|UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549  FORM 10-Q/A


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


For the Quarterly
Period Ended March 31, 2003


OR


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


Commission File
Number 0-26483VaxGen, 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 200Brisbane, 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 |_|


Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes |X|
No |_|


The issuer has one class of common
stock with 15,930,654 shares outstanding as of May 1, 2003.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|VaxGen, Inc.


      Form 10-Q/A


For the Quarter
Ended March 31, 2003


Table of Contents
|-------------------------------------------------------------------------------------------

|Part
      I.   Financial Information                                          |  |  |  | Page | 
|------------------------------------------------------------------------------ |  |  |  | ---- | 
|Recent Accounting
      and Financial Developments                             |  |  |  | 1    | 
|Item 1
        Financial Statements (unaudited):                               |  | 
|Condensed Balance Sheets                                                       |  |  |  | 2    | 
|Condensed Statements of Operations                                             |  |  |  | 3    | 
|Condensed Statements of Cash Flows                                             |  |  |  | 4    | 
|Notes to Condensed Financial Statements                                        |  |  |  | 6    | 
|Item 2   Management's
      Discussion and Analysis of Financial Condition and |  | 
|Results of Operations:                                                         |  | 
|Overview                                                                       |  |  |  | 12   | 
|Results of Operations                                                          |  |  |  | 14   | 
|Liquidity and Capital Resources                                                |  |  |  | 15   | 
|Risk Factors                                                                   |  |  |  | 17   | 
|Item
      3   Quantitative and Qualitative Disclosures About Market Risk      |  |  |  | 25   | 
|Item
      4   Controls and Procedures                                         |  |  |  | 25   | 
|Part II   Other
      Information                                              |  | 
|Item
      1   Legal Proceedings                                               |  |  |  | 25   | 
|Item
      6   Exhibits and Reports on Form 8-K                                |  |  |  | 26   | 
|Signature                                                                      |  |  |  | 27   | 
|Certifications                                                                 |  |  |  | 28   | 

|
|

|Recent Accounting and
Financial Developments


In October 2003, the Company
discovered an error related to the classification and valuation of warrants issued in
connection with the Companys Series A Redeemable Convertible Preferred Stock. As a
result, the financial statements for the fiscal year 2002 and for the second, third and
fourth fiscal quarters of 2001 were restated in the Companys Form 10-K/A filed
on November 19, 2003. Financial statements for the first fiscal quarter of 2003 and 2002 are
restated in this Form 10-Q/A. Restated financial statements reflect adjustments relating
to the recognition, classification and valuation of warrants and beneficial conversion
features relating to the Companys Series A Redeemable Convertible Preferred Stock
financing, which closed in May 2001. These warrants provide for cash redemption by the warrant holders
upon the occurrence of certain events outside the control of the Company. As such, the
Company has reclassified these warrants from equity to a liability. As a result of the
restatement, the net loss applicable to common stockholders decreased by $4,748,000 for
the three months ended March 31, 2003 and by $7,000 for the three months ended March 31, 2002.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | For the three months ended March 31, 2003, the net loss applicable to common stockholders
decreased to $2,037,000 from $6,785,000 and basic and diluted loss per share applicable to
common stockholders decreased to $(0.13) from $(0.43), each as compared to the amounts
previously reported by VaxGen on its Form 10-Q filed on May 15, 2003.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | For the three months ended March 31, 2002, the net loss applicable to common stockholders
decreased to $7,692,000 from $7,699,000 and basic and diluted loss per share applicable to
common stockholders was unchanged at $(0.54) each as compared to the amounts previously
reported by VaxGen on its Form 10-Q filed on May 15, 2003.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The restated financial statements
reflect the following adjustments during the past two fiscal years and the first quarter
of the current fiscal year:
|------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In 2001, the Company reclassified $3,507,000, the initial value assigned to warrants
issued in connection with the Companys Series A Redeemable Convertible Preferred
Stock financing, from stockholders equity to current liabilities.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Beginning on June 30, 2001 and in each subsequent quarter the restated financial
statements reflect a non-cash expense or credit based on the fair market value of the
warrants measured as of the end of each quarter, and a corresponding change in the current
liability representing the value assigned to the warrants noted above.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The value of beneficial conversion features totaling $11,795,000, originally recorded as
immediate deemed dividends to preferred stockholders of $734,000 in 2001 and $11,061,000
in 2002 has been reclassified to Series A Redeemable Convertible Preferred Stock and is
now amortized over the period ending on the redemption date, May 23, 2004. Upon
conversions of Series A Redeemable Convertible Preferred Stock prior to the redemption
date, of which two occurred in 2002, the related unamortized value of beneficial
conversion features and the unamortized value of the warrants have been recorded as a beneficial conversion feature charge of
$10,686,000 in 2002 and $0 for the first fiscal
quarter of 2003.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|1
|-

|PART I  FINANCIAL
INFORMATION


Item 1. Financial
Statements


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

|                                                                   |  |  |   | March
      31, |   |   | December
      31, |  
|------------------------------------------------------------------ |  |  | - | --------------- | - | - | ------------------ | -
|                                                                   |  |  |   | 2003            |   |   | 2002               |  
|                                                                   |  |  |   | (As Restated)   |   |   | (As Restated)      |  
|ASSETS                                                            
|Current assets:                                                    |  | 
|Cash and
      cash equivalents                                    |  |  | $ | 1,272,000       |   | $ | 4,449,000          |  
|Investment
      securities                                        |  |  |   | 8,872,000       |   |   | 13,572,000         |  
|Accounts
      receivable                                          |  |  |   | 3,777,000       |   |   | 1,302,000          |  
|Accounts
      receivable - related party                          |  |  |   | 225,000         |   |   | 440,000            |  
|Deferred
      costs                                               |  |  |   | 1,385,000       |   |   | 1,379,000          |  
|Prepaid expenses
      and other current assets                    |  |  |   | 1,033,000       |   |   | 1,765,000          |  
|                                                                   |  |  |   |                
|Total current
      assets                                         |  |  |   | 16,564,000      |   |   | 22,907,000         |  
|Property
      and equipment, net                                  |  |  |   | 3,326,000       |   |   | 3,309,000          |  
|Restricted
      cash                                              |  |  |   | 1,035,000       |   |   | 1,033,000          |  
|Investment
      in affiliate                                      |  |  |   | 2,012,000       |   |   | 268,000            |  
|Employee
      loans receivable                                    |  |  |   | 135,000         |   |   | 135,000            |  
|Other assets                                                       |  |  |   | 332,000         |   |   | 385,000            |  
|                                                                   |  |  |   |                
|Total assets                                                       |  |  | $ | 23,404,000      |   | $ | 28,037,000         |  
|                                                                   |  |  |   |                
|LIABILITIES
      AND STOCKHOLDERS' EQUITY                        
|Current liabilities:                                               |  | 
|Payable to
      Genentech                                         |  |  | $ | 1,445,000       |   | $ | 1,900,000          |  
|Accounts
      payable                                             |  |  |   | 1,778,000       |   |   | 595,000            |  
|Accrued clinical
      trial expenses                              |  |  |   |                |   |   | 2,455,000          |  
|Accrued liabilities                                                |  |  |   | 4,340,000       |   |   | 3,705,000          |  
|Deferred
      revenues                                            |  |  |   | 3,304,000       |   |   | 917,000            |  
|Dividends
      payable                                            |  |  |   | 57,000          |   |   |                   |  
|Warrant valuation
      obligation                                 |  |  |   | 705,000         |   |   | 5,780,000          |  
|Current portion
      of long-term obligations                     |  |  |   | 11,000          |   |   | 15,000             |  
|                                                                   |  |  |   |                
|Total current
      liabilities                                    |  |  |   | 11,640,000      |   |   | 15,367,000         |  
|Deferred
      rent                                                |  |  |   | 567,000         |   |   | 606,000            |  
|Redeemable
      convertible preferred stock, $0.01 par            |  | 
|value, 20,500
      shares authorized:                             |  | 
|Series
      A 6% cumulative, $0.01 par value, 3,800 and           |  | 
|3,800
      shares issued and outstanding at March 31,             |  | 
|2003
      and December 31, 2002, respectively (liquidation        |  | 
|preference
      of $3,800,000 and $3,800,000 at March 31,         |  | 
|2003
      and December 31, 2002, respectively)                    |  |  |   | 1,904,000       |   |   | 1,497,000          |  
|Commitments
      and contingencies                                |  | 
|Stockholders
      equity:                                        |  | 
|Preferred
      stock, $0.01 par value, 19,979,500 shares          |  | 
|authorized;
      none issued or outstanding                       |  |  |   |                |   |   |                   |  
|Common stock,
      $0.01 par value, 40,000,000 shares authorized; |  | 
|15,930,654
      and 15,777,064 shares issued and outstanding      |  | 
|at
      March 31, 2003 and December 31, 2002, respectively        |  |  |   | 159,000         |   |   | 157,000            |  
|                                                                   |  |  |   |                 |   |   |                    |  
|Additional
      paid-in capital                                   |  |  |   | 154,839,000     |   |   | 154,007,000        |  
|Deferred
      stock compensation                                  |  |  |   | (53,000)        |   |   | (94,000)           |  
|Accumulated
      other comprehensive income -                     |  | 
|unrealized
      gain on investment securities                     |  |  |   | 186,000         |   |   | 298,000            |  
|Deficit accumulated
      during the development stage             |  |  |   | (145,838,000    | ) |   | (143,801,000       | )
|                                                                   |  |  |   |                
|Total stockholders'
      equity                                   |  |  |   | 9,293,000       |   |   | 10,567,000         |  
|                                                                   |  |  |   |                
|Total liabilities
      and stockholders' equity                   |  |  | $ | 23,404,000      |   | $ | 28,037,000         |  
|                                                                   |  |  |   |                

|See accompanying notes
to condensed financial statements.


2
|-------------------------------------------------------------

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

|                                          | Three months
      ended 
      March 31, | Period
      from Inception
      (November 27, 1995)
      through March 31,
      2003
      (As Restated) |  
|----------------------------------------- | ----------------------------------------- | ------------------------------------------------------------------------------------------------------------ | -
|
|Revenue:                                  |                                           |                                                                                                              |  
|Research
      grant and contract revenue |                                           |                                                                                                              | $
|Related party
      services revenue      |                                           |                                                                                                              |  
|                                          |                                           |                                                                                                              |  
|Total revenues                            |                                           |                                                                                                              |  
|Operating
      expenses:                 |                                           |                                                                                                             
|Research
      and development:           |                                           |                                                                                                             
|Genentech
      charges                   |                                           |                                                                                                              |  
|Other                                     |                                           |                                                                                                              |  
|                                          |                                           |                                                                                                              |  
|Total research
      and development      |                                           |                                                                                                              |  
|General and
      administrative expenses |                                           |                                                                                                              |  
|                                          |                                           |                                                                                                              |  
|Loss from
      operations                |                                           |                                                                                                              |  
|Other income
      (expense):             |                                           |                                                                                                             
|Investment
      income                   |                                           |                                                                                                              |  
|Interest
      expense                    |                                           |                                                                                                              |  
|Equity in
      loss of affiliate         |                                           |                                                                                                              |  
|Warrant valuation
      adjustment        |                                           |                                                                                                              |  
|                                          |                                           |                                                                                                              |  
|Total other
      income, net             |                                           |                                                                                                              |  
|                                          |                                           |                                                                                                              |  
|Net loss                                  |                                           |                                                                                                              |  
|Charges related
      to convertible      |                                           |                                                                                                             
|preferred
      stock:                    |                                           |                                                                                                             
|Dividends                                 |                                           |                                                                                                              |  
|Accretion
      to redemption value       |                                           |                                                                                                              |  
|Beneficial
      conversion charge        |                                           |                                                                                                              |  
|                                          |                                           |                                                                                                              |  
|Net loss
      applicable to common       |                                           |                                                                                                             
|stockholders                              |                                           |                                                                                                              | $
|                                          |                                           |                                                                                                              |  
|Basic and
      diluted loss per share    |                                           |                                                                                                             
|applicable

      to common               |                                           |                                                                                                             
|stockholders                              |                                           |                                                                                                              | $
|Weighted
      average shares used in     |                                           |                                                                                                             
|computing
      basic and diluted         |                                           |                                                                                                             
|loss
      per share                      |                                           |                                                                                                              |  

|See accompanying notes
to condensed financial statements.



3
|--------------------------------------------------------------

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

|                                                              | Three months
      Ended 
      March 31, | Period
      from Inception
      (November 27, 1995)
      through March 31, 2003
      (As Restated)
|------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------------------------------------------------------
|
|Cash
      flows from operating activities:                   |                                           |                                                                                                       
|Net loss                                                      |                                           |                                                                                                       
|Adjustments
      to reconcile net loss to net                |                                           |                                                                                                       
|cash used
      in operating activities:                      |                                           |                                                                                                       
|Depreciation
      and amortization                           |                                           |                                                                                                       
|Amortization
      of premiums and                            |                                           |                                                                                                       
|discounts
      on investment securities                      |                                           |                                                                                                       
|Stock compensation
      expense                              |                                           |                                                                                                       
|Note receivable
      allowance                               |                                           |                                                                                                       
|Warrants
      issued to consultants                          |                                           |                                                                                                       
|Non-cash
      warrant valuation adjustments                  |                                           |                                                                                                       
|Equity in
      loss of affiliate                             |                                           |                                                                                                       
|Changes
      in assets and liabilities:                      |                                           |                                                                                                       
|Accounts
      receivable                                     |                                           |                                                                                                       
|Deferred
      costs                                          |                                           |                                                                                                       
|Prepaid
      expenses and other current assets               |                                           |                                                                                                       
|Restricted
      cash                                         |                                           |                                                                                                       
|Employee
      loans receivable                               |                                           |                                                                                                       
|Other
      assets                                            |                                           |                                                                                                       
|Payable
      to Genentech                                    |                                           |                                                                                                       
|Deferred
      revenues                                       |                                           |                                                                                                       
|Deferred
      rent                                           |                                           |                                                                                                       
|Accounts
      payable, accrued liabilities                   |                                           |                                                                                                       
|and
      other long-term obligations                         |                                           |                                                                                                       
|                                                              |                                           |                                                                                                       
|Net cash
      used in operating activities                   |                                           |                                                                                                       
|Cash flows
      from investing activities:                   |                                           |                                                                                                       
|Purchase
      of investment securities                       |                                           |                                                                                                       
|Proceeds
      from sale and maturities of                    |                                           |                                                                                                       
|investment
      securities                                   |                                           |                                                                                                       
|Purchase
      of property and equipment                      |                                           |                                                                                                       
|Investment
      in affiliate                                 |                                           |                                                                                                       
|Long-term
      lease deposits                                |                                           |                                                                                                       
|                                                              |                                           |                                                                                                       
|Net cash
      provided by (used in)                          |                                           |                                                                                                       
|investing
      activities                                    |                                           |                                                                                                       
|Cash flows
      from financing activities:                   |                                           |                                                                                                       
|Proceeds
      from issuance of preferred stock               |                                           |                                                                                                       
|Payments
      under capital lease obligations                |                                           |                                                                                                       
|Proceeds
      from issuance of common stock, net of issuance |                                           |                                                                                                       
|costs
      of $8,594,000                                     |                                           |                                                                                                       
|Return of
      capital on redeemable convertible preferred   |                                           |                                                                                                       
|stock                                                         |                                           |                                                                                                       
|Exercise
      of employee stock options                      |                                           |                                                                                                       
|Employee
      stock purchase plan                            |                                           |                                                                                                       
|Loans from
      Genentech                                    |                                           |                                                                                                       
|                                                              |                                           |                                                                                                       
|Net cash
      provided by financing activities               |                                           |                                                                                                       
|                                                              |                                           |                                                                                                       
|Increase
      (decrease) in cash and cash equivalents        |                                           |                                                                                                       
|Cash and
      cash equivalents at beginning of               |                                           |                                                                                                       
|period                                                        |                                           |                                                                                                       
|                                                              |                                           |                                                                                                       
|Cash and
      cash equivalents at end                        |                                           |                                                                                                       
|of
      period                                               |                                           |                                                                                                       
|                                                              |                                           |                                                                                                       

|4
|-

|VaxGen, Inc.(A
Development Stage Enterprise)


STATEMENTS OF CASH
FLOWS(continued)
|----------------------------------------------------------------------------------

|                                                                  | Three months
      ended 
      March 31, |  | Period
      from Inception (November 27,
      1995) through March 31,
      2003
      (As Restated) |           
|----------------------------------------------------------------- | ----------------------------------------- |  | ------------------------------------------------------------------------------------------------------ | ----------
|
|Supplemental
      schedule of non cash                           |                                           |  |                                                                                                        |           
|investing
      and financing activities:                         |                                           | 
|Dividends
      paid/accrued to redeemable convertible preferred  |                                           | 
|stockholders
      through the issuance of common stock           |                                           |  | $                                                                                                      | 57,000    
|Accretion
      of redemption value of redeemable                 |                                           | 
|convertible
      preferred stock                                 |                                           |  |                                                                                                        | 80,000    
|Recognition
      of beneficial conversion feature                |                                           | 
|of
      redeemable convertible preferred stock                   |                                           |  |                                                                                                        | 327,000   
|Recognition
      of fair value of common stock warrants issued   |                                           | 
|with
      redeemable convertible preferred stock                 |                                           |  |                                                                                                        |          
|Recognition
      of valuation adjustment to fair value of common |                                           | 
|stock
      warrants issued with redeemable convertible           |                                           | 
|preferred
      common stock                                      |                                           |  |                                                                                                        | (5,075,000
|Conversion
      of redeemable convertible preferred stock        |                                           | 
|into
      common stock                                           |                                           |  |                                                                                                        |          
|Reclassification
      of unaccreted portion of financing costs   |                                           | 
|from
      preferred stock to equity upon conversion              |                                           |  |                                                                                                        |          
|Equipment
      acquired through capital leases                   |                                           |  |                                                                                                        |          
|Issuance
      of stock through conversion of                     |                                           | 
|Genentech
      note payable                                      |                                           |  |                                                                                                        |          
|Note
      receivable partially settled by                        |                                           | 
|severance
      obligation                                        |                                           |  |                                                                                                        |          

|See accompanying notes
to condensed financial statements.




5
|---------------------------------------------------------------

|VaxGen, Inc. (A Development
Stage Enterprise)


Notes to Condensed
Financial StatementsMarch 31,
2003(Unaudited)


1. Basis of
Presentation


The unaudited condensed financial
statements of VaxGen, Inc. (a development stage enterprise) (VaxGen,
we, or the Company) 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 amended Annual Report on Form 10-K/A for the year
ended December 31, 2002, as filed on November 19, 2003. The results of operations for the three months ended March 31,
2003, are not necessarily indicative of the operating results for the full year.


We have presented the financial
statements on the basis of a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. However, we may not
be able to continue our operations because we have experienced significant operating
losses, which we expect, will continue, and have insufficient sources of funding for our
operations. In order for us to remain a going concern we will require significant
additional funding in the near term. We are exploring opportunities to raise capital
through equity offerings, strategic alliances and other financing vehicles. However, there
can be no assurance that any such additional financing will be available to us on the
terms that we deem acceptable, if at all. The financial statements do not include any
adjustments relating to the recoverability and classification of liabilities that might be
necessary should we be unable to continue as a going concern. We expect the cash and cash
equivalents at March 31, 2003, will be sufficient to fund operations according to our
current plan through November 2003. External cash requirements are expected to be lower
during the last half of 2003 because of anticipated revenues from our contract with the
National Institutes of Health (NIH) related to the development of an anthrax
vaccine and other revenue sources. Should managements plan not develop as
anticipated, we will restrict additional planned activities and operations, as necessary,
to sustain operations and conserve cash resources.


Accounting for Asset
Retirement Obligations


On January 1, 2003, we adopted SFAS
No. 143, Accounting for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or normal use of the assets. SFAS No. 143
requires that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of fair value
can be made. The fair value of the liability is added to the carrying amount of the
associated asset and this additional carrying amount is depreciated over the life of the
asset. The adoption of SFAS 143 did not have a material effect on our financial condition
or results of operations.



6
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. Restatement


      In October 2003, the
        Company discovered an error related to the classification and valuation
        of warrants issued in connection with the Companys Series A Redeemable
        Convertible Preferred Stock. As a result, the financial statements for
        the fiscal year 2002 and for the second, third and fourth fiscal quarters
        of 2001 were restated in the Companys Form 10-K/A filed on November
        19, 2003. Financial statements for the first fiscal quarter of 2003 and
        2002 are restated in this Form 10-Q/A. Restated financial statements reflect
        adjustments relating to the recognition, classification and valuation
        of warrants and beneficial conversion features relating to the Companys
        Series A Redeemable Convertible Preferred Stock financing, which closed
        in May 2001. These warrants provide for cash redemption by the warrant holders upon
        the occurrence of certain events outside the control of the Company. As
        such, the Company has reclassified these warrants from equity to a liability.
        As a result of the restatement, the net loss applicable to common stockholders
        decreased by $4,748,000 for the three months ended March 31, 2003 and by $7,000 for the three months ended March 31, 2002.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | For
the three months ended March 31, 2003, the net loss applicable to common stockholders
decreased to $2,037,000 from $6,785,000 and basic and diluted loss per share applicable
to common stockholders decreased to $(0.13) from $(0.43), each as compared to the amounts
previously reported by VaxGen on its Form 10-Q filed on May 15, 2003.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | For
the three months ended March 31, 2002, the net loss applicable to common stockholders
decreased to $7,692,000 from $7,699,000 and basic and diluted loss per share applicable
to common stockholders was unchanged at $(0.54) each as compared to the amounts
previously reported by VaxGen on its Form 10-Q filed on May 15, 2003.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The restated financial
        statements reflect the following adjustments during the past two fiscal
        years and the first quarter of the current fiscal year:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
2001, the Company reclassified $3,507,000, the initial value assigned to warrants issued
in connection with the Companys Series A Redeemable Convertible Preferred Stock
financing, from stockholders equity to current liabilities.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Beginning
on June 30, 2001 and in each subsequent quarter the restated financial statements reflect
a non-cash expense or credit based on the fair market value of the warrants measured as
of the end of each quarter, and a corresponding change in the current liability
representing the value assigned to the warrants noted above.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The value
of beneficial conversion features totaling $11,795,000, originally recorded as
immediate deemed dividends to preferred stockholders of $734,000 in 2001 and
$11,061,000 in 2002 has been reclassified to Series A Redeemable Convertible
Preferred Stock and is now amortized over the period ending on the redemption
date, May 23, 2004. Upon conversions of Series A Redeemable Convertible
Preferred Stock prior to the redemption date, of which two occurred in 2002, the
related unamortized value of beneficial conversion features and the unamortized
value of the warrants have been recorded as beneficial conversion feature
charges of $10,686,000 in 2002 and $0 for the first quarter of 2003.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The principal effects of these
adjustments on the accompanying financial statements are set forth below:

|                                                       | Condensed
      Balance Sheet 
      March 31, 2003 | 
|------------------------------------------------------ | --------------------------------------------------- | 
|
|
|Warrant
      valuation obligation                     |                                                     | 
|Total current
      liabilities                        |                                                     | 
|Redeemable
      convertible preferred stock           |                                                     | 
|Additional
      paid-in capital                       |                                                     | 
|Deficit accumulated
      during the development stage |                                                     | 
|Total stockholders
      equity                       |                                                     | 

|                                                                                    | CONDENSED
      STATEMENTS OF OPERATIONS | 
|----------------------------------------------------------------------------------- | ---------------------------------------- | 
|
|
|
|
|
|                                                                                    |                                          | 
|Warrant
      valuation adjustment                                                  |                                          | 
|Total
      other income, net                                                       |                                          | 
|Net
      loss                                                                      |                                          | 
|Accretion of redemption value 
     of redeemable convertible 
     preferred stock |                                          | 
|Beneficial
      conversion charges                                                 |                                          | 
|Net
      loss applicable to common                                                 |                                          | 
|stockholders                                                                        |                                          | 
|                                                                                   
|Basic
      and diluted loss per share                                              |                                          | 
|applicable
      to common                                                          |                                          | 
|stockholders                                                                        |                                          | 
|Weighted
      average shares used in                                               |                                          | 
|computed
      basic and diluted                                                    |                                          | 
|loss
      per share                                                                |                                          | 

|7
|-

|                                                                                                                                                                     | CONDENSED
      STATEMENTS OF CASH FLOWS
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------
|
|
|
|Net
      loss                                                                                                                                                       |                                         
|Non-cash
      warrant valuation adjustments                                                                                                                         |                                         
|                                                                                                                                                                     |                                         
|Supplemental
      schedule of non-cash
      investing and financing activities:                                                                                    |                                         
|                                                                                                                                                                     |                                         
|Accretion
      of redemption value of
           redeemable convertible preferred stock                                                                             |                                         
|Recognition
      of beneficial conversion
           feature of redeemable convertible
           preferred stock                                                   |                                         
|Recognition
      of valuation adjustment to fair
           value of common stock warrants issued
           with redeemable convertible preferred
           stock |                                         
|Reclassification
      of unaccreted portion of
           financing costs from preferred stock 
           to equity upon conversion                                |                                         

|3. Stock-Based
Compensation


We account for stock-based
compensation based on the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25), which
states that, for fixed plans, no compensation expense is recorded for stock options or
other stock-based awards to employees that are granted with an exercise price equal to or
above the estimated fair value per share of our common stock on the grant date. In the
event that stock options are granted with an exercise price below the estimated fair value
of our common stock at the grant date, the difference between the fair value of our common
stock and the exercise price of the stock option is recorded as deferred compensation.
Deferred compensation is amortized to compensation expense over the vesting period of the
stock option. We have adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation and
Statement of Financial Accounting Standards No. 148, Accounting for Stock Based
CompensationTransition and Disclosurean Amendment of FASB Statement No.
123, which requires compensation expense to be disclosed based on the fair value of
the options granted at the date of the grant. If we had accounted for our stock based
compensation plans using a fair-value-based method in accordance with SFAS 123, our net
loss and net loss per share would approximate pro forma amounts indicated in the following
table:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                       | Three months
      ended March 31,
|------------------------------------------------------ | ----------------------------------
|
|Net
      loss applicable to common                    |                                   
|stockholders                                           |                                   
|Add: Stock-based
      employee compensation           |                                   
|expense included
      in reported net loss,           |                                   
|net of related
      tax effects                       |                                   
|Less: Total
      stock-based employee compensation    |                                   
|expense determined
      under fair value based method |                                   
|for all awards,
      net of related tax effects       |                                   
|                                                       |                                   
|Net loss
      applicable to common                    |                                   
|stockholderspro
      forma                           |                                   
|                                                       |                                   
|Loss per
      sharebasic and diluted                 |                                   
|                                                       |                                   
|Loss per
      sharebasic and diluted, pro forma      |                                   

|4. 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. Potential common shares include dilutive shares
issuable upon the exercise of outstanding common stock options, warrants, and shares of
our Series A 6% redeemable cumulative convertible preferred stock, which are listed below
assuming that the shares of the convertible preferred stock converted into shares of our
common stock. For all periods presented, such potential common shares were excluded from
the computation of diluted net loss per share, as their effect is antidilutive.

8
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Potentially dilutive securities
include:
|----------------------------------------

|                                        | March
      31,
|--------------------------------------- | ---------------
|
|Options
      to purchase common stock  |                
|Warrants
      to purchase common stock |                
|Convertible
      preferred stock       |                
|Total                                   |                

|5. Anthrax Contract


      In September 2002,
        we were awarded a contract from the National Institute of Allergy and
        Infectious Diseases (NIAID) to develop a new anthrax vaccine
        candidate and to create a feasibility plan to manufacture an emergency
        stockpile of 25 million doses of the vaccine. The period of performance
        of the contract is from September 30, 2002 through December 31, 2003.
        The government is expected to award separate contracts in 2003 to provide
        advanced development of the vaccine and to manufacture the stockpile.
        The goal of the government contract is to develop a modern 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, we will be awarded $16.2 million, upon satisfaction of
        certain milestones, to advance the development of a vaccine candidate
        initially developed by the United States Army Medical Research Institute
        of Infectious Diseases (USAMRIID). Performance under the current
        contract may position us to be awarded additional contracts later on in
        2003 to advance the product development of an anthrax vaccine; conduct
        a large-scale Phase II clinical trial; and manufacture an emergency stockpile
        of anthrax vaccine under an Investigational New Drug Application (IND),
        however, we cannot be certain we will be awarded these contracts. During
        the three months ended March 31, 2003, we recognized a total of $667,000
        in revenue related to the completion of the first contractual milestone.
        We will recognize revenue based on the completion of future milestones,
        which have been specified by NIAID. Revenues and direct costs (not to
        exceed revenues) associated with milestones which have not been substantiated
        through objective evidence from NIAID, will be deferred on our balance
        sheet. At March 31, 2003, we had $1,385,000 of deferred costs and $3,304,000
        of deferred revenues related to this contract.


6. Celltrion Joint
Venture


As of March 31, 2003, the South
Korean investors had contributed approximately $43.75 million in cash to Celltrion of the
$50.0 million in cash that the joint venture agreement between Celltrion and us 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 48.9% interest in
Celltrion, although if funding is completed as intended, our interest will be
approximately 44%. In the event that AIDSVAX is ultimately licensed for commercial use and
the Incheon facility is validated and licensed to produce AIDSVAX, Celltrion would produce
bulk material that will be sold to us. Celltrion could also be used to manufacture other
products that VaxGen may develop in the future or products from third parties.


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 funding of the $7 million capital contribution was
completed in December 2002. The capitalization of VCI has been used to design and
construct the manufacturing facility adjacent to VaxGens research facility in South
San Francisco, California. We plan to use this facility to manufacture our anthrax vaccine
if we are awarded a U.S. Government contract to produce an emergency stockpile of the
vaccine. We will supervise the design and construction of this manufacturing facility and
are responsible for all costs of validation, operation and licensure of the facility. At
the end of each calendar year, VCI will issue to us one share of VCI common stock for
every dollar expended by us in connection with the validation, operation and licensure of
the facility. Based on our direct ownership interest of approximately 23% in VCI as of
March 31, 2003, we have determined that the equity method of accounting should be applied.
During the three months ended March 31, 2003, we incurred approximately $1,870,000 in
costs, primarily equipment purchases, that have been accounted as a capital credit. In
addition, equity in losses of VCI of $128,000 has been recognized.


9
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. Related Party
Transactions


As of March 31, 2003, 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 per the
executives employment agreement will be forgiven at the rate of 25% per year for
each of the first four full years of the executives employment with the Company. 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. In May 2003, the executive was in the process of making
arrangements to repay the $55,000 loan. Both loans were made to assist in the purchase of
residences in connection with employment-related relocations.


8. Comprehensive Loss
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     |   | Three
      Months Ended
      March 31,
|---------------------------------------------------- | - | ----------------------------------------
|
|Net
      loss                                       | $ | (1,573,000)                             
|Net
      unrealized losses on investment securities |   | (112,000)                               
|Comprehensive
      loss                             | $ | (1,685,000)                             

|10
|--

|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 ability to raise additional capital to
finance our operations, forecasts regarding the length of time current cash resources will
enable us to continue our operations in the absence of additional financing, the timing of
completion and announcement of the results of our Thai Phase III clinical trial of
AIDSVAX, the timing and progress of completion of our anthrax, smallpox or HIV/AIDS
vaccine candidates, the timing and amount of any government awards relating to an anthrax
vaccine, our ability to obtain additional financing from private sources, from
governmental agencies or from philanthropic organizations to continue to develop AIDSVAX
and Celltrions ability to complete construction of its manufacturing facilities and
its ability to manufacture biopharmaceutical products. Reference should be made to the
section of this report entitled Risk Factors, and to our amended Annual Report
on Form 10-K/A, filed with the Securities and Exchange Commission on November 19, 2003
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 do not undertake and specifically
decline any obligation to update or to publicly announce the results of any revisions to
these forward-looking statements to reflect future events or developments.


Restatement


      In October 2003, the
        Company discovered an error related to the classification and valuation
        of warrants issued in connection with the Companys Series A Redeemable
        Convertible Preferred Stock. As a result, the financial statements for
        the fiscal year 2002 and for the second, third and fourth fiscal quarters
        of 2001 were restated on our Form 10-K/A filed on November 19, 2003.
        Financial statements for the first fiscal quarter of 2003 and 2002 are
        restated in this Form 10-Q/A. Restated financial statements reflect adjustments
        relating to the recognition, classification and valuation of warrants
        and beneficial conversion features relating to the Companys Series
        A Redeemable Convertible Preferred Stock financing, which closed in May
        2001. The warrants provide for cash redemption by the warrant holders upon occurrence
        of certain events outside the control of the Company. As such, the Company
        has reclassified the warrants from equity to a liability.


The following discussion should be
read in conjunction with the accompanying restated financial statements as of and for the
three month periods ended March 31, 2003 and 2002. For additional information on the
restatement, refer to note 2 to the Financial Statements.


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 affects 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:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Persuasive
evidence of an arrangement exists;
|- | ---------------------------------------------

| | Delivery
has occurred or services have been rendered;
|- | -----------------------------------------------------

| | The
price is fixed and determinable; and
|- | ----------------------------------------

| | 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.


      In addition, we adopted
        the guidance provided by the SEC, which addresses the proper recognition
        of service revenue. We believe that this is the appropriate treatment
        of our contract with the NIH to develop a new anthrax vaccine. Under this
        arrangement we deferred revenues and expenses on our balance sheet until
        we are able to provide objective evidence that we have attained the specified
        milestones established by the NIH. Costs are deferred only to the extent
        of expected revenues. At March 31, 2003, we had $1,385,000 of deferred direct
        costs and $3,304,000 of deferred revenues related to this agreement.


11
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Investment in Celltrion
and VCI


We account for our investment in the
Celltrion Joint Venture using the equity method of accounting. We do not own a majority of
the voting stock nor will we be the primary beneficiary of the Joint Venture. Since the
historical cost of the non-monetary assets that we contributed is zero, there is no
investment in Celltrion recorded on our balance sheet. Additionally, because we have no
further funding obligation to the Joint Venture we will not pick up equity in earnings
(loss) of the Joint Venture until such time that losses previously not recognized have
been recovered.


We also account for our investment in
VCI using the equity method of accounting. Similar to Celltrion, VCIs parent, we do
not own a majority of the voting stock nor are we currently the primary beneficiary of
VCI. Under the terms of our agreement we receive one share for every dollar expended by us
for certain costs incurred by us related to VCI, which to date have principally been
capital equipment. We have an investment in VCI of approximately $2.0 million at March 31,
2003. Additionally, we record our share of equity in losses of VCI based upon and limited
to our direct investment in VCI which is 23% at March 31, 2003. Recoverability of our
investment in VCI is monitored on a quarterly basis for impairment. At March 31, 2003, no
indicators of impairment were detected.


Valuation of Long-Lived
Assets


The carrying value of long-lived
assets, including our investment in VCI, is reviewed on a regular basis for the existence
of facts or circumstances both internally and externally that may suggest impairment.
Specific potential indicators of impairment include:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a
significant decrease in the fair value of an asset;
|- | -----------------------------------------------------

| | a
significant change in the extent or manner in which an asset is used or       a
significant physical change in an asset;
|- | --------------------------------------------------------------------------------------------------------------------------

| | a
significant adverse change in legal factors or in the business climate       that affects
the value of an asset;
|- | ------------------------------------------------------------------------------------------------------------------

| | a
adverse action or assessment by the U.S. Food and Drug Administration or       another
regulator; and
|- | -------------------------------------------------------------------------------------------------------

| | an
accumulation of costs significantly in excess of the amount originally       expected to
acquire or construct an asset.
|- | --------------------------------------------------------------------------------------------------------------------------

|When we determine that the carrying
value of intangible assets or long-lived assets are not recoverable based upon the
existence of one or more of the above indicators of impairment, we may be required to
record impairment charges for these assets that have not been previously recorded.



OVERVIEW


In November 1995, VaxGen was formed
to continue development of AIDSVAX, a preventive vaccine candidate against HIV/AIDS. At
that time, Genentech, Inc. (Genentech) licensed to us the technology necessary
for completing development and commercialization of AIDSVAX under a license agreement.
Currently, Genentech owns approximately 10% of our outstanding common stock.


Until 2002, our work was focused on
developing and testing AIDSVAX. We broadened our operations in 2002 with the formation of
Celltrion and the initiation of programs to develop preventive vaccines against anthrax
and smallpox.


We have developed two formulations of
AIDSVAX, which 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
East Asia (subtype E). We have commenced two Phase III clinical trials, one in North
America and Europe to determine the efficacy AIDSVAX B/B and one in Thailand, to determine
the efficacy of AIDSVAX B/E.


In October 1999, we completed the
initial inoculation and enrollment of over 5,400 trial volunteers for the North
American/European Phase III clinical trial, which was conducted in 59 clinical centers and
completed the clinical trial as planned in December 2002. On February 24, 2003, we
announced that the study did not show a statistically significant reduction of HIV within
the study population as a whole, which was the primary endpoint of the trial. Although we
intend to continue analyzing data from this trial and to complete a second Phase III trial
in Thailand, any additional development of AIDSVAX will depend on whether we obtain
funding from sources such as governmental agencies and philanthropic organizations.
Beginning in April 2003, NIAID and the Centers for Disease Control and Prevention
(CDC) have been supporting a series of meetings with us to examine data from
the trial to independently determine if any further government supported research and
development are warranted.

12
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In August 2000, we completed the
initial inoculation and enrollment of over 2,500 volunteers for the Thai Phase III
clinical trial, which is being conducted in 17 clinical centers in Bangkok. We are
scheduled to complete this trial during the second quarter of 2003 and expect to announce
clinical results during the second half of 2003. The Food and Drug Administration
(FDA) has designated our HIV/AIDS vaccine candidates Fast Track Products for
the prevention of HIV infection. The Fast Track designation could enable more rapid
regulatory review of AIDSVAX if and when we submit a Biologics License Application
(BLA).


      In February 2002, we and
        a group of South Korean investors announced the formation of a joint venture,
        called Celltrion, to build and operate a manufacturing facility in Incheon,
        South Korea. As our part of the investment in the joint venture, we are
        providing mammalian cell culture technology and biologics production expertise.
        Celltrion contributed funds to a joint venture, VCI, for the purpose of
        funding the first $7,000,000 of construction cost for a smaller manufacturing
        facility adjacent to our research facility in South San Francisco, California.
        This smaller facility was originally intended to support the licensure
        and commercial launch of AIDSVAX, if the North American and European clinical
        trial was successful, but is also designed to support the manufacture
        of other biopharmaceutical products, including our anthrax vaccine candidate
        or products from third parties. 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 we abandon the development of AIDSVAX, we believe the
        Incheon facility could be used to manufacture other biopharmaceutical
        products, in which we would share in the profits based on our percentage
        ownership. After all rounds of financing are complete, our fully diluted
        ownership of Celltrion will be approximately 44%. Although we have no
        further funding obligation to Celltrion, we are responsible for any additional
        capital equipment costs in excess of $7,000,000 for which we receive equivalent
        value in common stock and certain future costs related to the validation,
        operation and licensure of VCIs manufacturing facility in South
        San Francisco, California.


In September 2002, we were awarded a
contract from the National Institute of Allergy and Infectious Diseases
(NIAID) to develop a new anthrax vaccine candidate and to create a feasibility
plan to manufacture an emergency stockpile of 25 million doses of the vaccine. The period
of performance of the contract is from September 30, 2002 through December 31, 2003. The
goal of the government contract is to develop a modern 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, we will be awarded $16,200,000,
upon satisfaction of certain milestones, to advance the development of a vaccine candidate
initially developed by the USAMRIID. If results from the Phase I clinical trial are
positive, NIAID may elect, at least 60 days prior to December 31, 2003, to extend the
contract. If the contract were to be extended, we would be eligible for an additional
contract award of $15,000,000 beginning in late 2003 and running through 2007 as a
continuation of the current contract to support a Phase II clinical trial. Performance
under the current contract may position us to be awarded additional contracts expected to
be awarded in 2003 to advance the product development of an anthrax vaccine; conduct a
large-scale Phase II clinical trial; and manufacture an emergency stockpile of anthrax
vaccine under an Investigational New Drug Application (IND).


Also in September 2002, we were
awarded a $1,000,000 task order to provide AIDSVAX under a supply contract to develop HIV
vaccines for 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 earned in 2003. There are two government options, if exercised,
which would increase the contract award to a total of $3,300,000. In February 2003, the
NIAID exercised the first option to take delivery of the first two-thirds of the vaccine
supply. In April 2003, the NIAID exercised their second option to take delivery of the
remaining balance of the vaccine supply in September 2003. The start date of the clinical
trial has been delayed due to matters outside of our control, but is now currently
scheduled to begin enrolling volunteers during the fourth quarter of 2003 and will combine
our AIDSVAX B/E vaccine with ALVAC, an AIDS vaccine candidate being developed by Aventis
Pasteur.


In December 2002, we announced that
we and Chemo-Sero-Therapeutic Research Institute (Kaketsuken) of Kumamoto,
Japan, entered into initial agreements that will allow us to begin development of
Kaketsukens attenuated smallpox vaccine, LC16-Kaketsuken, for use in the United
States, subject to approval by the FDA. We believe, that the vaccine, which was licensed
in Japan in 1980, will have a better safety profile, yet be equally effective, compared to
smallpox vaccines available in the United States or elsewhere. We are currently in
negotiations with Kaketsuken to define the specific commercial terms of our relationship.


Since inception, our research and
development expenses have been applied to two product development projects: AIDSVAX B/B
and AIDSVAX B/E, our HIV vaccine candidates, and a program to develop a new anthrax
vaccine for the United States Government.


We have incurred total costs of
$83,007,000 in research and development of AIDSVAX since we began operations in late 1995.
For the three months ended March 31, 2003, we incurred costs of $1,173,000 towards the
research and development of AIDSVAX. The most significant research and development costs
incurred for the development of AIDSVAX include: the costs to conduct the Phase III
clinical trials, the cost of the clinical materials, the costs associated with the
laboratory activities required to support the trials, the advanced development of our
manufacturing process, the establishment of a regulatory and quality systems group to
support the possible licensure of the products, and the costs to refine the manufacturing
process of the vaccine. In 2003, we expect the development cost for AIDSVAX will be
approximately $3,900,000. The costs are primarily associated with the conclusion of the
Thai Phase III clinical trial.


The anthrax vaccine project began
during the fourth quarter of 2002 when the NIH awarded us a cost reimbursement contract to
develop a new vaccine to prevent anthrax infection. As of March 31, 2003, we have incurred
total costs of $1,844,000 towards this project, of which $1,385,000 has been deferred
along with the related revenue until the milestones that are required have been met. We
expect to incur approximately additional costs of approximately $6,000,000 during 2003, of
which we expect to receive be reimbursement for all our direct expenses, coverage for a
certain part of our overhead and general and administrative expenses and a fixed profit
amount.


13
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In February 2003, we received
official notification from NIAID indicating that we met the program requirements
stipulated under the first milestone of the anthrax vaccine development contract.
Milestone 1 required us to produce the pilot lot of the anthrax vaccine clinical material
amongst other associated activities. Along with Milestone 1, we continue to perform, in
parallel, against the other milestones required under the contract with NIAID. Thus far,
we are performing within budget and on schedule.


We cannot reasonably estimate the
nature, timing and cost of completing these product development projects due to the
numerous risks and uncertainties associated with developing vaccines, including:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | intense
and changing governmental regulation, both foreign and domestic, and social and political
considerations with respect to drug development, particularly bio-terrorism and AIDS
research;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
fact that the anthrax and smallpox vaccine projects are in the very early stages of
development and that we have only limited experience in developing vaccines and products
other than AIDSVAX;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
uncertainty of future pre-clinical and clinical study results and the uncertainty of the
timing of enrolling volunteers in vaccine trials, particularly in large scale clinical
vaccine trials enrolling numerous volunteers in multiple cities and in various countries;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
possibility of delays in the collection of clinical trial data;
|- | -------------------------------------------------------------------

| | the
uncertainty related to our manufacturing facilities, which are in an       early stage of
construction; and
|- | ---------------------------------------------------------------------------------------------------------------

| | various
risks related to our reliance on third parties, including       Genentech, Celltrion and
government entities.
|- | ---------------------------------------------------------------------------------------------------------------------

|See the section entitled Risk
Factors for a more detailed discussion of these risks and uncertainties.




RESULTS OF OPERATIONS


To date, we have generated $3,965,000
in revenue from a contract from NIAID to develop a new anthrax vaccine, grants from the
NIH for research and development of HIV vaccines along with funds received through a
collaborative agreement with BBI Biotech Research Laboratories, Inc. (BBI
Biotech), which is funded by NIAID, to obtain and store clinical specimens from our
North American/European Phase III clinical trial; and from service agreement fees from
Cellltrion.


Three months ended March 31, 2003
compared to the three months ended March 31, 2002


Revenue


Research grant and contract revenue
increased from $18,000 for the three months ended March 31, 2002 to $1,112,000 for the
three months ended March 31, 2003. The revenue for the three months ended March 31, 2003
primarily consisted of contract revenue with NIAID related to the completion of the first
milestone in the development of a new anthrax vaccine which amounted to approximately
$667,000; funds received as reimbursements under a collaborative agreement with BBI
Biotech which amounted to approximately $222,000; and two Small Business Innovation
Research (SBIR) grants that are funded by NIAID which amounted to
approximately $209,000. Related party service fee revenue of $101,000 was earned as part
of a service agreement with Celltrion. Revenue earned in one period is not indicative of
revenue to be earned in future periods.


Research and Development
Expenses


Research and development expenses
decreased 14%, from $4,657,000 for the three months ended March 31, 2002 to $4,025,000 for
the three months ended March 31, 2003. The net decrease is due primarily to a reduction of
$1,302,000 in expenses related to our clinical trials as a result of the completion of the
North American and European clinical trial along with a decrease of $246,000 in fees paid
to our licensing partner, Genentech, offset by an increase in personnel expenses of
$1,011,000. The increase in personnel costs included salary and benefits expenses required
to staff a regulatory and quality services organization and the staffing necessary to
develop, validate and operate a manufacturing facility. Both of the organizations have
been focused on the development efforts of all anthrax and smallpox programs. We expect
research and development expenses to increase for the foreseeable future if we are able to
advance the product candidates we are developing into clinical development and if we are
able to raise necessary funds to support such programs.


General and
Administrative Expenses


General and administrative expenses
increased 34%, from $2,928,000 for the three months ended March 31, 2002 to $3,909,000 for
the three months ended March 31, 2003. The increase was primarily due to higher spending
for occupancy, personnel and insurance costs. During the third quarter of 2002, we entered
into a sublease agreement to occupy an additional 50,000 square feet of space to establish
a manufacturing facility and the laboratory facilities needed to support a manufacturing
operation. Compensation costs increased due to the hiring of additional staff required to
support the expanding infrastructure of our operations. Finally, insurance premium cost,
mainly in the product liability and directors and officers liability programs, increased
due to current market conditions in the insurance industry. We expect general and
administrative expenses will be maintained at similar levels but will be adjusted
according to the level of our research and development activity and planned operations.


14
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Total Other Income, Net


Other income, net, increased 668%,
from $670,000 for the three months ended March 31, 2002 to $5,148,000 for the three months
ended March 31, 2003. The increase is primarily due to the effect of mark-to-market
adjustments relating to the valuation of warrants issued in our 2001 Redeemable
Convertible Preferred Stock financing. In addition, there was an offsetting decrease in
investment income of $403,000 that was primarily attributable to lower average balances of
cash, cash equivalents and investment securities, along with lower yields. The decrease
was also due to the recording of an equity loss in affiliate of $128,000 for the three
months ended March 31, 2003 as compared to $0 for the three months ended March 31, 2002.



LIQUIDITY AND CAPITAL
RESOURCES


Our primary financing requirements
are for (i) capital equipment expenditures related to the manufacturing facility in South
San Francisco, California; (ii) funding our day-to-day working capital requirements; and
(iii) research and development costs.


Cash, cash equivalents and investment
securities were $10,144,000 and our working capital position was $4,924 at March 31,
2003. We have financed our operations since inception primarily through capital provided
by Genentech, sales of our common stock and through an issuance of convertible preferred
stock. Genentech has no obligation to provide us future funding.


We completed our initial public
offering in July 1999, in which we sold 3,565,000 shares of common stock 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 helped support our on-going operations along with our AIDSVAX clinical trials.
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 Preferred
Stock at a price of $1,000 per share, convertible into shares of our common stock, at an
initial conversion price of $23.2185 per share. In the event that there is no earlier
conversion, we must redeem the Series A 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. Expenses relating to the transaction were approximately $1,700,000, resulting in
net proceeds to us of approximately $18,300,000. The proceeds from the Series A Preferred
Stock financing have been used to develop our commercial-scale manufacturing facilities
and general corporate purposes. As of March 31, 2003, 3,800 shares of Series A Preferred
Stock remained outstanding.


In connection with the preferred
stock financing, we issued warrants for the purchase of 297,177 shares of our common stock
to our preferred stock investors. The warrants, which expire on May 23, 2006, 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 to the terms of
the warrants. Any future financing at a price below $14.133 would cause a further
adjustment in the number of shares issuable upon exercise and the exercise price. These
warrants provide for a cash put to the Company upon the occurrence of certain events
outside the control of the Company.


Since our inception, investing
activities, other than purchases and sales of investment securities, have consisted
entirely of equipment acquisitions and leasehold improvements. From inception through
March 31, 2003, our gross investment in equipment and leasehold improvements was
$6,721,000. The increase in equipment and leasehold improvements has been primarily due to
the development of our research and development laboratories and the establishment of
office facilities. Net cash used in operating activities for the three months ended March
31, 2003 was $6,321,000, primarily representing expenditures for research and development
costs and general and administrative expenses in excess of revenues from grants and
contracts as compared to $5,973,000 for the three months ended March 31, 2002.


In October 1999, we entered into
collaboration with the CDC to support research at six of the 54 clinics in the United
States conducting Phase III clinical trials of our AIDSVAX vaccine. The participating
sites implemented our Phase III protocol, as well as conducted epidemiological, social and
behavioral research, which will be shared by the Company and the CDC. The sites were
compensated directly by the CDC for the clinical costs. 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, to obtain and store
clinical specimens from our North American/European Phase III clinical trial of AIDSVAX.
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 sample collection. We recognized $222,000 and $0
from this collaborative agreement for the three months ended March 31, 2003 and 2002,
respectively.

15
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Also in 2001, we were awarded an SBIR
grant from the NIH to continue the development of a vaccine designed to prevent infection
by HIV subtype C, the most widespread form of the virus, which is predominantly found in
Africa, China and India. The SBIR Fast Track grant provides up to $1,131,000 for the
development program. We recognized approximately $101,000 and $18,000 for the three months
ended March 31, 2003 and 2002, respectively. The NIH grant will allow us to create and
conduct laboratory tests of a subtype C vaccine that could be used alone in Southern
Africa and India, or it could be combined with a vaccine against the B and E subtypes for
other 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 formed a joint venture, named Celltrion, which intends to raise up
to approximately $122,000,000, consisting of up to approximately $92,000,000 in cash and
an in-kind investment of mammalian cell culture technology and production support valued
at $30,000,000, to build and operate a facility in Incheon, South Korea. The joint venture
also funded a capital contribution of $7,000,000 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 biopharmaceutical products made through mammalian-cell fermentation.


      As part of our investment
        in the joint venture, we provided mammalian cell culture technology and
        biologics production expertise. We currently are Celltrions single-largest
        stockholder. Although we have no further funding obligation to Celltrion,
        we are responsible for any additional capital equipment costs in excess
        of $7,000,000; and certain costs related to the validation, operation
        and licensure of VCIs manufacturing facility in South San Francisco,
        California. The South Korean partners will provide the funding necessary
        to design and construct both facilities and to validate and operate the
        Incheon facility. After all planned rounds of financing are completed,
        our fully diluted ownership of Celltrion will be approximately 44%. As
        of March 31, 2003, the South Korean investors had contributed approximately
        $43,750,000 in cash to Celltrion of the $50,000,000 in cash that the joint
        venture agreement between us and Celltrion, and secured a $40,000,000
        loan with a Korean bank. As a result, we currently have a 48.9% interest
        in the joint venture.


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. Under the initial phase of
the NIAID contract, we will be awarded $16,200,000, upon satisfaction of certain
milestones, to advance the development of a vaccine candidate initially developed by the
USAMRIID. During the first quarter of 2003, we recognized a total of $667,000 in revenue
related to the completion of the first contractual milestone. We will recognize revenue
based on the completion of future milestones, which have been specified by NIAID. Revenues
and costs (not to exceed revenues) associated with milestones which have not been
substantiated through objective evidence from NAID, will be deferred on our balance sheet.
As of April 2003, we received payments of approximately $1,845,000 from NIAID since the
award date for this contract.


Also in September 2002, we were
awarded a $1,000,000 task order to supply AIDSVAX B/E under an existing general contract
to develop HIV vaccines for a forthcoming Phase III trial in Thailand funded by NIAID and
conducted by WRAIR. There are two government options, which, if exercised, would increase
the total contract award to $3,300,000. In February 2003, NIAID exercised the first option
to take delivery of the first two-thirds of the vaccine supply. In April 2003, NIAID
exercised their second option to take delivery of the remaining balance of the vaccine
supply in September 2003. The majority of the contract award will be earned in 2003.


In October 2002, the NIH awarded us
an SBIR grant to characterize the sequences of the viruses responsible for recent HIV
infections. The viruses are being sequenced from blood specimens obtained from volunteers
who became infected during their participation in our North American/European Phase III
clinical trial and is intended to help identify Subtype B virus variants that should be
included in future vaccine formulations. The grant award for the first phase of the grant
is $210,000. We recognized approximately $108,000 in grant revenue for the three months
ended March 31, 2003. Funding for the first year of the second phase is proposed at
approximately $750,000 and we expect the grant will be awarded during the second quarter
of 2003.


We believe that our existing cash and
cash equivalents and investment securities, together with investment income, the funds
from our existing government contracts and grants, will enable us to meet our forecasted
expenditures through November 2003. However, we will need to raise additional funds to
support our product development programs, other business opportunities and our general
operations.


We will also need to raise additional
capital if the Thai Phase III clinical trials are delayed or are more costly than
currently anticipated, or if commercialization is delayed for any other reason. Our future
capital requirements are also dependent on several other factors, including:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
progress of other internal research and development projects;
|- | -----------------------------------------------------------------

| | the
timing and ability to negotiate government contracts or grants;
|- | -------------------------------------------------------------------

| | the
need for leasehold improvements to facilities and the purchase of       additional
capital equipment;
|- | ---------------------------------------------------------------------------------------------------------

| | the
ability to attract and negotiate business development opportunities;
|- | ------------------------------------------------------------------------

| | the
timing of collection of accounts receivable from our government       contracts and
grants; and
|- | ---------------------------------------------------------------------------------------------------

| | the
timing of revenue, from our vaccine candidates.
|- | ---------------------------------------------------

|16
|--

|We cannot assure you that we will be
able to raise funds when needed, or that such funds will be available on satisfactory
terms. If we are unable to raise additional capital, we will have to curtail or cease
operations. We will restrict additional planned activities and operations, as necessary,
to sustain operations and conserve cash resources.




RISK FACTORS


      You should carefully
        consider the following risk factors, in addition to the other information
        set forth in this Quarterly Report on Form 10-Q/A, before making any investment
        decisions regarding our common stock. Each of these risk factors could
        adversely affect our business, operating results and stock price.


Risks Relating to our
Business


We may need to raise
additional capital, and any inability to raise required funds could harm our business.


As of March 31, 2003, we had
$10,144,000 of cash and cash equivalents and investment securities. We believe that our
existing cash and cash equivalents and investment securities, together with investment
income and funds primarily from existing government contracts and grants, will enable us
to meet our forecasted expenditures through November 2003, but our existing capital
resources will not be sufficient to commercialize AIDSVAX. In addition, we have based this
estimate on assumptions that may prove to be wrong. In addition, our accountants have
expressed doubt about our ability to continue as a going concern. Even if we are
technically able to successfully develop AIDSVAX in light of our recent clinical trials,
we expect additional development efforts and clinical trials will add several years to the
development timeline and result in substantial additional expense. We are unable to fund
these efforts with our current financial resources. As a result, we will need to obtain
additional funding to support our vaccine candidates as well as to continue operations
past November 2003. We do not know if additional financing will be available, at all or on
acceptable terms. Any additional equity financing will be dilutive to existing
stockholders, and debt financing, if available, may involve restrictive covenants.
Collaborative arrangements will require us to relinquish our rights to certain
technologies drug candidates or marketing territories. If we fail to raise sufficient
funds, we would have to curtail or cease operations.


We depend on the award of
government contracts, which involve the coordination of several government agencies, for
the development of our anthrax vaccine. The process of procuring government contracts is
lengthy and uncertain. If we fail to obtain future contracts to pursue advanced
development of our anthrax vaccine, or provide an emergency stockpile, we may be unable to
commercialize the product.


We have entered into a contract with
the NIH to develop an anthrax vaccine. The contract requires us to provide a plan for how
it could manufacture an emergency stockpile of at least 25 million doses. However, the
contracts for advanced development and the emergency stockpile are each subject to
separate awards, which we must compete for. The process of obtaining government contracts
is lengthy and uncertain, and we cannot be certain that we would be awarded these
contracts.


In addition, the federal government
has undertaken multiple commitments to help secure improved countermeasures against
bio-terrorism, including those, which might arise from the illegal use of smallpox and
anthrax. The determination of when and whether a product is ready for use and large scale
purchase will be made by a combination of players, including the FDA, the NIH, the CDC,
and the Department of Homeland Security. In addition, President Bush has proposed and
Congress is actively considering measures to speed up the review of countermeasure
products by the NIH, the review process by the FDA and the final government procurement
contracting authority. We cannot predict the timing of enactment of pending legislation,
including Project BioShield, nor can we predict the decisions that will be made in the
future by various government agencies.


Clinical development is a long,
expensive and uncertain process, and delay or failure can occur at any stage of our
clinical trials. We may not succeed in our efforts to develop AIDSVAX based on our
preliminary results and not meeting the primary endpoint of the Phase III clinical trial.


We must provide the FDA and foreign
regulatory authorities with clinical data that demonstrate the safety and statistically
significant efficacy of our product candidates before they can be approved for commercial
sale. Clinical development is a long, expensive and uncertain process, and delay or
failure can occur at any stage of our clinical trials. AIDSVAX is our most advanced
product candidate. We recently announced data from the first of two Phase III clinical
trials for AIDSVAX, in which we failed to meet the primary endpoint of the trial, but did
observe some evidence of efficacy in certain racial subgroups. We will need to modify the
vaccine in order to continue developing it for use in a broad population. In addition, we
believe that we will have to conduct additional clinical trials of AIDSVAX in order to
obtain approval from the FDA either in a broad patient population or in any particular
subgroups. These development efforts and subsequent clinical trials are lengthy and
expensive, and the outcome is uncertain. Even with modifications, we may discover that
AIDSVAX fails to protect individuals from contracting HIV. If we are unable to
successfully develop AIDSVAX, we will be unable to generate revenue from this product
opportunity, and our stock price is likely to decline.


17
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|We have limited
experience in developing other types of vaccines and products, such as smallpox and
anthraxvaccines, and may be unable todevelop other vaccines and products, which could
adversely affect our ability toexecute our business strategy, our business and ourfinancial
condition.


Part of our business strategy is to
develop biologic products for the prevention and treatment of human infectious 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. In December 2002, we entered into agreements with Kaketsuken to initiate
development of Kaketsukens attenuated smallpox vaccine for use in the United States.
We have only limited experience in developing other types of vaccines and products, so we
may not be able to develop either an effective anthrax vaccine or a smallpox vaccine for
use in the United States or receive the appropriate regulatory approvals to distribute
either vaccine candidate in the U.S. If these development efforts fail, it could adversely
affect our ability to execute our business strategy, our business and our financial
condition.


Delay in completing our
clinical trials could jeopardize our ability to obtain regulatory approval to
marketAIDSVAX on a timely basis.


We expect to complete our Thai
clinical trials in the second quarter of 2003 and announce results sometime in the second
half of 2003. Completion of our clinical trial, and announcement of the results of the
trial could be delayed for a variety of reasons, including:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | serious
adverse events related to the vaccine;
|- | ----------------------------------------------

| | our
principal third-party investigator may not perform our clinical trials on our anticipated
schedule or consistent with a clinical trial protocol, and other third-party
organizations may not perform data collection and analysis in a timely or accurate
manner; or
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | different
interpretations of our preclinical and clinical data, which could lead initially to
inconclusive results.
|- | -------------------------------------------------------------------------------------------------------------------

|Our development costs will increase
if we have material delays in our clinical trial or if we need to perform more or larger
clinical trials than planned. If the delays are significant, our financial results and the
commercial prospects for our products and product candidates will be harmed, and our
prospects for profitability will be impaired. Furthermore, our inability to complete our
clinical trials in a timely manner could jeopardize our ability to obtain domestic or
foreign regulatory approval.


If we fail to comply with
extensive regulations enforced by domestic and foreign regulatory authorities,
thecommercialization of our productcandidates could be prevented or delayed.


Vaccine candidates are 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.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
FDA or foreign regulators may require additional testing for safety and efficacy.
|- | -------------------------------------------------------------------------------------

| | 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.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
FDA or foreign regulators may not approve our manufacturing processes or manufacturing
facilities, or may require additional clinical studies to establish the safety, purity
and potency of our product candidates.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Even
if United States regulatory approval for any product 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.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
regulatory approval of the vaccine candidate is granted, the marketing of that vaccine
would be subject to adverse event reporting requirements and the FDAs general
prohibition against promoting products for unapproved or off-label uses.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
will be subject to continual regulatory review and periodic inspection and approval of
manufacturing modifications, including compliance with the FDAs cGMPs regulations.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|18
|--

|In addition, the FDA stringently
applies regulatory standards for manufacturing. Failure to comply with any of these
post-approval requirements can, among other things, result 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 receive funding from the
U.S. Government, and in the future we may receive significant orders from the
U.S.Government, if the U.S. Government fails to continue funding or purchasing products we
manufacture, our business will be harmed.


We have received funding from the
U.S. Government for the development of an anthrax vaccine. Changes in government budgets
and agendas may result in future funding to be decreased and de-prioritized. Furthermore,
we cannot be certain of the timing of any future funding. The failure of the U.S.
Government to continue to fund our research and development programs would harm our
business. Similarly, if we develop any anthrax vaccine candidate that is approved by the
FDA, the U.S. Government is likely to be our largest customer for this product. The
failure of the U.S. Government to place sufficient orders for this product or to place
orders on a timely basis would be harmful to our future business. Even if the U.S.
Government were to become a customer, we would be subject to additional governmental
contract requirements, and future sales would depend, in part, on our ability to meet
those requirements, certain of which may be onerous or even impossible for us to satisfy


The approval requirements of
vaccines used to fight bio-terrorism are still evolving, and we cannot be certain that any
vaccines we develop, if effective, would meet these requirements.


The approval requirements of vaccines
used to fight bio-terrorism are still evolving, and we cannot be certain that any vaccines
we develop, if effective, would meet the approval requirements of regulatory authorities.
We are developing products based upon current policies regulating these vaccines. Our
business is subject to substantial risk because these policies may change quickly and
unpredictably and in ways that could impair our ability to obtain regulatory approval of
these products.


Our product development
efforts may not yield marketable products due to results of studies or trials, failure to
achieve regulatoryapprovals or market acceptance, proprietary rights of others or
manufacturing issues.


Our success depends on our ability to
successfully develop and obtain regulatory approval to market new biopharmaceutical
products. A significant portion of the research that we will conduct will involve new and
unproven technologies. Development of a product requires substantial technical, financial
and human resources even if the product is not successfully completed.


Our potential products may appear to
be promising at various stages of development yet fail to reach the market for a number of
reasons, including:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | lack
of sufficient prevention benefit or unacceptable safety during       preclinical studies
or clinical trials;
|- | -----------------------------------------------------------------------------------------------------------------

| | failure
to receive necessary regulatory approvals;
|- | --------------------------------------------------

| | existence
of proprietary rights of third parties; and
|- | -----------------------------------------------------

| | inability
to develop manufacturing methods that are efficient, cost-effective and capable of
meeting stringent regulatory standards.
|- | ------------------------------------------------------------------------------------------------------------------------------------

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


Several of our competitors 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. In addition, several of these
companies are developing new drug therapies and other treatments that may mitigate the
impact of the disease. Our competitors are also developing vaccine candidates for anthrax
and smallpox, which would compete with the vaccine candidates we are developing. Our
commercial opportunities will be reduced or eliminated if our competitors develop and
market products for any of the diseases that we target that are:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | more
effective;
|- | ---------------

| | have
fewer or less severe adverse side effects;
|- | -----------------------------------------------

| | are
easier to administer; or
|- | ----------------------------

| | are
less expensive than the products or product candidates we are developing.
|- | -----------------------------------------------------------------------------

|19
|--

|Even if we are successful in
developing effective drugs, obtaining FDA and other required regulatory approvals and
commercializing them, our products may not compete effectively with these products or
other successful products. Researchers are continually learning more about diseases, which
may lead to new technologies for treatment. Our competitors may succeed in developing and
marketing products either that are more effective than those that we may develop, alone or
with our collaborators, or that are marketed before any products we develop are marketed.




Our competitors include fully
integrated pharmaceutical companies and biotechnology companies that currently have drug
and target discovery efforts, as well as universities and public and private research
institutions. Many of the organizations competing with us have substantially greater
capital resources, larger research and development staffs and facilities, greater
experience in drug development and in obtaining regulatory approvals and greater marketing
capabilities than we do.


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


To date, we have engaged primarily in
research, development and clinical testing. At March 31, 2003, we had an accumulated
deficit of approximately $145,800,000. We expect to incur substantial losses in the
future.


Our South Korean
manufacturing joint venture may not be successful.


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. Celltrion will be
unable to complete its capitalization and unable to build a manufacturing facility in
South Korea or in South San Francisco, if Celltrion is unable to secure or raise the
necessary funding or does not receive the necessary technology for the manufacture of
AIDSVAX or other biopharmaceutical products.


Even if Celltrion successfully builds
its manufacturing facilities, we cannot be certain that the facilities will pass domestic
or foreign regulatory approvals or be able to manufacture the vaccine candidates we are
developing or third parties products in commercial quantities, on a cost-effective
basis or at all.


In addition, the political, social
and economic situation of South Korea, and the stability of the Korean peninsula as a
whole, may not continue to provide an environment in which we would be able to manufacture
the vaccine candidates we are developing 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. Celltrions manufacturing operations may expose our business to
numerous risks inherent in international operations including:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | foreign
currency controls;
|- | --------------------------

| | currency
fluctuations;
|- | ----------------------

| | trade
restrictions or changes in tariffs;
|- | -----------------------------------------

| | the
difficulties associated with staffing and managing international operations;
|- | --------------------------------------------------------------------------------

| | generally
longer receivables collection periods;
|- | ------------------------------------------------

| | potentially
limited protection for intellectual property rights;
|- | ----------------------------------------------------------------

| | potentially
adverse taxes; and
|- | ------------------------------

| | international
conflict and war.
|- | -------------------------------

|If Celltrion is unable to manufacture
AIDSVAX or other vaccines or products, or if it becomes commercially impractical for
Celltrion to manufacture those products, we may not recoup the cost of our investment, and
our business and results of operations will suffer.


Our use of hazardous
materials, chemicals and viruses exposes us to potential liabilities.


Our research and development involves
the controlled use of hazardous materials, chemicals, and viruses. Although we believe
that our safety procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, we cannot completely eliminate the
risk of accidental contamination or injury from these materials. In the event of such an
accident, we could be held liable for significant damages or fines.


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


We face an inherent risk of exposure
to product liability suits in connection with vaccines being tested in human clinical
trials or sold commercially. We may become subject to a product liability suit if any
vaccine we develop causes injury, or if vaccinated individuals subsequently become
infected 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. If a product liability claim is brought against us, the cost of
defending the claim would be significant and any adverse determination may result in
liabilities in excess of our insurance coverage. We currently have product liability
insurance in the amount of $25,000,000. However, we cannot be certain that our current
insurance can be maintained, or additional insurance coverage could be obtained, on
acceptable terms, if at all.

20
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Legislation limiting or
restricting liability for medical products used to fight bio-terrorism is evolving, and
we cannot be certain that any such protections will apply to our vaccines or products.


Legislation relating to medical
products used to fight bio-terrorism is evolving, and may enable the United States
government to release and use certain medical products prior to such products obtaining
FDA or other regulatory approval. According to the terms of one proposed bill, upon a
declaration of emergency, the United States government may authorize the introduction and
use of a qualified medical product (possibly the anthrax vaccine, currently under
development with government funding, and the smallpox vaccine) prior to either such
medical product obtaining FDA regulatory approval. Further, such proposed legislation
provides that the United States government may elect to purchase and stockpile quantities
of vaccines or products prior to receipt of regulatory approval to fight bio-terrorism.
Legislation limiting or restricting liability for the use of such vaccines is evolving,
and we cannot be certain that any such protections will apply to the vaccines or products
developed by us. If the legislation does not provide sufficient protection, and we are not
able to obtain these protections by contract, we may become subject to product liability
suits and other third party claims if vaccines or products developed by us cause injury,
or if vaccinated individuals subsequently become infected or otherwise suffer adverse
effects from such vaccines or products. We currently have product liability insurance in
the amount of $25,000,000. However, we cannot be certain that our current insurance will
cover such claims, or that adequate insurance coverage can be obtained.


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


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. Similarly products developed to treat or
combat the threat of bio-terrorism will be subject to changing political and social
environments. The political and social responses to the HIV/AIDS epidemic and to
bio-terrorism have been highly charged and unpredictable. Political or social pressures
may delay or cause resistance to bringing our products to market or limit pricing of our
products, which would harm our business.


Failure to hire and
retain key management employees could adversely affect our ability to obtain financing,
develop AIDSVAX and otherproducts, 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.


Failure to protect our
intellectual property or infringing on the intellectual property rights of others could
harm our business and causeour stock price to fall.


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 or other products. We
rely on patent and other intellectual property protection to prevent our competitors from
manufacturing and marketing AIDSVAX and other products. 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:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | obtain
patents;
|- | ---------------

| | protect
trade secrets;
|- | ----------------------

| | operate
without infringing upon the proprietary rights of others; and
|- | ---------------------------------------------------------------------

| | 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.

21
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Risks Relating to Our
Relationship with Genentech and Our Relationships with other Third Parties


We intend to rely on third
parties for the production, sales or marketing of our vaccines if they are successfully
developed. Our dependence on third parties may delay or impair our ability to generate
revenues, or adversely affect our profitability.


Since inception we have been
primarily focused on research and development of AIDSVAX. We lack any sales or marketing
history, and as of present do not have plans on developing internally such capability. We
intend to rely on third parties for the sales and marketing of our products. Our lack of
sales and marketing personnel and distribution relationships may impair our ability to
generate revenues. We are also entirely dependent on third parties to produce AIDSVAX. To
date, we have relied on Genentech for this purpose. Genentech currently has an exclusive
option to manufacture AIDSVAX, although they have consented to our participation in
Celltrion, our South Korean manufacturing joint venture. Our license agreement with
Genentech does not specify the price we will be required to pay Genentech to manufacture
AIDSVAX. Genentech is not able to assure us that it will have adequate manufacturing
capacity to produce AIDSVAX for us on a commercial scale.


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:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | fail
to use due diligence in developing, seeking regulatory approval for,       marketing or
commercializing products covered by the agreement;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------

| | 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
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | breach
the license agreement and fail to cure the breach within the time period provided in the
agreement.
|- | ----------------------------------------------------------------------------------------------------------

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

|22
|--

|Risks Related to the Issuance of
Series A 6% Cumulative Redeemable Convertible Preferred Stock (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 Preferred Stock and
warrants to purchase common stock for aggregate proceeds of $20,000,000. As of March 31,
2003, there were 3,800 shares of Series A Preferred Stock and warrants to purchase 530,674
shares of common stock outstanding. The terms of our Series A Preferred Stock, and the
warrants, give the holders 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:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | on
May 23, 2004, with respect to the Series A Preferred Stock;
|- | --------------------------------------------------------------

| | at
a 15% premium upon a change of control; and
|- | ----------------------------------------------

| | at
a 20% premium if we breach certain of our obligations under the purchase agreements, if
our stock is delisted or not quoted on an approved stock exchange or the Nasdaq National
Market or Small Cap Market for 5 consecutive days or if we are insolvent or certain
actions are 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, if any of these circumstances were to
happen they would require the expenditure of a significant amount of cash that could
substantially exceed the proceeds that we received in the private placement.


Our stockholders could
experience substantial dilution as result of the issuance of additional preferred 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.


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.


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.

23
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Other Risks


If we are unable to maintain
our Nasdaq National Market listing, it could have a material adverse impact on our stock
price, the market for our stock and our ability to raise capital.


Our common stock trades on The Nasdaq
National Market. In order to continue trading on The Nasdaq National Market, we must
satisfy the continued listing requirements for that market. While we are presently in
compliance with the continued listing requirements, we may not be able to maintain
compliance with them.


Under The Nasdaq National Market
continued listing requirements, the minimum net tangible asset requirement was replaced
with a minimum stockholders equity requirement of $10,000,000. At March 31, 2003, we had stockholders
equity of $9,293,000 and, therefore, to continue trading on The Nasdaq National Market we
will be required to maintain a minimum bid price of $1.00 for our common stock. If the
minimum bid price for our common stock is below $1.00 for 30 consecutive trading days, we
would have 90 calendar days to regain compliance. If we fail to comply with this or the
other applicable continued listing requirements, our common stock may be delisted from The Nasdaq National Market.


A delisting of our common stock from
The Nasdaq National Market would materially reduce the liquidity of our common stock and
result in a corresponding material reduction in the price of our common stock. In
addition, any such delisting would materially adversely affect our ability to raise
capital through alternative financing sources on terms acceptable to us, or at all, which
could materially harm our business.


If we are delisted from the Nasdaq
National Market, we will also face a variety of legal consequences that will likely
negatively affect our business including, without limitation, the following:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | we
may lose our exemption from the provisions of Section 2115 of the California
Corporations Code, which imposes aspects of California corporate law on certain
non-California corporations operating within California. As a result, (1) our
stockholders would be entitled to cumulative voting, and (2) we would be subject to
more stringent stockholder approval requirements and more stockholder-favorable dissenters rights
in connection with certain strategic transactions;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
state securities law exemptions available to us would be more limited and, as a result,
future issuances of our securities may require time-consuming and costly registration
statements and qualifications; and
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | due
to the application of different securities law exemptions and provisions, we may be
required to amend our stock option and stock purchase plans and comply with
time-consuming and costly administrative procedures.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Our stock price may be
volatile, and your investment in our stock could decline in value.


The trading price of our common stock
has been and is likely to continue to be extremely volatile. Our stock price could be
subject to wide fluctuations in response to a variety of factors, including the following:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | adverse
results or delays in clinical trials;
|- | ---------------------------------------------

| | delays
in our product development efforts;
|- | ------------------------------------------

| | failure
to win future government contracts for anthrax or smallpox;
|- | -------------------------------------------------------------------

| | real
or perceived safety issues with any of our vaccine candidates;
|- | -------------------------------------------------------------------

| | delays
in completion of our manufacturing facilities in South Korea and       the U.S.;
|- | ---------------------------------------------------------------------------------------

| | changes
in financial estimates by securities analysts;
|- | ------------------------------------------------------

| | rumors
about our business prospects, product development efforts or       clinical trials;
|- | ------------------------------------------------------------------------------------------

| | new
products or services offered by us or our competitors or announcements       relating to
product developments by our competitors;
|- | -------------------------------------------------------------------------------------------------------------------------------------

| | issuances
of debt or equity securities;
|- | ---------------------------------------

| | sales
by our stockholders of substantial amounts of our common stock, including shares issued
upon exercise of outstanding options and warrants and conversion of the Series A
Preferred Stock; and
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | other
events or factors, many of which are beyond our control.
|- | --------------------------------------------------------------

|24
|--

|In addition, the stock market in
general, and The Nasdaq National Market and biotechnology companies in particular, have
experienced extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of these companies. Broad market and
industry factors may negatively affect the market price of our common stock, regardless of
actual operating performance. In the past, following periods of volatility in the market
price of a companys securities, securities class action litigation has often been
instituted against companies. This type of litigation, if instituted, could result in
substantial costs and a diversion of managements attention and resources, which
would harm our business.




ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Our exposure to market rate changes
is related primarily to our debt securities included in our investment portfolio. We do
not have any derivative financial instruments. By policy, we invest in debt instruments of
the U.S. Government, Federal agencies and high-quality corporate issuers, limit the amount
of credit exposure to any one issuer, limit duration by restricting the term, and hold
investments to maturity except under rare circumstances. Investments in both fixed rate
and floating rate instruments carry a degree of interest rate risk. Fixed rate securities
may have their fair market value adversely impacted due to a rise in interest rates, while
floating rate securities may produce less income than expected if interest rates fall. Due
in part to these factors, our future investment income may decrease due to changes in
interest rates or due to losses we may suffer when securities decline in market value. At
March 31, 2003, we held government debt instruments and corporate obligations in the
principal amount of $8,570,000. If market interest rates were to increase immediately and
uniformly by 10% from levels at March 31, 2003, the fair value of our portfolio would
decline by an immaterial amount. Our exposure to losses as a result of interest rate
changes is managed through investing primarily in securities that mature in a period of
one year or less.


We have exposure to foreign exchange
rate risk primarily related to our conducting clinical trials in Thailand. Thailand is
currently considered an emerging economy. A material increase in the value of
Thailands currency against the U.S. Dollar could cause an increase in our expenses.
The majority of our contracts associated with conducting clinical trials in Thailand are
priced in Baht. For the three months ended March 31, 2003, we have incurred no foreign
exchange gains or losses.




ITEM 4. CONTROLS AND
PROCEDURES


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.


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 the preceding
paragraph above.



PART II  OTHER
INFORMATION


ITEM 1. LEGAL PROCEEDINGS


On March 17, 2003 a civil complaint
for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 was filed
in the United States District Court for the Northern District of California, entitled
Janice Whitkens v. VaxGen, Inc., et al., Civil Action No. C03-1129 JSW. Named, as
defendants are VaxGen, Inc., Chief Executive Officer Lance K. Gordon and President Donald
P. Francis, M.D. The plaintiff seeks to represent a class of persons who purchased the
Companys securities between August 6, 2002 and February 26, 2003, and alleges that
the defendants misled investors about the progress of certain clinical trials and the
Companys future manufacturing and marketing plans. Management believes the Company
has strong defenses and intends to defend the action vigorously.


Following the filing of the Whitkens
complaint, several additional class action complaints were filed in the same court, each
making identical or similar allegations against the same defendants. The Company expects
that these complaints will eventually be consolidated into a single action. Management
believes the Company has strong defenses and intends to defend the action vigorously.



25
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|On or about March 21, 2003, two
separate but virtually identical shareholder derivative actions were filed in California
Superior Court for San Mateo County entitled Rhodes v. Allen, et al. civil action no. CIV
430087, and MacDonald v. Allen, et al., civil action no. CIV 430088. Named as defendants
in both actions are Company directors Lance K. Gordon, Donald P. Francis. M.D., Phillip W.
Berman, David W. Beier, Randall L-W. Caudill, Stephen C. Francis and William D. Young.
Also named as defendants are Paul Allen and Vulcan Ventures, Inc. The allegations of these
complaints mirror those contained in the class action, and plaintiffs allege as well that
Mr. Allen and Vulcan Ventures sold shares of the companys stock while in possession
of material non-public information about the Company. Plaintiffs, purportedly suing on
behalf of the Company, assert claims against all defendants for breach of fiduciary duty,
abuse of control, mismanagement, waste and unjust enrichment, and against Mr. Allen and
Vulcan Ventures for breach of fiduciary duty and insider trading. Management believes the
Company has strong defenses and intends to defend the action vigorously.




ITEM 6. EXHIBITS AND
REPORTS ON FORM 8-K
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|The following exhibits are filed as
part of this report:
|--------------------------------------------------------

|Exhibit No. | Exhibit | Form |                                                                                                                           |  | File
      No. |     | Incorporated
      by Reference
      Filing Date |  | Exhibit
      No. |           | Filed
      Herewith |  |        
|----------- | ------- | ---- | ------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --- | ------------------------------------------------- |  | ----------------- | --------- | -------------------- |  | -------
|            |         |      |                                                                                                                           |  |                |     |                                                   |  |                   |           |                      |  |        
|3.1         |         |      | Amended
      and Restated Certificate of Incorporation.                                                                  |  |                | S-8 |                                                   |  |                   | 333-84922 |                      |  | 3-26-02
|            |         |      |                                                                                                                           |  |                |    
|            |         |      |                                                                                                                           |  |                |     |                                                   |  |                   |           |                      |  |        
|3.2         |         |      | Amendment
      to the Amended and Restated Certificate of                                                                |  |                | S-8 |                                                   |  |                   | 333-84922 |                      |  | 3-26-02
|            |         |      | Incorporation.                                                                                                            |  |                |     |                                                   |  |                   |           |                      |  |        
|            |         |      |                                                                                                                           |  |                |     |                                                   |  |                   |           |                      |  |        
|3.3         |         |      | Amended
      and Restated Bylaws                                                                                         |  |                | S-1 |                                                   |  |                   | 333-78065 |                      |  | 6-11-99
|            |         |      |                                                                                                                           |  |                |     |                                                   |  |                   |           |                      |  |        
|4.1         |         |      | Reference
      is made to Exhibits 3.1, 3.2 and 3.3.                                                                     |  |                |     |                                                   |  |                   |           |                      |  |        
|            |         |      |                                                                                                                           |  |                |    
|            |         |      |                                                                                                                           |  |                |     |                                                   |  |                   |           |                      |  |        
|4.2         |         |      | Certificate
      of Designations, Rights and Preferences of                                                              |  |                | S-8 |                                                   |  |                   | 333-84922 |                      |  | 3-26-02
|            |         |      | Series
      A 6% Cumulative Convertible Preferred Stock.                                                                 |  |                |     |                                                   |  |                   |           |                      |  |        
|            |         |      |                                                                                                                           |  |                |     |                                                   |  |                   |           |                      |  |        
|4.3         |         |      | Securities
      Purchase Agreement by and among Registrant                                                               |  |                | 8-K |                                                   |  |                   | 000-26483 |                      |  | 5-24-01
|            |         |      | and
      Certain Stockholders.                                                                                           |  |                |     |                                                   |  |                   |           |                      |  |        
|            |         |      |                                                                                                                           |  |                |     |                                                   |  |                   |           |                      |  |        
|4.4         |         |      | Registrant
      Rights Agreement by and among Registrant                                                                 |  |                | 8-K |                                                   |  |                   | 000-26483 |                      |  | 5-24-01
|            |         |      | and
      Certain Stockholders.                                                                                           |  |                |     |                                                   |  |                   |           |                      |  |        
|            |         |      |                                                                                                                           |  |                |     |                                                   |  |                   |           |                      |  |        
|4.5         |         |      | Form
      of Common Stock Purchase Warrant.                                                                              |  |                | 8-K |                                                   |  |                   | 000-26483 |                      |  | 5-24-01
|            |         |      |                                                                                                                           |  |                |     |                                                   |  |                   |           |                      |  |        
|99.1        |         |      | Certifications
      Required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter
      63 of Title 18 of the |  |                |     |                                                   |  |                   |           |                      |  |        
|            |         |      | United States
      Code (18 U.S.C. 1350)                                                                                 |  |                |     |                                                   |  |                   |           |                      |  |        
|            |         |      |                                                                                                                           |  |                |     |                                                   |  |                   |           |                      |  |        

|(b) | Reports
on Form 8-K:
|--- | --------------------

|A current report on Form 8-K, dated
February 4, 2003, was filed with the Securities and Exchange Commission, reporting under
Item 5 that we had announced that Michel Greco, former deputy CEO and board member of
Aventis Pasteur, has joined VaxGens Board of Directors.


A current report on Form 8-K, dated
February 13, 2003, was filed with the Securities and Exchange Commission, reporting under
Item 5 the press release announcing our fourth quarter and year ended December 31, 2002
financial results.


A current report on Form 8-K, dated
February 24, 2003, was filed with the Securities and Exchange Commission, reporting under
Item 5 that we had announced initial results from the first of our three-year,
multi-national, randomized, double-blind, placebo-controlled Phase III trials of AIDSVAX
(rgp120) to prevent HIV infection. The study did not show a statistically significant
reduction of HIV infection within the study population as a whole, which was the primary
endpoint of the trial. However, the study did show a statistically significant reduction
of HIV infection in certain vaccinated groups.


A current report on Form 8-K, dated
February 28, 2003, was filed with the Securities and Exchange Commission, reporting under
Item 5 that we had issued a statement that our analysis of data from the Phase III
clinical trial of AIDSVAX B/B followed a statistical analysis plan that was agreed on in
advance with the U.S. Food and Drug Administration.


A current report on Form 8-K, dated
March 13, 2003, was filed with the Securities and Exchange Commission, reporting under
Item 5 that we had announced that the Companys CEO Lance K. Gordon, Ph.D., will
provide updated guidance regarding expected cash and revenue from grants and contracts.


A current report on Form 8-K, dated
March 19, 2003, was filed with the Securities and Exchange Commission, reporting under
Item 5 that on March 17, 2003 a civil complaint for violation of Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 was filed in the United States District Court for
the Northern District of California, entitled Janice Whitkens v. VaxGen, Inc., et al.,
Civil Action No. C03-1129 JSW.

26
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Dated:
      November 19, 2003 |  | VaxGen, Inc. By:  /s/ Carter A. Lee
      Carter A. Lee
      Senior Vice President
      Finance & Administration
      (Principal Financial Officer)
|------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|27
|--

|CERTIFICATION OF
CHIEF EXECUTIVE OFFICER


I, Lance K. Gordon, certify that:


1.     I have reviewed this
quarterly report on Form 10-Q/A 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 19, 2003/s/ Lance K. Gordon
Lance K. Gordon, Chief Executive Officer |  | 
|------------------------------------------------------------------------------------------- |  | 

|28
|--

---

|CERTIFICATION OF
PRINCIPAL FINANCIAL OFFICER


I, Carter A. Lee, certify that:


1.     I have reviewed this
quarterly report on Form 10-Q/A 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 19, 2003/s/ Carter A. Lee
Carter A. LeeSenior Vice PresidentFinance & AdministrationPrincipal Financial Officer |  | 
|-------------------------------------------------------------------------------------------------------------------------------------- |  | 

|29
|--