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 September 30, 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 14,493,774 shares outstanding as
of October 31, 2002.

<PAGE>

                                  VaxGen, Inc.

                                    Form 10-Q

                    For the Quarter Ended September 30, 2002

                                Table of Contents

Part I.   Financial Information                                       Page

Item 1    Financial Statements:
          Condensed Balance Sheets ..................................    2
          Condensed Statements of Operations ........................    3
          Condensed Statements of Cash Flows ........................    4
          Notes to Condensed Financial Statements ...................    5

Item 2    Management's Discussion and Analysis of Financial Condition
          and Results of Operations:
          Overview .................................................    10
          Results of Operations .....................................   11
          Liquidity and Capital Resources ...........................   12
          Risk Factors  .............................................   15

Item 3    Quantitative and Qualitative Disclosures About Market Risk.   21

Item 4    Controls and Procedures ....................................  21

Part II. Other Information

Item 5    Other Information ..........................................  22

Item 6    Exhibits and Reports on Form 8-K ...........................  23
          Signature ..................................................  24
          Certifications .............................................  25

<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

<TABLE>
<CAPTION>
                                                            ASSETS
                                                                                      September 30,     December 31,
                                                                                           2002             2001
                                                                                      -------------    -------------
<S>                                                                                   <C>              <C>
Current assets:
Cash and cash equivalents                                                             $   5,187,000    $   7,499,000
Restricted cash                                                                             500,000               --
Investment securities                                                                    20,536,000       40,911,000
Interest receivable                                                                         196,000          620,000
Prepaid expenses and other current assets                                                 2,286,000        1,156,000
                                                                                      -------------    -------------
Total current assets                                                                     28,705,000       50,186,000

Property and equipment, net                                                               3,232,000        2,987,000
Employee loans receivable                                                                   135,000           55,000
Other assets                                                                                332,000          144,000
                                                                                      -------------    -------------
Total assets                                                                          $  32,404,000    $  53,372,000
                                                                                      =============    =============

                                              LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to Genentech                                                                  $   1,270,000    $   2,250,000
Accounts payable                                                                            496,000          557,000
Accrued liabilities                                                                       3,449,000        2,106,000
Dividends payable to redeemable convertible
     preferred stockholders                                                                 300,000               --
Current portion of long-term obligations                                                     20,000           31,000
                                                                                      -------------    -------------
Total current liabilities                                                                 5,535,000        4,944,000

Long-term obligations                                                                            --           22,000

Commitments and contingencies

Redeemable convertible preferred stock, $0.01 par value, 20,500 shares
authorized:
    Series A 6% cumulative convertible stock, $0.01 par value, 20,000 shares
    issued and outstanding at September 30, 2002 and December 31, 2001 (liquidation
    preference of $20,000,000 at September 30, 2002)                                     16,878,000       15,845,000

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; 14,493,774 and 14,300,600 shares issued
  and outstanding at September 30, 2002 and
  December 31, 2001, respectively                                                           144,000          143,000
Additional paid-in capital                                                              129,619,000      128,387,000
Deferred stock compensation                                                                (174,000)        (516,000)
Accumulated other comprehensive income -
  unrealized gain on investment securities                                                  356,000          877,000
Deficit accumulated during the development stage                                       (119,954,000)     (96,330,000)
                                                                                      -------------    -------------
Total stockholders' equity                                                                9,991,000       32,561,000
                                                                                      -------------    -------------
Total liabilities and stockholders' equity                                            $  32,404,000    $  53,372,000
                                                                                      =============    =============
</TABLE>

           See accompanying notes to condensed financial statements.


                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                                    Period from
                                                         Three Months Ended             Nine Months Ended             Inception
                                                           September 30,                  September 30,         (November 27, 1995)
                                                     --------------------------    ---------------------------        through
                                                        2002           2001            2002           2001      September 30, 2002
                                                     -----------   ------------    ------------   ------------  ------------------
<S>                                                  <C>           <C>             <C>            <C>             <C>
Revenue:

Contract revenue                                     $   132,000   $         --    $    370,000   $    421,000    $  1,540,000

Operating expenses:

Research and development:
Genentech expenses                                        96,000        706,000         703,000      1,208,000      12,481,000
Other                                                  4,846,000      3,757,000      13,195,000     11,505,000      66,297,000
                                                     -----------   ------------    ------------   ------------    ------------
Total research and development                         4,942,000      4,463,000      13,898,000     12,713,000      78,778,000

General and administrative expenses                    3,608,000      2,494,000       9,677,000      8,212,000      50,987,000
                                                     -----------   ------------    ------------   ------------    ------------

Loss from operations                                  (8,418,000)    (6,957,000)    (23,205,000)   (20,504,000)   (128,225,000)
                                                     -----------   ------------    ------------   ------------    ------------

Other income (expense):
Investment income, net                                   658,000        769,000       1,821,000      2,545,000      13,083,000
Interest expense                                              --         (4,000)         (4,000)       (18,000)        (92,000)
                                                     -----------   ------------    ------------   ------------    ------------
Total other income, net                                  658,000        765,000       1,817,000      2,527,000      12,991,000
                                                     -----------   ------------    ------------   ------------    ------------

Net loss                                              (7,760,000)    (6,192,000)    (21,388,000)   (17,977,000)   (115,234,000)

Charges attributed to convertible preferred stock:

     Dividends                                          (300,000)      (300,000)       (903,000)      (427,000)     (1,643,000)
     Accretion of redemption value                      (466,000)      (430,000)     (1,333,000)      (572,000)     (2,343,000)
     Beneficial conversion charge                             --             --              --       (734,000)       (734,000)
                                                     -----------   ------------    ------------   ------------   -------------
Net loss applicable to common shareholders           $(8,526,000)  $ (6,922,000)   $(23,624,000)  $(19,710,000)  $(119,954,000)
                                                     ===========   ============    ============   ============   =============

Net loss per share applicable to common
     shareholders, basic and diluted                 $     (0.59)  $      (0.49)   $      (1.64)  $      (1.40)
                                                     ============  ============    ============   ============

Weighted average shares used in computing
     basic and di1uted loss per share                 14,472,000     14,184,000      14,378,000     14,118,000
                                                     ===========   ============    ============   ============
</TABLE>

           See accompanying notes to condensed financial statements.


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                    Period from
                                                                      Nine Months Ended              Inception
                                                                        September 30,            (November 27, 1995)
                                                              -------------------------------          through
                                                                   2002               2001        September 30, 2002
                                                              -------------      -------------    ------------------
<S>                                                           <C>                <C>                <C>
Cash flows from operating activities:
Net loss                                                      $ (21,388,000)     $ (17,977,000)     $(115,234,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization                                       728,000            689,000          2,986,000
Amortization of premiums and
   discounts on investment securities, net                           34,000             14,000           (796,000)
Stock compensation expense                                          559,000          1,094,000         15,116,000
Note receivable allowance                                                --                 --            487,000
Warrants issued to consultants                                       47,000            228,000            275,000
   Changes in assets and liabilities:
     Restricted cash                                               (500,000)                --           (500,000)
     Interest receivable                                            424,000            153,000           (196,000)
     Prepaid expenses and other current assets                   (1,130,000)         2,031,000         (3,179,000)
     Employee loans receivable and other assets                    (268,000)            99,000           (356,000)
     Payable to Genentech                                          (980,000)        (1,017,000)         1,270,000
     Accounts payable, accrued liabilities
       and other long-term obligations                            1,250,000           (516,000)         4,259,000
                                                              -------------      -------------      -------------
Net cash used in operating activities                           (21,224,000)       (15,202,000)       (95,868,000)
                                                              -------------      -------------      -------------
Cash flows from investing activities:
Purchase of investment securities                               (13,350,000)       (19,320,000)      (178,857,000)
Proceeds form sale and maturities of
   investment securities                                         33,170,000         19,459,000        159,473,000
Purchase of property and equipment                                 (973,000)          (445,000)        (6,071,000)
Long-term lease deposits                                                 --                 --           (120,000)
                                                              -------------      -------------      -------------
Net cash provided by (used in)
  investing activities                                           18,847,000           (306,000)       (25,575,000)
                                                              -------------      -------------      -------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock                                --         18,347,000         18,342,000
Payments under capital lease obligations                            (33,000)           (24,000)          (118,000)
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)
Return of capital on redeemable convertible preferred stock        (300,000)                --           (300,000)
Exercise of employee stock options                                  223,000          1,105,000          3,469,000
Employee stock purchase plan                                        175,000                 --            277,000
Loans from Genentech                                                     --                 --          1,000,000
                                                              -------------      -------------      -------------
Net cash provided by financing activities                            65,000         19,428,000        126,630,000
                                                              -------------      -------------      -------------
Increase (decrease) in cash and equivalents                      (2,312,000)         3,920,000          5,187,000
Cash and cash equivalents at beginning of
  period                                                          7,499,000          5,426,000                 --
                                                              -------------      -------------      -------------
Cash and cash equivalents at end
  of period                                                   $   5,187,000      $   9,346,000      $   5,187,000
                                                              -------------      -------------      -------------
Supplemental schedule of non cash investing and financing
activities:
Stock dividend on redeemable convertible preferred stock      $     903,000      $     427,000      $   1,643,000
Accretion of redemption value of redeemable
  convertible preferred stock                                     1,333,000            572,000          2,343,000
Recognition of beneficial conversion feature
  of redeemable convertible preferred stock                              --            734,000            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.


                                       4
<PAGE>

                                  VaxGen, Inc.
                        (A Development Stage Enterprise)

                     Notes to Condensed Financial Statements
                               September 30, 2002
                                   (Unaudited)

1. Basis of Presentation

The unaudited condensed financial statements of VaxGen, Inc. included herein
have been prepared by VaxGen 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
VaxGen's management, 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
VaxGen 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 VaxGen'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, our stockholders approved an increase in the number of shares
of common stock reserved for grant under our 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, we recorded deferred compensation
in the amount of $3,223,000, representing the excess of fair market value of our
common stock 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 on a straight-line basis to expense over the
remaining vesting period of the options. Additional non-cash compensation has
been incurred as a result of stock option grants subsequent to our initial
public offering in June 1999 along with stock issued related to our 401(k)
company match. Total non-cash compensation for the nine months ended September
30, 2002 was $560,000 as compared to $1,095,000 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 3,172,646 shares of
common stock subject to outstanding stock options, 956,762 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 September 30, 2002,
and 2,136,689 shares of common stock subject to outstanding stock options and
720,165 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 September 30, 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 our 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 had no impact on our 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. 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, we cannot predict the impact on our
financial statements.


                                       5
<PAGE>

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, SFAS No. 64, Extinguishment of Debt made to satisfy
Sinking-Fund Requirements, and SFAS No. 44, Accounting for Intangible Assets of
Motor Carriers. This statement also amends SFAS No. 13, Accounting for Leases,
to eliminate an inconsistency between the accounting for sale-leaseback
transactions and the accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. SFAS 145 is
effective for fiscal years beginning after, transactions entered into after and
financial statements issued on or subsequent to May 15, 2002. The adoption of
SFAS No. 145 had no impact on our financial statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal
Activities. SFAS 146 addresses the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including costs
related to terminating a contract that is not a capital lease and termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract. SFAS 146 supersedes Emerging
Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring), and requires liabilities associated with
exit and disposal activities to be expensed as incurred. SFAS 146 is effective
for exit or disposal activities that we initiate after December 31, 2002.

5. Redeemable Convertible Preferred Stock Financing

We entered into a Securities Purchase Agreement dated as of May 23, 2001 with
four investors, whereby we received approximately $20,000,000 in consideration
for the sale of 20,000 shares of our Series A 6% Cumulative Convertible
Preferred Stock (the "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 to us of approximately
$18,300,000. These proceeds are being used to prepare our HIV/AIDS vaccine
candidate, AIDSVAX(R) ("AIDSVAX"), for commercial-scale manufacturing if it
proves effective, the potential development of new adjuvants and general
corporate purposes. During the second and third quarters of 2002, we returned
$300,000 to our holders of Preferred Stock in exchange for their agreement to
limit as-converted voting of their Preferred Stock. We have accounted for the
payments as a return of capital to the holders of Preferred Stock.

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

Conversion

Each share of Preferred Stock can be converted into common stock 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. Subsequent to
October 31, 2002, one of the holders of Preferred Stock exercised a warrant,
which had the effect, under the anti-dilution provisions applicable to the
Preferred Stock, of reducing the conversion price of the Preferred Stock to
$14.133, and subsequently converted 3,500 shares of Preferred Stock in exchange
for 252,724 shares of common stock, which included shares issued for accrued but
unpaid dividends. We may also force conversion of the Preferred Stock into
common stock if, at any time after May 23, 2002, the weighted average price per
share of our stock for at least 20 out of 30 consecutive trading days equals or
exceeds $24.73.

Redemption

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. We may, within certain limits, pay up to
50% of such redemption price in shares of our common stock.

We account for the difference between the carrying amount of the 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 nine months ended September 30, 2002 amounted to
$1,333,000, which is comprised of $877,000 related to the accretion of the fair
value of the Common Stock Purchase Warrants and $456,000 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.
Payment of the dividend accrued between January 1 and June 30, 2002, in the
amount of $30.17 per share of Preferred Stock, was made on July 1, 2002 in the
form of 106,794 shares of common stock. Net loss applicable to common
stockholders for the nine months ended September 30, 2002 includes a non-cash
charge of $903,000 for Preferred Stock dividends.


                                       6
<PAGE>

Voting

Each share of Preferred Stock has voting rights equal to the number of shares of
common stock into which it is convertible on the record date of the vote, based
on a conversion price of $19.824 per share.

Liquidation

In the event of liquidation, dissolution or winding up of VaxGen, either
voluntary or involuntary, each holder of shares of Preferred Stock will be
entitled to receive, out of our assets 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, we issued Common Stock
Purchase Warrants (the "Warrants") initially for the purchase of 297,177 shares
of common stock to the Preferred Stock investors. The Warrants, which expire on
May 23, 2006, originally had an exercise price of $25.2375 per share; however,
effective as of May 23, 2002, the exercise price was automatically adjusted to
$14.133 per share and the number of shares issuable on exercise of the warrants
increased to 530,674, in accordance with the terms of the Warrants.

We have 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 discount is
being amortized over three years, and accordingly, net loss to common
stockholders for the nine months ended September 30, 2002 reflects a non-cash
charge of approximately $877,000. The fair value of the Warrants was calculated
using the Black-Scholes model.

Effect of Beneficial Conversion Feature

The 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
holders of Preferred Stock, which increases the net loss applicable to common
stockholders.

6. Celltrion Joint Venture

In February 2002, we and a group of South Korean investors announced the
formation of a joint venture, which intends to raise up to approximately $122
million, consisting of up to approximately $52 million in cash, a $40 million
bank loan 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. We have no further funding
obligation to Celltrion, although we are responsible for all costs of
validation, operation and licensure of the manufacturing facility in South San
Francisco, California, which initially will be owned by Celltrion. The joint
venture also is obligated to contribute $7 million to a subsidiary for the
purpose of funding construction of a smaller manufacturing facility in South San
Francisco, California. The facility is intended to support the licensure and
commercial launch of AIDSVAX. We would fund any additional capital costs related
to the smaller facility. 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.

As of September 30, 2002, the South Korean investors had contributed
approximately $40.6 million in cash to Celltrion of the $47.0 million in cash
that the joint venture agreement between us and Celltrion requires to have been
funded by the end of August 2002, and secured a $40 million loan with a Korean
bank. As a result of the cash investment, we currently have a 49.0% interest in
Celltrion, although if funding is completed as intended, our interest will be
approximately 44%. In the event that AIDSVAX is proven successful and the
Incheon facility is validated and licensed to produce AIDSVAX, Celltrion would
produce bulk material that will be sold to us. However, in the event that
AIDSVAX is proven to be unsuccessful, we believe the Incheon facility would be
used to manufacture other biopharmaceutical products, in which we would share in
the profits based on our percentage ownership.

As part of our investment in the joint venture, we provided mammalian cell
culture technology and biologics production expertise to Celltrion in exchange
for an initial 52% interest in the joint venture. We have no further funding
obligation to Celltrion, although we are responsible for all costs of
validation, operation and licensure of the manufacturing facility in South San
Francisco, California, which originally will be owned by a subsidiary of
Celltrion. After three planned rounds of financing, our fully diluted ownership
will be approximately 44%. The South Korean partners plan to provide the funding
that we believe is necessary to design and construct the Incheon facility and to
validate and operate the Incheon facility. We intend to provide the funding
necessary to validate and operate a facility in South San Francisco. The Incheon
facility is being designed to be built on approximately 23 acres of land sold to
Celltrion by the city of Incheon at a discount to prevailing market rates.

The Board of Directors of Celltrion is comprised of five individuals, two from
VaxGen and the remaining three from the joint venture partners. We are
contractually entitled to hold two of the five director seats for so long as we
retain at least 66 2/3% of our initial shareholdings. Based on the management
structure of Celltrion, we do not have outright control of Celltrion regardless
of ownership. Also, we have less than 50% ownership of the voting stock of
Celltrion. As a result, we will account for the joint venture using the equity
method of accounting from inception of the joint venture. Since the historical
cost of the non-monetary assets that we contributed is zero, there is no
investment to be recorded for the technology contributed. Additionally, we would
not be able to pick up equity in earnings until such time that we have recovered
losses not recognized.


                                       7
<PAGE>

Under the terms of the joint venture agreement, Celltrion is obligated to invest
$7 million to capitalize a new corporation, VaxGen-Celltrion, Inc. ("VCI"), and
Celltrion will initially be the sole shareholder of VCI, receiving seven million
shares of common stock in exchange for its $7 million capital contribution. The
capitalization of VCI will be used to design and construct the manufacturing
facility in the South San Francisco, California area for our use to support
licensure and commercial launch of AIDSVAX, if it proves successful. If the
Incheon facility is validated and licensed to produce AIDSVAX, we believe the
VCI facility would be utilized to develop and manufacture other
biopharmaceutical products for us. In addition, if we receive FDA approval to
market AIDSVAX, we are required to purchase all VCI shares held by Celltrion, at
a purchase price of $1.00 per share plus interest. In July 2002, Celltrion made
an initial investment of $3 million to capitalize VCI, while the remaining $4
million is required to be funded by December 31, 2002. The Board of Directors of
VCI is comprised of three individuals, two of whom are from VaxGen. We will
supervise the design and construction of the manufacturing facility and are
responsible for all costs of validation, operation and licensure of the
facility, provided, that we shall have the right to suspend or terminate our
obligation with respect to such costs in the event that the outcome of our
pending Phase III clinical trials of AIDSVAX are unfavorable or in the event
that regulatory approval of AIDSVAX is otherwise delayed or denied. At the end
of each calendar year, VCI will issue us one share of its common stock for every
dollar expended by us in connection with the validation, operation and licensure
of the facility. Given the contingent nature of our option to purchase VCI and
the uncertainty regarding the recovery of its investment, capital contributions
and payments made on behalf of VCI have been expensed. For the nine-month period
ended September 30, 2002, such contributions and payments have been
approximately $200,000.

7. Equity Incentive Plans

On May 29, 2002, our stockholders approved amendments to our 1996 Stock Option
Plan (the "1996 Plan") and the 1998 Director Stock Option Plan (the "1998
Plan"). The amendments to the 1996 Plan increased the number of shares of common
stock reserved for issuance under the 1996 Plan from 3,250,000 to 4,750,000, and
also added a provision that will automatically increase the number of shares
reserved under the 1996 Plan by 3.5% of the issued and outstanding common stock
on the last trading day of the December immediately preceding each fiscal year,
beginning with January 2003 and ending with January 2007. The amendments to the
1998 Plan increased the number of shares of common stock reserved for issuance
under the 1998 Plan from 37,500 to 300,000 and modified the number of options
granted to non-employee directors annually.

8. Related Party Transactions

On July 2, 2002, we announced that the Genentech license agreement had been
amended and restated to give us greater flexibility in commercializing AIDSVAX.
A summary of the significant changes to the Genentech license agreement is as
follows:

      o     Genentech no longer has an option to manufacture AIDSVAX on a
            commercial basis.

      o     Genentech has an exclusive option to use, sell, offer for sale and
            import, on an exclusive basis, AIDSVAX and certain other products in
            the United States, Mexico and Canada (previously, this exclusive
            option extended to the entire world). Genentech must exercise this
            exclusive option, if at all, prior to 90 days from the date we
            deliver to Genentech a final report from our phase III clinical that
            the trial has met all of its primary endpoints, in a form suitable
            for filing with the FDA for marketing approval.

      o     If Genentech exercises its exclusive option, VaxGen and Genentech
            will share net profits from sales of the licensed products in North
            America, 30% and 70%, respectively.

      o     If Genentech does not exercise its exclusive option, and in any
            event for all sales outside of North America, Genentech will receive
            a royalty equal to 15% of net sales of the licensed products, except
            that the royalty owed to Genentech for such sales shall be reduced
            by a proportional amount, to a minimum rate of 7.5%, for sales to
            the World Health Organization or the United Nations for use in a
            third world country at a price lower than the average price charged
            in private markets in such country.

      o     The license agreement cannot be terminated by Genentech for our
            failure to maintain previously specified tangible net worth levels.

As of September 30, 2002, we had loans outstanding to two executive officers in
the amount of $135,000. In May 2002, an executive received a non-interest
bearing loan in the amount of $80,000. The loan will be forgiven at the rate of
25% per year for each of the first four full years of the executive's employment
with us. The loan was made for the purchase of a residence in connection with
the job-related relocation. In August 2000, an executive received a non-interest
bearing loan in the amount of $55,000. The loan is payable in full on April 30,
2003 and is secured by the executive's stock options on a dollar for dollar
basis out of any proceeds received as a result of sale of shares of common
stock.


                                       8
<PAGE>

9. Comprehensive Loss

<TABLE>
<CAPTION>
                                                   Three Months Ended               Nine Months Ended
                                                      September 30,                    September 30,
                                                --------------------------    ----------------------------
                                                    2002           2001           2002            2001
                                                    ----           ----           ----            ----
<S>                                             <C>            <C>            <C>             <C>
Net loss                                        $(7,760,000)   $(6,192,000)   $(21,388,000)   $(17,977,000)
Net unrealized gains (losses) on
  investment securities                            (139,000)       598,000        (521,000)        800,000
                                                -----------    -----------    ------------    ------------
Comprehensive loss                              $(7,899,000)   $(5,594,000)   $(21,909,000)   $(17,177,000)
                                                ===========    ===========    ============    ============
</TABLE>


                                       9
<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 our 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 or any other vaccine or product; our ability to commercialize AIDSVAX or
any other vaccine or product; our ability to manage our Celltrion manufacturing
joint venture; the timing, and announcement of results, of either of our Phase
III clinical trials; statements regarding the progress, costs, timing and
results of our anthrax contract with the National Institutes of Health; our and
our subcontractors' ability to develop a new anthrax vaccine in accordance with
government specifications, or at all; our ability to secure a government
contract to manufacture and supply an anthrax vaccine, if development of such a
vaccine were successful; 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 or licensed; 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
secure the 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. We undertake 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

Our discussion and analysis of our operating results and financial condition is
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of the financial statements requires us to make estimates,
judgments, and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. While we believe our estimates, judgments,
and assumptions are reasonable, the inherent nature of estimates is that actual
results will likely be different from the estimates made.

We believe the following critical accounting policy affect the most significant
judgments and estimates used in the preparation of our consolidated financial
statements.

Revenue Recognition

We recognize revenue when all of the following conditions have occurred:

o     Persuasive evidence of an arrangement exists,

o     Delivery has occurred or services have been rendered,

o     The price is fixed and determinable, and

o     Collectibility is reasonably assured.

Our fees are typically considered to be fixed or determinable at the inception
of an arrangement and are negotiated at the outset of an arrangement, and are
generally based on specific services or products to be delivered. In the event
payment terms are provided that differ significantly from our standard business
practices and collectibility is not reasonably assured, the fees are deemed to
not be fixed or determinable and revenue is recognized as the fees are paid.

OVERVIEW

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

Since our formation, we have focused on developing and testing AIDSVAX, a
vaccine candidate 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. Our laboratory, with funding from the National
Institutes of Health ("NIH"), is also working on a formulation of AIDSVAX for
use in Sub-Saharan Africa, India and China.


                                       10
<PAGE>

To date, we have generated $1,540,000 in revenue from grants from the NIH for
research and development of HIV vaccine candidates 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 have incurred losses since
inception as a result of research and development and general and administrative
expenses in support of our operations. As of September 30, 2002, we had a
deficit accumulated during the development stage of approximately $119,954,000.
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 vaccines and expand our operations.

Our strategy is to develop, test and obtain regulatory approval for various
formulations of AIDSVAX and to develop other biologic products for the
prevention and treatment of human infectious diseases. The first two approvals
for AIDSVAX we plan to obtain are in North America/Europe for the formulation
being tested in the North America/Europe trial and in Thailand for the
formulation being tested in the Thai trial. We intend to use 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 an exclusive option to market and sell AIDSVAX
products in North America. If Genentech does not exercise its exclusive
marketing and sales option, we have the right to pursue third party arrangements
for the marketing and sales of AIDSVAX products in North America.

Beginning in 2002, we began preparing for a possible successful outcome of our
North American/European Phase III trial by incurring additional personnel and
infrastructure costs to support the completion of our pivotal clinical trials.
The costs incurred have been for creation of a regulatory and quality systems
group and adding personnel dedicated to the advanced development of our
production processes. Accordingly, our net operating losses have increased for
the third quarter and for the nine-month period ended September 30, 2002
compared to the same periods from 2001.

RESULTS OF OPERATIONS

Nine months ended September 30, 2002 compared to the nine months ended September
30, 2001

Contract Revenue

There was $370,000 in contract revenue for the nine months ended September 30,
2002, compared to $421,000 for the nine months ended September 30, 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. Contract revenue earned in one period is not indicative of contract
revenue to be earned in future periods.

Research and Development Expenses

Research and development expenses increased 9%, from $12,713,000 for the nine
months ended September 30, 2001 to $13,898,000 for the nine months ended
September 30, 2002. The increase is attributable to a $768,000 increase in
salaries and benefits related to additional personnel hired in our Regulatory
Affairs, Quality Systems and Manufacturing groups in preparation for the
completion of our AIDSVAX phase III trials and advancing commercial development
along with an increase of $701,000 for professional service fees offset by lower
clinical site costs and fees paid to third parties associated with conducting
the clinical trials.

General and Administrative Expenses

General and administrative expenses increased 18%, from $8,212,000 for the nine
months ended September 30, 2001 to $9,677,000 for the nine months ended
September 30, 2002. The increase was primarily due to the building of our
infrastructure with an increase in salaries and related benefits expense of
$680,000 along with higher occupancy costs of $747,000, offset by a decrease of
$586,000 in legal fees.

Other Income, Net

Other income, net, consisting primarily of interest income, decreased 28%, from
$2,527,000 for the nine months ended September 30, 2001 to $1,817,000 for the
nine months ended September 30, 2002. The decrease was primarily attributable to
lower average balances of cash, cash equivalents and investment securities,
along with lower yields.


                                       11
<PAGE>

Three months ended September 30, 2002 compared to the three months ended
September 30, 2001

Contract Revenue

There was $132,000 in contract revenue for the three months ended September 30,
2002, compared to $0 for the three months ended September 30, 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.
Contract revenue earned in one period is not indicative of contract revenue to
be earned in future periods.

Research and Development Expenses

Research and development expenses increased 11%, from $4,463,000 for the three
months ended September 30, 2001 to $4,942,000 for the three months ended
September 30, 2002. The increase is attributable to a $417,000 increase in
salaries and benefits related primarily to additional personnel hired in our
Regulatory Affairs and Quality Systems group in preparation for the completion
of our AIDSVAX phase III trials and advancing commercial development along with
an increase of $263,000 for professional service fees offset by lower clinical
site costs and fees paid to third parties associated with conducting the
clinical trials.

General and Administrative Expenses

General and administrative expenses increased 45%, from $2,494,000 for the three
months ended September 30, 2001 to $3,608,000 for the three months ended
September 30, 2002. The increase was primarily due to the building of our
infrastructure with an increase in salaries and related benefits expense of
$398,000 along with higher occupancy costs of $381,000 and insurance costs of
$190,000.

Other Income, Net

Other income, net, consisting primarily of interest income, decreased 14%, from
$765,000 for the three months ended September 30, 2001 to $658,000 for the three
months ended September 30, 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 $26,223,000 at September
30, 2002. We have financed our operations since inception through private
placements of common stock and preferred stock, our initial public offering and
capital provided by Genentech. Genentech has no obligation to provide future
funding to us.

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 (the
"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.
Subsequent to October 31, 2002, in connection with the exercise of a warrant by
one of our holders of Preferred Stock, the conversion price of the Preferred
Stock was adjusted to $14.133 per share. On the same date, the holder also
converted 3,500 shares of Preferred Stock into 252,724 shares of common stock,
which included shares issued for accrued but unpaid dividends on the shares of
Preferred Stock converted. 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 to us of $18,300,000. The proceeds from the Preferred Stock financing
will be used to prepare our HIV/AIDS vaccine candidate, AIDSVAX, for
commercial-scale manufacturing if it proves effective, the potential development
of new adjuvants and general corporate purposes.


                                       12
<PAGE>

In connection with the Preferred Stock financing, we issued warrants initially
for the purchase of 297,177 shares of our common stock to our Preferred Stock
investors. The warrants, which expire on May 23, 2006, originally had an
exercise price of $25.2375 per share. On May 23, 2002, the exercise price was
automatically adjusted to $14.133 per share, and the number of shares of common
stock issuable on exercise of the warrants increased to 530,674, pursuant to the
terms of the warrants.

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 September 30, 2002, our gross
investment in equipment and leasehold improvements was $6,071,000. The increase
in equipment and leasehold improvements has been primarily due to the
development of our research and development laboratory and the establishment of
larger office facilities. Net cash used in operating activities for the nine
months ended September 30, 2002 was $21,224,000, 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 candidate. The participating sites have continued to
implement our Phase III protocol, as well as conducting epidemiological, social
and behavioral research, which has been shared by us and the CDC. The sites have
been compensated directly by the CDC for the clinical costs, which would have
been incurred by us, 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. In 2002, we have recognized no income under
this agreement. Due to the contract arrangement with BBI Biotech, fees are not
always fixed and determinable, therefore we recognize fees as they are paid. We
expect to receive approximately $800,000 in the fourth quarter of 2002. If
AIDSVAX proves successful in our Phase III clinical trials, the samples will be
used to determine if the vaccine candidate 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 candidate 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 earned approximately $370,000 for the nine months ended
September 30, 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 candidate 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 mammalian 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 a capital contribution of $7 million towards construction of a
smaller facility in South San Francisco 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.

As part of our investment in the joint venture, 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 stockholder. We have no further funding obligation to
Celltrion, although we are responsible for all costs of validation, operation
and licensure of the manufacturing facility in South San Francisco, California,
which originally will be owned by a subsidiary of Celltrion. After three planned
rounds of financing, our fully diluted ownership will be approximately 44%. As
of September 30, 2002, the South Korean investors had contributed approximately
$40.6 million in cash to Celltrion of the $47.0 million in cash that the joint
venture agreement between us and Celltrion requires to have been funded by the
end of August 2002, and secured a $40 million loan with a Korean bank. As a
result, we currently have a 49.0% interest in the joint venture. 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 facility.

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. Our facility in South San Francisco 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 we believe
will occur in 2005. We expect to complete construction of our facility by the
middle of 2003 and Celltrion 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, we intend to use the South San Francisco 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 our research and development facility, is expected to be used for
commercial manufacturing of AIDSVAX at least through commissioning of the
Incheon facility.

In September 2002, we were awarded a contract from NIAID to develop a new
anthrax vaccine and to create a feasibility plan to manufacture an emergency
stockpile of 25 million doses. The period of performance of the contract is from
September 30, 2002 through December 31, 2003. NIAID is expected to award a
separate contract in 2003 to manufacture the stockpile. The goal of the new
government contract is to develop a vaccine that proves to be safe in humans,
efficacious in animal challenge studies and requires no more than three
injections. Under the initial phase of the NIAID contract, VaxGen will be
awarded $13.6 million, upon satisfaction of certain milestones, to advance the


                                       13
<PAGE>

development of a vaccine candidate initially developed by the U.S. Army Medical
Research Institute of Infectious Diseases (USAMRIID). If results from the first
phase are positive, NIAID may elect, at least 60 days prior to December 31,
2003, to extend the contract. If the contract were extended, we would be
eligible for an additional $13.6 million in 2003 as a continuation of the
current contract to support a Phase II clinical trial. A second, much larger
contract to manufacture the 25-million dose stockpile will be awarded by NIAID
through a competitive bid process next year. We are expecting to recognize
approximately $40,000 in revenue during the fourth quarter of 2002.

Also in September 2002, we were awarded a $1.0 million contract to supply
AIDSVAX to a forthcoming Phase III trial in Thailand funded by the NIH and
conducted by the Walter Reed Army Institute of Research (WRAIR). The majority of
the contract award will be accrued in 2003. There are two government options, if
exercised, that would increase the total contract award to $3.3 million. The
trial is scheduled to begin enrolling volunteers in March 2003 and will combine
VaxGen's AIDSVAX B/E with ALVAC, an AIDS vaccine being developed by Aventis
Pasteur.

We believe that our existing cash and cash equivalents and investment
securities, together with investment income and funds from other potential
collaborative arrangements, will enable us to meet our forecasted expenditures
through the anticipated completion of our North American/European and Thai Phase
III clinical trials and into the second half of 2003. However, we may 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;

o     the need for leasehold improvements to facilities and the purchase of
      additional capital equipment including the funds that may be needed to
      commence and complete the construction of the South San Francisco
      facility;

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.


                                       14
<PAGE>

                                  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 may 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 at
least 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 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.

Completion of our clinical trials, and announcements of the results of such
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
      could 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.


                                       15
<PAGE>

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 candidate 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.

We have limited experience in developing other types of vaccines and products,
such as an anthrax vaccine, and may be unable successfully to develop other
vaccines and products, which could adversely affect our ability to execute our
business strategy, our business and our financial condition.

Part of our business strategy is to develop biologic products for the prevention
and treatment of human infections diseases. In September 2002, we were awarded a
contract from NIAID to develop a new anthrax vaccine and to create a feasibility
plan to manufacture an emergency stockpile of 25 million doses. Since our
inception, we have focused our research and development efforts exclusively on
development of AIDSVAX and have limited experience in the development of other
types of vaccines and products. We may be unable successfully to develop an
effective anthrax vaccine, and also may be unsuccessful in our future efforts to
develop other types of vaccines and products, which failure could adversely
affect our ability to execute our business strategy, our business and our
financial condition.

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 September 30, 2002, we had an accumulated deficit of approximately
$120.0 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 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;

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

      o     additional trials are required.


                                       16
<PAGE>

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 and Thai Phase
III clinical trials and into the second half of 2003. However, we may need to
raise additional funds to support the necessary manufacturing and development
programs required to obtain regulatory approval.

Funding of our South Korean manufacturing joint venture is not yet completed,
and even if completed, the joint venture may not be successful at manufacturing
or supplying AIDSVAX or other vaccines or products 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 South
San Francisco. We have not yet completed the full capitalization of, or the
transfer of all technology to, Celltrion. If:

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

o     Celltrion is otherwise unable to secure or 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; 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 capitalization, and would be unable to
build a manufacturing facility in Incheon, South Korea or in South San
Francisco. Even if Celltrion successfully builds its manufacturing facilities,
there can be no assurance that the facilities will pass domestic or foreign
regulatory approvals or be able to manufacture AIDSVAX or other vaccines or
products in commercial quantities, or at all, or that they will be able to
manufacture AIDSVAX or other vaccines or products 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.


                                       17
<PAGE>

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.

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 other vaccines or products 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


                                       18
<PAGE>

any other vaccines or products that may in the future be tested in human
clinical trials, and products that may be sold commercially. We may become
subject to a product liability suit if AIDSVAX or any other vaccine or product
we develop causes injury, or if vaccinated individuals subsequently become
infected with HIV or otherwise suffer adverse effects from our vaccines or
products. Regardless of merit or eventual outcome, product liability claims may
result in decreased demand for a vaccine or product, 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.

                Risks Relating to our Relationship with Genentech

We intend to rely on 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 sell AIDSVAX in North America. If
Genentech does not elect to exercise its option to market and sell the product
in North America, 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, as amended effective as of May 1, 2002,
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 amended
            Genentech license agreement;

      o     fail to file the first market approval application for AIDSVAX with
            the FDA prior to May 1, 2004; provided, that this date may be
            extended to May 1, 2006 if our phase III clinical trials do not meet
            all of their primary endpoints; or

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

     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 us to redeem all of the outstanding 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     a registration statement relating to the shares of common stock held by
      the selling stockholders is not effective for 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


                                       19
<PAGE>

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 (excluding shares beneficially owned
in connection with the Series A preferred stock and the common stock warrants
issued to the holders of Series A preferred 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 16,500 remaining outstanding shares of Series A preferred stock are
currently convertible into approximately 1,167,480 shares of common stock,
obtained by dividing $16.5 million by $14.133, which is the current conversion
price of the Series A preferred stock.. The outstanding warrants are currently
exercisable for 530,674 shares of common stock, at an exercise price of $14.133
per share. The number of shares of common stock issuable by us upon conversion
of the Series A preferred stock and exercise of the warrants can increase
substantially in certain events, including our issuance of common stock at
prices less than the then-existing conversion price of the Series A preferred
stock or the exercise price of the warrants.

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


                                       20
<PAGE>

      receives any payment if we are liquidated; and

o     the obligation to seek the consent of the holders of the Series A
      preferred stock before we can take certain actions, including but not
      limited to amending our certificate of incorporation or bylaws, issuing
      securities that have senior or equal rights as the Series A preferred.

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 September 30, 2002, we
held government debt instruments and corporate obligations in the principal
amount of $19,943,000. If market interest rates were to increase immediately and
uniformly by 10% from levels at September 30, 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 nine months ended September 30, 2002, we have incurred no
foreign exchange gains or losses.

ITEM 4.  CONTROLS AND PROCEDURES

(a) Under the supervision and with the participation of our management,
including our chief executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), within 90 days of the filing date of this
report. Based on their evaluation, our chief executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective.

(b) There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph (a) above.


                                       21
<PAGE>

ITEM 5. OTHER INFORMATION

On June 7, 2002, we entered into four agreements with Celltrion or
VaxGen-Celltrion, Inc. ("VCI"), a subsidiary of Celltrion formed to support
licensure and commercial launch of AIDSVAX. The four agreements are a Joint
Venture Agreement, a License Agreement, a Sub-License Agreement and a Consulting
Services Agreement.

Under the Joint Venture Agreement between us and Celltrion, Celltrion is
obligated to invest $7 million to capitalize VCI, and Celltrion will initially
be the sole shareholder of VCI, receiving seven million shares of common stock
in exchange for its $7 million capital contribution, $3 million of which has
been paid and the remaining $4 million of which is due on or before December 31,
2002. The capitalization of VCI will be used to design and construct the
manufacturing facility in the South San Francisco, California area for our use
to support licensure and commercial launch of AIDSVAX, if it proves successful.
We will supervise the design and construction of the manufacturing facility and
are responsible for all costs of validation, operation and licensure of the
facility. At the end of each calendar quarter prior to commercial production of
the first VaxGen product manufactured by VCI, we will be issued one share of VCI
for each dollar so expended. In addition, we have an exclusive option to
purchase all VCI shares held by Celltrion, at a purchase price of $1.00 per
share plus interest, at any time between February 25, 2003 and February 24,
2008, provided, that we will be required to purchase such shares upon receiving
FDA approval to market any VaxGen product manufactured at the VCI facility
during such five-year period. The Board of Directors of VCI is comprised of
three individuals, two of whom are from VaxGen.

Under the License Agreement, we granted VCI a non-exclusive worldwide license to
certain technical knowledge deemed "platform technology" necessary to enable VCI
to construct a manufacturing facility in South San Francisco in connection with
the possible future manufacture of AIDSVAX. This "platform technology," which
will be transferred to VCI in multiple phases through the fourth quarter of
2005, 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, and includes a license to certain specified
future patent rights. The License Agreement will expire on June 7, 2017,
provided, that VCI 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 or upon a bankruptcy or similar
event. VCI shall have no right to sublicense its rights under the License
Agreement. The License Agreement grants VCI a perpetual, non-exclusive,
worldwide royalty-free license to use the "platform technology," including after
the License Agreement's expiration; however, this "platform technology" does not
cover intellectual property granted to VCI under the Sub-License Agreement.

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

Under the Consulting Services Agreement, we will provide services to VCI as an
independent contractor in connection with the services contemplated by the
License Agreement and the Sub-License Agreement or otherwise reasonably
requested by VCI. The agreement will terminate on June 7, 2007. Either party may
terminate the agreement on ninety days written notice, provided, that either
party may terminate the agreement upon a default by the other party that is not
cured within thirty days or upon a bankruptcy or similar event.

The foregoing descriptions are summaries and are qualified by reference to the
full text of the agreements, which are attached as exhibits to this report.

                                       22

<PAGE>

                           PART II - OTHER INFORMATION

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:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Exhibit No.                            Exhibit                           Form    File No.   Filing Date   Exhibit No.      Filed
                                                                                                                         Herewith
-----------------------------------------------------------------------------------------------------------------------------------
<S>           <C>                                                         <C>   <C>           <C>            <C>            <C>
    3.1       Amended and Restated Certificate of Incorporation           S-8   333-84922     3-26-02        4.1

-----------------------------------------------------------------------------------------------------------------------------------
    3.2       Certificate of Designations, Rights and Preferences of      S-8   333-84922     3-26-02        4.2
              Series A 6% Cumulative Convertible Preferred Stock

-----------------------------------------------------------------------------------------------------------------------------------
    3.3       Amendment to the Amended and Restated Certificate of        S-8   333-84922     3-26-02        4.3
              Incorporation

-----------------------------------------------------------------------------------------------------------------------------------
    3.4       Amended and Restated Bylaws                                 S-1   333-78065     6-11-99        3.2

-----------------------------------------------------------------------------------------------------------------------------------
   10.39      Contract between VaxGen and the National Institute of
              Allergy and Infectious Diseases, National Institutes of
              Health, under Contract No. N01-A1-25494, dated September                                                      X
              30, 2002.

-----------------------------------------------------------------------------------------------------------------------------------
   10.40      Amendment of contract between VaxGen and the National
              Institute of Allergy and Infectious Diseases, National
              Institutes of Health, under Contract No. N01-AI-95373,                                                        X
              dated September 30, 2002.

-----------------------------------------------------------------------------------------------------------------------------------
   10.41      Employment Agreement between VaxGen and Piers C.
              Whitehead, dated as of July 1, 2002.
                                                                                                                            X
-----------------------------------------------------------------------------------------------------------------------------------
   10.42      Joint Venture Agreement between VaxGen and Celltrion,
              Inc., dated as of June 7, 2002
                                                                                                                            X
-----------------------------------------------------------------------------------------------------------------------------------
   10.43      License Agreement between VaxGen and VaxGen-Celltrion, Inc., dated
              June 7, 2002.
                                                                                                                            X
-----------------------------------------------------------------------------------------------------------------------------------
   10.44      Sub-License Agreement between VaxGen and VaxGen-Celltrion, Inc.,
              dated June 7, 2002.
                                                                                                                            X
-----------------------------------------------------------------------------------------------------------------------------------
   10.45      Consulting Services Agreement between VaxGen and VaxGen-Celltrion,
              Inc., dated June 7, 2002.
                                                                                                                            X
-----------------------------------------------------------------------------------------------------------------------------------
   10.46      Contract between VaxGen and the National Institute of                                                         X
              Allergy and Infectious Diseases, National Institutes of
              Health, under Contract No. N01-AI-95373, dated July 9,
              1999.
-----------------------------------------------------------------------------------------------------------------------------------
    99.1      Chief Executive Officer Certification Pursuant to 18
              U.S.C. Section 1350, as Adopted Pursuant to Section 906
              of the Sarbanes-Oxley Act of 2002.                                                                            X

-----------------------------------------------------------------------------------------------------------------------------------
    99.2      Principal Financial Officer Certification Pursuant to 18
              U.S.C. Section 1350, as Adopted Pursuant to Section 906
              of the Sarbanes-Oxley Act of 2002.                                                                            X
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       23
<PAGE>

(b) Reports on Form 8-K:

A current report on Form 8-K, dated July 15, 2002, was filed with the Securities
and Exchange Commission, reporting under Item 5 that we had announced (i) that
we had entered into an Amended and Restated License and Supply Agreement with
Genentech, and (ii) that it had hired Piers Whitehead as Vice President of
Corporate and Business Development.

A current report on Form 8-K, dated October 4, 2002, was filed with the
Securities and Exchange Commission, reporting under Item 5 that we had announced
we had been awarded a $13.6 million contract from the National Institute of
Allergy and Infectious Diseases (NIAID), part of the U.S. National Institutes of
Health (NIH), to develop a new anthrax vaccine and to create a feasibility plan
to manufacture an emergency stockpile of 25 million doses.

A current report on Form 8-K, dated October 22, 2002, was filed with the
Securities and Exchange Commission, reporting under Item 5 that we had announced
that the independent board that oversees the Company's clinical trials completed
the final safety and conduct review of our Phase III trial in Thailand and again
concluded that the study was being conducted appropriately and that our AIDS
vaccine candidate appears safe. The independent board also conducted an interim
analysis of efficacy using data from the trial in Thailand and recommended that
the study continue to its planned conclusion in the second half of 2003.

A current report on Form 8-K, dated November 7, 2002, was filed with the
Securities and Exchange Commission, reporting under Item 5 the press release
announcing our third quarter financial results.


                                       24
<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: November 14, 2002                      By:  /s/ Carter A. Lee
                                                   -----------------------------
                                                   Carter A. Lee
                                                   Senior Vice President
                                                   Finance & Administration
                                                   (Principal Financial Officer)


                                       25
<PAGE>

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
                             PURSUANT TO RULE 13a-14

I, Lance K. Gordon, certify that:

1. I have reviewed this quarterly report on Form 10-Q of VaxGen, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

      a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

      b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

      c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

      a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

      b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

November 14, 2002

                                      /s/ Lance K. Gordon
                                      -----------------------------------------
                                      Lance K. Gordon, Chief Executive Officer


                                       26
<PAGE>

                  CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
                             PURSUANT TO RULE 13a-14

I, Carter A. Lee, certify that:

1. I have reviewed this quarterly report on Form 10-Q of VaxGen, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

      a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

      b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

      c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

      a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

      b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

November 14, 2002

                                           /s/ Carter A. Lee
                                           -------------------------------------
                                           Carter A. Lee
                                           Senior Vice President
                                           Finance & Administration
                                           Principal Financial Officer


                                       27