<PAGE>   1

                                 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, 2001.

                                       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                              (I.R.S. Employer
incorporation or organization)                              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 30, 2001, 23,594,927 shares of the Registrant's Common Stock were
issued and outstanding.



<PAGE>   2






                        APPLIED MOLECULAR EVOLUTION, INC.
                                 FORM 10-Q INDEX
<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        -----
<S>      <C>                                                                             <C>
PART I:  FINANCIAL INFORMATION

    ITEM 1:  Financial Statements.........................................................3

             Consolidated Balance Sheets at March 31, 2001 (unaudited) and
             December 31, 2000............................................................3

             Consolidated Statements of Operations for the three months ended
             March 31, 2001 and 2000 (unaudited)..........................................4

             Consolidated Statements of Cash Flows for the three months ended
             March 31, 2001 and 2000 (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...........................................................12

PART II:  OTHER INFORMATION

    ITEM 1:  Legal Proceedings...........................................................12

    ITEM 2:  Changes in Securities and Use of Proceeds...................................13

    ITEM 3:  Defaults Upon Senior Securities.............................................13

    ITEM 4:  Submission of Matters to a Vote of Security Holders.........................13

    ITEM 5:  Other Information...........................................................13

    ITEM 6:  Exhibits and Reports on Form 8-K............................................13

SIGNATURES...............................................................................14

</TABLE>



                                       2
<PAGE>   3


                        APPLIED MOLECULAR EVOLUTION, INC.
                           CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
                                                                     MARCH 31,         DECEMBER 31,
                                                                       2001               2000
                                                                    -----------       -------------
                                                                    (UNAUDITED)
<S>                                                                   <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents ....................................      $  20,426       $  36,865
  Short-term investments .......................................         67,993          52,685
  Prepaid expenses .............................................            379             552
  Other current assets .........................................          1,513           2,317
                                                                      ---------       ---------
      Total current assets .....................................         90,311          92,419

Property and equipment, net ....................................          1,804             851
Patents, net ...................................................          1,559           1,532
Other assets ...................................................            112              72
                                                                      ---------       ---------
      Total assets .............................................      $  93,786       $  94,874
                                                                      =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities .....................      $     994       $   1,579
  Current portion of deferred revenue ..........................            498             258
  Current portion of long-term obligations .....................             13              17
                                                                      ---------       ---------
      Total current liabilities ................................          1,505           1,854

Deferred revenue ...............................................            572             631
Deferred rent ..................................................             96             100
Minority interest ..............................................            385             372

Stockholders' equity:
  Preferred stock, $.001 par value, 5,000,000 shares authorized,
      none issued ..............................................              -               -
  Common stock,  $.001 par value, 45,000,000 shares authorized,
      23,592,727 and 23,592,264 shares issued and outstanding at
      March 31, 2001 and December 31, 2000, respectively .......             24              24
  Additional paid-in-capital ...................................        158,993         158,776
  Deferred compensation ........................................         (8,842)        (10,918)
  Notes receivable from employees ..............................           (841)           (827)
  Accumulated other comprehensive income .......................            514             180
  Accumulated deficit ..........................................        (44,220)        (40,918)
  Less: Treasury stock at cost - 1,200,000 shares ..............        (14,400)        (14,400)
                                                                      ---------       ---------
      Total stockholders' equity ...............................         91,228          91,917
                                                                      ---------       ---------
      Total liabilities and stockholders' equity ...............      $  93,786       $  94,874
                                                                      =========       =========
</TABLE>



                    See accompanying notes.


                                       3
<PAGE>   4


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

                                                          THREE MONTHS ENDED MARCH 31,
                                                          ---------------------------
                                                              2001           2000
                                                            --------       --------
<S>                                                         <C>            <C>
Revenue
    Contract revenue .................................      $    250       $    721
    Other revenue ....................................           602            110
                                                            --------       --------
    Total revenue ....................................           852            831
                                                            --------       --------

Operating expenses
    Research and development .........................         1,879            667
    General and administrative .......................         1,486            419
    Non-cash, stock based compensation ...............         2,292          1,184
                                                            --------       --------
    Total operating expenses .........................         5,657          2,270
                                                            --------       --------
Loss from operations .................................        (4,805)        (1,439)
Minority interest ....................................           (13)            43
Interest income, net .................................         1,516             38
                                                            --------       --------
Net loss .............................................      $ (3,302)      $ (1,358)
                                                            ========       ========


Net loss per share, basic and diluted ................      $  (0.16)      $  (0.53)

Weighted average shares outstanding, basic and
    diluted ..........................................        21,125          2,577

</TABLE>





                    See accompanying notes.



                                       4
<PAGE>   5


                        APPLIED MOLECULAR EVOLUTION, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED MARCH 31,
                                                              ----------------------------
                                                                 2001           2000
                                                               --------       --------
<S>                                                            <C>            <C>
OPERATING ACTIVITIES
Net loss ................................................      $ (3,302)      $ (1,358)
Adjustments to reconcile net loss to net cash
  used in operating activities:
  Depreciation and amortization .........................           134             58
  Amortization of stock-based compensation ..............         2,075          1,180
  Compensation related to consultant stock options ......           217              4
  Deferred revenue ......................................           181            (59)
  Deferred rent .........................................            (4)            (3)
  Minority interest .....................................            13            (43)
  Realized gain on short-term investments ...............          (131)             -
  Accrued interest on notes receivable from employees ...           (14)             -
Changes in operating assets and liabilities:
  Prepaid expenses and other assets .....................           937           (623)
  Accounts payable and accrued expenses .................          (585)          (163)
                                                               --------       --------
Net cash flows used in operating activities .............          (479)        (1,007)
                                                               --------       --------

INVESTING ACTIVITIES
Purchase of property and equipment ......................        (1,057)          (104)
Purchase of short-term investments ......................       (27,964)             -
Proceeds from sale of short-term investments ............        13,122            335
Patents .................................................           (57)           (69)
                                                               --------       --------
Net cash flows provided by (used in) investing
   activities ...........................................       (15,956)           162
                                                               --------       --------

FINANCING ACTIVITIES
Payments on long-term obligations .......................            (4)            (4)
Issuance of common stock, net ...........................             -              9
                                                               --------       --------
Net cash flows provided by (used in) financing
   activities ...........................................            (4)             5
                                                               --------       --------

Net decrease in cash and cash equivalents ...............       (16,439)          (840)
Cash and cash equivalents at the beginning of the
   period ...............................................        36,865          1,974
                                                               --------       --------

Cash and cash equivalents at the end of the period ......      $ 20,426       $  1,134
                                                               ========       ========

</TABLE>

                     See accompanying notes.




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<PAGE>   6


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

1.  Organization and Business

    Applied Molecular Evolution, Inc., or the Company or AME, a Delaware
    corporation, was incorporated on August 14, 1989. The Company has a broad
    technology platform termed AMEsystem(TM), 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 monoclonal
    antibodies for pharmaceutical and biotechnology companies.

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, 2000.

    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 Novasite Pharmaceuticals, Inc., or Novasite, which is 72% owned by AME
    and which was incorporated in July 1999. All significant intercompany
    accounts and transactions have been eliminated.

3.  Comprehensive Loss

    Total comprehensive loss was $2,968,000 for the three months ended March 31,
    2001, and $1,356,000 for the three months ended March 31, 2000.

4.  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) and Staff Accounting Bulletin 98 issued by the Staff of the
    Securities and Exchange Commission (SAB 98), for all periods presented.
    Under the provisions of SAB 98, common and preferred stock that has been
    issued or granted for nominal consideration prior to the anticipated
    effective date of the initial public offering must be included in the
    calculation of basic and diluted net loss per share as if these shares had
    been outstanding for all periods presented. To date, the Company has not
    issued or granted shares for nominal consideration. 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.

5.  Recently Issued Accounting Pronouncements

    The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
    Hedging Activities" (SFAS No. 133), effective January 1, 2001. SFAS No. 133
    establishes accounting and reporting standards for derivative instruments,
    including certain derivative instruments embedded in other contracts
    (collectively referred to as derivatives), and for hedging activities. It
    requires that an entity recognize all derivatives as either assets or
    liabilities in the


                                       6
<PAGE>   7



statement of financial position and measure those instruments at fair value. The
adoption of SFAS No. 133 had no effect on the financial statements as the
Company currently does not invest in derivative instruments or engage in hedging
activities.



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, 2000.

OVERVIEW

We are a leader in the application of directed evolution to the development of
biotherapeutics. Directed 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 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 1995-1999 was allocated to preclinical
development and initial clinical trials for Vitaxin. In 1999 we licensed Vitaxin
to MedImmune, which is responsible for future clinical development expenses and
commercialization. In the first quarter of 2001, MedImmune initiated clinical
trials with an improved, second generation version of Vitaxin that we enhanced
using our AMEsystem technology.

To date we have generated revenue from research collaborations, product and
technology licenses, prepaid royalties and government grants. We have strategic
collaborations with MedImmune, Bristol-Myers Squibb, Seattle Genetics, Cell
Matrix, and Biosynexus. We have licensed intellectual property to Biosite
Diagnostics, Inc. in exchange for a non-refundable, prepaid, fixed royalty which
is 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, 2001, we had an
accumulated deficit of $44.2 million. These losses and this accumulated deficit
resulted from the significant costs incurred in the development of our
technology platform and the clinical development of Vitaxin. We expect these
losses to increase as we continue to invest in our AMEsystem technology and
internal development projects.

We have capitalized 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, 2001, we had capitalized costs related to issued patents totaling
approximately $351,000 (net of accumulated amortization) and approximately $1.2
million related to unissued patents. Our results of operations could be
materially impacted when 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.



                                       7
<PAGE>   8


RESULTS OF OPERATIONS

Three Months Ended March 31 2001 Compared to Three Months Ended March 31, 2000

Revenue. Our revenue increased to $852,000 for the quarter ended March 31, 2001,
from $831,000 for the same period in 2000, an increase of approximately $21,000.
The increase was due to an increase in grant revenue, offset by a decrease in
contract revenue.

Research and development. Research and development expenses increased to $1.9
million for the quarter ended March 31, 2001, from $667,000 for the same period
in 2000, an increase of approximately $1.2 million. The increase was primarily
related to additional scientific staffing and expansion of facilities to support
our internal development projects, collaborations, and grants.

General and administrative. General and administrative expenses increased to
$1.5 million for the quarter ended March 31, 2001, from $419,000 for the same
period in 2000, an increase of approximately $1.1 million. The increase was
primarily due to the expansion of the administrative infrastructure to support
the needs of a public company, and professional fees in connection with the
expansion of our business development 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 Statement of Financial Accounting Standards 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 EITF 96-18.

For the three months ended March 31, 2001, we recorded non-cash, stock based
compensation expenses of $2.3 million ($1.6 million and $694,000 related to
research and development and general and administrative, respectively), compared
to $1.2 million ($573,000 and $611,000 related to research and development and
general and administrative, respectively) for the same period in 2000.

Interest income, net. Net interest income increased to $1.5 million for the
quarter ended March 31, 2001, from $38,000 for the same period in 2000. The
increase was primarily due to our higher average cash and investment balances
during 2001 as a result of the cash proceeds from our initial public offering,
which closed in the third quarter of 2000.


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 primarily through private placements of equity
securities, with aggregate net proceeds of approximately $39.9 million. In
addition, we have generated $18.1 million of cash from research collaborations
through March 31, 2001.

As of March 31, 2001, we had approximately $88.4 million in cash, cash
equivalents and short-term investments, compared to $89.6 million of cash, cash
equivalents and short-term investments as of December 31, 2000.

For the three months ended March 31, 2001, we used cash of approximately
$479,000 in operating activities to fund our net losses of $3.3 million, offset
by non-cash charges for depreciation and patent amortization totaling $134,000,
non-cash, stock based compensation totaling $2.3 million, a decrease in deferred
revenue of $181,000, and changes in operating assets and liabilities of
$352,000.


                                       8
<PAGE>   9


For the three months ended March 31, 2001, we used cash of approximately $16.0
million in investing activities. Our investing activities consisted primarily of
purchases and sales of short-term investments, and capital expenditures for
property and equipment to be used in our business. We expect to continue to make
investments in our infrastructure, including purchasing property and equipment
to support our operations.


We expect our cash requirements to increase significantly in 2001 as we continue
our research and development efforts, hire additional personnel, grow our
administrative support activities and expand our facilities. 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 approximately 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.



                                  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 $3.3 million
for the three months ended March 31, 2001, and our revenue for that same period
was $852,000. Additionally, we have had net losses each year since inception
and, as of March 31, 2001, had an accumulated deficit of $44.2 million. We
expect to report a net loss for fiscal year 2001, 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 collaborations and expect to
continue to do so in the foreseeable future. Revenues from collaborations are
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.

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
products that we otherwise would seek to commercialize ourselves. We expect that
our current resources, together with future operating revenue, will be
sufficient to fund operations for approximately two years. The amount of money
we will need will depend on many factors, including:

     o  the success of our research and development efforts

     o  our ability to establish collaborative agreements

     o  our costs of prosecuting and maintaining patents

     o  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.



                                       9
<PAGE>   10


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, Vitaxin, in clinical trials that has been developed using our
technology.

WE HAVE OPTIMIZED ONLY ONE TYPE OF PROTEIN AND MAY NOT BE ABLE TO OPTIMIZE
OTHERS, THEREBY LIMITING OUR MARKET POTENTIAL.

To date we have optimized only antibodies for corporate collaborators. 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 primary 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
products. 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 products under
their respective agreements. 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 products 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 products arising out of our collaborative
arrangements or not to devote sufficient resources to develop, manufacture,
market or sell these products. Moreover, some of our collaborators may also be
researching competing technologies and products targeted by our collaborative
programs.

IF PRODUCT CANDIDATES WE OPTIMIZE DO NOT RECEIVE REGULATORY APPROVAL, NEITHER WE
NOR OUR COLLABORATORS WILL BE ABLE TO COMMERCIALIZE THESE PRODUCTS.

The U.S. Food and Drug Administration, or FDA, must approve any therapeutic
product 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
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. Some of our collaborators are in early stages of the FDA regulatory
process for drugs we have optimized.

IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY, OUR
COMPETITIVE POSITION COULD BE HURT.

The patent positions of biopharmaceutical 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



                                       10
<PAGE>   11

competitive position. Others may independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our trade
secrets or discover 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 products. 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 products 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 products 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 products through the
application of our proprietary AMEsystem directed 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, as a result, our technology or the
products we develop cannot be marketed, 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 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



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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 products 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 common stock by our stockholders under Rule 144 of the
Securities Act of 1933 or 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
5,450,000 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 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 31.4% of our outstanding shares of common stock. As a
result, these stockholders, acting together, could 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 non government debt securities. The average duration
of all of our investments as of March 31, 2001, was approximately one year. 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.


                           PART II: OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

               None.



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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, 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, $1.1 million for purchases of property and
              equipment and approximately $500,000 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

              None.

        (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 1, 2001                     By: /s/ William D. Huse, M.D., Ph.D
---------------------------------           --------------------------------
                                            William D. Huse, M.D., Ph.D.,
                                            President and Chief Executive
                                            Officer


Date:    May 1, 2001                     By: /s/ Lawerence E. Bloch, M.D.
----------------------------------          --------------------------------
                                            Lawrence E. Bloch, M.D., Chief
                                            Financial Officer, Vice President
                                            of Business Development and
                                            Secretary




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