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

FORM 10-Q



|[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the Quarterly period ended March 31, 2002.

or



|[   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________
to ___________________
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

Commission File No. 000-31101

APPLIED MOLECULAR EVOLUTION, INC.

---

(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0374014                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)

3520 Dunhill Street
San Diego, California 92121

---

(Address of principal executive offices and zip code)


(858) 597-4990

---

(Registrants 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 [   ]

As of April 22, 2002, 23,624,616 shares of the Registrants Common Stock were
issued and outstanding.





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TABLE OF CONTENTS



|                              |                                                                                               |                                            |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I: FINANCIAL INFORMATION
|                              | ITEM 1: FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II: OTHER INFORMATION   
|                              | ITEM 1: LEGAL PROCEEDINGS                                                                    
|                              | ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                              | ITEM 3: DEFAULTS UPON SENIOR SECURITIES                                                      
|                              | ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | ITEM 5: OTHER INFORMATION                                                                    
|                              | ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|EXHIBIT 10.28                



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APPLIED MOLECULAR EVOLUTION, INC.
FORM 10-Q INDEX

|                               |         |                                                                                                      |                                                                                       |  |   |    |      |  | 
|------------------------------ | ------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- |  | - | -- | ---- |  | 
|                               |         |                                                                                                      |                                                                                       |  |   |    | PAGE
|                               |         |                                                                                                      |                                                                                       |  |   |    |     
|PART I:  FINANCIAL INFORMATION |         |                                                                                                      |                                                                                       | 
|                               | ITEM 1: |                                                                                                      | Financial Statements                                                                  |  |   | 3  |     
|                               |         | Consolidated Balance Sheets at March 31, 2002 (unaudited) and December 31, 2001                      |                                                                                       |  | 3 |   
|                               |         | Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 (unaudited) |                                                                                       |  | 4 |   
|                               |         | Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 (unaudited) |                                                                                       |  | 5 |   
|                               |         | Notes to Consolidated Financial Statements (unaudited)                                               |                                                                                       |  | 6 |   
|                               | ITEM 2: |                                                                                                      | Management's Discussion and Analysis of Financial Condition and Results of Operations |  |   | 7  |     
|                               | ITEM 3: |                                                                                                      | Quantitative and Qualitative Disclosures About Market Risk                            |  |   | 13 |     
|                              
|PART II:   OTHER INFORMATION   |         |                                                                                                      |                                                                                       | 
|                               | ITEM 1: |                                                                                                      | Legal Proceedings                                                                     |  |   | 14 |     
|                               | ITEM 2: |                                                                                                      | Changes in Securities and Use of Proceeds                                             |  |   | 14 |     
|                               | ITEM 3: |                                                                                                      | Defaults Upon Senior Securities                                                       |  |   | 14 |     
|                               | ITEM 4: |                                                                                                      | Submission of Matters to a Vote of Security Holders                                   |  |   | 14 |     
|                               | ITEM 5: |                                                                                                      | Other Information                                                                     |  |   | 14 |     
|                               | ITEM 6: |                                                                                                      | Exhibits and Reports on Form 8-K                                                      |  |   | 14 |     
|                              
|SIGNATURES                     |         |                                                                                                      | 15                                                                                    | 

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APPLIED MOLECULAR EVOLUTION, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

|                                                              |                                                                                                                                                                            |                                            |        |             |        |              |       |         |        | 
|------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ----------- | ------ | ------------ | ----- | ------- | ------ | 
|                                                              |                                                                                                                                                                            |                                            |        | MARCH 31,   |        | DECEMBER 31,
|                                                              |                                                                                                                                                                            |                                            |        | 2002        |        | 2001        
|                                                              |                                                                                                                                                                            |                                            |        |             |        |             
|                                                              |                                                                                                                                                                            |                                            |        | (UNAUDITED) |        |              |       |        
|ASSETS                                                        |                                                                                                                                                                            |                                            |        |             |        |              |       |        
|Current assets:                                               |                                                                                                                                                                            |                                            |        |             |        |              |       |        
|                                                              | Cash and cash equivalents                                                                                                                                                  |                                            | $      | 15,303      |        |              | $     | 25,927  |       
|                                                              | Short-term investments                                                                                                                                                     |                                            |        | 53,196      |        |              |       | 54,269  |       
|                                                              | Prepaid expenses                                                                                                                                                           |                                            |        | 423         |        |              |       | 429     |       
|                                                              | Other current assets                                                                                                                                                       |                                            |        | 1,533       |        |              |       | 3,385   |       
|                                                              |                                                                                                                                                                            |                                            |        |             |        |              |       |        
|                                                              |                                                                                                                                                                            | Total current assets                       |        |             | 70,455 |              |       |         | 84,010 | 
|Restricted cash, cash equivalents, and short-term investments |                                                                                                                                                                            |                                            | 11,990 |             |        |              |      |        
|Property and equipment, net                                   |                                                                                                                                                                            |                                            | 12,678 |             |        |              | 3,223 |        
|Patents, net                                                  |                                                                                                                                                                            |                                            | 1,903  |             |        |              | 1,865 |        
|Other assets                                                  |                                                                                                                                                                            |                                            | 489    |             |        |              | 1,584 |        
|                                                              |                                                                                                                                                                            |                                            |        |             |        |              |       |        
|                                                              |                                                                                                                                                                            | Total assets                               |        | $           | 97,515 |              |       | $       | 90,682 | 
|                                                              |                                                                                                                                                                            |                                            |        |             |        |              |       |        
|LIABILITIES AND STOCKHOLDERS EQUITY                          |                                                                                                                                                                            |                                            |        |             |        |              |       |        
|Current liabilities:                                          |                                                                                                                                                                            |                                            |        |             |        |              |       |        
|                                                              | Accounts payable                                                                                                                                                           |                                            | $      | 1,120       |        |              | $     | 1,128   |       
|                                                              | Accrued liabilities                                                                                                                                                        |                                            |        | 1,887       |        |              |       | 1,173   |       
|                                                              | Current portion of deferred revenue                                                                                                                                        |                                            |        | 1,275       |        |              |       | 1,967   |       
|                                                              | Short-term loan                                                                                                                                                            |                                            |        | 56          |        |              |       |        |       
|                                                              |                                                                                                                                                                            |                                            |        |             |        |              |       |        
|                                                              |                                                                                                                                                                            | Total current liabilities                  |        |             | 4,338  |              |       |         | 4,268  | 
|Deferred revenue                                              |                                                                                                                                                                            |                                            | 335    |             |        |              | 394   |        
|Deferred rent                                                 |                                                                                                                                                                            |                                            | 76     |             |        |              | 84    |        
|Long-term obligation                                          |                                                                                                                                                                            |                                            | 10,000 |             |        |              |      |        
|Minority interest                                             |                                                                                                                                                                            |                                            |       |             |        |              |      |        
|Stockholders equity:                                         |                                                                                                                                                                            |                                            |        |             |        |              |       |        
|                                                              | Preferred stock, $.001 par value, 5,000,000 shares authorized, none issued                                                                                                 |                                            |        |            |        |              |       |        |       
|                                                              | Common stock, $.001 par value, 45,000,000 shares authorized,
23,624,616 and 23,607,058 shares issued and outstanding at
March 31, 2002 and December 31, 2001, respectively |                                            |        | 24          |        |              |       | 24      |       
|                                                              | Additional paid-in capital                                                                                                                                                 |                                            |        | 159,243     |        |              |       | 159,126 |       
|                                                              | Deferred compensation                                                                                                                                                      |                                            |        | (3,349      | )      |              |       | (4,373  | )     
|                                                              | Notes receivable from employees                                                                                                                                            |                                            |        | (895        | )      |              |       | (880    | )     
|                                                              | Accumulated other comprehensive income (loss)                                                                                                                              |                                            |        | (39         | )      |              |       | 587     |       
|                                                              | Accumulated deficit                                                                                                                                                        |                                            |        | (57,818     | )      |              |       | (54,148 | )     
|                                                              | Less: Treasury stock at cost - 1,200,000 shares                                                                                                                            |                                            |        | (14,400     | )      |              |       | (14,400 | )     
|                                                              |                                                                                                                                                                            |                                            |        |             |        |              |       |        
|                                                              |                                                                                                                                                                            | Total stockholders equity                 |        |             | 82,766 |              |       |         | 85,936 | 
|                                                              |                                                                                                                                                                            |                                            |        |             |        |              |       |        
|                                                              |                                                                                                                                                                            | Total liabilities and stockholders equity |        | $           | 97,515 |              |       | $       | 90,682 | 
|                                                              |                                                                                                                                                                            |                                            |        |             |        |              |       |        

See accompanying notes.

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APPLIED MOLECULAR EVOLUTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

|                                                       |                                                |   |                              |       |      |   |        |       | 
|------------------------------------------------------ | ---------------------------------------------- | - | ---------------------------- | ----- | ---- | - | ------ | ----- | 
|                                                       |                                                |   | THREE MONTHS ENDED MARCH 31,
|                                                       |                                                |   |                             
|                                                       |                                                |   | 2002                         |       | 2001
|                                                       |                                                |   |                              |       |     
|Revenue:                                               |                                                |   |                              |       |      |   |        |      
|                                                       | Contract revenue from collaboration agreements |   | $                            | 1,956 |      |   | $      | 250   | 
|                                                       | Other revenue                                  |   |                              | 659   |      |   |        | 602   | 
|                                                       |                                                |   |                              |       |      |   |        |      
|                                                       | Total revenue                                  |   |                              | 2,615 |      |   |        | 852   | 
|                                                       |                                                |   |                              |       |      |   |        |      
|Operating expenses:                                    |                                                |   |                              |       |      |   |        |      
|                                                       | Research and development                       |   |                              | 3,366 |      |   |        | 1,879 | 
|                                                       | General and administrative                     |   |                              | 2,804 |      |   |        | 1,486 | 
|                                                       | Stock-based compensation                       |   |                              | 1,039 |      |   |        | 2,292 | 
|                                                       |                                                |   |                              |       |      |   |        |      
|                                                       | Total operating expenses                       |   |                              | 7,209 |      |   |        | 5,657 | 
|                                                       |                                                |   |                              |       |      |   |        |      
|Loss from operations                                   |                                                |   | (4,594                       | )     |      |   | (4,805 | )    
|Minority interest                                      |                                                |   |                             |       |      |   | (13    | )    
|Interest income, net                                   |                                                |   | 924                          |       |      |   | 1,516  |      
|                                                       |                                                |   |                              |       |      |   |        |      
|Net loss                                               |                                                | $ | (3,670                       | )     |      | $ | (3,302 | )    
|                                                       |                                                |   |                              |       |      |   |        |      
|Net loss per share, basic and diluted                  |                                                | $ | (0.17                        | )     |      | $ | (0.16  | )    
|Weighted average shares outstanding, basic and diluted |                                                |   | 21,842                       |       |      |   | 21,125 |      

See accompanying notes.

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APPLIED MOLECULAR EVOLUTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

|                                                                            |                                                     |   |                              |       |      |   |         |       |  
|--------------------------------------------------------------------------- | --------------------------------------------------- | - | ---------------------------- | ----- | ---- | - | ------- | ----- | -
|                                                                            |                                                     |   | THREE MONTHS ENDED MARCH 31,
|                                                                            |                                                     |   |                             
|                                                                            |                                                     |   | 2002                         |       | 2001
|                                                                            |                                                     |   |                              |       |     
|OPERATING ACTIVITIES                                                        |                                                     |   |                              |       |      |   |         |      
|Net loss                                                                    |                                                     | $ | (3,670                       | )     |      | $ | (3,302  | )    
|Adjustments to reconcile net loss to net cash
used in operating activities: |                                                     |   |                              |       |      |   |         |      
|                                                                            | Depreciation and amortization                       |   |                              | 335   |      |   |         | 134   |  
|                                                                            | Amortization of stock-based compensation            |   |                              | 1,024 |      |   |         | 2,075 |  
|                                                                            | Compensation related to consultant stock options    |   |                              | 15    |      |   |         | 217   |  
|                                                                            | Deferred revenue                                    |   |                              | (751  | )    |   |         | 181   |  
|                                                                            | Deferred rent                                       |   |                              | (8    | )    |   |         | (4    | )
|                                                                            | Minority interest                                   |   |                              |      |      |   |         | 13    |  
|                                                                            | Realized gain on short-term investments             |   |                              | (136  | )    |   |         | (131  | )
|                                                                            | Accrued interest on notes receivable from employees |   |                              | (15   | )    |   |         | (14   | )
|Changes in operating assets and liabilities:                                |                                                     |   |                              |       |      |   |         |      
|                                                                            | Prepaid expenses and other assets                   |   |                              | 2,953 |      |   |         | 937   |  
|                                                                            | Accounts payable and accrued expenses               |   |                              | 706   |      |   |         | (585  | )
|                                                                            |                                                     |   |                              |       |      |   |         |      
|Net cash flows provided by (used in) operating activities                   |                                                     |   | 453                          |       |      |   | (479    | )    
|                                                                            |                                                     |   |                              |       |      |   |         |      
|INVESTING ACTIVITIES                                                        |                                                     |   |                              |       |      |   |         |      
|Restricted cash, cash equivalents, and short-term investments               |                                                     |   | (11,990                      | )     |      |   |        |      
|Purchase of property and equipment                                          |                                                     |   | (9,754                       | )     |      |   | (1,057  | )    
|Purchase of short-term investments                                          |                                                     |   | (19,929                      | )     |      |   | (27,964 | )    
|Proceeds from sale of short-term investments                                |                                                     |   | 20,512                       |       |      |   | 13,122  |      
|Patents                                                                     |                                                     |   | (74                          | )     |      |   | (57     | )    
|                                                                            |                                                     |   |                              |       |      |   |         |      
|Net cash flows used in investing activities                                 |                                                     |   | (21,235                      | )     |      |   | (15,956 | )    
|                                                                            |                                                     |   |                              |       |      |   |         |      
|FINANCING ACTIVITIES                                                        |                                                     |   |                              |       |      |   |         |      
|Proceeds from (payments on) long-term obligations                           |                                                     |   | 10,000                       |       |      |   | (4      | )    
|Proceeds from short-term loan                                               |                                                     |   | 56                           |       |      |   |        |      
|Issuance of common stock, net                                               |                                                     |   | 102                          |       |      |   |        |      
|                                                                            |                                                     |   |                              |       |      |   |         |      
|Net cash flows provided by (used in) financing activities                   |                                                     |   | 10,158                       |       |      |   | (4      | )    
|                                                                            |                                                     |   |                              |       |      |   |         |      
|Net decrease in cash and cash equivalents                                   |                                                     |   | (10,624                      | )     |      |   | (16,439 | )    
|Cash and cash equivalents at the beginning of the period                    |                                                     |   | 25,927                       |       |      |   | 36,865  |      
|                                                                            |                                                     |   |                              |       |      |   |         |      
|Cash and cash equivalents at the end of the period                          |                                                     | $ | 15,303                       |       |      | $ | 20,426  |      
|                                                                            |                                                     |   |                              |       |      |   |         |      

See accompanying notes.

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APPLIED MOLECULAR EVOLUTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization and Business

Applied Molecular Evolution, Inc. (Company or AME), a Delaware
corporation, was incorporated on August 14, 1989. The Company has a broad
technology platform termed AMEsystem, which the Companys management
believes will provide AME with a valuable and efficient solution to
optimizing proteins with commercial potential. To date, the Company has
successfully utilized its proprietary technology to optimize protein
therapeutic candidates for pharmaceutical and biotechnology companies as well
as for the Companys own internal development projects.

2. Basis of Presentation

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The results of
operations for the interim period are not necessarily indicative of results
to be expected for any other interim period or for the year as a whole. These
unaudited consolidated financial statements and footnotes thereto should be
read in conjunction with the audited financial statements and footnotes
thereto contained in the Companys annual report on Form 10-K for the year
ended December 31, 2001.

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the consolidated financial statements and
related footnotes. Changes in the estimates may affect amounts reported in
future periods.

The consolidated financial statements include the accounts of the Company and
its majority owned subsidiaries, Novasite Pharmaceuticals, Inc. (Novasite),
and AME Torrey View, LLC (Torrey View). Novasite and Torrey View are 72%
and 99% owned by AME, respectively. All significant intercompany accounts and
transactions have been eliminated.

3. Commitments

On August 17, 2001, we entered into an Operating Agreement with Torrey View
Phase II, L.P., to establish Torrey View. On March 4, 2002, Torrey View
purchased a 10.73-acre parcel of undeveloped land in San Diego County from a
third party at a cost of approximately $8.0 million. The Company intends to
develop this property over the next few years as its corporate headquarters.

In connection with the purchase, the Company borrowed approximately $10.0
million, under a $15.0 million collateralized credit facility, from Merrill
Lynch Bank USA to fund the purchase price and certain development costs. The
Company expects to borrow the remaining $5.0 million under the credit
facility during 2002 to fund future development costs. The Company also
entered into a $3.0 million loan and a development and management agreement
with a group, that is not affiliated with the Company, but that is affiliated
with the 1% owner of Torrey View, who will assist the Company with the
development of the project. The $3.0 million loan from the Company to the
group is collateralized by a perfected security interest in the 1% owners
membership rights in Torrey View and is due in 2004. Torrey View also entered
into an engagement letter and compensation agreement with a third party to
act as a broker and co-development manager, on behalf of Torrey View, in
connection with the purchase and development of the land.

4. Comprehensive Loss

Total comprehensive loss was $4,296,000 for the three months ended March 31,
2002, and $2,968,000 for the three months ended March 31, 2001. The
difference between net loss and comprehensive loss is primarily due to the
difference between market value and cost basis of the Companys short-term
marketable securities.

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5. Computation of Net Loss Per Share

Basic and diluted net loss per share are presented in conformity with
Statement of Financial Accounting Standards No. 128, Earnings per Share(SFAS
No. 128). In accordance with SFAS No. 128, basic and diluted net loss per
share has been computed using the weighted average number of shares of common
stock outstanding during the period, less shares subject to repurchase. To
the extent common stock equivalents (stock options) are dilutive, they would
be included in diluted per share amounts.

6. Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinationsand No. 142, Goodwill and Other Intangible
Assets. Under the new rules, goodwill and indefinite-lived intangible assets
are no longer amortized but are reviewed annually for impairment. Separable
intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The amortization provisions
of SFAS No. 142 apply to goodwill and intangible assets acquired after June
30, 2001. The Company applied the new rules beginning January 1, 2002, with
no impact to its consolidated financial statements as the Company has not
recorded any goodwill or other intangible assets as a result of a business
combination.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which establishes one accounting model to
be used for long-lived assets to be disposed of by sale and broadens the
presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 supercedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and the accounting and reporting provisions of APB Opinion No. 30. SFAS No.
144 is effective for fiscal years beginning after December 15, 2001. The
Companys adoption of SFAS No. 144, effective January 1, 2002, did not have a
material impact on its financial statements.




ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements in this quarterly report that are not descriptions of
historical facts may be forward-looking statements that are subject to risks
and uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified below and in
our other publicly available documents. We are under no obligation to update
any of these forward-looking statements after the filing of this quarterly
report to reflect actual results or changes in our expectations.

The following information should be read in conjunction with the
consolidated financial statements and the notes thereto included in Item 1 of
this quarterly report. We also urge readers to review and consider our
disclosures describing various factors that affect our business, including the
disclosures under Managements Discussion and Analysis of Financial Condition
and Results of Operations and Risk Factors and the audited financial statements
and notes thereto contained in our annual report on Form 10-K for the year
ended December 31, 2001.

OVERVIEW

We are a leader in the application of directed molecular evolution to the
optimization and development of biotherapeutics. Directed molecular evolution
is a process by which genes and proteins are optimized for specific commercial
purposes. We focus principally on applying our technology to human
biotherapeutics, the largest and most profitable target market for directed
molecular evolution.

Since our formation, we have expended considerable resources on the
development of our AMEsystem technology and the development of Vitaxin, a
product candidate engineered from an antibody we licensed from The Scripps
Research Institute. Much of our research and development from 1995 to 1999 was
allocated to preclinical development and initial clinical trials for Vitaxin.
In 1999, we licensed Vitaxin to MedImmune, Inc.
(MedImmune), which is responsible for future
clinical development expenses and commercialization. In 2001, MedImmune
initiated Phase I clinical trials with an improved, second-generation version
of Vitaxin that we enhanced using our AMEsystem technology.

To date we have generated revenue from corporate collaborations, product
and technology licenses, prepaid royalties, and government grants. We have
corporate collaborations with MedImmune, Eli Lilly and Company,
Chiron Corporation, CancerVax, Inc., Biosynexus, Inc.,
Bristol-Myers Squibb Company, Seattle Genetics, Inc., and Aventis
Pharmaceuticals, Inc., the final one through our
majority owned subsidiary, Novasite. We have licensed intellectual property to
Biosite Incorporated, formerly Biosite Diagnostics, Inc., in exchange for a
nonrefundable, prepaid, fixed royalty which is

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being recognized over six years, the estimated useful lives of the related
patents. Our government grants have come from the National Institutes of
Health. Research funding from corporate collaborators and government grants is
recognized as revenue when the services are rendered.

We have incurred losses since our inception. As of March 31, 2002, we had
an accumulated deficit of $57.8 million. These losses and this accumulated
deficit resulted from the significant costs incurred in the development of our
technology platform and the preclinical and clinical development of Vitaxin and
our internal development projects. We expect these losses to increase as we
continue to invest in our AMEsystem technology and internal development
projects.

On August 17, 2001, we entered into an Operating Agreement with Torrey
View Phase II, L.P., to establish AME Torrey View, LLC (Torrey View). Torrey
View is a 99% owned subsidiary and is consolidated in the Companys financial
statements. On March 4, 2002, Torrey View purchased a 10.73-acre parcel of
undeveloped land in San Diego County from a third party at a cost of
approximately $8.0 million. The Company intends to develop this property over
the next few years as its corporate headquarters.

In connection with the purchase, the Company borrowed approximately $10.0
million, under a $15.0 million collateralized credit facility, from Merrill
Lynch Bank USA to fund the purchase price and certain development costs. The
Company expects to borrow the remaining $5.0 million under the credit facility
during 2002 to fund future development costs. The Company also entered into a
$3.0 million loan and a development and management agreement with a group, that
is not affiliated with the Company, but that is affiliated with the 1% owner of
Torrey View, who will assist the Company with the development of the project.
The $3.0 million loan from the Company to the group is collateralized by a
perfected security interest in the 1% owners membership rights in Torrey View
and is due in 2004. Torrey View also entered into an engagement letter and
compensation agreement with a third party to act as a Broker and co-development
manager, on behalf of Torrey View, in connection with the purchase and
development of the land.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of
operations are based upon the Companys consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to revenue recognition, patent costs, and
income taxes. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.

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

Revenue recognition

We recognize revenue when all four of the following criteria are met: (i)
persuasive evidence that an arrangement exists; (ii) delivery of the products
and/or services has occurred; (iii) the selling price is fixed or determinable;
and (iv) collectibility is reasonably assured. In addition, we follow the
provisions of the Securities and Exchange Commissions Staff Accounting
Bulletin No. 101 (SAB 101), Revenue Recognition
in Financial Statements,
which sets forth guidelines in the timing of revenue recognition based upon
factors such as passage of title, installation, payments, and customer
acceptance. Amounts received for upfront product and technology license fees
under multiple-element arrangements are deferred and recognized over the period
of such services or performance if such arrangements require ongoing services
or performance. Amounts received for milestones are recognized upon achievement
of the milestone, unless the amounts received are creditable against royalties
or we have ongoing performance obligations. Royalty revenue will be recognized
upon sale of the related products, provided the royalty amounts are fixed and
determinable and collection of the related receivable is probable. Any amounts
received prior to satisfying our revenue recognition criteria will be recorded
as deferred revenue in the accompanying balance sheets.

Patent costs

We capitalize the costs incurred to file patent applications. These costs
are amortized over a six-year estimated life from the date of patent issuance.
At March 31, 2002, capitalized costs related to issued patents total
approximately $499,000 (net of accumulated amortization) and approximately $1.4
million related to unissued patents. Our results of operations could be
materially impacted when

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we begin amortizing the costs related to unissued patents. In addition, we
expense all costs related to abandoned patent applications. If we elect to
abandon any of our currently issued or unissued patents, the related expense
could be material to our results of operations for the period of the
abandonment.

Income taxes

We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize our deferred tax assets in the
future in excess of its net recorded amount, an adjustment to the deferred tax
asset would increase income in the period such determination was made.
Likewise, should we determine that we would not be able to realize all or part
of our net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was made.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2002, Compared to Three Months Ended March 31,
2001

Revenue. Our revenue increased to $2.6 million for the quarter ended March
31, 2002, from $852,000 for the same period in 2001, an increase of
approximately $1.7 million. The increase was primarily due to milestones and
contract revenue recognized under our corporate collaborations.

Research and development. Research and development expenses increased to
$3.4 million for the quarter ended March 31, 2002, from $1.9 million for the
same period in 2001, an increase of $1.5 million. The increase was primarily
related to additional scientific staffing and expansion of facilities to
support our internal development projects, corporate collaborations, and
grants.

General and administrative. General and administrative expenses increased
to $2.8 million for the quarter ended March 31, 2002, from $1.5 million for the
same period in 2001, an increase of $1.3 million. The increase was primarily
due to additional legal expenses incurred in our litigation against MorphoSys
and the expansion of our corporate communication efforts.

Stock-based compensation. Deferred compensation for options granted to
employees is the difference between the exercise price and the estimated fair
value of our common stock on the date the options were granted. Deferred
compensation is included as a component of stockholders equity and is being
amortized in accordance with FASB Interpretation No. 28 over the vesting
periods of the related options, which is generally four years.

Deferred compensation for options granted to consultants has been
determined in accordance with SFAS No.
123, Accounting for Stock-Based Compensation, as the fair value of the equity
instruments issued, and is periodically remeasured as the underlying options
vest in accordance with the Emerging Issues Task Forces (EITF) No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.

For the three months ended March 31, 2002, we recorded non-cash,
stock-based compensation expenses of $1.0 million ($336,000 and $702,000
related to research and development and general and administrative,
respectively), compared to $2.3 million ($694,000 and $1.6 million related to
research and development and general and administrative, respectively) for the
same period in 2001.

Interest income, net. Net interest income decreased to $924,000 the
quarter ended March 31, 2002, from $1.5 million for the same period in 2001, a
decrease of $592,000. The decrease was primarily due to lower interest rates
and lower cash, cash equivalent, and short-term investment balances in 2002.

LIQUIDITY AND CAPITAL RESOURCES

In July 2000, we sold 5.3 million shares of Common Stock in an initial
public offering resulting in net proceeds to the Company of approximately $94.5
million (excluding offering expenses). Prior to the initial public offering, we
had financed our operations

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primarily through private placements of equity securities, with aggregate
net proceeds of approximately $39.9 million. In addition, we have generated
$20.1 million of cash from corporate collaborations through March 31, 2002.

As of March 31, 2002, we had approximately $80.5 million in restricted and
unrestricted cash, cash equivalents, and short-term investments, compared to
$80.2 million of unrestricted cash, cash equivalents, and short-term
investments as of December 31, 2001.

For the three months ended March 31, 2002, we generated cash of
approximately $453,000 from operating activities, net of non-cash charges for
depreciation and patent amortization totaling $335,000, non-cash, stock based
compensation totaling $1.0 million, a decrease in deferred revenue of $751,000,
and changes in operating assets and liabilities of $3.7 million.

For the three months ended March 31, 2002, we used cash of approximately
$21.2 million in investing activities. Our investing activities consisted
primarily of purchases and sales of short-term investments, purchase of land,
preconstruction costs related to the development of our corporate headquarters
and capital expenditures for other property and equipment to be used in our
business. We expect to continue to make investments in our infrastructure,
including construction of our corporate headquarters, and purchasing other
property and equipment to support our operations.

For the three months ended March 31, 2002, we generated cash of
approximately $10.2 million from financing activities. Our financing activities
consisted primarily of a collateralized loan from Merrill Lynch Bank USA. At
March 31, 2002, we had approximately $5.0 million available for future
financing needs under this credit facility. These funds are being used to
finance expenses related to the Companys new headquarters, which is under
development.

We expect our cash requirements to increase significantly in 2002 as we
continue our research and development efforts, hire additional personnel, grow
our administrative support activities and construct our corporate headquarters.
We believe that our current cash, cash equivalents, and investments and
interest earned thereon, together with funding received from collaborators and
government grants will be sufficient to satisfy our anticipated cash needs for
working capital and capital expenditures for at least the next two years.
However, it is possible that we will seek additional financing within this
timeframe. We may raise additional funds through public or private financing,
collaborative relationships, or other arrangements. We cannot assure you that
additional funding, if sought, will be available on terms favorable to us.
Further, any additional equity financing may be dilutive to stockholders, and
debt financing, if available, may involve restrictive covenants. Our failure to
raise capital when needed may harm our business and operating results.

On June 25, 2001, we filed a complaint against MorphoSys AG and its wholly
owned subsidiary MorphoSys USA, Inc., in the United States District Court for
the District of Massachusetts seeking injunctive relief and damages on behalf
of the Company. The complaint alleges that MorphoSys AG and MorphoSys USA,
Inc., are willfully infringing on patents under which we hold an exclusive
license.

RISK FACTORS

We have not achieved profitability and may never become profitable.

We are at an early stage of development. We incurred a net loss of $3.7
million for the three months ended March 31, 2002, and our revenue for the same
period was $2.6 million. Additionally, we have had net losses each year since
inception and as of March 31, 2002, had an accumulated deficit of $57.8
million. We expect to report a net loss for fiscal year 2002, and we expect to
report increasing net losses for the foreseeable future. We may never achieve
profitability. The size of our net losses will depend, in part, on the rate of
growth, if any, in our contract revenue and on the level of our expenses. To
date, we have derived most of our revenue from corporate collaborations and
expect to continue to do so for the foreseeable future. Revenue from corporate
collaborations is uncertain because our ability to secure future agreements
will depend upon our ability to address the needs of our potential
collaborators. We expect to spend significant amounts to fund research and
development and enhance our core technology. We expect that our operating
expenses will increase significantly in the near term and, consequently, we
will need to generate significant additional revenue to achieve profitability.
Even if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.

We may need additional capital in the future. If additional capital is not
available, we may have to curtail or cease operations.

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We may need to raise more money to continue our operations. We may seek
additional funds from public and private stock offerings, corporate
collaborations, borrowings under lease lines of credit or other sources. If we
cannot raise more money, we may have to reduce our capital expenditures, scale
back our development of new products, reduce our workforce or license to others
product candidates or products that we otherwise would seek to commercialize
ourselves. We expect that our current resources, together with future operating
revenues, will be sufficient to fund operations for at least the next two
years. The amount of money we will need will depend on many factors, including:



| |  |  | the success of our research and development efforts
| | - |  | ---------------------------------------------------
|
| |  |  | our ability to establish collaborative agreements  
|
| |  |  | our costs of prosecuting and maintaining patents   
|
| |  |  | market and competing technological developments    

Additional capital may not be available on terms acceptable to us, or at all.
Any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may include restrictive covenants.

The commercial utility of our AMEsystem technology is unproven and may never be
realized.

While we have met with initial success in applying our AMEsystem
technology, to prove the commercial value of our technology, we or our
collaborators will need to commercialize biotherapeutics that we have
optimized. Successful commercialization of biotherapeutics requires:
preclinical testing, clinical trials, regulatory approval, and commercial
manufacturing. It will take us or our collaborators many years to complete
these steps for any biotherapeutic. If we or our collaborators do not undertake
and successfully complete these activities, then our AMEsystem technology will
be of little commercial value, and our ability to generate revenue will be
limited. Currently, there is one product candidate, Vitaxin, in clinical trials
that has been developed using our technology.

We have announced the optimization of only two types of proteins and may not be
able to optimize others, thereby limiting our market potential.

To date we have announced the optimization of only proteins from the
classes of antibodies and enzymes for corporate collaborators and internal
development projects. If we are unable to apply our AMEsystem technology to
other types of proteins, the scope of our potential business will be
significantly limited.

If our collaborators are not successful or if we are unable to find
collaborators in the future, we may not be able to commercialize product
candidates.

Our strategy for developing and commercializing product candidates calls
for us to enter into contractual arrangements with collaborators. We may be
unsuccessful in attracting collaborators to develop and commercialize our
product candidates. Some collaborators may not perform their obligations as we
expect, or we may not derive any revenue from these arrangements. We do not
know whether these collaborators will successfully develop and market any
product candidates under their respective agreements. Moreover, some of our
collaborators are also researching competing technologies and product
candidates targeted by our collaborative programs. Our success depends in part
upon the performance by these collaborators of their responsibilities under
these arrangements. We have no control over the resources that any collaborator
may devote to the development and commercialization of product candidates under
these collaborations. Our collaborators may terminate their agreements with us
or otherwise fail to conduct their collaborative activities successfully and in
a timely manner. Our collaborators may elect not to develop product candidates
arising out of our collaborative arrangements or not to devote sufficient
resources to develop, manufacture, market, or sell these product candidates.

If product candidates we optimize do not receive regulatory approval, neither
we nor our collaborators will be able to commercialize these product
candidates.

The FDA must approve any therapeutic product candidate before it can be
marketed in the United States. The regulatory process is expensive and
time-consuming. Before we or a collaborator can file a new drug application
with the FDA, the product candidate must undergo extensive testing, including
animal studies and human clinical trials that can take many years and may
require substantial expenditures. Data obtained from such testing may be
susceptible to varying interpretations which could delay, limit, or prevent

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regulatory approval. Changes in regulatory policy for product approval may
cause delays or rejections. Because our product candidates will be developed in
a novel way, government regulatory authorities may subject these product
candidates to greater scrutiny than those developed using more conventional
methods. Our collaborators are in early stages of the FDA regulatory process
for product candidates we have optimized.

If we are unable to adequately protect our proprietary technology, our
competitive position could be hurt.

The patent positions of pharmaceutical and biotechnology companies,
including our patent position, are generally uncertain and involve complex
legal and factual questions. We may be able to protect our proprietary rights
from infringement by third parties only to the extent that our proprietary
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. Furthermore, others may independently develop
similar or alternative technologies or design around our patented technologies.
Litigation or other proceedings to defend or enforce our intellectual property
rights could require us to spend significant time and money and could disrupt
and harm our business.

We also rely upon trade secrets, technical know-how, and continuing
inventions to develop and maintain our competitive position. Others may
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets or disclose our
technology, and we may not be able to meaningfully protect our trade secrets or
be capable of protecting our rights to our trade secrets.

If we infringe third-party patents or breach our license agreements, litigation
may deplete our resources and undermine our ability to use our AMEsystem
technology.

Our commercial success also depends in part on neither infringing valid,
enforceable patents or proprietary rights of third parties, nor breaching any
licenses that may relate to our technology and product candidates. We are aware
of third-party patents that may relate to our technology. It is possible that
we may unintentionally infringe these patents or other patents or proprietary
rights of third parties. Any legal action taken against us or our collaborative
partners claiming damages and seeking to enjoin commercial activities relating
to our product candidates and processes affected by third-party rights may
require us or our collaborators to obtain licenses in order to continue to
manufacture or market the affected product candidates and processes. In
addition, these actions may subject us to potential liability for damages. We
or our collaborators may not prevail in an action, and any license required
under a patent may not be made available on commercially acceptable terms, or
at all. Litigation could result in substantial costs and the diversion of
managements efforts, regardless of the result of the litigation.

If we lose our key personnel or are unable to attract and retain additional
personnel, we may be unable to successfully develop our technology.

We are highly dependent on the principal members of our management and
scientific staff, particularly our President and Chief Executive Officer,
William D. Huse, M.D., Ph.D. If we lose their services we may not achieve our
objectives. In addition, recruiting and retaining qualified scientific
personnel to perform future research and development work will be critical to
our success. We do not have sufficient personnel to fully execute our business
plan, and there is currently a shortage of skilled executives and scientists,
which is likely to continue. As a result, competition for experienced
executives and scientists from numerous companies and academic and other
research institutions may limit our ability to hire or retain personnel on
acceptable terms. If we fail to attract and retain sufficient personnel, we may
not be able to develop or implement our technology.

Public perception of ethical and social issues may limit the use of our
technology, which could reduce our revenue.

Our success will depend upon our ability to develop product candidates
through the application of our directed molecular evolution technology.
Governmental authorities could, for social or other purposes, limit the use of
genetic modification or prohibit the practice of our technology. Ethical and
other concerns about the use of products derived from modified genes could
adversely affect their market acceptance. If our technology or the product
candidates we develop cannot be marketed as a result, we would lose our core
business.

We use hazardous chemicals and radioactive and biological materials in our
business. Any claims relating to improper handling, storage or disposal of
these materials could be time-consuming and costly.

We use hazardous materials, including chemicals, and radioactive and
biological materials. These materials include o-phenylenediamine
dihydrochloride, ethidium bromide, and acrylamide. Our operations also produce
hazardous waste products. We

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cannot eliminate the risk of accidental contamination or discharge and any
resultant injury from these materials. We could be subject to civil damages in
the event of an improper or unauthorized release of, or exposure of individuals
to, hazardous materials. In addition, claimants may sue us for injury or
contamination that results from the use of these materials. Federal, state, and
local laws and regulations govern the use, manufacture, storage, handling, and
disposal of these materials. Compliance with environmental laws and regulations
may be expensive, and current or future environmental regulations may impair
our research, development, or production efforts.

If people are harmed by drugs developed using our AMEsystem technology, we may
be sued for product liability.

We may be sued for product liability and other claims if our technology or
products developed from our technology are alleged to have caused harm. We may
not be able to avoid significant liability exposure. We maintain product
liability insurance, but we may not have sufficient coverage. If we are sued
for any injury caused by our product candidates and found liable, our financial
condition, reputation, and ability to find collaborators may be harmed.

Substantial sales of our common stock by our existing stockholders could cause
our stock price to fall.

Future sales of our common stock by our stockholders under Rule 144 of the
Securities Act of 1933 (the Securities Act), or through the exercise of
outstanding registration rights or otherwise could have an adverse effect on
the price of our common stock. Shares of our common stock are eligible for sale
in the public market in reliance on Rule 144(k) or Rule 701 under the
Securities Act, without any volume restrictions. Additionally, we registered a
total of 5,950,000 shares of common stock reserved for issuance under our stock
plans. Some of our existing stockholders have rights to require us to register
their shares for future sale.

Our financial condition could be affected by offerings of our subsidiarys
stock.

We could engage in future offerings or other sales of the common or
preferred stock of our subsidiary, Novasite, if our board determines that it is
in the best interests of the stockholders to pursue that course of action. This
could adversely affect our business, financial condition, and results of
operations. For example, any offering or other sale of a minority portion of
our subsidiarys stock could reduce the subsidiarys contribution to our gross
revenues.

We are subject to influence from our executive officers and directors who may
vote in ways with which you disagree because they have interests both as
managers and stockholders.

Our officers and directors and their affiliates, in the aggregate, own
beneficially approximately 30% of our outstanding shares of common stock. As a
result, these stockholders, acting together, would be able to effectively
control most matters requiring approval by our stockholders, including the
election of a majority of the directors. If your interests as a stockholder are
different from their interests as both managers and stockholders, you may not
agree with their decisions.




ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we invest in may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate
at the then-prevailing rate and the prevailing interest rate later rises, the
market value of our investment will probably decline. To minimize this risk in
the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, and government and nongovernment debt securities. The
average duration of all of our investments as of March 31, 2002, was
approximately two years. Due to the short-term nature of these investments, we
believe that we have no material exposure to interest rates arising from our
investments. A hypothetical 100 basis point adverse move in interest rates
along the entire interest rate yield curve would not materially affect the fair
value of our interest sensitive financial instruments. Declines in interest
rates over time will, however, reduce our investment income while increases in
interest rates over time will increase our interest expense.

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PART II: OTHER INFORMATION




ITEM 1: LEGAL PROCEEDINGS

On June 25, 2001, we filed a complaint against MorphoSys AG and its wholly
owned subsidiary MorphoSys USA, Inc., in the United States District Court for
the District of Massachusetts seeking injunctive relief and damages on behalf
of the Company. The complaint alleges that MorphoSys AG and MorphoSys USA,
Inc., are willfully infringing the Kauffman patent family under which we hold
an exclusive license.




ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS



| | (a) |  | Not applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Not applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (c) |  | Not applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (d) |  | The effective date of our first registration statement, filed on Form
S-1 under the Securities Act of 1933 (No. 333-36830) relating to our
initial public offering of common stock, was July 26, 2000. A total of
5,347,500 shares of our common stock were sold at a price of $19.00 per
share to an underwriting syndicate led by CIBC World Markets, UBS
PaineWebber Incorporated, formerly known as PaineWebber Incorporated,
and SG Cowen. Of these 5,347,500 shares, 697,500 shares were issued upon
exercise of the underwriters over-allotment option. The offering
commenced on July 27, 2000, and closed on August 2, 2000. The initial
public offering resulted in gross proceeds of $101.6 million, $7.1
million of which was applied toward the underwriting discount. Expenses
related to the offering totaled approximately $1.6 million. No direct or
indirect payments were made to any directors, officers, owners of ten
percent or more of any class of our equity securities, or other
affiliates of the Company other than for reimbursement of expenses. Net
proceeds to us, after deducting these expenses, were approximately $92.9
million. We have used approximately $3.6 million of the net offering
proceeds for a portion of the repurchase of 1.2 million shares of our
stock for $14.4 million, $3.7 million for purchases of property and
equipment, and approximately $6.1 million to fund our net losses. The
balance of the proceeds was applied towards the purchase of temporary
investments consisting of U.S. government agencies obligations,
corporate bonds, asset-backed securities, and cash and cash equivalents.




ITEM 3: DEFAULTS UPON SENIOR SECURITIES

Not applicable.




ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.




ITEM 5: OTHER INFORMATION

Not Applicable.




ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits
| | --- |  | --------

|      |  |                                                                                                                              
|----- |  | -----------------------------------------------------------------------------------------------------------------------------
|10.28 |  | Engagement Letter and Compensation Agreement by and between AME
Torrey View, LLC, and Irving Hughes, dated as of May 6, 2002.



| | (b) |  | Reports on Form 8-K during the first quarter
| | --- |  | --------------------------------------------

None.

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SIGNATURES

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

|                  |                                                                    |                                                                    
|----------------- | ------------------------------------------------------------------ | -------------------------------------------------------------------
|Date: May 7, 2002 | By:                                                                | /s/ William D. Huse, M.D.,
Ph.D.                                   
|                  |                                                                   
|                  | William D. Huse, M.D., Ph.D.
President and Chief Executive Officer
|                 
|Date: May 7, 2002 | By:                                                                | /s/ Lawrence E. Bloch, M.D., J.D.                                  
|                  |                                                                    |                                                                    
|                  |                                                                    | Lawrence E. Bloch, M.D., J.D.
Chief Financial Officer and Secretary

15