations enforced by domestic and foreign
regulatory  authorities,  the commercialization of AIDSVAX could be prevented or
delayed.

AIDSVAX is subject to extensive  government  regulations related to development,
clinical trials,  manufacturing and commercialization.  The process of obtaining
and complying with FDA, other governmental and foreign regulatory  approvals and
regulations is costly,  time consuming,  uncertain and subject to  unanticipated
delays.  It also  subjects  us to the  following  risks and  obligations,  among
others.

     o    The FDA or foreign  regulators may refuse to approve an application if
          they believe that applicable regulatory criteria are not satisfied.

     o    The FDA or foreign  regulators  may  require  additional  testing  for
          safety and efficacy.

     o    If  regulatory  approval of a product is granted,  the approval may be
          limited  to  specific  indications  or  limited  with  respect  to its
          distribution;  for example,  the FDA may approve the licenses for only
          high-risk populations.

     o    The  FDA  or  foreign   regulators   may  not   approve   the  AIDSVAX
          manufacturing  processes or manufacturing  facilities,  or may require
          additional  clinical  studies  to  establish  the  safety,  purity and
          potency of AIDSVAX.

     o    Even if United States regulatory approval for AIDSVAX is obtained, the
          license will be subject to continual  review,  and newly discovered or
          developed  safety or  efficacy  data may result in  revocation  of the
          marketing license.

     o    If  regulatory  approval of the vaccine is granted,  the  marketing of
          AIDSVAX would be subject to adverse event reporting  requirements  and
          the  FDA's  general   prohibition   against  promoting   products  for
          unapproved or "off-label" uses.

     o    We will  be  subject  to  continual  regulatory  review  and  periodic
          inspection  and  approval of  manufacturing  modifications,  including
          compliance with the FDA's Good Manufacturing Practices regulations.

In addition, the FDA stringently applies regulatory standards for manufacturing.
Failure to comply with any of these post-approval  requirements can, among other
things,  have resulted in warning letters,  product  seizures,  recalls,  fines,
injunctions,   suspensions  or  revocations  of  marketing  licenses,  operating
restrictions and criminal prosecutions.

There can be no  assurance  that we will avoid  incurring  significant  costs to
comply  with  such  laws and  regulations  in the  future,  or that such laws or
regulations will not have a material adverse effect on us.


                                      -13-
<PAGE>

We have only a limited  operating  history and we expect to continue to generate
losses.

To date,  we have  engaged  primarily  in  research,  development  and  clinical
testing.  At March 31,  2002,  we had an  accumulated  deficit of  approximately
$104.0 million.  We sustained net losses of approximately  $2.1 million in 1996,
$3.1 million in 1997, $9.2 million in 1998, $23.3 million in 1999, $31.8 million
in 2000 and $24.4 million in 2001. We expect to incur substantial  losses for at
least an additional three to four years.

If we need  additional  funds,  and are unable to raise  them,  we would have to
curtail or cease operations.

We cannot be certain  that our existing  capital  resources,  together  with the
funding from the Centers for Disease Control and Prevention and the funding from
the National Institute of Allergy and Infectious Diseases, will be sufficient to
support our current and planned operations through commercialization of AIDSVAX.
We do not expect AIDSVAX to be commercially  available until at least the fourth
quarter  of 2004.  The  North  American/European  Phase  III  clinical  trial is
anticipated  to be  completed in the fourth  quarter of 2002.  Once the trial is
completed,  we will need to analyze  the data and,  if  favorable,  prepare  our
Biologics  License  Application for submission to the FDA, which typically takes
between six and 12 months to be accomplished.  The FDA review process could take
at least an additional six months. We anticipate that it would take at least six
months  after   obtaining   regulatory   approval  for   Genentech,   the  pilot
manufacturing  facility,  or another third party to begin  commercialization  of
AIDSVAX.

We may need to raise additional funds if:

     o    AIDSVAX is not sufficiently  safe, pure and potent to commercialize in
          its current formulation;

     o    our Phase III clinical  trials are delayed,  are not successful or are
          more costly than currently estimated;

     o    commercialization   of  AIDSVAX  is  delayed  for  any  other  reason,
          including  the need to locate a  third-party  manufacturer  other than
          Genentech;

     o    we need to manufacture AIDSVAX ourselves using our own facilities; or

     o    additional trials are required.

We  cannot  assure  you  that we will be able to raise  sufficient  funds in the
future.  If we fail to raise sufficient funds, we would have to curtail or cease
operations.  We  believe  that  our  existing  cash  and  cash  equivalents  and
investment   securities,   together  with  investment   income  and  funds  from
collaborative  arrangements,  will enable us to meet our forecasted expenditures
through the  anticipated  completion  of our North  American/European  Phase III
clinical trial.  However,  we may need to raise additional funds to complete the
Thai Phase III  clinical  trial,  and we may need to raise  additional  funds to
support the necessary  manufacturing and development programs required to obtain
regulatory approval.

Formation of our South Korean  manufacturing joint venture is not yet completed,
and even if  completed,  may not be  successful  at  manufacturing  or supplying
AIDSVAX in necessary quantities, or at all.

In February  2002 we entered into a joint  venture,  Celltrion,  with a group of
South Korean investors for the purpose of building and operating a manufacturing
facility in Incheon,  South Korea, and a smaller  manufacturing  facility in the
South  San  Francisco  area.  We  have  not  yet  completed  the  formation  and
capitalization of, or the transfer of all technology to, Celltrion. If:

     o    the  investors in Celltrion  are unable or unwilling for any reason to
          fund Celltrion;

     o    Celltrion is otherwise unable to raise the anticipated,  or necessary,
          funding;

     o    we are for any reason unable to transfer to Celltrion  the  technology
          necessary for the manufacture of AIDSVAX;


                                      -14-
<PAGE>

     o    the remaining documents necessary for the formation and capitalization
          of Celltrion are not executed;

     o    Korean governmental approval of the joint venture is not obtained; or

     o    for any other reason Celltrion is not properly capitalized or does not
          receive the necessary technology for the manufacture of AIDSVAX,

Celltrion  will be unable to complete its formation and initial  capitalization,
and would be unable to build a manufacturing facility in Incheon, South Korea or
in the South San Francisco area. Even if Celltrion successfully builds either or
both of these  manufacturing  facilities,  there  can be no  assurance  that the
facilities  will pass  domestic or foreign  regulatory  approvals  or be able to
manufacture  AIDSVAX in commercial  quantities,  or at all, or that they will be
able to  manufacture  AIDSVAX on a  cost-effective  basis.  There also can be no
assurance that the building of either  manufacturing  facility will be completed
on time and will not be subject to cost overruns.

Our proposed South Korean international  manufacturing  operations may expose us
to numerous business risks.

South Korea is still in the process of developing its economic, social and other
infrastructure  and is  susceptible  to various  uncertainties.  The  political,
social and  economic  situation  of South  Korea may not  continue to provide an
environment in which we would be able to manufacture AIDSVAX cost-efficiently or
at all. The South Korean government may impose  regulations or restrictions that
would  make it  difficult,  impractical  or  impossible,  whether  economically,
legally or  otherwise,  for us to conduct our business  there.  Our future South
Korean  manufacturing  operations may expose our business to numerous risks that
could harm our business, including:

     o    international currency fluctuations;

     o    general strikes or other disruptions in working conditions;

     o    political instability;

     o    trade restrictions or changes in tariffs;

     o    the difficulties  associated with staffing and managing  international
          operations;

     o    generally longer receivables collection periods;

     o    unexpected  changes in or imposition of new  legislative or regulatory
          requirements;

     o    potentially limited protection for intellectual property rights; and

     o    potentially adverse taxes.

We face competition from several companies with greater financial, personnel and
research and development resources than ours.

The goal of developing an HIV vaccine is an area of interest to competitors, and
several companies with substantially  greater financial,  personnel and research
and  development  resources  than ours have  announced  that they are  trying to
develop an HIV vaccine and are planning, conducting or have completed Phase I or
Phase II clinical  trials.  Although  our research  has  indicated  that AIDSVAX
contains a protein that is critical in the infection process, other proteins and
elements may be necessary  to develop an effective  vaccine,  and several of our
competitors are working to develop vaccines that activate a different arm of the
immune system. In addition,  several of these companies are developing new "drug
cocktails"  and other  treatments  that may  mitigate the impact of the disease.
Even if we complete our Phase III clinical trials, obtain FDA and other required
regulatory  approvals and  commercialize  AIDSVAX,  our  competitors may develop
vaccines or treatments  that are as or more  effective,  or less complex or less
expensive to produce, than AIDSVAX.


                                      -15-
<PAGE>

Adverse publicity regarding the safety or side effects of AIDSVAX could harm our
business and cause our stock price to fall.

Despite the  favorable  safety  tests that have been  completed  with respect to
AIDSVAX and our clinical  trials,  there still may be potential  side effects or
safety  concerns  that  have  not yet come to  light.  If our  studies  or other
researchers'  studies were to raise or substantiate  concerns over the safety or
side effects of AIDSVAX or vaccine development efforts generally, our reputation
and public support for our clinical trials could be harmed, which would harm our
business and could cause our stock price to fall.

Failure to hire and retain key management  employees could adversely  affect our
ability to obtain financing, develop AIDSVAX, conduct clinical trials or execute
our business strategy.

We  are  highly  dependent  on  our  senior  management  and  scientific  staff,
particularly Lance Gordon,  Ph.D., our Chief Executive Officer,  Donald Francis,
M.D.,  D.Sc.,  our  President,  and  Phillip  Berman,  Ph.D.,  our  Senior  Vice
President, Research & Development. These individuals have played a critical role
in raising financing, negotiating business development opportunities, developing
the vaccine and conducting  clinical trials.  The loss of the services of any of
these key members of senior  management and scientific staff may prevent us from
achieving our business objectives.

If we are  unable to  protect  our  intellectual  property,  we may be unable to
prevent other companies from using our technology in competitive products. If we
infringe the  intellectual  property rights of others,  we may be prevented from
developing or marketing AIDSVAX.

We rely on patent and other  intellectual  property  protection  to prevent  our
competitors from manufacturing and marketing AIDSVAX. Our technology,  including
technology  licensed from Genentech,  will be protected from unauthorized use by
others only to the extent that it is covered by valid and enforceable patents or
effectively maintained as trade secrets. As a result, our success depends on our
ability, and Genentech's ability, to:

     o    obtain patents;

     o    protect trade secrets;

     o    operate without infringing upon the proprietary rights of others; and

     o    prevent others from infringing on our proprietary rights.

We cannot be certain that our patents or patents that we license from  Genentech
will be enforceable and afford protection against competitors.  We cannot assure
you that our operations or technology  will not infringe  intellectual  property
rights of others. If we infringe the intellectual  property of others, there can
be no assurance  that we would be able to obtain  licenses to use the technology
on commercially reasonable terms or at all.

We may become subject to product liability claims, which could reduce demand for
AIDSVAX or result in damages that exceed our insurance limitation.

We face an inherent  risk of exposure to product  liability  suits in connection
with AIDSVAX  vaccines being tested in human  clinical  trials and products that
may be sold  commercially.  We may become subject to a product liability suit if
AIDSVAX causes injury, or if vaccinated individuals subsequently become infected
with HIV. Regardless of merit or eventual outcome,  product liability claims may
result in decreased demand for a vaccine,  injury to our reputation,  withdrawal
of clinical trial volunteers and loss of revenues.

Political  or social  factors  may  delay or  reduce  revenues  by  delaying  or
impairing our ability to market AIDSVAX.

Products  developed for use in addressing  the HIV/AIDS  epidemic have been, and
will  continue to be,  subject to competing  and changing  political  and social
pressures.  The political and social response to the HIV/AIDS  epidemic has been
highly  charged and  unpredictable.  Political or social  pressures may delay or
cause  resistance  to  bringing  our  product to market or limit  pricing of our
product.


                                      -16-
<PAGE>

                Risks Relating to Our Relationship with Genentech

We currently  rely entirely on Genentech  for the  manufacture  of AIDSVAX.  Our
inability to manufacture AIDSVAX, and our dependence on Genentech,  may delay or
impair our ability to generate revenues, or adversely affect our profitability.

We currently  have no  manufacturing  facilities.  We are entirely  dependent on
third parties to produce AIDSVAX.  To date, we have relied on Genentech for this
purpose.  Genentech  currently has an exclusive  option to manufacture  AIDSVAX,
although they have verbally  consented to our  participation  in Celltrion,  our
South Korean  manufacturing joint venture.  Our license agreement with Genentech
does not specify the price we will be required to pay  Genentech to  manufacture
AIDSVAX.  Genentech  is not  able  to  assure  us that  it  will  have  adequate
manufacturing capacity to produce AIDSVAX for us on a commercial scale.

We  intend  to rely on  Genentech  and/or  other  third  parties  for the  sale,
marketing  and  commercialization  of AIDSVAX.  Our lack of sales and  marketing
personnel  and  distribution  relationships  may impair our  ability to generate
revenues.

We have no sales, marketing or commercialization capability. Genentech currently
has an  exclusive  option  to  market  and  distribute  AIDSVAX.  We may rely on
Genentech  to  provide an  established  distribution  system and sales  force to
market AIDSVAX. If Genentech does not elect to exercise its option to market and
distribute the product,  we will need to identify and engage another  partner to
market and commercialize  AIDSVAX. We cannot assure you that we would be able to
establish  marketing or  commercialization  arrangements with third parties in a
timely manner or on favorable terms, or at all.

If Genentech  were to terminate our license  agreement,  we would not be able to
develop or market AIDSVAX.

Our  license  agreement  with  Genentech  permits  Genentech  to  terminate  the
agreement, or terminate the exclusivity of our license, if we:

     o    fail to use due diligence in developing,  seeking regulatory  approval
          for,  marketing or  commercializing  products covered by the Genentech
          license agreement;

     o    fail to file the first market  approval  application  for AIDSVAX with
          the FDA prior to May 2002, however, Genentech has informally agreed to
          extend this  milestone  until 2006,  and we expect an amendment to the
          Genentech  license  agreement to be completed in the second quarter of
          2002,  although  there can be no assurance that such an amendment will
          be completed;

     o    breach the license  agreement  and fail to cure the breach  within the
          time period provided in the agreement; and

     o    fail to maintain a tangible net worth of at least $1 million.

     Risks Related to the Issuance of Series A Preferred Stock and Warrants

We may be  obligated  to redeem the Series A Preferred  Stock,  the common stock
issued on  exercise  of the  warrants  and/or the  warrants  at a premium to the
purchase or exercise price.

On May 23,  2001 we  completed  a private  placement  in which we issued  20,000
shares of our  Series A 6%  Cumulative  Convertible  Preferred  Stock and common
stock purchase  warrants for aggregate  proceeds of $20.0 million.  The terms of
our Series A preferred  stock, and the warrants,  give the selling  stockholders
the right to require


                                      -17-
<PAGE>

us to  redeem  all of the  Series A  preferred  stock,  common  stock  issued on
exercise of the  warrants,  and/or the warrants,  under  certain  circumstances,
including:

     o    on May 23, 2004, with respect to the Series A preferred stock;

     o    upon a change of control, at a 15% premium to the purchase price, plus
          accrued dividends, with respect to the Series A preferred stock;

     o    a 20% premium, if:

          o    the selling  stockholders  are unable to sell common  stock under
               the  registration  statement  after  the  expiration  of the time
               periods described in the registration rights agreement;

          o    our stock is delisted or not quoted on an approved stock exchange
               or on the  Nasdaq  National  Market  or Small  Cap  Market  for 5
               consecutive trading days;

          o    we do not have a  sufficient  number of  shares  of common  stock
               authorized  to satisfy our  obligations  in  connection  with the
               conversion  of the Series A  preferred  stock or  exercise of the
               warrants;

          o    we  commit a  material  breach  under,  or  otherwise  materially
               violate the terms of, the transaction  documents  entered into in
               connection  with the issuance of the Series A preferred stock and
               the warrants; or

          o    we are  insolvent or take other  actions,  or allow actions to be
               taken, as part of a bankruptcy proceeding.

Our  redemption  of the  Series  A  preferred  stock,  common  stock  issued  on
conversion  of the Series A  preferred  stock or on  exercise  of the  warrants,
and/or the warrants,  would require the  expenditure of a significant  amount of
cash that  would  substantially  exceed the  proceeds  that we  received  in the
private  placement  and could  exceed our ability to make such  payment or raise
additional capital.

We cannot issue common stock to a selling stockholder,  whether as a dividend or
in redemption  of  securities,  if after such issuance such selling  stockholder
would be deemed the beneficial owner of more than 9.9% of our common stock.

Under the terms of the agreements  between us and the selling  stockholders,  we
are, under limited  circumstances,  permitted to satisfy dividend and redemption
obligations  through  the  issuance of common  stock  rather than the payment of
cash.  We are not  permitted to issue common stock to a selling  stockholder  if
after such  issuance  such selling  stockholder  would be deemed the  beneficial
owner of more than 9.9% of our common  stock.  If we are unable to issue  common
stock to satisfy our dividend and redemption  obligations,  we would be required
to use cash to  satisfy  our  obligations,  which  could  adversely  affect  our
business and operating results.

Our stockholders could experience substantial dilution as result of the terms of
our Series A preferred stock and warrants issued in the private placement to the
selling stockholders or our ability to issue additional preferred stock.

The  20,000  outstanding  shares  of  Series A  preferred  stock  are  initially
convertible  into  approximately  861,383  shares of common  stock,  obtained by
dividing $20 million by $23.2185,  which represents a 15% premium to the closing
price of $20.19, calculated for purposes of the private placement that closed on
May 23, 2001. The  outstanding  warrants are initially  exercisable  for 297,177
shares of common stock. The number of shares of common stock issuable by us upon
conversion of the Series A preferred stock and exercise of the warrants can


                                      -18-
<PAGE>

increase substantially in certain events, including our issuance of common stock
at prices less than the conversion  price of the Series A preferred stock or the
exercise price of the warrants.  For example, the exercise price of the warrants
initially is $25.2375 per share,  but the exercise  price is subject to downward
adjustment  on May 23,  2002 if the  average of the  closing  bid prices for our
common  stock  during  the 20 trading  days  prior to May 23,  2002 is less than
$25.2375,  to such  average  price,  but not below  $14.133  per  share.  If the
exercise price of the warrants  adjusts to a price below the conversion price of
the Series A preferred  stock,  which is currently  $23.2185 per share, and if a
warrant is exercised,  then the conversion price of the Series A preferred stock
will automatically be reduced to the exercise price of the warrants,  but not to
a price less than  $14.133  per share.  Any such  exercise or  conversion  price
adjustment  could  result  in  the  issuance  of  up  to  approximately  790,000
additional shares, assuming exercise and conversion prices of $14.133 per share.

In addition,  we are permitted under limited  circumstances  to satisfy dividend
and redemption obligations on the preferred stock through the issuance of common
stock rather than through the expenditure of cash. Any increase in the number of
shares of common stock issuable  pursuant to the terms of the Series A preferred
stock  and  the  warrants,  or our  issuance  of  common  stock  to the  selling
stockholders to satisfy our dividend and redemption obligations, may result in a
decrease in the value of the outstanding shares of our common stock.

Our board of  directors  has the  authority  to  establish  the  designation  of
19,979,500 additional shares of preferred stock that are convertible into common
stock  without  any  action  by  our  stockholders,   and  to  fix  the  rights,
preferences,  privileges and  restrictions,  including  voting  rights,  of such
shares.  The issuance and conversion of any such  preferred  stock would further
dilute the percentage ownership of our stockholders.

The  perceived  risk of dilution or any actual  dilution  occasioned by Series A
preferred  stock;  the  warrant  or  additional  preferred  stock  may cause our
stockholders  to sell their  shares,  which  would  contribute  to the  downward
movement  in stock  price of the common  stock.  In  addition,  the  significant
downward  pressure on the  trading  price of the common  stock  could  encourage
investors to engage in short sales, which would further contribute to a downward
pricing of the common stock.

If the holders of the Series A preferred  stock and the  warrants  elect to have
the Series A preferred stock and the warrants assumed by a potential acquirer of
VaxGen,  or redeemed by VaxGen,  the acquirer could be deterred from  completing
the acquisition.

The Series A  preferred  stock and the  warrants  permit the holders to elect to
have  their  shares  of  Series  A  preferred  stock  and  the  warrants  remain
outstanding after an acquisition of VaxGen,  and to have the acquirer assume all
of our obligations to the holder.  The Series A preferred stock also permits the
holders of Series A  preferred  stock to require us to  repurchase  the Series A
preferred stock, at a premium, in connection with an acquisition. The ability to
force an acquirer to assume the Series A preferred  stock and the warrants,  and
the ability to force us to repurchase the Series A preferred stock at a premium,
in the event of a merger could deter a potential  acquirer  from  completing  an
acquisition of VaxGen.

Among our obligations that an acquirer might be forced to assume which would act
as a deterrent are:

     o    the price adjustment provisions, which could have an adverse effect on
          the market value of the acquirer's outstanding securities;

     o    the  obligation  to register the resale of the common  stock  issuable
          upon  conversion  of the Series A  preferred  stock and the  warrants,
          which could  result in the sale of a  substantial  number of shares in
          the market;

     o    the obligation to pay dividends on the Series A preferred stock;

     o    the  obligation  to redeem the  Series A  preferred  stock,  including
          redemption at a premium to the purchase  price,  on the  occurrence of
          certain events or on May 23, 2004;

     o    the obligation to pay the holders of Series A preferred stock the
          amount invested plus accrued dividends before any other stockholder
          receives any payment if we are liquidated; and

                                      -19-
<PAGE>



     o    the  obligation  to seek the  consent  of the  holders of the Series A
          preferred  stock before we can take  certain  actions,  including  the
          issuance of securities  that have senior or equal rights as the Series
          A preferred  stock or incurring  unsecured  indebtedness  for borrowed
          money,  or take other  actions  with respect to the Series A preferred
          stock or securities that have fewer rights than the Series A preferred
          stock.

We may be  required  to obtain the  consent of the holders of Series A preferred
stock before taking corporate actions, which could harm our business.

Our  certificate  of  incorporation  requires  us to obtain  the  consent of the
holders of the Series A preferred stock before we may issue securities that have
senior  or equal  rights  as the  Series A  preferred  stock or incur  unsecured
indebtedness  for  borrowed  money,  or take other  actions  with respect to the
Series A preferred  stock or securities that have fewer rights than the Series A
preferred  stock.  We are also  required to obtain the consent of the holders of
the  Series A  preferred  stock  before we amend or modify  our  certificate  of
incorporation  or bylaws to change any of the  rights of the Series A  preferred
stockholders.  While  these  obligations  may deter a  potential  acquirer  from
completing a transaction with us, they may also prevent us from taking corporate
actions that would be beneficial to us and our stockholders.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market rate changes is related  primarily to our debt securities
included in our investment  portfolio.  We do not have any derivative  financial
instruments.  By policy,  we invest in debt instruments of the U.S.  Government,
Federal agencies and high-quality  corporate issuers, limit the amount of credit
exposure to any one issuer,  limit  duration by  restricting  the term, and hold
investments  to maturity  except under rare  circumstances.  Investments in both
fixed rate and floating rate  instruments  carry a degree of interest rate risk.
Fixed rate securities may have their fair market value adversely impacted due to
a rise in interest rates, while floating rate securities may produce less income
than expected if interest rates fall.  Due in part to these factors,  our future
investment income may decrease due to changes in interest rates or due to losses
we may suffer when  securities  decline in market  value.  At March 31, 2002, we
held  government  debt  instruments  and corporate  obligations in the principal
amount of $38,700,000. If market interest rates were to increase immediately and
uniformly by 10% from levels at March 31, 2002,  the fair value of our portfolio
would  decline by an  immaterial  amount.  Our exposure to losses as a result of
interest rate changes is managed through investing  primarily in securities that
mature in a period of one year or less.

We have  exposure  to  foreign  exchange  rate  risk  primarily  related  to our
conducting  clinical  trials in Thailand.  Thailand is currently  considered  an
emerging  economy.  A  material  increase  in the value of  Thailand's  currency
against the U.S. Dollar could cause an increase in our expenses. The majority of
our contracts  associated with conducting clinical trials in Thailand are priced
in Baht.  For the three months ended March 31, 2002, we have incurred no foreign
exchange gains or losses.


                                      -20-
<PAGE>

PART II - OTHER INFORMATION

ITEM 5. OTHER INFORMATION

On May 7, 2002, the Company issued a press release  relating to the  resignation
of one of its directors. The Company announced that Ruth B. Kunath resigned from
the Company's Board of Directors and from the Audit Committee and the Nominating
Committee.  Ms. Kunath,  whose  resignation  will be effective May 15, 2002, had
been a member of the Company's Board of Directors since September 1999.

On March 25, 2002, we entered into three agreements with Celltrion in connection
with the  formation of the joint  venture:  a License  Agreement,  a Sub-License
Agreement  and a Supply  Agreement.  Under the  License  Agreement,  we  granted
Celltrion a license to certain technical knowledge deemed "platform  technology"
necessary  for  Celltrion to construct  the  facilities  that would  manufacture
AIDSVAX.  This  "platform  technology"  consists of know how in the areas of the
production of bulk human therapeutic proteins,  facility design, process design,
start-up and validation, operations and licensure support. The License Agreement
will expire on March 25,  2017,  provided,  that  Celltrion  may  terminate  the
License  Agreement upon six months written notice and either party may terminate
the agreement  upon a default by the other party that is not cured within thirty
days.  The  License   Agreement   grants   Celltrion  a  perpetual,   exclusive,
royalty-free license to use the "platform  technology" in the Republic of Korea,
including  after the License  Agreement's  expiration.  However,  this "platform
technology" does not cover intellectual  property granted to Celltrion under the
Sub-License  Agreement.  In exchange for granting the rights to Celltrion in the
License  Agreement and the Sub-License  Agreement,  we have received 7.8 million
shares of Celltrion common stock.

Under the Sub-License Agreement, we granted Celltrion a non-exclusive license to
the  patents  and  intellectual  property we license  from  Genentech  under our
License and Supply Agreement.  The Sub-License Agreement will terminate 15 years
after the first commercial sale of AIDSVAX.  Celltrion may terminate the License
Agreement  upon three months  written  notice.  Either party may  terminate  the
agreement  upon a default  by the other  party that is not cured  within  thirty
days. The Sub-License  Agreement covers the patents and other related  technical
knowledge  necessary to produce AIDSVAX that we license from Genentech under our
License  and  Supply  Agreement.  Celltrion  will use the  non-exclusive  rights
obtained under this Sub-License Agreement to manufacture AIDSVAX in the Republic
of Korea, if regulatory approval is obtained. While we and Celltrion jointly own
any improvements made to AIDSVAX,  the Sub-License  Agreement does not grant any
ownership  interest to Celltrion over AIDSVAX or its related patents.  Under the
Sub-License  Agreement,  Celltrion  may not  sublicense  any rights  that it has
obtained.

The Supply Agreement governs the terms upon which Celltrion will produce AIDSVAX
for us.  The term of the  Supply  Agreement  is for five  years  from the  first
commercial  production  of AIDSVAX at the  facility  located in  Incheon,  South
Korea.  The  first  commercial  production  is  expected  to occur on or  before
December 31, 2005. If AIDSVAX is not produced  within a year after  December 31,
2005, there is a delay for more than six months in initial production not caused
by us, or production is  interrupted  for a certain time period once  production
has  begun,  we have the right to  commit  to the  production  of  AIDSVAX  at a
different site.

If production has begun, two years prior to the expiration of the agreement,  we
and  Celltrion  have the  obligation  to discuss in good faith  terms upon which
Celltrion may become the primary  provider of AIDSVAX for us for five additional
years. Under the agreement, Celltrion will produce a maximum of 87 million units
of the vaccine per year.  During each year that Celltrion is  manufacturing  the
vaccine,  we and  Celltrion  may modify the number of orders for the  vaccine as
long as the number does not exceed 87 million units.

All  units  of  the  vaccine   produced  under  the  Supply  Agreement  will  be
manufactured in accordance with the relevant  specifications  promulgated by the
FDA. If the vaccine does not meet certain required standards,  we have the right
to  reject  the  specific  units  and  receive a  replacement  or a refund.  The
agreement  contemplates  that we and Celltrion  will work together to coordinate
any modifications to AIDSVAX, as they may arise.

If a dispute  arises as the quality of AIDSVAX,  we and Celltrion have agreed to
be bound by the results of a independent laboratory or expert. Both parties will
share the expense of such laboratory or expert. We and Celltrion have waived our
claims to any  consequential  damages or lost profits that may arise as a result
of a breach of this Supply Agreement.

The foregoing  descriptions  are summaries and are qualified by reference to the
full text of the attached documents.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits required by Item 601 of Regulation S-K:

     The following exhibits are filed as part of this report:

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

10.32       Employment Agreement between VaxGen and Carmen M. Betancourt,  dated
            as of January 28, 2002.

10.33       Employment  Agreement between VaxGen and James P. Panek, dated as of
            February 4, 2002.

10.34       Employment  Agreement between VaxGen and Phillip W. Berman, dated as
            of February 7, 2002.

10.35       License  Agreement  between VaxGen and Celltrion,  dated as of March
            25, 2002.

10.36       Sub-License  Agreement  between  VaxGen and  Celltrion,  dated as of
            March 25, 2002.

10.37       Supply Agreement between VaxGen and Celltrion, dated as of March 25,
            2002.

     (b) Reports on Form 8-K:

     A current  report on Form 8-K,  dated  February 27, 2002 was filed with the
     Securities and Exchange Commission, reporting under Item 5 that the Company
     announced  that  the  Company,  together  with  a  group  of  South  Korean
     investors,  formed a joint venture,  which will invest  approximately  $120
     million  to build and  operate a  facility  in  Incheon,  South  Korea,  to
     manufacture the Company's AIDS vaccine.

     A current  report on Form 8-K,  dated  February 27, 2002 was filed with the
     Securities and Exchange Commission, reporting under Item 5 that the Company
     announced  that  Carmen M.  Betancourt  was  appointed  vice  president  of
     Regulatory  Affairs  and  Quality  Assurance,  Mark  R.  Busch,  Ph.D.  was
     appointed  senior  director  of  Quality  Assurance,  James  P.  Panek  was
     appointed  senior  vice  president  of  Manufacturing  Operations  and Marc
     Gurwith,  M.D. was appointed  senior vice  president,  Medical  Affairs and
     chief medical officer.

     A current  report on Form 8-K,  dated  February 27, 2002 was filed with the
     Securities  and  Exchange  Commission,  reporting  under  Item 5  that  the
     National Institute of Allergy and Infectious Diseases (NIAID) announced its
     decision  not to  proceed  forward  with a Phase III trial  that would have
     tested  a  prime/boost   vaccine   approach  using  an  Aventis   Pasteur's
     experimental AIDS vaccine for North and South America, ALVAC-HIV (vCP1452),
     as the prime, with our AIDSVAX B/B as the boost. NIAID's decision was based
     on its Phase II study indicating that ALVAC-HIV did not induce a sufficient
     cytotoxic T  lymphocyte  (CTL)  immune  response to qualify it for the next
     trial phase.  NIAID's  decision not to proceed with the trial does not mean
     that the  vaccines  are not  efficacious.  NIAID and the  Walter  Reed Army
     Institute of Research plan to conduct a Phase III trial in Thailand,  which
     combines  another  formulation  of an Aventis  Pasteur  vaccine,  ALVAC-HIV
     (vCP1521), and our B/E formulation of AIDSVAX.


                                      -21-
<PAGE>

                                   Signatures

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                         VaxGen, Inc.

Dated: May 13, 2002                      By:   /s/Carter A. Lee
       ------------                         ---------------------------
                                            Carter A. Lee
                                            Senior Vice President
                                            Finance & Administration
                                            (Principal Financial Officer)


                                      -22-