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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
    2002                                             
|  
|or
|  
|o  |  | 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. 0-19591

Epimmune Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                                    |  |                                         
|--------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                            |  | 33-0245076                              
|(State or other jurisdiction of
    incorporation or organization)                                  |  | (I.R.S. Employer
    Identification No.)
|5820 Nancy Ridge Drive,
    San Diego, California 92121(Address of Principal executive
    offices)

Registrants telephone number, including
area code:

(858) 860-2500


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $.01 par value


(Title of class)


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 þ         No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.    Yes o         No þ

Indicate by check mark whether the Registrant is
an accelerated filer as defined in Rule 12b-2 of the
Securities Exchange Act of
1934.    Yes o         No þ

The aggregate market value of the
Registrants Common Stock held by non-affiliates of the
Registrant as of June 30, 2002 was approximately
$9.8 million, based on the closing price on that date of
Common Stock on the Nasdaq National Stock Market.*

The number of shares outstanding of the
Registrants Common Stock, $.01 par value, was 12,182,919
as of March 14, 2003.



---

* Excludes 6,357,283 shares of Common Stock
held by directors and officers and stockholders whose ownership
exceeds 10% of the Common Stock outstanding on June 30,
2002. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power,
direct or indirect, to direct or cause the direction of the
management or policies of the Registrant, or that such person is
controlled by or under common control with the Registrant.



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TABLE OF CONTENTS



|             |                                                                                                         |  |  |  |  |  |  | 
|------------ | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I      
|             | Item 1. Business                                                                                       
|             | Item 2. Properties                                                                                     
|             | Item 3. Legal Proceedings                                                                              
|             | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II     
|             | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|             | Item 6. Selected Financial Data                                                                        
|             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|             | Item 7A. Quantitative and Qualitative Disclosures About Market Risks                                   
|             | Item 8. Consolidated Financial Statements and Supplementary Data                                       
|             | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.          
|PART III    
|             | Item 10. Directors and Executive Officers of the Registrant                                            
|             | Item 11. Executive Compensation                                                                        
|             | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|             | Item 13. Certain Relationships and Related Transactions                                                
|PART IV     
|             | Item 14. Controls and Procedures                                                                       
|             | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES  
|EXHIBIT 23.1
|EXHIBIT 99.1
|EXHIBIT 99.2



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PART I






|        |         
|------- | --------
|Item 1. | Business

Except for the historical information contained
herein, the following discussion contains forward-looking
statements that involve risks and uncertainties. These
statements reflect managements current views with respect
to future events and financial performance and actual results
could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, without
limitation, those discussed in the description of our business
below and the sections entitled Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and in our other SEC
filings.

EpimmuneTM, EISTM,
EpiGeneTM and PADRE® are our trademarks and
ImmunoSense and ImmunoStealth are our service marks.

Overview

We are developing therapeutic vaccines that use
multiple epitopes, or protein fragments, to specifically
activate the bodys immune system for the more effective
management of infectious diseases and cancer. In September 2002,
we commenced a Phase I/ II clinical trial of our therapeutic,
multi-epitope vaccine candidate EP HIV-1090 in patients infected
with HIV-1, which is the predominant strain of HIV in North
America and Western Europe. Patients enrolled in the trial will
be immunized while receiving multiple antiretroviral drugs. The
primary objective of this trial is to determine the safety and
the effect on the immune system, or immunogenicity, of the EP
HIV-1090 vaccine. The vaccine candidate is designed to induce a
sufficiently potent immune response so that the patients
immune system can control the virus, allowing the patient to
suspend or stop taking antiretroviral drugs that have serious
side effects and can induce drug resistance when taken over
time. In February, we also commenced a Phase I/ II clinical
trial of our therapeutic, multi-epitope vaccine candidate
EP-2101 in patients with lung or colorectal cancer. The primary
objective of this trial is to determine the safety and
immunogenicity of the EP-2101 vaccine. In July 2001, we entered
into a collaboration with Genencor International, Inc. for
vaccines to treat or prevent hepatitis B virus, hepatitis C
virus and human papilloma virus. In addition, we are conducting
research and preclinical development of vaccines to treat
breast, prostate and other cancers and vaccines for the
prevention of HIV and malaria.

Eliciting a strong cellular, or T cell, immune
response is crucial for treating and preventing many infectious
diseases and tumors. Clinical experience has shown that the
cellular immune response is directly related to viral clearance
and tumor regression in those patients who are able to clear
chronic viral infection without treatment and in cancer patients
who respond to immunotherapy, or treatment that stimulates an
immune response. This successful cellular immune response
includes activity of cytotoxic T cells, or CTLs, and helper T
cells, or HTLs, which are directed toward specific antigen
fragments, known as epitopes.

Our vaccines are composed of proprietary epitopes
that can stimulate specific T cell immune responses. We can
rapidly identify such epitopes from any protein or gene sequence
using EIS, which enables the rapid identification of novel
epitopes that can stimulate specific CTL and HTL immune
responses. These epitopes can be identified from any protein or
gene sequence. In an attempt to establish a broad patent
position, we have identified, evaluated and disclosed in our
patent applications more than 54,000 epitopes. We also make
analogs of the epitopes we discover by selectively altering
their composition to increase vaccine potency, and we apply for
patent protection for these analogs. We select a small subset of
these epitopes and analogs, typically 10 to 50, to develop each
of our vaccine candidates.

Based on our scientists discoveries in the
field, we believe we are establishing a broad intellectual
property position directed toward the methods of epitope
identification, epitope compositions and epitope uses in
vaccines and diagnostics products.

In February 2003, we preliminarily agreed with
Anosys, Inc. to merge our operations to create a combined
company focused on the field of immunotherapeutics and products
for the treatment of cancer and

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infectious diseases. The all-stock transaction is
subject to the parties entering into a definitive merger
agreement, approval by the shareholders of both companies,
obtaining commitments for capital resources to fund the combined
companys operations and various other conditions that must
be satisfied prior to the merger.


Market Opportunities

HIV

It is estimated that approximately 940,000 people
in North America and nearly 560,000 people in Western Europe are
currently infected with HIV. According to estimates, in the
United States alone, an additional 40,000 people are newly
infected with HIV each year. The standard approach to treating
HIV infection has been to lower viral loads by using drugs that
inhibit two of the viral enzymes that are necessary for the
virus to reproduce: reverse transcriptase inhibitors, or RTIs,
protease inhibitors, or PIs, or a combination of these drugs.
Current therapies based on combinations of RTIs or PIs, reduce
HIV viral loads in many patients. In 2000, deaths attributable
to HIV infection were reduced to approximately 15,000 from
38,000 in 1996, largely due to improvements in treatment
regimens. Total sales in 2001 of approved RTIs and PIs exceeded
$3.1 billion in the United States and $5.0 billion
worldwide.

While significant progress has been made in
combating HIV, current treatments continue to have significant
limitations, such as viral resistance, toxicity and
non-adherence to the complicated treatment regiments. HIV is
prone to genetic changes that can produce strains of HIV that
are resistant to currently approved RTIs and PIs. Generally, HIV
that is resistant to one drug within a class is likely to become
resistant to the entire class, a phenomenon known as
cross-resistance. As a result of cross-resistance, attempts to
re-establish suppression of HIV viral load by substituting
different RTI and PI combinations often fail. It is estimated
that, in the United States, over 70% of patients currently
taking medications have failed at least one regimen. Studies
suggest that 10% to 15% of newly-infected HIV patients in the
United States have become resistant to at least one member of
each of the classes of currently approved anti-HIV drugs, and
that number is believed to be growing.

Over time, in addition to generating resistance
to drugs, many patients develop intolerance to different
medications. Data suggest that some HIV infected patients refuse
to commence or continue taking RTIs and PIs, either alone or in
combination, because of side effects and difficult dosing
regimens. Several side effects commonly associated with
currently approved anti-HIV drugs include neurological
disorders, gastrointestinal disorders, diabetes-like symptoms,
elevated cholesterol levels, other abnormal lipid metabolism and
bone disorders. Dosing regimens can require taking as many as 30
pills per day. The emergence of drug-resistant strains of HIV,
as well as toxic side effects associated with existing
therapies, have heightened demand for new HIV therapies that
work by different mechanisms of action, and have unique
resistance profiles, fewer side effects and a simpler dosing
regimen.

Lung and
Colorectal Cancer

The World Health Organization (WHO) predicts
that by 2020 there will be 15 million cases of cancer every
year. In the United States approximately 1.25 million new cases
of cancer are diagnosed annually and cancer is, by 2020,
expected to surpass heart disease as the primary cause of death
in adults. Of the various cancers, the four most common types
include lung, breast, prostate and colorectal cancer. These four
cancers have the greatest incidence of new cases and are
responsible for the highest combined mortality, approximately
58.1% of all cancer deaths worldwide. In the United States
alone, there were approximately 135,000 new cases of colorectal
cancer diagnosed in 2001 and colorectal cancer represents the
third highest incidence of any cancer for American men. In 2001
an estimated 56,000 deaths in the United States were attributed
to colorectal cancer. Cancer of the lungs continues to be a
major health problem with a very high mortality rate and
represents the leading cause of cancer death in the United
States. Approximately 170,000 new lung cancer cases were
diagnosed in the United States in 2001, and an estimated 160,000
patients died from lung cancer. In addition more than 75% of
cancers are expected to occur in individuals over the age of 50
and demographic trends clearly show an aging population.

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The current course of treatment for lung cancer
includes surgery, if possible, followed by various regimens of
radiation and chemotherapy to try to destroy cancer cells that
have spread. Chemotherapy causes well-known adverse side effects
such as hair loss, decreased function of various organs, and a
substantial suppression of the immune system, leading to
susceptibility to other diseases. The side effects of these
treatments, combined with relatively low success rates for most
cancers, have led to the need for development of different
methods of treatment. The unmet needs for more effective cancer
treatments provide a significant market potential for emerging
therapeutics. Current pharmaceutical therapies for lung cancer
include taxanes, platinun-based drugs and nucleoside analogs,
with combined sales exceeding $2.3 billion in 2001. Drug
therapies for colorectal cancer had combined sales in excess of
$700 million in 2001. According to a PhRMA 2001
report on pharmaceutical drug development, there were 402 new
product candidates in clinical development for the treatment of
cancer and at least 33 companies were developing more than 50
vaccines against various cancers.

The Immune Response

The immune system is the bodys natural
defense mechanism to prevent and combat disease. The immune
system differentiates between normal tissue, or self, and
diseased tissue, or non-self. When a competent immune system
recognizes diseased cells, a series of steps ensues resulting in
the elimination of these cells. There are two types of immune
response: antibody-based and cellular or T cell-based.

The antibody immune response is involved
primarily in the prevention of diseases. Antibodies are proteins
produced by the body in response to disease causing agents known
as pathogens. Antibodies bind to pathogens, including viruses
and bacteria, and block their ability to infect cells.
Preventative vaccines that trigger an antibody-based immune
response have been very successful in reducing the incidence of
several deadly diseases, including polio and measles. These
vaccines generally consist of weakened or attenuated pathogens
that stimulate the production of antibodies. However, these
types of vaccines have not been effective in the prevention or
treatment of many serious diseases, including cancers and
infectious diseases.

The cellular, or T cell-based, immune response is
involved primarily in combating cancers and infectious diseases.
T cells are specialized white blood cells that are normally
produced by the body to kill cancer cells and infected cells.
The cellular immune response begins when specialized immune
cells, called antigen-presenting cells, capture antigens, the
structural components that distinguish cancers and pathogens
from normal tissues. Once inside antigen-presenting cells, these
protein antigens are broken down into small peptide fragments,
called epitopes that are subsequently displayed on the surface
of the antigen-presenting cell. T cells continually scan the
surface of antigen-presenting cells for epitopes bound to a cell
surface receptor referred to as the major histocompatibility
complex, or MHC. If T cells recognize displayed epitopes as
foreign or non-self, the T cells replicate rapidly and then
search for and kill other diseased cells displaying those same
epitopes.

Significant scientific evidence suggests that
cancers and infections trigger a T cell-based immune response
during the initial course of disease progression. For diseases
such as the ones we are targeting, this immune response alone is
usually insufficient to eradicate the disease. Studies have
analyzed the effective cellular response in individuals who
clear chronic viral infection without treatment, and in cancer
patients who respond to immunotherapy. This effective cellular
response is comprised of CTL and HTL directed toward multiple,
discrete, specific, antigen-specific epitopes. Therapeutic
vaccines attempt to recreate this successful multi-specific CTL
and HTL response.

To date, efforts to develop vaccines that
stimulate multi-specific T cell responses sufficient to
selectively and accurately target and kill diseased cells have
failed. We believe this failure is due to one or both of the
following:



| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the inability of drug developers to identify the
    antigens appropriate to induce the desired immune response; and                                                                      
|
| |  | the inability to present or display these
    relevant antigens in a manner that induces T cell responses
    sufficiently potent and broad enough to actually destroy
    diseased cells.

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Although we have not yet completed either of our
Phase I/ II clinical trials, based on our animal study data thus
far, we believe our technology and vaccine candidates
specifically address these issues.

Our Approach

Our approach to T cell vaccine development is to
rationally create a multi-specific cellular response, causing
the immune system to be stimulated specifically against
multiple, select epitopes, which meet stringent criteria. We
have developed our proprietary technology, known as EIS, to
rapidly identify these antigen-specific epitopes from the
genetic information of tumor-associated antigens or infectious
agents (such as viruses, bacteria and parasites).

Our approach of using epitopes in vaccine
development offers several distinct advantages over traditional
vaccine approaches.



| |   |                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enhanced Potency:For some diseases, such as cancer,
    whole antigens or even naturally occurring epitopes may not be
    sufficient to generate an effective immune response. In
    contrast, we are selectively altering the composition of
    specific epitopes in vaccines to enhance the desired immune
    response.
|
| |  | Sustained Efficacy:We select multiple epitopes from
    conserved regions of multiple viral or tumor-associated
    antigens, increasing the likelihood that the vaccine will
    continue to elicit an effective immune response as the virus or
    tumor changes.                                                         
|
| |  | Improved Safety:The
    use of selected, well defined, epitopes is designed to elicit a
    specifically targeted immune response with fewer undesired side
    effects than can be caused by whole antigen vaccines.                                                                                                        
|
| |  | Better Quality Control:Our approach allows us to develop
    well-characterized, fully synthetic vaccines with a high degree
    of consistency, simplifying manufacturing and product
    characterization.                                                                                                                 
|
| |  | Broader Disease and Population Coverage:We are designing vaccines using
    multiple epitopes so that our vaccines can address different
    strains of a disease or be used to treat the worlds
    diverse population, regardless of varying genetic profiles.                                                            

Our Vaccine Product Candidates

We have a number of vaccine product opportunities
as described in the following table:

|                      |                      |                              |                                |                   |         
|--------------------- | -------------------- | ---------------------------- | ------------------------------ | ----------------- | --------
|                      |                      |                              |                                | Commercialization
|Indication            |                      | Product Development Stage(1) |                                | Rights           
|                      |                      |                              |                                |                  
|Infectious Diseases   |                      |                              |                                |                  
|Therapeutic Vaccines  |                      |                              |                                |                  
|                      | HIV                  |                              | Phase I/II Clinical Trial      |                   | Epimmune
|                      | Hepatitis B          |                              | Preclinical                    |                   | Genencor
|                      | Hepatitis C          |                              | Preclinical                    |                   | Genencor
|                      | Papilloma virus      |                              | Preclinical                    |                   | Genencor
|Prophylactic Vaccines |                      |                              |                                |                  
|                      | HIV                  |                              | Preclinical                    |                   | Epimmune
|                      | Malaria              |                              | Preclinical                    |                   | Epimmune
|                      | Hepatitis C          |                              | Preclinical                    |                   | Genencor
|Cancer                |                      |                              |                                |                  
|Therapeutic Vaccines  |                      |                              |                                |                  
|                      | Colorectal           |                              | Phase I/II Clinical Trial      |                   | Epimmune
|                      | Lung                 |                              | Phase I/II Clinical Trial      |                   | Epimmune
|                      | Breast               |                              | Preclinical                    |                   | Epimmune
|                      | Prostate             |                              | Epitope/Antigen Identification |                   | Epimmune
|Ex Vivo Immunotherapy |                      |                              |                                |                  
|                      | Various Solid Tumors |                              | Preclinical                    |                   | Nexell  
|                      | Various Solid Tumors |                              | Preclinical                    |                   | Anosys  
|                      | Various Solid Tumors |                              | Preclinical                    |                   | IDM     

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | By using the term Epitope/ Antigen
    Identification, we mean that we are discovering, evaluating and
    selecting epitopes for inclusion in candidate vaccines that
    would be advanced to preclinical development. By using the term
    Preclinical, we mean that we have identified and selected
    specific epitope compositions for inclusion in a vaccine and are
    conducting preclinical testing aimed at optimizing the
    construction, formulation and manufacture of the vaccine and
    toxicology studies with the objective of filing an
    investigational new drug application or IND with regulatory
    authorities.

Therapeutic
Vaccine for HIV

We commenced our Phase I/ II clinical trial of
our EP HIV-1090 therapeutic, multi-epitope vaccine in
HIV-1-infected patients in September 2002. The initial Phase I/
II trial is a double blind, placebo-controlled, dose escalation
study and will include approximately 40 patients. The primary
objective of this study is to determine the safety and the
immunogenicity of the vaccine as measured by the quantity and
breadth of CTLs generated. Completion of the Phase I/ II trial
and final data are expected in the second quarter of 2004.

Our EP HIV-1090 vaccine is composed of 21 CTL
epitopes, which were selected from conserved regions of multiple
HIV proteins using our EIS proprietary technology. The use of
conserved epitopes is expected to make it much less likely that
the virus will develop genetic changes or mutations that can
escape the vaccine-induced immune response. The vaccine
candidate will be delivered as DNA combined with PVP, a polymer
shown to increase the potency of DNA vaccines in animal studies.
In addition, the vaccine will include our PADRE universal helper
T cell epitope, which is designed to enhance the magnitude and
duration of CTL response. We have filed several patent
applications in the United States and abroad that disclose the
epitopes comprising the EP HIV-1090 vaccine construct, both as
individual epitopes and as our EP HIV-1090 minigene construct
itself. The applications are at various stages of prosecution.

Patients enrolled in the trial will be immunized
while receiving multiple antiretroviral drugs, a regimen termed
highly active antiretroviral therapy, to reduce the suppressive
effects that HIV has on the immune system. The goal of our
vaccine is to induce a sufficiently potent immune response so
that the patients immune system can control the virus,
allowing the patient to suspend or stop taking the
antiretroviral drugs that can have serious side effects and
induce drug resistance when taken over time.

Therapeutic
Vaccine for Lung and Colorectal Cancer

We commenced our Phase I/ II clinical trial of
our EP-2101 therapeutic, multi-epitope vaccine in lung and
colorectal cancer patients in February 2003. Primary objectives
of this initial Phase I/ II trial will be to determine the
safety and immunogenicity of the EP-2101 vaccine. Completion of
the Phase I/ II trial and final data are expected in the second
quarter of 2004. This initial clinical trial will involve
approximately 25 cancer patients who have had surgery to remove
the majority of the cancer cells. Patients, who have had surgery
to remove the majority of the cancer cells, generally have
normal immune system function.

Our initial cancer vaccine candidate is composed
of multiple tumor-specific CTL epitopes that were selected from
tumor-associated antigens using our proprietary processes. Some
of the epitopes have been modified to create analogs in order to
enhance the potency of the T cell response induced by the
vaccine. The vaccine candidate will be delivered as an injection
of peptide epitopes in combination with conventional therapies.
In addition, the vaccine candidate will include our PADRE
universal helper T cell epitope. We have filed several patent
applications in the United States and abroad that disclose the
individual peptides that comprise our initial cancer vaccine
candidate. These applications are also in various stages of
prosecution. In addition, we plan to file one or more
applications directed to the specific epitopes comprising the
vaccine to be delivered in the form of peptides and an adjuvant
within the next several months.

Clinical trial results and studies conducted by
others correlating T cell infiltration into tumors with a more
favorable prognosis indicate that T cells can play an important
role in the control and elimination of cancer cells. However,
because cancer cells are inefficient at inducing anti-cancer T
cell responses, tumors grow and metastasize without attracting
the attention of the immune response. Also, once tumors become
large, they suppress the immune system by liberating factors
that inhibit T cell activation. Following standard therapy to
remove the majority of the cancer cells, our vaccine will be
administered to patients in order to

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induce a strong T cell response that we believe
will eliminate any remaining cancer cells and prevent disease
recurrence.


Other
Vaccines

In addition, we and our strategic collaborators
are conducting research and preclinical development of vaccines
to treat breast, prostate and other cancers, hepatitis B,
hepatitis C and human papilloma virus and vaccines for the
prevention of hepatitis C, HIV and malaria. We believe our
technology has broad applicability and will allow us to develop
vaccines to pursue these cancer and infectious disease
indications.

Our Technology

Epitope
Identification System (EIS)

We developed and optimized EIS based on extensive
work over the past eleven years in the field of T cell
recognition and stimulation. Our intellectual property portfolio
includes one issued patent and several pending patent
applications having claims directed to peptide epitopes and
methods of using sequence motifs to identify and make peptide
epitopes. With the genetic sequence of a tumor-associated
antigen, virus, bacteria or parasite as input, we use EIS to
rapidly identify antigen-specific epitopes that meet
pre-determined criteria for broad conservation, binding,
population coverage and immunogenicity.



| |   |                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We use computer algorithms to analyze the
    sequence of all known antigens associated with the target
    disease for the presence of peptides that contain specified
    types of epitopes from conserved regions of the antigens.      
|
| |  | We synthesize peptides that meet these
    requirements and perform in vitroassays to assess
    binding to human MHC molecules referred to as human leukocyte
    antigens, or HLA.                                                       
|
| |  | We evaluate peptides to assess their ability to
    bind broadly to a spectrum of MHC molecules referred to as HLA.
    We identify epitopes from these peptides that enable broad
    population coverage for the vaccine being developed.
|
| |  | We then test peptides for immunogenicity, both
    in vivoin transgenic mice, which express HLA, and in
    vitroagainst infected or transfected cells.                                                                                    

Using EIS, we have already identified T cell
epitopes for a number of diseases, including breast, colon, lung
and prostate cancers, as well as hepatitis C virus, hepatitis B
virus, human papilloma virus, HIV and malaria.

Multi-Epitope
Vaccines

Our candidate vaccines for each cancer and
infectious disease indication are comprised of the particular
epitopes that can stimulate the specific T cells needed to
combat the relevant indication. We select epitopes for a target
indication using EIS and then combine them to form an epigene, a
string of DNA coding for select epitopes from several antigens.
In animal models, epigene vaccines have elicited strong
multi-specific T cell responses that are both stronger and
broader than the responses generated by whole antigen DNA
vaccines.

The first of our candidate vaccines to enter
human clinical trials is a therapeutic vaccine targeting HIV.
The vaccine incorporates multiple CTL epitopes from six HIV
associated antigens and our PADRE universal helper T cell
epitope. We began a Phase I/ II clinical trial of our EP
HIV-1090 therapeutic, multi-epitope vaccine in HIV-1 infected
patients in September 2002.

In addition to the Phase I/ II clinical trial for
our HIV vaccine, we are advancing epigene candidate vaccines for
HIV, hepatitis B virus, hepatitis C virus and human papilloma
virus in preclinical development. To be effective in treating or
preventing HIV, hepatitis B virus, hepatitis C virus and human
papilloma virus, vaccines should target multiple strains of the
virus and induce T cells directed at conserved regions of the
virus. Our candidate vaccines incorporate epitopes, which are
selected from multiple viral proteins and from highly conserved
regions of the virus.

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PADRE

Our PADRE universal helper T cell epitope
consists of a family of small (13 amino acid), synthetic
proprietary molecules that are potent immunostimulants, meaning
that they stimulate the immune response. When combined with
disease-specific antigens, PADRE induces important signals that
enhance the antigen-specific immune response, enabling the
production of more effective antibody responses. We believe that
PADRE offers several advantages over the immunogenic carrier
proteins traditionally used to enhance antibody vaccines:



| |   |                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | PADRE can be easily synthesized and its linkage
    to an antigen readily characterized, whereas the carrier
    proteins traditionally used to enhance immune response can
    complicate manufacturing;                                                                                                                      
|
| |  | The antibody responses generated by PADRE are
    primarily specific to the vaccine antigen, rather than to PADRE,
    whereas carrier proteins generate high antibody responses
    specific primarily to the carrier protein itself rather than to
    the vaccine antigen, which can render the vaccine ineffective;
    and
|
| |  | Because it simplifies vaccine manufacture and
    induces antibodies primarily specific to the vaccine antigens
    with which it is used, PADRE could simplify the development of
    combination vaccines, whereas the use of carrier proteins is
    generally limited to vaccines containing single protein antigens.      

We are evaluating several antibody vaccine
opportunities, primarily as licensing opportunities with others.
The vaccines being considered target cancers, bacteria,
autoimmune disorders and neurologic diseases. All of these
vaccine opportunities incorporate our PADRE technology with one
or more target antigens. We use our PADRE technology in all of
our T cell vaccines and have licensed this technology to several
of our corporate collaborators.

ImmunoStealth
Technology

Although an enhanced immune response is critical
in combating many diseases, in some cases, immunogenicity is a
barrier to further development of potential therapeutic
products. This barrier is often discovered only late in the
development process. Helper T cells play a central role in the
bodys immune response, including stimulating B cells to
produce antibodies. Using our ImmunoStealth technology, we can
identify helper T cell epitopes in a product candidate and
modify them to potentially reduce or eliminate recognition by
helper T cells, thereby enhancing the safety and efficacy of the
product. We are exploring opportunities, both internally and
with potential partners, for using our ImmunoStealth technology
at both an early stage and at later stages in the discovery
process to identify and potentially eliminate undesirable
antibody responses to proteins used as therapeutic drugs or in
consumer products.

Collaborations and Licenses

We intend to continue to seek research and
development collaborations with multiple pharmaceutical and
biotechnology companies to develop and commercialize therapeutic
and prophylactic vaccines for select infectious disease and
tumor types. Our unique capabilities include expertise in
identifying those epitopes from viral and tumor-associated
antigens that elicit the desired immune response as well as
expertise in creating and evaluating product candidates that
elicit a potent immune response.



| |                                                       
| | ------------------------------------------------------
| | Collaboration and Technology In-License
    Agreements

Genencor International, Inc.In July 2001, we entered into a
collaboration with Genencor International, Inc. pursuant to
which we exclusively licensed to Genencor our PADRE and epitope
technologies for vaccines to treat or prevent hepatitis B,
hepatitis C and human papilloma virus. In connection with this
collaboration, we received an upfront license fee. In addition,
Genencor made an initial ten percent equity investment in our
common stock at a premium to the market price and, if certain
conditions are met, has the right to acquire up to 500,000
additional shares of Epimmune common stock. Under our agreement
with Genencor, we may receive a total of approximately
$60 million in payments, including the initial equity
investment but excluding royalties. In January 2002, we received
a payment from Genencor for achievement of our first milestone,
identification of a product candidate to treat chronic hepatitis
B infection. In addition, Genencor fully funds

7



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our research in these specific indications and is
obligated to pay us royalties on sales of any products that may
be developed under the collaboration. The initial collaboration
had a term through September 2003, and in October 2002, was
extended to September 2004. Genencor has the right to terminate
the agreement if we breach our obligations under the
collaboration agreement or upon certain force majeure events.


Valentis, Inc.In
December 2000, as amended in October 2002, we licensed gene
delivery technology on a nonexclusive basis from Valentis, Inc.
for preventive and therapeutic DNA vaccines against HIV and
hepatitis C virus. In October 2002, we licensed the same
gene delivery technology on a nonexclusive basis from Valentis
for preventive and therapeutic DNA vaccines against cancer. In
connection with both licenses, we paid an upfront license fee
and will make payments to Valentis upon achievement of certain
clinical milestones and pay royalties on sales of any products
incorporating the Valentis technology.

Bavarian Nordic A/S.In November 2001, we entered into a
collaboration agreement with Bavarian Nordic A/S to combine our
technology and expertise in the fields of T cell epitope
identification and vaccine design with Bavarian Nordics
vaccine delivery technology and manufacturing expertise to
develop vaccines for the treatment or prevention of HIV
infection. We will share equally with Bavarian Nordic in all
research related expenses during the five-year term of this
collaboration.



| |                           
| | --------------------------
| | License Options Agreements

Elan Corporation, plc.In April 2001, we entered into a
license and option agreement with Elan, which gives Elan an
exclusive license to evaluate our PADRE technology in animal
studies and Phase I clinical trials for prevention and treatment
of neurodegenerative conditions including Alzheimers
Disease. Elan also has the right to negotiate an exclusive
license for continued development and commercialization of
products using the technology in that field. In connection with
the agreement, we received an upfront license fee.

Aventis Pasteur Limited.In July 2002, we entered into an
evaluation and license option agreement with Aventis Pasteur
Limited, which gives Aventis, for a limited period of time, the
right to exercise its option to license from us certain epitopes
from two cancer associated antigens. Aventis Pasteur will
evaluate the epitopes for possible integration into its poxvirus
therapeutic cancer vaccine program. In the event Aventis Pasteur
exercises its option under the agreement, the parties have
agreed to negotiate an exclusive license to be granted to
Aventis Pasteur to allow it to use the epitopes in connection
with its proprietary poxvirus delivery system in several cancer
fields. We received an evaluation license fee and are further
entitled to receive a license fee if Aventis Pasteur exercises
its option. In the event Aventis exercises its option, and the
parties successfully negotiate a license agreement, we may be
entitled to receive commercialization milestone payments and
royalties on product sales if Aventis Pasteur develops products
using our technology.

Immuno-Designed Molecules, S.A.In October 2002, we entered into an
evaluation and license option agreement with Immuno-Designed
Molecules, S.A. for certain cancer antigens for use in
IDMs ex vivocancer therapy program. Under the
terms of the agreement, IDM had 120 days from the date of
the option agreement to evaluate the epitopes and exercise its
option to license certain patented and non-patented rights to
our universal cancer epitope packages for use in ex vivocancer therapy. In February 2003, IDM exercised its option
and we are negotiating a license agreement whereby we will grant
IDM a non-exclusive license to use the epitopes in connection
with its DendritophageTMex vivo technology.
We received an evaluation license fee when we entered into the
evaluation and license option agreement and a license fee when
IDM exercised its option. In the event the parties enter into a
license agreement, we may be entitled to receive
commercialization milestone payments and royalties on product
sales if IDM develops products using our technology.

Beckman Coulter, Inc.In January 2003, we entered into an
option and license agreement with Beckman Coulter, Inc. under
which Beckman Coulter may acquire a non-exclusive, worldwide
license to certain Epimmune epitopes on an epitope-by-epitope
basis for certain infectious diseases and cancer indications.
Beckman Coulter may use these epitopes for research and
diagnostic applications in connection with their MHC Tetramer
and other immune response monitoring technologies. Under the
terms of the agreement, we are entitled to annual option fees.
In the event that Beckman Coulter exercises its option to
acquire a license

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to any specific epitope, we will be entitled to
additional license fees for each epitope and royalties on
product sales in the event any products are commercialized using
our technology.




| |                                                                  
| | -----------------------------------------------------------------
| | License Agreements for Technology Outside
    our Areas of Focus.

Nexell Therapeutics, Inc.In March 2001, we entered into a
license agreement with Nexell Therapeutics Inc. granting Nexell
a non-exclusive license to certain cancer antigens and
associated technology for use in ex vivocell therapy. In
connection with the agreement, we received an upfront license
fee. We are also entitled to receive milestone and royalty
payments on product sales, if any products are developed. In May
2002, Nexell publicly announced that they were winding down
their operations.

Pharmexa A/S.In
June 2001, we entered into a license agreement with Pharmexa A/
S granting Pharmexa a non-exclusive license to our PADRE
technology for use in connection with Pharmexas
AutoVacTM technology for controlling autoimmune
diseases. In connection with the agreement, we received an
upfront license fee and are also entitled to receive milestone
and royalty payments on product sales, if any products are
developed.

Biosite Incorporated.In August 2001, we entered into a
license agreement with Biosite Incorporated granting Biosite a
non-exclusive, irrevocable license to our PADRE technology for
use in connection with Biosites antibody technology which
can be used to discover any target and its utility as a target
for diagnostic or therapeutic products. In connection with the
agreement, we received an upfront license fee.

Anosys Inc.In
August 2001, we entered into a license agreement with Anosys
Inc., formerly AP Cells, granting Anosys a non-exclusive license
to certain cancer antigens and associated technology for use in
ex vivocell therapy. In connection with the agreement,
we received an upfront license fee and are also entitled to
receive milestone and royalty payments on product sales, if any
products are developed. In the event we merge with Anosys, this
agreement will be terminated.



| |                            
| | ---------------------------
| | Government Research Funding

In October 2002, we were awarded a contract from
the National Institute of Allergy and Infectious Diseases, or
NIAID, an institute of the National Institutes of Health, or
NIH, to conduct research and development aimed at developing a
malaria vaccine. The award is part of the NIAIDs
Millennium Vaccine Initiative that solicits vaccine technology
from the private sector to accelerate the development of
effective vaccines for malaria and tuberculosis. The program is
composed of a Phase A feasibility study and an option for a
Phase B development program for a total potential value of
$3.5 million over five-years. We are working with
investigators at the Naval Medical Research Center on the
program. In June 2001, we were also awarded a NIH grant to
continue our work in collaboration with the U.S. Naval Medical
Research Center to develop a vaccine against malaria. We
completed this work in May 2002.

In August 2000, we were awarded a
$3.8 million grant from the Integrated Preclinical/
Clinical Program of the NIH, Division of AIDS, for the
development of our vaccine to treat people infected with HIV.
Pursuant to the terms of the grant, the government agreed to
fund a four-year program designed to evaluate Epimmunes
epitope-based vaccines as a therapeutic strategy for the
treatment of HIV-1-infected individuals on highly active
antiretroviral therapy. The current Phase I/ II clinical trial
for the treatment of HIV, as well as preclinical activities, is
being sponsored in part by this grant.



| |                                                    
| | ---------------------------------------------------
| | Former Collaboration with Searle, Now
    Pharmacia

In November 2000, we were notified by Pharmacia,
that following the merger between Pharmacia and Monsanto, the
parent of Searle, they would not continue funding cancer vaccine
programs, including the collaboration that we had formed with
Searle.

Patents, Proprietary Rights and
Licenses

Our success will depend in part on our ability to
obtain patents having claims directed to our products and
processes, both in the United States and other countries. The
patent position of biotechnology and

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pharmaceutical companies is highly uncertain and
involves complex legal and factual questions. We file patent
applications, as we believe appropriate that cover our
proprietary technology.


We have developed our patent portfolio over
approximately the past ten years. The patents and patent
applications in our patent portfolio include claims directed to
epitope identification, epitope analogs, methods for identifying
epitopes and epitope analogs, vaccine design, specific vaccines
and our PADRE universal HTL epitope and ImmunoStealth epitope
modification technologies. As of March 14, 2003, our
intellectual property portfolio includes 20 issued United
States patents, 39 issued foreign patents,
56 applications pending in the United States and
138 foreign applications pending, and licenses to other
intellectual property relevant to epitope discovery and gene
delivery.

These patent applications and patents in the
portfolio are owned by or are under license to us. We cannot be
certain that patents will issue from the patent applications we
have filed or licensed, or that if patents do issue, that issued
claims in those patents will be sufficiently broad to exclude
others from making or using our products and processes. In
addition, we cannot be certain that third parties will not
challenge, invalidate or circumvent any patents issued to us, or
that the rights granted thereunder are sufficiently broad to
exclude others from making or using our products and processes.

As is typical in the biotechnology industry, our
commercial success will depend in part on our ability to avoid
infringing patents issued to competitors or breaching the
technology licenses upon which we might base our products. If we
fail to obtain a license to any technology that we require to
commercialize our products, or to develop an alternative
compound and obtain regulatory approval within an acceptable
period of time if required to do so, our business would be
harmed. Litigation or the threat of litigation, which could
result in substantial costs to us, may also be necessary to
enforce the claims in any patents issued to us, to defend
ourselves against any patents owned by third parties that are
asserted against us, or to determine the scope and validity of
others proprietary rights. In addition, we may have to
participate in one or more interference proceedings declared by
the United States Patent and Trademark Office, which could
result in substantial costs to determine the priority of
inventorship.

If we become involved in litigation or
interference proceedings, we may incur substantial expense, and
the proceedings may divert the attention of our technical and
management personnel, even if we ultimately prevail. An adverse
determination in proceedings of this type could subject us to
significant liabilities, allow our competitors to market
competitive products without obtaining a license from us,
prohibit us from marketing vaccines or other products or require
us to seek licenses from third parties that may not be available
on commercially reasonable terms, if at all. If we cannot obtain
such licenses, we may be restricted or prevented from developing
and commercializing our product candidates.

We also attempt to protect our proprietary
products and processes in part by confidentiality agreements
with our collaborative partners, employees and consultants.
These agreements may be breached, and we may not have adequate
remedies for any breach, and our trade secrets may become known
or be independently discovered by competitors.

Competition

The biotechnology industry continues to undergo
rapid change and competition is intense and is expected to
increase. Our competitors may succeed in developing technologies
and products that are more effective or affordable than any of
the products we are developing or which would render our
technology and products obsolete and noncompetitive. We compete
with many public and private companies, including pharmaceutical
companies, chemical companies, specialized biotechnology
companies and academic institutions. There are 16 drugs
currently approved in the United States for HIV, and according
to a PhRMA 2001 report on pharmaceutical drug
development, there were 98 new product candidates in clinical
development for HIV and related conditions, including 14 HIV
vaccines. In addition, according to a PhRMA 2001 report
on pharmaceutical drug development, there were 402 new product
candidates in clinical development for the treatment of cancer,
and at least 33 companies were developing more than 50 vaccines
against various cancers. Many of our competitors have
substantially greater experience, financial and technical
resources and production, marketing and development capabilities
than us. In addition, many of our competitors have

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significantly greater experience conducting
preclinical studies and clinical trials of new products, and in
obtaining regulatory approvals for such products. Accordingly,
some of our competitors may succeed in obtaining, developing and
commercializing products more rapidly or effectively than us, or
in developing technology and products that would render our
technology and products obsolete or noncompetitive. We are aware
of companies that are pursuing the development of
pharmaceuticals that target the same diseases that we are
targeting. These and other efforts by potential competitors may
be successful, and other technologies may be developed to
compete with our technologies. If we cannot successfully respond
to technological change in a timely manner, our
commercialization efforts may be harmed.


In addition, our products under development
address a range of markets. Almost all large pharmaceutical
companies have programs for infectious diseases and cancer. Our
competition will ultimately be determined in part by the
potential indications for which our compounds are developed and
ultimately approved by regulatory authorities. An important
factor in competition may be the timing of market introduction
of our products and competitive products. Accordingly, the
relative speed with which we can develop products, complete the
clinical trials and approval processes and supply commercial
quantities of the products to the market are expected to be
important competitive factors. We expect that competition among
products approved for sale will be based, among other things, on
product effectiveness, safety, reliability, availability, price
and patent position.

Our competitive position also depends upon our
ability to attract and retain qualified personnel, obtain patent
protection or otherwise develop proprietary products or
processes and secure sufficient capital resources for the
often-substantial period between technological conception and
commercial sales.

Government Regulation

Our research and development activities and any
future manufacturing and marketing of our products are subject
to regulation for safety and efficacy by numerous governmental
authorities in the United States and other countries. In the
United States, drugs are subject to rigorous regulation by the
Food and Drug Administration, or FDA. The process from
development to approval typically takes between 7 and
12 years, depending upon the type, complexity and novelty
of the pharmaceutical product. The Federal Food, Drug and
Cosmetic Act and the Public Health Service Act govern the
testing, manufacture, safety, efficacy, labeling, storage,
record keeping, approval, advertising and promotion of our
products. In addition to FDA regulations, we are also subject to
other federal and state regulations such as the Occupational
Safety and Health Act and the Environmental Protection Act.
Product development and approval within this regulatory
framework involves the expenditure of substantial resources. In
addition, this regulatory framework may change and additional
regulation may arise at any stage of our product development,
which may affect approval or delay an application or require
additional expenditures.

The steps required before a pharmaceutical agent
may be marketed in the United States include:



| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | preclinical laboratory and animal tests,                                                                                                                   
|
| |  | the submission to the FDA of an application for
    an IND, which must become effective before human clinical trials
    may commence in the United States,
|
| |  | adequate and well-controlled human clinical
    trials to establish the safety and efficacy of the drug,                                                   
|
| |  | the submission of a new drug application, or NDA,
    or a biologic license application, or BLA to the FDA, and                                            
|
| |  | the FDA approval of the NDA or BLA prior to any
    commercial sale or shipment of the drug.                                                               

In addition to obtaining FDA approval for each
product, each domestic drug-manufacturing establishment must be
registered with, and approved by, the FDA. Drug product
manufacturing establishments located in California also must be
licensed by the state of California in compliance with separate
regulatory requirements.

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Preclinical tests include laboratory evaluation
of product chemistry and animal studies to assess the safety and
efficacy of the product and its formulation. The results of the
preclinical tests are submitted to the FDA as part of an IND and
subsequently when additional non-clinical work is completed and,
unless the FDA objects, the IND will become effective
30 days following its receipt by the FDA. Submission of an
IND may never result in the commencement of human clinical
trials.

Clinical trials involve the administration of the
drug under the supervision of a qualified principal investigator
to healthy volunteers or to patients identified as ones with the
condition for which the drug is being tested. Clinical trials
are conducted in accordance with protocols that detail the
objectives of the study, the parameters to be used to monitor
safety and the efficacy criteria to be evaluated. Each protocol
is submitted to the FDA as part of the IND. Each clinical study
is conducted under the auspices of an independent Institutional
Review Board, or IRB, at the institution at which the study will
be conducted. Prior to its approval for the study to be
conducted, the IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability
of the institution.

Clinical trials are typically conducted in three
sequential phases prior to product approval, but the phases may
overlap. Phase I involves the initial introduction of the drug
into healthy human subjects and often into patients as well. In
Phase I, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and clinical
pharmacology. Phase II involves studies in a limited patient
population to:



| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | determine the effectiveness of the drug for
    specific targeted indications,
|
| |  | determine dosage tolerance and optimal dosage and
    regimen, and            
|
| |  | identify possible adverse side effects and safety
    risks.                  

When a compound is found to be effective and to
have an acceptable safety profile in Phase II evaluations,
Phase III trials are undertaken to evaluate clinical
efficacy further and to test further for safety within an
expanded patient population at multiple clinical study sites.
Even after NDA or BLA approval, the FDA may require additional
Phase IV clinical trials. The FDA reviews both the clinical
plans and the results of the trials and may discontinue the
trials at any time if there are significant safety issues.

The results of the preclinical tests and clinical
trials and other data are submitted to the FDA in the form of an
NDA or BLA for marketing approval. The testing and approval
process is likely to require substantial time and effort and any
approval may not be granted on a timely basis, or may not be
granted at all. The approval process is affected by a number of
factors, including the severity of the disease, the availability
of alternative treatments and the risks and benefits
demonstrated in clinical trials. Additional animal studies or
clinical trials may be requested during the FDA review period
and may delay marketing approval. After FDA approval for the
initial indications, further clinical trials may be necessary to
gain approval for the use of the product for additional
indications. The FDA mandates that adverse effects be reported
to the FDA and may also require post-marketing testing to
monitor for adverse effects, which can involve significant
expense.

Among the conditions for NDA or BLA approval is
the requirement that the prospective manufacturers quality
control and manufacturing procedures conform to good
manufacturing practices prescribed by the FDA. Domestic
manufacturing facilities are subject to FDA inspections twice
yearly and foreign manufacturing facilities are subject to
periodic FDA inspections or inspections by the foreign
regulatory authorities with reciprocal inspection agreements
with the FDA.

The Prescription Drug User Fee Act of 1992, as
amended, requires companies engaged in pharmaceutical
development, such as our company, to pay user fees in the amount
of at least $100,000 upon submission of an NDA. We do not
believe that this requirement will harm our business.

For marketing outside the United States, we are
also subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs. The
requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to
country.

The time required for completing such testing and
obtaining such approvals is uncertain and approval itself may
not be obtained. In addition, delays or rejections may be
encountered based upon changes in FDA

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policy during the period of product development
and FDA regulatory review of each submitted NDA or BLA. Similar
delays may also be encountered in foreign countries. Even after
such time and expenditures, regulatory approval may not be
obtained for any drugs that we develop. Moreover, if regulatory
approval of a drug is granted, such approval may entail
limitations on the indicated uses for which the drug may be
marketed. Further, even if such regulatory approval is obtained,
a marketed drug, its manufacturer and the facilities in which
the drug is manufactured are subject to continual review and
periodic inspections. Later discovery of previously unknown
problems with a product, manufacturer or facility may result in
restrictions on such product or manufacturer, including
withdrawal of the product from the market.


Manufacturing

To be successful, our products and the products
of our partners must be manufactured in commercial quantities in
compliance with regulatory requirements and at an acceptable
cost. We have not commercialized any products, nor have we
demonstrated that we can manufacture commercial quantities of
our product candidates or our partners product candidates
in accordance with regulatory requirements. If we cannot
manufacture products in suitable quantities in accordance with
regulatory standards, either on our own our through contracts
with third parties, it may delay clinical trials, regulatory
approvals and marketing efforts for such products. Such delays
could adversely affect our competitive position and our chances
of achieving profitability. We cannot be sure that we can
manufacture, either on our own or through contracts with third
parties, such products at a cost or in quantities, which are
commercially viable. We currently rely and intend to continue to
rely on third-party contract manufacturers to produce materials
needed for clinical trials and, ultimately, for product
commercialization.

Employees

As of March 14, 2003, we employed
52 individuals full-time, of whom 40 were engaged in
research and development, and 19 of whom hold Ph.D. or M.D.
degrees. A significant number of our management and professional
employees have had prior experience with pharmaceutical,
biotechnology or medical product companies. None of our
employees are covered by collective bargaining agreements, and
management considers relations with our employees to be good.

Available Information

Our website address is www.epimmune.com.
We make available free of charge through our website our annual
report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to these
reports as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and
Exchange Commission.

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RISK FACTORS

We wish to caution readers that the following
important factors, among others, in some cases have affected our
results and in the future could cause our actual results and
needs to vary materially from forward-looking statements made
from time to time by us on the basis of managements
then-current expectations. The business in which we are engaged
is in rapidly changing and competitive markets and involves a
high degree of risk, and accuracy with respect to
forward-looking projections is difficult.

Our substantial additional financing
requirements and limited access to financing may adversely
affect our ability to develop products and fund our
operations.

Assuming that we do not complete the merger with
Anosys and related financing, we anticipate that our existing
cash and investments and interest earned thereon, along with the
cash receipts related to existing contracts will enable us to
maintain our current and planned operations only through
December 2003. We will continue to spend substantial amounts on
research and development, including amounts spent for
manufacturing clinical supplies, conducting clinical trials for
our product candidates and expanding our drug development
programs. Therefore, we will need to raise additional funding
and we do not have committed external sources of funding and may
not be able to obtain any additional funding, especially if weak
market conditions persist for biotechnology companies. Our
future operational and capital requirements will depend on many
factors, including:



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | whether we complete the merger with Anosys and
    related financing;                                                                    
|
| |  | the costs associated with our clinical trials for
    our vaccine targeting HIV, which began in September of 2002;                       
|
| |  | the costs associated with our clinical trials for
    our vaccine targeting lung and colorectal cancer, which began in
    February 2003;
|
| |  | progress with other preclinical testing and
    clinical trials in the future;                                                           
|
| |  | our ability to establish and maintain
    collaborative research and development arrangements and license
    agreements;                
|
| |  | the actual revenue we receive under our
    collaborative research and development agreements;                                           
|
| |  | the actual costs we incur under our research
    collaboration with Bavarian Nordic;                                                     
|
| |  | the actual payment of license fees which may
    become payable at the option of the licensor;                                           
|
| |  | the time and costs involved in obtaining
    regulatory approvals;                                                                       
|
| |  | the costs involved in filing, prosecuting,
    enforcing and defending patent claims and any other proprietary
    rights;               
|
| |  | competing technological and market developments;                                                                                         
|
| |  | changes in our existing research relationships;                                                                                          
|
| |  | continued scientific progress in our drug
    discovery programs; and                                                                    
|
| |  | the magnitude of our drug discovery and
    development programs.                                                                        

We intend to seek additional funding through
collaborative arrangements and license agreements, research
grants or equity or debt financings. In the event we are able to
obtain financing, it may not be on favorable terms. In addition,
we may not be able to enter into additional collaborations to
reduce our funding requirements. If we acquire funds by issuing
securities, further dilution to existing stockholders will
result. If we raise funds through additional collaborations and
license agreements, we will likely have to relinquish some or
all of the rights to product candidates or technologies that we
may have otherwise developed ourselves. If we are unable to
obtain funding, we may be required to cease development of some
product candidates, reduce the scope of our operations, sell the
Company or certain of its assets or technologies or cease
operations.

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We may not be successful in completing our
proposed merger with Anosys, Inc.

Although we have preliminarily agreed with Anosys
to merge our operations, we may never enter into a definitive
agreement with Anosys and even in the event that we do enter
into a definitive merger agreement, the merger may not close
because we are unable to obtain financing for the combined
company or our stockholders may fail to approve the issuance of
the shares of our common stock in the proposed merger or in the
proposed financing. If the proposed merger and related financing
is not completed or is delayed, our business may suffer for a
number of reasons including, but not limited to, other
opportunities foregone while the transaction was pending,
additional costs incurred in support of the proposed merger,
loss of employees due to uncertainty surrounding the acquisition
and a further reduction in our cash balances. Even if the
proposed merger is completed, we may fail to realize the
anticipated benefits of the merger.

The process of developing therapeutic products
requires significant research and development, preclinical
testing and clinical trials, all of which are extremely
expensive and time-consuming and may not result in a commercial
product.

Except for our HIV and lung and colorectal
vaccine candidates, for which we began clinical trials in
September 2002 and February 2003 respectively, all of our
potential vaccine products are in research or preclinical
development, the results of which do not necessarily predict or
prove safety or efficacy in humans. We must demonstrate for each
vaccine, safety and efficacy in humans through extensive
clinical testing, which is very expensive, can take many years,
and has an uncertain outcome. We may experience numerous
unforeseen events during or as a result of the testing process
that could delay or prevent testing or commercialization of our
products, including the following:



| |   |                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the results of preclinical studies may be
    inconclusive, or they may not be indicative of results that will
    be obtained in human clinical trials;                                                                                
|
| |  | after reviewing test results, we or our
    collaborators may abandon projects that we might previously have
    believed to be promising;                                                                                              
|
| |  | we, our collaborators or regulators may suspend
    or terminate clinical trials if the participating subjects or
    patients are being exposed to unacceptable health risks;                                                          
|
| |  | we may have to delay clinical trials as a result
    of scheduling conflicts with participating clinicians and
    clinical institutions, or difficulties in identifying and
    enrolling patients who meet trial eligibility criteria;
|
| |  | safety and efficacy results attained in early
    human clinical trials may not be indicative of results that are
    obtained in later clinical trials; and                                                                            
|
| |  | the effects our vaccine candidates have may not
    be the desired effects or may include undesirable side effects
    or other characteristics that preclude regulatory approval or
    limit their commercial use if approved.        

The data collected from clinical trials may not
be sufficient to support regulatory approval of any of our
products, and the FDA may not ultimately approve any of our
therapeutic products for commercial sale, which will adversely
affect our revenues and prospects. If we fail to commence or
complete, or experience delays in, any of our planned clinical
trials, our operating income, our stock price and our ability to
conduct our business as currently planned could be harmed.

Our history of operating losses and our
expectations of continuing losses may hurt our ability to reach
profitability or continue operations.

We have experienced significant operating losses
since our inception in 1987. As of December 31, 2002, we
had an accumulated deficit of $150.9 million. We expect to
continue to incur substantial operating expenses and net
operating losses for the foreseeable future, which may hurt our
ability to continue operations. We have not generated revenues
from the commercialization of any product. All of our revenues
to date have consisted of contract research and development
revenues, license and milestone payments, research grants,
certain asset divestitures and interest income. We expect that
substantially all of our revenues for the

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foreseeable future will result from similar
sources. To achieve profitable operations, we, alone or with
collaborators, must successfully identify, develop, register and
market proprietary products. We do not expect to generate
revenues from the commercialization of any product for at least
six years. We may not be able to generate sufficient product
revenue to become profitable. Even if we do achieve
profitability, we may not be able to sustain or increase our
profitability on a quarterly or yearly basis.


We are at an early stage of development, and
we may experience delays and other problems in entering clinical
trials.

We are an early stage research and development
company, and only recently commenced our first Phase I/II
clinical trials for two of our vaccines. There are many factors
outside of our control that may affect the timing of completion
of our current clinical trials, and any future clinical trials
may not commence when planned or be completed within any
anticipated time frame. We have already experienced unexpected
delays in filing an IND for our therapeutic vaccine candidate
targeting HIV, due to additional time necessary to complete all
of the animal safety studies that were contemplated in our
pre-IND discussions with the FDA. We may experience unexpected
delays in our research and development efforts that would
require us to postpone the commencement or completion of
clinical trials of other vaccine candidates. The FDA may comment
or raise concerns or questions with respect to any IND that we
file and, therefore, clinical trials may not begin when planned,
if at all.

Our failure to obtain issued patents and,
consequently, to protect our proprietary technology, could hurt
our competitive position.

Our success will depend in part on our ability to
obtain and enforce claims in our patents directed to our
products, technologies and processes, both in the United States
and other countries. Although we have filed various patent
applications, our patent position is highly uncertain and
involves complex legal and factual questions. Legal standards
relating to patentability, validity and scope of patent claims
in epitope identification and other aspects of our technology
field are still evolving. Patents may not issue from any of the
patent applications that we own or license and, if patents do
issue, claims issued in the patents may not be sufficiently
broad to protect our vaccines, technologies and processes. For
example, even though our patent portfolio includes patent
applications that include claims directed to peptide epitopes
and methods of utilizing sequence motifs to identify peptide
epitopes, we cannot assure you of the breadth of claims that
will be allowed or that may issue in future patents. Other risks
and uncertainties that we face with respect to our patents and
patent applications include the following:



| |   |                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the pending patent applications we have filed or
    to which we have exclusive rights may not result in issued
    patents or may take longer than we expect to result in issued
    patents;                                 
|
| |  | the allowed claims of any patents that issue may
    not provide meaningful protection;                                                                                                                                        
|
| |  | we may be unable to develop additional
    proprietary technologies that are patentable;                                                                                                                                       
|
| |  | the patents licensed or issued to us may not
    provide a competitive advantage;                                                                                                                                              
|
| |  | other companies may challenge patents licensed or
    issued to us;                                                                                                                                                            
|
| |  | disputes may arise regarding inventions and
    corresponding ownership rights in inventions and know-how
    resulting from the joint creation or use of intellectual
    property by us, our licensors, or collaborators; and
|
| |  | other companies may design around our patented
    technologies.                                                                                                                                                               

Our competitors may develop products that are
more effective and that render our potential products
obsolete.

The biotechnology industry continues to undergo
rapid change, and competition is intense and is expected to
increase. Our competitors may succeed in developing
technologies, vaccines or other therapeutic products

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that are more effective than any of the products
we are developing, which would render our technology and
products obsolete and noncompetitive.


If we are unable to compete effectively in the
highly competitive biotechnology industry, our business will
fail.

Many companies and institutions compete with us
in developing vaccines and other therapies to activate the
bodys immune system or to otherwise treat or more
effectively manage infectious diseases and cancer, including:



| |   |                                     
| | - | ------------------------------------
| |  | pharmaceutical companies;           
|
| |  | chemical companies;                 
|
| |  | specialized biotechnology companies;
|
| |  | academic institutions; and          
|
| |  | research organizations.             

Many of the companies developing competing
technologies and products have significantly greater financial
resources and expertise in research and development,
manufacturing, preclinical and clinical development, obtaining
regulatory approvals and marketing than we do, and we may not be
able to compete effectively against them.

Our vaccines under development address a range of
cancer and infectious disease markets. The competition in these
markets is extremely formidable. There are 16 drugs currently
approved in the United States for HIV, and according to a
PhRMA 2001 report on pharmaceutical drug development,
there were 98 new product candidates in clinical development for
HIV and related conditions, including 14 HIV vaccines. In
addition, according to a PhRMA 2001 report on
pharmaceutical drug development, there were 402 new product
candidates in clinical development for the treatment of cancer,
and at least 33 companies were developing more than 50 vaccines
against various cancers. An important factor in competition may
be the timing of market introduction of our vaccines and
competitive products. Accordingly, the relative speed with which
we can develop vaccines, complete the clinical trials and
approval processes and supply commercial quantities of the
vaccines to the market are expected to be important competitive
factors. We expect that competition among products approved for
sale will be based, among other things, on product
effectiveness, safety, reliability, availability, price and
patent position.

Litigation regarding intellectual property
rights owned or used by us may be costly and
time-consuming.

Litigation may be necessary to enforce the claims
in any patents issued to us, to defend ourselves against any
patents owned by third parties that are asserted against us, or
to determine the scope and validity of others proprietary
rights. In addition, we may have to participate in one or more
interference proceedings declared by the United States Patent
and Trademark Office, which could result in substantial costs to
determine the priority of inventions.

If we become involved in litigation or
interference proceedings, we may incur substantial expense, and
the proceedings may divert the attention of our technical and
management personnel, even if we ultimately prevail. An adverse
determination in proceedings of this type could subject us to
significant liabilities, allow our competitors to market
competitive products without obtaining a license from us,
prohibit us from marketing vaccines or other products or require
us to seek licenses from third parties that may not be available
on commercially reasonable terms, if at all. If we cannot obtain
such licenses, we may be restricted or prevented from developing
and commercializing our product candidates.

The enforcement, defense and prosecution of
intellectual property rights, United States Patent and Trademark
Office interference proceedings and related legal and
administrative proceedings in the United

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States and elsewhere involve complex legal and
factual questions. As a result, these proceedings are costly and
time-consuming, and their outcome is uncertain. Litigation may
be necessary to:




| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | assert against others or defend ourselves against
    claims of infringement;                    
|
| |  | enforce patents in our portfolio owned by us or
    licensed from another party;                 
|
| |  | protect our trade secrets or know-how; or                                                        
|
| |  | determine the enforceability, scope and validity
    of the proprietary rights of ours or others.

Unexpected side effects or other
characteristics of our technology may delay or otherwise hurt
the development of our vaccine candidates.

There may be side effects in our current or
future clinical trials that we may discover, including side
effects that become apparent only after long-term exposure, even
though our safety tests may indicate favorable results. We may
also encounter technological challenges relating to these
technologies and applications in our research and development
programs that we may not be able to resolve. Any such unexpected
side effects or technological challenges may delay or otherwise
adversely affect the development, regulatory approval or
commercialization of our drug candidates.

There are no therapeutic vaccines that have
been approved for use by the FDA and our vaccines may not work,
which would prevent us from ever becoming profitable.

Because there are not yet any therapeutic
vaccines that have undergone the complete clinical development
process and FDA review, there is still insufficient evidence
that therapeutic vaccines will become products. Our business is
dependent upon the concept of a therapeutic vaccine and,
therefore, if therapeutic vaccines are found not to be safe or
effective, we would never commercialize a product candidate and
would never make a profit.

Adverse publicity regarding the safety or side
effects of the technology approach or products of others could
reduce our revenues and cause our stock price to fall.

Despite any favorable safety tests that may be
completed with respect to our product candidates, adverse
publicity regarding vaccines or products being developed or
marketed by others could negatively affect us. If other
researchers studies raise or substantiate concerns over
the safety or side effects of vaccines or our technology
approach or product development efforts generally, our
reputation and public support for our clinical trials or
products could be harmed, which would harm our business and
could cause our stock price to fall.

Our research and development programs may not
yield effective product candidates, which could prevent us from
developing our products.

We cannot guarantee that our research and
development programs will be successful in identifying vaccine
candidates for clinical trials. Even if we do receive positive
data during preclinical testing and during Phase I/II clinical
trials for our therapeutic vaccine candidates targeting HIV, and
lung and colorectal cancer or any other candidates we may
develop, this data cannot be relied upon as evidence that the
clinical candidate will be safe and effective in humans, and
data from Phase III or other pivotal clinical trials may
not be consistent with earlier data or be sufficient to support
regulatory approval.

We may not identify the correct epitopes and,
therefore, not develop a safe or effective vaccine.

Our strategy involves identifying multiple
epitopes in order to create our vaccines. If we are unable to
identify the correct epitopes, or if we are unable to combine
them in the correct manner, to stimulate desired immune
responses we may never develop a vaccine that is safe or
effective in any of the indications that we are pursuing.

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Our business is based on a novel technology,
which has not been used in any commercial drugs, and may not
work.

Our vaccine candidates use epitopes to stimulate
specific T cell immune responses, but we are not aware of
any commercial drugs that are based on this technology. Our
technology related to T cell stimulation is unproven and
may not produce any commercial vaccines.

If we cannot obtain and maintain strategic
collaborations on acceptable terms in the future, we may not be
able to develop some products.

We will need to enter into and maintain
collaborative arrangements with pharmaceutical companies or
other strategic partners both for development and
commercialization of potential vaccine products in markets where
it would be too costly or complex to do so on our own. To date,
our only collaborations are with Genencor and Bavarian Nordic.
If we are not able to enter into and maintain additional
research and development collaborations or other collaborations
in the future on acceptable terms, we may be forced to abandon
development and commercialization of some vaccine product
candidates.

If our collaboration or license arrangements
are unsuccessful, our revenues and product development may be
limited.

Our collaborations and license arrangements
generally pose the following risks:



| |   |                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | collaborators and licensees may not pursue
    further development and commercialization of potential products
    resulting from our collaborations or may elect not to renew
    research and development programs;                                            
|
| |  | collaborators may delay clinical trials, under
    fund a clinical trial program, stop a clinical trial or abandon
    a product candidate, repeat or conduct new clinical trials or
    require new formulation of a product candidate for clinical
    testing;
|
| |  | expected revenue might not be generated because
    milestones may not be achieved and product candidates may not be
    developed;                                                                                                                              
|
| |  | collaborators could independently develop, or
    develop with third parties, products that could compete with our
    future products;                                                                                                                          
|
| |  | the terms of our contracts with our current or
    future collaborators may not be favorable to us in the future;                                                                                                                                                
|
| |  | a collaborator with marketing and distribution
    rights to one or more of our products may not commit enough
    resources to the marketing and distribution of our products,
    limiting our potential revenues from the commercialization of a
    product; 
|
| |  | disputes may arise delaying or terminating the
    research, development or commercialization of our product
    candidates, or result in significant and costly litigation or
    arbitration; and                                                              
|
| |  | collaborations may be terminated and we will
    experience increased operating expenses and capital requirements
    if we elect to pursue further development of the product
    candidate.                                                                    

We may not be able to obtain licenses to
technology that is necessary for us to develop
products.

We may be required to enter into licenses or
other collaborations with third parties in order to access
technology that is necessary to successfully develop certain of
our products. We may not successfully negotiate acceptable
licenses or other collaborative arrangements that will allow us
to access such technologies. If we cannot obtain and maintain
license rights on acceptable terms to access necessary
technologies, we may be prevented from developing some product
candidates. In addition, any technologies accessed through such
licenses or other collaborations may not help us achieve our
product development goals.

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We may not be able to commercialize our
products under development if they infringe claims in existing
patents or patents that have not yet issued, and this would
materially harm our ability to operate.

As is typical in the biotechnology industry, our
commercial success will depend in part on our ability to avoid
infringing patents issued to others or breaching the technology
licenses upon which we might base our vaccines or other
products. We are aware of patents issued to others that contain
claims that may cover certain aspects of our or our
collaborators technologies, including cancer vaccine
epitopes, HIV vaccine epitopes, and methods for delivering DNA
vaccines to patients. We do not believe that any of these known
patents are likely to require us to obtain a license in order to
pursue the development or commercialization of our vaccine
product candidates. However, we may be required to take a
license under one or more of these patents to practice certain
aspects of our vaccine technologies in the United States, and
such a license may not be available on commercially reasonable
terms, if at all. If we fail to obtain a license on acceptable
terms to any technology that we need in order to develop or
commercialize our vaccines or other products, or to develop an
alternative vaccine or other product that does not infringe on
the patent rights of others, we would be prevented from
commercializing our vaccine, and our business would be harmed.

If we or our collaborators cannot
cost-effectively manufacture vaccines in commercial quantities
and for clinical trials in compliance with regulatory
requirements, we or our collaborators may not be able to
successfully commercialize the products.

We have not commercialized any products, and we
do not have the experience, resources or facilities to
manufacture vaccines on a commercial scale. We will not be able
to commercialize any vaccines and earn product revenues unless
we or our collaborators demonstrate that we can manufacture
commercial quantities of vaccines in accordance with regulatory
requirements. Among the other requirements for regulatory
approval is the requirement that prospective manufacturers
conform to the FDAs Good Manufacturing Practices, or GMP,
requirements specifically for biological drugs, as well as for
other drugs. In complying with the FDAs GMP requirements,
manufacturers must continue to expend time, money and effort in
production, record keeping and quality control to assure that
the product meets applicable specifications and other
requirements.

We currently rely and intend to continue to rely
on third-party contract manufacturers to produce materials
needed for clinical trials and, ultimately, for product
commercialization. Third-party manufacturers may not be able to
meet our needs with respect to timing, quantity or quality. If
we are unable to contract for a sufficient supply of needed
materials on acceptable terms, or if we encounter delays or
difficulties in our relationships with manufacturers, it may
delay clinical trials, regulatory approvals and marketing
efforts for our vaccines. Such delays could adversely affect our
ability to earn revenues and our chances of achieving
profitability. We cannot be sure that we can manufacture, either
on our own our through contracts with outside parties, vaccines
at a cost or in quantities that are commercially viable.

Pharmacias decision to end our
collaboration has delayed and may limit our ability to develop
our cancer epitope products, which may limit our ability to
generate revenue.

Pharmacia terminated our research and development
collaboration in November 2000 with respect to the production,
use and sale of pharmaceutical products derived from our cancer
epitopes and the use of these epitopes in therapeutic vaccines.
We will not receive further revenues from Pharmacia under our
prior collaboration. In light of the termination of our
collaboration with Pharmacia, our preclinical or clinical
development of drug candidates in our cancer program is delayed.
We have not spent any time or money on the development of any of
these candidates (other than our therapeutic lung and colorectal
cancer vaccine candidate) because we do not have financial or
other resources for such development at this time, and we may
never develop any of those cancer epitope products, which could
prevent us from ever commercializing a product.

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If we do not successfully develop and
commercialize our products, we may never generate significant
revenues or become profitable.

We have not completed the development of any
product and, accordingly, have not begun to market or generate
revenues from the commercialization of any product. We do not
expect to market any of our therapeutic or prophylactic vaccines
or any other products for at least six years. If we do not
successfully develop and commercialize products, we will never
generate revenues that would allow us to become profitable.

The lengthy approval process and uncertainty
of government regulatory requirements may impair our ability to
develop, manufacture and sell any vaccines.

We and our collaborators cannot commercialize our
vaccines or other products if we do not receive FDA or state
regulatory approval to market our products. The regulatory
process for new therapeutic drug products, including the
required preclinical studies and clinical testing, is lengthy,
uncertain and expensive. We and our collaborators may not
receive necessary FDA clearances for any of our vaccines or
other potential products in a timely manner, or at all. Once
approved, we are subject to the continuing requirements of the
FDA. Noncompliance with initial or continuing requirements can
result in, among other things:



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | fines and penalties;                                          
|
| |  | injunctions;                                                  
|
| |  | seizure of products;                                          
|
| |  | total or partial suspension of product marketing;             
|
| |  | failure of the government to grant a new drug
    application;
|
| |  | withdrawal of marketing approvals; and                        
|
| |  | criminal prosecution.                                         

The length of the clinical trial process and the
number of patients the FDA will require to be enrolled in
clinical trials in order to establish the safety and efficacy of
our products is uncertain. In addition, our clinical studies may
not provide the FDA with sufficient clinical data to permit
approval of a new drug application, or NDA, or a biologic
license application, or BLA, even though we or our collaborators
believe we are doing the right studies based on the protocol.
The FDA or we and our collaborators may decide to discontinue or
suspend clinical trials at any time if the subjects or patients
who are participating in such trials are being exposed to
unacceptable health risks or if the results show no or limited
benefit in patients treated with the vaccine compared to
patients in the control group.

Regulatory requirements are evolving and
uncertain. Future United States or state legislative or
administrative acts could also prevent or delay regulatory
approval of our products. Even if we obtain commercial
regulatory approvals, the approvals may significantly limit the
indicated uses for which we may market our products.

The approval process outside the United States
is also uncertain and may limit our ability to develop,
manufacture and sell our products internationally.

To market any drug products outside of the United
States, we and our collaborators are also subject to numerous
and varying foreign regulatory requirements, implemented by
foreign health authorities, governing the design and conduct of
human clinical trials and marketing approval for vaccines or
other drug products. The approval procedure varies among
countries and can involve additional testing, and the time
required to obtain approval may differ from that required to
obtain FDA approval. The foreign regulatory approval process
includes all of the risks associated with obtaining FDA approval
set forth above, and approval by the FDA does not ensure
approval by the health authorities of any other country, nor
does the approval by foreign health authorities ensure approval
by the FDA.

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Even if we obtain regulatory approval, we may
be required to perform additional clinical trials or change the
labeling of our products if we or others identify side effects
after our products are on the market, which could harm sales of
the affected products.

If we or others identify adverse side effects
after any of our vaccines or other drug products are on the
market, or if manufacturing problems occur:



| |   |                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | regulatory approval may be withdrawn;                                                                                                                                                    
|
| |  | reformulation of our products, additional
    clinical trials, changes in labeling of our products or changes
    to or re-approvals of our manufacturing facilities may be
    required;
|
| |  | sales of the affected products may drop
    significantly;                                                                                                                               
|
| |  | our reputation in the marketplace may suffer; and                                                                                                                                        
|
| |  | lawsuits, including costly and lengthy class
    action suits, may be brought against us.                                                                                                

Any of the above occurrences could halt or reduce
sales of the affected vaccines or other products or could
increase the costs and expenses of commercializing and marketing
these vaccines or other products.

If we are unable to protect our trade secrets,
we may be unable to protect from competitors our interests in
proprietary know-how that is not patentable or for which we have
elected not to seek patent protection.

Our competitive position depends in part on our
ability to protect trade secrets that are not patentable or for
which we have elected not to seek patent protection. To protect
our trade secrets, we rely primarily on confidentiality
agreements with our collaborative partners, employees and
consultants. Nevertheless, our collaborative partners, employees
and consultants may breach these agreements and we may be unable
to enforce these agreements. In addition, other companies may
develop similar or alternative technologies, methods or products
or duplicate our technologies, methods or vaccines that are not
protected by our patents or otherwise obtain and use information
that we regard as proprietary, and we may not have adequate
remedies in such event. Any material leak of our confidential
information into the public domain or to third parties could
harm our competitive position.

If we lose our key scientific and management
personnel or are unable to attract and retain qualified
personnel, it could delay or hurt our epitope identification and
vaccine development efforts.

We are highly dependent on the principal members
of our scientific and management staff. We do not maintain key
person life insurance on the life of any employee and, although
we have an employment contract with Dr. Emile Loria, he may
terminate his employment at any time. Our ability to identify
epitopes, develop vaccines and achieve our other business
objectives also will depend in part on the continued service of
our key scientific and management personnel and our ability to
identify, hire and retain additional qualified personnel. There
is intense competition for qualified personnel in biochemistry,
molecular biology, immunology and other areas of our activities,
and we may not be able to continue to attract and retain such
personnel necessary for the development of our business. Because
of the intense competition for qualified personnel among
technology-based businesses, particularly in the San Diego area,
we may not be successful in adding technical personnel as needed
to meet the staffing requirements of additional collaborative
relationships. Our failure to attract and retain key personnel
could delay or be significantly detrimental to our product
development programs and could cause our stock price to decline.

We out-license technology outside of our core
area of focus, and these licensees may not develop any products
using our technology, which may limit our revenue.

We have licensed to third parties some of our
technology in markets that we are not pursuing ourselves or with
our collaborators. If these licensees are not successful in
developing and commercializing products using our technology,
our revenues would be limited. Our licensees may pursue
alternative technologies or develop

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alternative products either on their own or in
collaboration with others in competition with products developed
under licenses or collaborations with us.


If we do not develop a sufficient sales and
marketing force, we may not be able to successfully
commercialize our products, which would limit our ability to
earn product revenues.

We have no experience in sales, marketing or
distribution. Before we can market any of our products directly,
we must develop a substantial marketing and sales force with
technical expertise and supporting distribution capability or
obtain the assistance of one or more pharmaceutical companies
with a large distribution system and a large direct sales force.
If we cannot develop sales and distribution capabilities, or
enter into effective arrangements with third parties in a timely
manner on acceptable terms, we may not be able to successfully
commercialize any products we may develop and may not earn
product revenues. Other than our agreement with Genencor, we do
not have any existing distribution arrangements with any
pharmaceutical company for our vaccines under development. We
cannot be sure that we can establish sales and distribution
capabilities or successfully gain market acceptance for our
products.

Some of our programs are funded by the
government and, therefore, the government may have rights to
certain of our technology and could require us to grant licenses
of our technology to third parties.

We fund certain of our research and development
related to our HIV and malaria programs pursuant to grants from
the government. As a result of these grants, the government may
have rights in the technology, including inventions developed
with government funding. In addition, the government may require
us to grant to a third party an exclusive license to any
inventions resulting from the grant if the government determines
that we have not taken adequate steps to commercialize
inventions, or for public health or safety needs.

Adverse determinations concerning product
pricing, reimbursement and related matters could prevent us from
successfully commercializing products and impair our ability to
generate revenues.

Our ability to successfully commercialize our
vaccines or other products may depend in part on the extent to
which reimbursement for the cost of such products and related
treatment will be available from government health
administration authorities, private health insurers and other
organizations. Third-party payors are increasingly challenging
the price of medical products and services. Significant
uncertainty exists as to the reimbursement status of newly
approved health care products, and adequate third-party coverage
may not be available to enable us to maintain price levels
sufficient to realize an appropriate return on our investment in
product development.

Product liability risks may expose us to
significant liability that could cause us to incur significant
costs or cease developing our products.

Our business exposes us to potential product
liability risks that are inherent in the testing, manufacturing
and marketing of human therapeutic products. While we currently
have product liability insurance for an early stage clinical
trial, we cannot be sure that we can maintain such insurance on
acceptable terms or obtain acceptable insurance as we progress
through product development and commercialization, or that our
insurance will provide adequate coverage against potential
liabilities, either in human clinical trials or following
commercialization of any vaccines we may develop.

Our use of hazardous materials could expose us
to significant costs.

Our research and development processes involve
the controlled storage, use and disposal of hazardous materials,
chemicals and radioactive compounds. We are subject to federal,
state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of these materials
and some waste products. The risk of accidental contamination or
injury from these materials cannot be completely eliminated. In
the event of an accident, we could be held liable for any
damages that result, and any liability could exceed our
resources. We cannot be sure that compliance with environmental
laws and regulations in

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the future will not entail significant costs, or
that our ability to conduct research and development activities
will not be harmed by current or future environmental laws or
regulations.


The volatility of the price of our common
stock may hurt our stockholders.

The market prices for securities of biotechnology
companies, including our common stock, have historically been
highly volatile, and the market from time to time has
experienced significant price and volume fluctuations that are
not necessarily related to the operating performance of such
companies. Our stock price has been and will continue to be
influenced by general market and industry conditions. In
addition, the following factors may have a significant effect on
the market price of our common stock:



| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | whether we complete the proposed merger with
    Anosys and the related financing;                                          
|
| |  | announcements of technological innovations or new
    commercial vaccines or other therapeutic products by us or
    others;
|
| |  | governmental regulation that affects the
    biotechnology and pharmaceutical industries;                                   
|
| |  | developments in patent or other proprietary
    rights;                                                                     
|
| |  | developments in, or termination of, our
    relationships with our collaborators;                                           
|
| |  | public concern as to the clinical results and/or
    the safety of drugs developed by us or others; and                     
|
| |  | announcements related to the sale of our stock.                                                                             

Fluctuations in our financial performance from
period to period also may have a significant impact on the
market price of our common stock.

The subordination of our common stock to our
preferred stock could hurt common stockholders and, upon
conversion, our preferred stock will further dilute our holders
of common stock.

Our common stock is expressly subordinate to our
series S and series S-1 preferred stock in the event
of our liquidation, dissolution or winding up. With respect to
our series S preferred, any merger or sale of substantially all
of our assets shall be considered a deemed liquidation. In
connection with the proposed merger with Anosys and related
financing, these shares of Series S and Series S-1
preferred stock would be converted into 1,608,448 shares of our
common stock. If we were to cease operations and liquidate our
assets, we would first be required to pay $10 million to
our holders of preferred stock and there may not be any
remaining value available for distribution to the holders of
common stock after providing for the series S and
series S-1 preferred stock liquidation preference. In
addition, due to adjustments to the conversion price of our
series S preferred stock, in the event our series S
preferred stock is converted to common stock, it will further
dilute our holders of common stock.

The effect of anti-takeover provisions may
deprive our stockholders from receiving a premium over the
market price of our common stock.

Provisions of our certificate of incorporation
may have the effect of deterring unsolicited take-over offers
and thereby deprive our stockholders from receiving a premium
over the market price of our common stock. Our certificate of
incorporation includes a provision that requires the approval of
holders of at least 66 2/3% of our voting stock as a
condition to a merger or certain other business transactions
with, or proposed by, a holder of 15% or more of our voting
stock. This approval is not required in cases where certain of
our directors approve the transaction or where certain minimum
price criteria and other procedural requirements are met. Our
certificate of incorporation also requires the approval of
holders of at least 66 2/3% of our voting stock to amend or
change the provisions mentioned relating to the transaction
approval. Finally, our certificate of incorporation provides
that any action required or permitted to be taken by our
stockholders must be effected at a duly called annual or special
meeting rather than by any consent in writing. Our poison pill
expired on March 19, 2003.

24



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##### Table of Contents



Concentration of ownership among our existing
officers, directors and principal stockholders may prevent other
stockholders from influencing significant corporate decisions
and depress our stock price.

As of December 31, 2002, our officers,
directors and those stockholders owning at least five percent of
our outstanding stock together control approximately 67.7% of
our outstanding common stock as converted and Pharmacia holds
100% of our preferred stock. If some or all of these officers,
directors and principal stockholders act together, they will be
able to exert a significant degree of influence over our
management and affairs and over matters requiring stockholder
approval, including the election of directors and approval of
the proposed merger with Anosys and related financing or other
business combination transactions. The interests of this
concentration of ownership may not always coincide with our
interests or the interests of other stockholders. For instance,
officers, directors and principal stockholders, acting together,
could cause us to enter into transactions or agreements that we
would not otherwise consider. Similarly, this concentration of
ownership may have the effect of delaying or preventing a change
in control of our company otherwise favored by our other
stockholders. This concentration of ownership also could depress
our stock price.






|        |           
|------- | ----------
|Item 2. | Properties

We lease a 24,000 square foot administrative and
research laboratory facility in San Diego. We believe our
existing facilities will be adequate to meet our needs for the
foreseeable future.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are not a party to any legal proceedings.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

Not applicable.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Our common stock (NASDAQ symbol EPMN)
is traded publicly through the National Market System. The
following table presents quarterly information on the price
range of our common stock. This information indicates the high
and low sale prices reported by the National Market System.
These prices do not include retail markups, markdowns or
commissions.

|     |                                  |      |   |      |  |  |   |      | 
|---- | -------------------------------- | ---- | - | ---- |  |  | - | ---- | 
|     |                                  | High |   | Low 
|     |                                  |      |   |     
|2003 |                                  |      |   |      |  |  |   |     
|     | First Quarter (through March 14) |      | $ | 1.25 |  |  | $ | 0.81 | 
|2002 |                                  |      |   |      |  |  |   |     
|     | First Quarter                    |      | $ | 4.24 |  |  | $ | 2.30 | 
|     | Second Quarter                   |      | $ | 2.75 |  |  | $ | 1.40 | 
|     | Third Quarter                    |      | $ | 2.10 |  |  | $ | 1.17 | 
|     | Fourth Quarter                   |      | $ | 1.50 |  |  | $ | 0.85 | 
|2001 |                                  |      |   |      |  |  |   |     
|     | First Quarter                    |      | $ | 7.00 |  |  | $ | 1.88 | 
|     | Second Quarter                   |      | $ | 4.00 |  |  | $ | 2.19 | 
|     | Third Quarter                    |      | $ | 4.75 |  |  | $ | 1.70 | 
|     | Fourth Quarter                   |      | $ | 3.25 |  |  | $ | 1.75 | 

As of March 14, 2003, there were
approximately 261 stockholders of record of our common stock. We
have never declared or paid dividends on our common stock and do
not anticipate the payment of dividends in the foreseeable
future.

25



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##### Table of Contents



During the period covered by this Annual Report
on Form 10-K, we did not sell or issue any securities,
which were not registered under the Securities Act of 1933, as
amended, or the Securities Act.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The selected data presented below under the
captions, Statement of Operations Data and
Balance Sheet Data, for, and as of the end of, each
of the years in the five-year period ended December 31,
2002, are derived from our consolidated financial statements,
which consolidated financial statements have been audited by
Ernst & Young LLP, our independent auditors. Along with this
selected financial data, it is important that you read the
historical statements and related notes, as well as the
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this report.

|                                       |  |                                              |       |      |  |      |       |      |  |      |       |   |  |   |       |   |  |   |       |  
|-------------------------------------- |  | -------------------------------------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                       |  |                                             
|                                       |  | Years Ended December 31,                    
|                                       |  |                                             
|Statement of Operations Data:          |  | 2002                                         |       | 2001 |  | 2000 |       | 1999 |  | 1998
|                                       |  |                                              |       |      |  |      |       |      |  |     
|                                       |  |                                             
|                                       |  | (In millions, except for net loss per share)
|Operating revenues                     |  | $                                            | 7.1   |      |  | $    | 8.2   |      |  | $    | 1.6   |   |  | $ | 4.2   |   |  | $ | 3.7   |  
|Net loss                               |  |                                              | (6.5  | )    |  |      | (2.6  | )    |  |      | (4.7  | ) |  |   | (8.3  | ) |  |   | (21.5 | )
|Net loss per share  basic and diluted |  |                                              | (0.57 | )    |  |      | (0.31 | )    |  |      | (0.68 | ) |  |   | (1.57 | ) |  |   | (4.48 | )

|                      |  |                    |      |      |  |      |      |      |  |      |      |  |  |   |      |  |  |   |      | 
|--------------------- |  | ------------------ | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | - | ---- |  |  | - | ---- | 
|                      |  |                   
|                      |  | As of December 31,
|                      |  |                   
|Balance Sheet Data:   |  | 2002               |      | 2001 |  | 2000 |      | 1999 |  | 1998
|                      |  |                    |      |      |  |      |      |      |  |     
|                      |  |                   
|                      |  | (In millions)     
|Working capital       |  | $                  | 7.7  |      |  | $    | 15.4 |      |  | $    | 8.2  |  |  | $ | 6.9  |  |  | $ | 9.8  | 
|Total assets          |  |                    | 15.5 |      |  |      | 23.9 |      |  |      | 14.5 |  |  |   | 12.7 |  |  |   | 21.0 | 
|Long-term obligations |  |                    |     |      |  |      | 0.04 |      |  |      | 0.4  |  |  |   | 0.4  |  |  |   | 1.6  | 
|Stockholders equity  |  |                    | 12.6 |      |  |      | 19.4 |      |  |      | 12.1 |  |  |   | 10.4 |  |  |   | 14.0 | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Except for the historical information
contained herein, the following discussion contains
forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences
include, without limitation, those discussed below and in the
section entitled Risk Factors.

Since 1997, we have devoted substantially all of
our resources to the discovery and development of potential
therapeutic and prophylactic products. To date, we have not
received any revenues from the sale of products. We have funded
our research and development primarily from equity-derived
working capital and through strategic alliances and
collaborations with other companies. We have not been profitable
since our inception and expect to incur substantial operating
losses for at least the next several years. As of
December 31, 2002, our accumulated deficit was
approximately $150.9 million.

In July 2001, we entered into a collaboration
agreement with Genencor. The revenue that we recognize from
Genencor includes milestone payments, recognition of upfront
license fees over the term of the contract and contract revenue
to support our research over the term of the collaboration. As
of December 31, 2002, Genencor owned 11.0% of our common
stock and is therefore considered a related party
for financial reporting purposes. Therefore, all payments that
we receive under this agreement are itemized under the category,
Related Party Revenue.

In February 2003, we preliminarily agreed with
Anosys, Inc. to merge our operations to create a combined
company focused on the field of immunotherapeutics and products
for the treatment of cancer and infectious diseases. The
all-stock transaction is subject to the parties entering into a
definitive merger agreement, approval by the shareholders of
both companies, obtaining commitments for capital resources to
fund the combined companys operations and various other
conditions that must be satisfied prior to the merger. All of
the projections, trends and forward-looking statements included
herein are based on Epimmune operating as a stand-alone entity.
In the event that this proposed merger is completed, these
projections, trends and forward-looking statements will likely
change, and the changes may be significant.

26



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##### Table of Contents



Significant Accounting Policies

Our discussion and analysis of our financial
condition and results of operations are based upon our
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, patents 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 (see
Note 1 to our financial statements).

Revenue
Recognition

We recognize revenues pursuant to Staff
Accounting Bulletin No. 101, Revenue
Recognition. License fees are earned and recognized in
accordance with the provisions of each agreement. Upfront
license fees for perpetual licenses where we have no performance
obligations are recognized when received. License fees with
ongoing involvement or performance obligations are recognized
over the term of the agreement. For example, in connection with
our Genencor collaboration, because we received an upfront
license fee, it is being amortized into revenue over the
collaboration term. Milestone payments are recognized as revenue
upon the completion of the milestone as long as the milestone
event was substantive, and its achievability was not reasonably
assured at inception and the Companys performance
obligations after milestone achievement will continue to be
funded at a comparable level before the milestone achievement.
Revenues from grants are recognized on a
percentage-of-completion basis as related costs are incurred. We
defer revenue recognition until performance obligations have
been completed and collectibility is reasonably assured.

Patents

We capitalize the costs incurred to file patent
applications when we believe there is a high likelihood that the
patent will issue and there will be future economic benefit
associated with the patent. These costs are amortized over a
ten-year life from the date of patent filing. We expense all
costs related to abandoned patent applications. In addition, we
review the carrying value of patents for indicators of
impairment on a periodic basis. If we elect to abandon any of
our currently issued or unissued patents or we determine that
the carrying value is impaired, the related expense could be
material to our results of operations for the period of the
abandonment.

Investment
Policy

The primary objective of our investment
activities is to preserve principal while at the same time
achieving competitive yields, without significantly increasing
risk. To achieve this objective, we primarily invest in cash and
money market accounts as well as A1 or P1 or higher rated debt
securities with maturities of less than two years, with the
weighted average maturity not to exceed eighteen months. We also
attempt to minimize our portfolio risk by placing constraints on
how much of our portfolio may be held in a specific type of
investment such as asset-backed securities or collateralized
mortgage obligations as well as limiting our holdings in any one
issuer. At December 31, 2002, our investment portfolio
included only cash and money market accounts and had no
fixed-income securities.

Results of Operations

We had total revenues of $7.1 million for
the year ended December 31, 2002, compared to
$8.2 million in 2001 and $1.6 million in 2000. The
decrease of 13% in 2002 relates primarily to a reduction of
$3.2 million in license fees and milestone payments we
received compared to 2001, partially offset by an increase of

27



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##### Table of Contents



$2.1 million in related party revenue we
received in 2002 compared to 2001. License fee and milestone
revenue for the year ended December 31, 2001 included
recognition of non-recurring license fees associated with
numerous license agreements we entered into during that period,
including agreements with Biosite, Anosys, Nexell and Pharmexa.
For the year ended December 31, 2002, we received
$1.9 million in research grants and contract revenue
compared to $1.8 million received in the year ended
December 31, 2001. We had related party revenue of
$4.7 million in the year ended December 31, 2002
compared to $2.6 million of related party revenue in the
year ended December 31, 2001. The increase in related party
revenue was due to reimbursement for expenditures on our
Genencor collaboration and amortization of license fees
associated with the Genencor collaboration that was entered into
in July 2001. Total revenues increased 409% in 2001 compared to
2000, due primarily to receipt of upfront, one-time payment of
license fees in connection with transactions completed in 2001,
an increase in related party revenue and increased grant and
contract payments in 2001 compared to 2000.


Research and development expenses increased to
$11.3 million in the year ended December 31, 2002 from
$7.9 million in the year ended December 31, 2001. The
increase in 2002 relates primarily to an increase of
$1.6 million in outside costs related to preclinical
activities such as formulation and toxicology studies for our
HIV and lung and colorectal cancer programs, an increase of
$0.6 million in labor and related costs, including
recruitment and relocation as a result of an increase in our
personnel responsible for research and development activities,
an increase of $0.4 million associated with amortization
and other costs related to increased spending to prosecute our
patent portfolio and an increase of $0.3 million on
scientific supplies due to increased research and development
efforts and our collaboration with Genencor. Research and
development expenses increased to $7.9 million in 2001 from
$6.3 million in 2000, primarily as a result of higher labor
and related costs due to increased staffing and salary
increases, expensing costs related to abandoned patents in 2001,
increased expenditures on general scientific supplies, higher
equipment related costs and increased costs for sponsored
research as part of our HIV grant program during the 2001
period. We expect our research and development expenses to
continue to significantly increase in 2003, compared with those
of 2002, as we continue our clinical trials for our HIV vaccine
and our lung and colorectal cancer vaccine. We expect to
continue to incur costs in 2003 for, among other things, product
formulation, manufacturing of product for use in clinical
trials, medical and clinical consultant costs and product
development costs for additional vaccine candidates.

General and administrative costs were
approximately $2.9 million in the year ended
December 31, 2002 and $3.4 million in the year ended
December 31, 2001. The decrease in 2002 was primarily due
to $0.6 million less paid for bonuses in 2002 compared to
2001, a benefit of $0.3 million of stock compensation
related to a lower stock price for variable stock equity
instruments, and a decrease of $0.1 million in legal
expenses in 2002 compared to 2001. These decreases were
partially offset by a $0.3 million increase in payroll and
related expenses and a $0.1 million increase in consultant
expenses in 2002 compared to 2001. General and administrative
expenses increased to $3.4 million in 2001 from
$2.3 million in 2000, primarily due to increased labor,
recruiting and related costs, increased legal expenses resulting
from licensing and collaborative efforts during the 2001 period
and $0.2 million of stock-based compensation recorded in
2001.

We had no restructuring related charges in 2002
or 2001 compared to a reduction or reversal of restructuring
charges of $0.1 million in 2000 related to the termination
of non-Epimmune operations in 1999.

We had negligible other income in 2002 and 2001
compared to other income of $1.6 million in 2000. The 2000
amount represents a payment from Elan International Services, or
Elan, of $0.5 million related to the assignment of a
license and the release of $1.1 million from escrow under
an agreement between Cytel and Neose Technologies, Inc. for the
purchase of certain assets.

Net interest income was approximately
$0.6 million in 2002 compared to $0.4 million in 2001
and $0.6 million in 2000. Interest income during 2002
includes $0.3 million of interest accrued on the note
issued for the purchase in January 2001 of our common stock by
Dr. Loria, our president and chief executive officer.
Higher average cash balances in 2002 were offset by lower
average returns than in 2001 due to lower interest rates. The
decrease in 2001 from 2000 was based on lower average returns on
cash balances.

28



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##### Table of Contents



We expect to incur operating losses over at least
the next several years due to continuing expenses associated
with our research and development programs, including
development activities, preclinical testing and clinical trials.
Operating losses may fluctuate from quarter to quarter as a
result of differences in the timing and amounts of revenues
received and expenses incurred, and such fluctuations may be
substantial.

Liquidity and Capital Resources

We have financed operations since inception
primarily through private placements of our equity securities,
two public common stock offerings, license fees, revenues under
collaborative research and development agreements, grant
revenues, capital and operating lease transactions, certain
asset divestitures and interest income. Through December 2002,
we have raised approximately $163.8 million from the sale
of equity securities, of which $28.8 million was raised to
fund the business since the formation of our business related to
immunotherapy. As of December 31, 2002, we had
13,761,910 shares outstanding on an as-converted to common
stock basis, assuming conversion of the series S and S-1
preferred shares.

As of December 31, 2002, our cash, cash
equivalents and short-term investments were $9.7 million
compared to $19.0 million at December 31, 2001. The
decrease was primarily due to $7.1 million of cash used to
fund the Companys research activities and
$1.2 million of cash for capitalized patent expenses,
offset by licensing and grant revenues. We expect to continue to
use our cash, cash equivalents and short-term investments to
fund our ongoing clinical trials, drug research and development
programs. We had net working capital of $7.7 million as of
December 31, 2002 compared to $15.4 million as of
December 31, 2001.

Capital expenditures for the year ended
December 31, 2002 were $0.7 million compared to
$0.3 million for the year ended December 31, 2001 and
$0.4 million for the year ended December 31, 2000. The
expenditures for 2002 were primarily for laboratory equipment to
increase and improve immunological screening throughput, to
build out additional laboratory space to accommodate additional
employees and for information technology equipment and upgrades
to accommodate new employees. Capital expenditures for 2001 and
2000 were primarily for laboratory equipment. In the past, we
have financed our laboratory equipment and research and office
facilities primarily through operating lease arrangements and a
note payable. During 2002, 2001 and 2000 we made payments under
the notes payable of $0.3 million, $0.4 million and
$0.2 million, respectively. During 2003, we anticipate that
payments related to leasehold improvements and capital
expenditures will decrease compared to 2002 levels to a range of
approximately $0.4 million to $0.5 million. We will
also pay approximately $0.6 million in rent on our lease
commitments during 2003. The future minimum rental commitment
for the lease of our facility will range from approximately
$0.6 million to $0.7 million each year over seven
years, based upon pre-established annual rent increases.

Payments related to capitalized patent expenses
were approximately $1.2 million, $0.7 million and
$0.6 million for 2002, 2001 and 2000, respectively. The
increase in each year over the prior year was primarily as a
result of maturity of our portfolio filings and pursuit of
additional claims. We expect payments related to patents to be
relatively flat in 2003 compared to 2002 as we continue to
pursue filings and claims in our intellectual property portfolio.

We expect to incur additional research and
development expenditures in 2003 compared to 2002 levels in
connection with our ongoing drug research and development
programs, including costs related to preclinical testing,
clinical trials and manufacturing. We intend to seek
collaborative research and development relationships with
suitable corporate partners and U.S. government agencies.
We have in the past and may in the future also license to third
parties some of our technology in markets that we are not
pursuing ourselves or through our collaborations. Any agreements
that may result from these discussions may not successfully
reduce our funding requirements or, if entered into, may be
terminated.

We currently anticipate that total revenue for
2003 will be in the range of $7.0 million to
$7.5 million, which includes anticipated grant and contract
revenue, related party revenue and certain license fees. Our
estimate assumes that we recognize revenue from milestone or
licensing payments under existing agreements with third parties
related to the licensing of our technology. We also anticipate
that operating expenses for the full year 2003 will rise from
$14.1 million in 2002 to between approximately
$15.0 million and $17.0 million, representing a 6% to
20% increase over 2002. The anticipated rise in expenses relates
to beginning our

29



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##### Table of Contents



Phase I/II clinical trial targeting HIV in
September 2002 and our Phase I/II clinical trial targeting
lung and colorectal cancer in February 2003. We also anticipate
using some of our cash and investment in 2003 to fund our
collaboration with Bavarian Nordic. We will share equally with
Bavarian Nordic in all research related expenses and have
included these anticipated expenditures in our operating expense
forecast for 2003. We will also become liable in 2003 for
payment of license fees of up to $0.1 million.


We anticipate that our existing cash and
investments and interest earned thereon, along with the cash
receipts related to existing contracts will enable us to
maintain our current and planned operations through December
2003. We will continue to spend substantial amounts on research
and development, including amounts spent for manufacturing
clinical supplies, conducting clinical trials for our product
candidates and expanding our drug development programs.
Therefore, we will need to raise additional funding and we do
not have committed external sources of funding and may not be
able to obtain any additional funding, especially if weak market
conditions persist for biotechnology companies. If we are unable
to obtain additional funding, we may be forced to curtail
certain operations to focus on our primary research and
development activities. Our future operational and capital
requirements will depend on many factors, including:



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | whether the proposed merger with Anosys and
    related financing occurs                                                                 
|
| |  | the costs associated with our clinical trials for
    our vaccine targeting HIV, which began in the third quarter of
    2002;           
|
| |  | the costs associated with our clinical trials for
    our vaccine targeting lung and colorectal cancer, which began in
    February 2003;
|
| |  | progress with other preclinical testing and
    clinical trials in the future;                                                           
|
| |  | our ability to establish and maintain
    collaborative research and development arrangements and license
    agreements;                
|
| |  | the actual revenue we receive under our
    collaborative research and development agreements;                                           
|
| |  | the actual costs we incur under our research
    collaboration with Bavarian Nordic;                                                     
|
| |  | the actual payment of license fees which may
    become payable at the option of the licensor;                                           
|
| |  | the time and costs involved in obtaining
    regulatory approvals;                                                                       
|
| |  | the costs involved in filing, prosecuting,
    enforcing and defending patent claims and any other proprietary
    rights;               
|
| |  | competing technological and market developments;                                                                                         
|
| |  | changes in our existing research relationships;                                                                                          
|
| |  | continued scientific progress in our drug
    discovery programs; and                                                                    
|
| |  | the magnitude of our drug discovery and
    development programs.                                                                        

As is typical in the biotechnology industry, our
commercial success will depend in part on not infringing upon
the patent or other proprietary rights of others and maintaining
the technology licenses upon which our products might be based.
Our business is also subject to other significant risks,
including the uncertainties associated with our ability to enter
into and maintain new collaborations, the lengthy regulatory
approval process, and potential competition from other products.
Even if our products appear promising at an early stage of
development, they may not reach the market for a number of
reasons. Such reasons include, but are not limited to, our
inability to fund clinical development of such products, or the
possibilities that the potential products will be found
ineffective during clinical trials, fail to receive necessary
regulatory approvals, be difficult to manufacture on a large
scale or be uneconomical to market.

30



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##### Table of Contents



Contractual Obligations

The following table summarizes our contractual
obligations at December 31, 2002, and the effect such
obligations are expected to have on our liquidity and cash flows
in future periods.

|                                   |  |                        |       |           |  |       |     |       |  |           |       |  |  |   |       |  |  |   |       | 
|---------------------------------- |  | ---------------------- | ----- | --------- |  | ----- | --- | ----- |  | --------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                   |  |                       
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                        |       | Less than |  | Years |     | Years |  | More than
|                                   |  | Total                  |       | 1 Year    |  | 2-3   |     | 4-5   |  | 5 Years  
|                                   |  |                        |       |           |  |       |     |       |  |          
|                                   |  |                       
|                                   |  | (unaudited)           
|                                   |  | (in thousands)        
|Long-term debt(1)                  |  | $                      | 43    |           |  | $     | 43  |       |  | $         |      |  |  | $ |      |  |  | $ |      | 
|Operating lease obligations(2)     |  |                        | 3,837 |           |  |       | 568 |       |  |           | 1,187 |  |  |   | 1,259 |  |  |   | 823   | 
|Licensing and purchase obligations |  |                        | 1,518 |           |  |       | 131 |       |  |           | 132   |  |  |   | 315   |  |  |   | 940   | 
|Deferred compensation              |  |                        | 203   |           |  |       | 99  |       |  |           | 104   |  |  |   |      |  |  |   |      | 
|                                   |  |                        |       |           |  |       |     |       |  |           |       |  |  |   |       |  |  |   |       | 
|Total                              |  | $                      | 5,601 |           |  | $     | 841 |       |  | $         | 1,423 |  |  | $ | 1,574 |  |  | $ | 1,763 | 
|                                   |  |                        |       |           |  |       |     |       |  |           |       |  |  |   |       |  |  |   |       | 



---



|    |                                              
|--- | ---------------------------------------------
|(1) | Remaining balance on equipment loan          
|   
|(2) | Facilities lease, which expires in March 2009

Recently Issued Accounting Standards

In October 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. This statement supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of), and amends
APB Opinion No. 30, Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions).
SFAS No. 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or
fair value less costs to sell. SFAS No. 144 retains the
fundamental provisions of SFAS No. 121 for
(a) recognition and measurement of the impairment of
long-lived assets to be held and used and (b) measurement
of long-lived assets to be disposed of by sale. This statement
also retains APB Opinion No. 30s requirement that
companies report discontinued operations separately from
continuing operations. All provisions of SFAS No. 144 were
effective for us on January 1, 2002. The adoption of SFAS
No. 144 did not have an impact on our consolidated
financial position or results of operations, and we do not
expect any impact in the foreseeable future.

In June 2002, the FASB issued SFAS No. 146
Accounting for Costs Associated with Exit or Disposal
Activities. This statement supercedes Emerging Issues
Task Force (EITF) Issue No. 94-3 Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under
EITF Issue No. 94-3, a liability is recognized at the date
an entity commits to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and
recorded at fair value. The provisions of SFAS No. 146 will
be effective for any exit and disposal activities initiated
after December 31, 2002.

In December 2002, the FASB issued SFAS
No. 148 Accounting for Stock-Based Compensation-
Transition and Disclosure  an amendment of FASB
Statement No. 123. This statement amends SFAS
No. 123 Accounting for Stock Based
Compensationto provide alternative methods of
voluntarily transitioning to the fair value based method of
accounting for stock-based employee compensation. SFAS 148 also
amends the disclosure requirements of SFAS 123 to require
disclosure of the method used to account for stock-based
employee compensation and the effect of the method on reported
results in both annual and interim financial statements. The
disclosure provisions are effective for us beginning with our
year ended December 31, 2002. We have not yet completed the
final evaluation of the options presented by SFAS 148. However,
within this fiscal year, we expect to reach a determination of
whether and, if so, when to change our existing accounting for
stock-based compensation to the fair value method in accordance
with the transition alternatives of SFAS 148.

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In November 2002, EITF reached consensus on EITF
Issue No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables, which addresses how to account
for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The
final consensus of EITF Issue No. 00-21 will be applicable
to agreements entered into in fiscal periods beginning after
June 15, 2003, with early adoption permitted. Additionally,
companies will be permitted to apply the consensus guidance to
all existing arrangements as the cumulative effect of a change
in accounting principle in accordance with APB Opinion
No. 20, Accounting Changes.




Item 7A.Quantitative
and Qualitative Disclosures About Market Risks

At December 31, 2002, our investment
portfolio included only cash and money market accounts and had
no fixed-income securities. There would be no material impact to
our investment portfolio, in the short term, associated with any
change in interest rates and any decline in interest rates over
time will reduce our interest income, while increases in
interest rates over time will increase our interest income.




Item 8.Consolidated
Financial Statements and Supplementary Data

The Report of Ernst & Young LLP, Independent
Auditors, the Consolidated Financial Statements and Notes to
Consolidated Financial Statements are included on pages F-1
through F-24.






|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial
    Disclosure.

None.




PART III




Item 10. Directors and Executive Officers
of the Registrant

The following table sets forth information
regarding our current directors and executive officers as of
March 14, 2003:

|                              |  |     |    |          |  |                                                                            
|----------------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------------------
|Name                          |  | Age |    | Position
|                              |  |     |    |         
|Directors:                    |  |     |    |          |  |                                                                            
|Howard E. (Ted) Greene, Jr. |  |     | 60 |          |  | Chairman of the Board of Directors                                         
|William T. Comer, Ph.D.       |  |     | 67 |          |  | Director                                                                   
|Georges Hibon                 |  |     | 65 |          |  | Director                                                                   
|Michael G. Grey               |  |     | 50 |          |  | Director                                                                   
|Emile Loria, M.D.             |  |     | 53 |          |  | Director, President and Chief Executive Officer                            
|John P. McKearn, Ph.D.        |  |     | 49 |          |  | Director                                                                   
|Michael J. Ross. Ph.D.        |  |     | 53 |          |  | Director                                                                   
|Executive Officers:           |  |     |    |          |  |                                                                            
|Emile Loria, M.D.             |  |     | 53 |          |  | Director, President and Chief Executive Officer                            
|Robert W. Chesnut, Ph.D.      |  |     | 59 |          |  | Executive Vice President, Research and Development                         
|Robert J. De Vaere            |  |     | 45 |          |  | Vice President, Finance and Administration, and
    Chief Financial Officer
|John D. Fikes, Ph.D.          |  |     | 42 |          |  | Vice President, Cancer Program                                             
|Michael R. McClurg            |  |     | 46 |          |  | Vice President, Business Development                                       
|Mark J. Newman, Ph.D.         |  |     | 48 |          |  | Vice President, Infectious Disease Program                                 

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Directors

Mr. Greene,a founder of Epimmune, has served
as a director since our inception. He was elected Chairman of
the board in January 1989 and served as President from July 1987
to January 1989. Mr. Greene is a director and founder of
Amylin Pharmaceuticals, Inc. a biotechnology company involved in
research and development of medicines for treating diabetes and
served as Chairman of the Board from 1987 to 1998. He was a
general partner of Biovest Partners, a seed venture capital firm
specializing in medical technology companies from 1986 until
1993. Prior to Biovest, he was Chief Executive Officer of
Hybritech Incorporated, a biotechnology company acquired by Eli
Lilly & Company in 1986. Mr. Greene is a director
of Amylin and Biosite Incorporated.

Dr. Comerhas served as a director since
January 1994. Since May 2000, he has been Chairman of the Board
of Neurogenetics, Inc., a privately held biopharmaceutical
company, where he also served as Interim Chief Executive Officer
from March 2000 through March 2002. Dr. Comer served as
President and Chief Executive Officer and a member of the Board
of Directors of SIBIA Neurosciences, Inc., a biotechnology
company, from April 1991 to November 1999. SIBIA was acquired by
Merck & Co., Inc., in November 1999. Dr. Comer served
as a consultant to Merck from December 1999 until August 2000.
Dr. Comer resigned from Merck on December 31, 1999.
Dr. Comer previously served in various roles with
Bristol-Myers Squibb, a pharmaceutical company, culminating in
his position as Senior Vice President of Strategic Management,
Pharmaceuticals and Nutritionals. He served as Chairman of
Prescient Neuropharma, Inc. until December 17, 2002 and is
currently a director of Innapharma, Inc.

Mr. Hibonhas served as a director since
August 2001. He currently serves as an advisor and has served
since 1998 to several companies and organizations in Europe and
North America. From 1990 to 1998, he was with Pasteur Merieux
Connaught, now Aventis Pasteur, a pharmaceutical company, most
recently as Chairman and Chief Executive Officer of PMC North
America, a vaccine focused business. From 1986 to 1989, he was
with Gillette group as President Director General of ST Dupont,
a luxury goods distributor. He was with Merck  & Co., a
pharmaceutical company, from 1968 to 1986 during which time he
held various executive positions in their European and
international operations. He currently serves on the Boards of
Directors of Cerep, Aphton Corporation and Care France.

Mr. Greyhas served as our director since
July 1999. Since April 2001, he has served as Chief Business
Officer and a member of the Board of Directors of Structural
GenomiX, Inc., a privately held biotechnology company. Between
January 1999 and April 2001, he served as President and Chief
Executive Officer of Trega Biosciences, Inc., a biotechnology
company. Prior to joining Trega, Mr. Grey served as
President of BioChem Therapeutics, Inc., a division of BioChem
Pharma, Inc., a pharmaceutical company, from November 1994 to
August 1998. During 1994, Mr. Grey served as President and
Chief Operating Officer of Ansan, Inc., a biopharmaceutical
Company. From 1974 to 1993, Mr. Grey served in various
roles with Glaxo, Inc. and Glaxo Holdings, p.l.c., a
pharmaceutical company, culminating in his position as Vice
President, Corporate Development. Mr. Grey serves on the
Boards of Directors of Achillion Pharmaceuticals, Inc. and
Incellico, Inc.

Dr. Loriahas served as our director since
January 2001. He joined us as President and Chief Executive
Officer in June 2001. From 1995 to 2000, he served as President
and Chief Executive Officer of Biovector Therapeutics, a vaccine
company. Prior to his appointment as Chief Executive Officer, he
served as Senior Vice President, Business Development at
Biovector from 1994 to 1995. From 1986 to 1993, he was founder
and Managing Director of MS Medical Synergy; a company
specialized in drug delivery. From 1978 to 1985, Dr. Loria
held various positions with the pharmaceutical companies Hoffman
La Roche-Kontron, Ciba-Geigy and Sanofi Pharma.

Dr. McKearnhas served as our director since
April 2000. He has been with Pharmacia Corporation, formerly
G.D. Searle and Co., a pharmaceutical company, since 1987. Since
August 2000, he has served as Senior Vice President, Pharmacia
Discovery Research, responsible for research activities in
cardiovascular diseases, arthritis and oncology. Prior to that
he served as Vice President, Searle Discovery Research from 1999
to 2000, Executive Director of Oncology from 1995 to 1999, and
directed all arthritis, inflammation and oncology research from
1987 to 1995. Dr. McKearn was a Senior Scientist at E.I.
DuPont de Nemours and

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Company, a pharmaceutical company, from 1985 to
1987 and a member of the Basel Institute for Immunology from
1982 to 1985.


Dr. Rosshas served as our director since
April 2002. He is currently a general partner with Schroder
Ventures Life Sciences, a private equity group focused on
healthcare. From 1999 to 2001 he was the managing partner of
Didyma, LLC, a healthcare consulting partnership. From 1996 to
1999 he was President and Chief Executive Officer of MetaXen
LLC, a biotechnology company that was sold to Exelixis
Pharmaceuticals. From 1990 to 1996, Dr. Ross was with Arris
Pharmaceutical Corp., now Celera Genomics Inc., a biotechnology
company, as Chief Scientific Officer, President and Chief
Executive Officer. Prior to joining Arris Pharmaceutical,
Dr. Ross spent twelve years with Genentech, Inc., a
biotechnology company, from 1978 to 1990, where he served in
various senior executive positions including Vice President,
Development and Vice President, Medicinal and Biomolecular
Chemistry. Dr. Ross currently serves on the Boards of
Directors of Aderis Pharmaceutical, Inc., Carta Proteomics,
Inc., CyThera, Inc. and Prescient Neuropharma Inc.

Executive Officers

Dr. Chesnuthas served as our Executive Vice
President of Research and Development since October 1997 and
Corporate Secretary since July 1999. Prior to joining Epimmune,
Dr. Chesnut was with Cytel Corp. from 1988 to October 1997,
most recently as Vice President of Research and Development,
Immunotherapy Program. From 1977 to 1988, Dr. Chesnut was a
Member of the Department of Medicine, National Jewish Medical
and Research Center in Denver, Colorado. He also serves as an
Associate Member of the Department of Immunology, Scripps Clinic
and Research Foundation in San Diego. He received his Ph.D.
degree in Microbiology from Oklahoma State University.

Mr. De Vaerehas served as our Vice President,
Finance and Chief Financial Officer since May 2000 and became
our Vice President, Finance and Administration in December 2001.
Prior to joining us in May 2000, Mr. De Vaere was with
Vista Medical Technologies, Inc., a medical device company,
since January 1996 where he served as Vice President of Finance
and Administration and Chief Financial Officer. Prior to his
employment with Vista, he was Director of Finance and Business
Management for Kaiser Electro-Optics from April 1993 to January
1996 and Controller for Kaiser Rollmet, an aerospace company,
from January 1991 to April 1993.

Dr. Fikeshas served as our Vice President,
Cancer Program, since January 2002. Prior to January 2002,
Dr. Fikes was our Director, Cancer Program, since October
1997. He was with Cytel since 1991, most recently as Associate
Director, Molecular Biology, and Director of Preclinical
Development. He received his Ph.D. from the University of North
Carolina at Chapel Hill, Department of Microbiology and
Immunology.

Mr. McClurghas served as our Vice President,
Business Development, since October 2001. Prior to joining us in
October 2001, Mr. McClurg held the position of Director,
Business Development, with Prometheus Laboratories, a
pharmaceutical company, since August 1999. His previous
employment was with Isis Pharmaceuticals, a biotechnology
company, as the Assistant Director of Business Planning and
Market Analysis from May 1998 to August 1999, and with Ligand
Pharmaceuticals, a biotechnology company, in various corporate
development and scientific research capacities from August 1990
to May 1998.

Dr. Newmanhas served as our Vice President,
Infectious Disease Program since March 1999. Prior to joining
Epimmune, Dr. Newman served as Vice President of Research
and Development of Vaxcel, Inc., a vaccine delivery/adjuvant
company, from January 1995 to March 1999. Prior to joining
Vaxcel, he was Associate Vice President, Research and
Development for Apollon, Inc., a DNA vaccine company. He also
previously held the position of Senior Director at Cambridge
Biotech Corporation.

Board Committees and Meetings

During the fiscal year ended December 31,
2002, the Board held seven meetings and acted by unanimous
written consent two times. Our board of directors currently has
an Audit Committee, a Compensation Committee and a Nominating
Committee.

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The Audit Committee is comprised of three
independent non-employee directors: Mr. Greene;
Mr. Grey; and Dr. Comer. This committee monitors our
financial reporting process and internal control systems,
reviews audit and management reports and makes recommendations
regarding the appointment of the independent auditors. The Audit
Committee met two times prior to April 1, 2002 to plan for
and discuss the 2001 annual audit with the Companys
independent auditors. The Audit Committee met three times after
April 1, 2002, to review and discuss the Companys
first, second and third quarter financial results and financial
statements to be included in the Companys Form 10-Q
filings and also acted by unanimous written consent one time
during the year. The Audit Committee met two times following the
2002 fiscal year end to discuss the 2002 annual audit with the
Companys independent auditors. The Audit Committee
recommends the independent auditors to the Board and provides a
direct line of communication between the auditors and the Board.
The independent auditors separately meet with the Audit
Committee, with and without Company management present, to
review and discuss various matters, including the Companys
financial statements, the report of the independent auditors on
the results, scope and terms of their work and their
recommendations concerning the Companys financial
practices and procedures. All members of the Audit Committee are
independent, as defined in Rule 4200(a)(14) of the National
Association of Securities Dealers, Inc. (NASD)
listing standards. In addition, our board of directors believes
that Mr. Greene is an audit committee financial expert. An
audit committee financial expert is a person who has (i) an
understanding of generally accepted accounting principles and
financial statements, (ii) the ability to assess the
general application of said principles in connection with the
accounting for estimates, accruals and reserves,
(iii) experience preparing, auditing, analyzing or
evaluating financial statements of comparable breadth and
complexity to the Companys or experience supervising
others who do, and (iv) an understanding of internal
controls and procedures.

The Compensation Committee is comprised of three
independent non-employee directors: Mr. Greene;
Dr. Comer; and Dr. McKearn. This Committee administers
Epimmunes stock option plans, stock purchase plan and
401(k) plan, approves salaries, bonuses and other compensation
arrangements for our officers and performs such other functions
regarding compensation as our board of directors may delegate.
The Compensation Committee held one meeting and acted by
unanimous written consent three times during 2002.

The Nominating Committee is composed of two
independent non-employee directors: Mr. Grey and
Dr. McKearn. The Nominating Committee interviews,
evaluates, nominates and recommends individuals for membership
on our board and committees thereof and nominates specific
individuals to be elected as our officers by the board. The
Nominating Committee acted by unanimous written consent one time
during 2002.

During the fiscal year ended December 31,
2002, all of the Companys directors attended or
participated in 75% or more of the aggregate of (i) the
total number of meetings of the Board and (ii) the total
number of meetings held by all committees of the Board on which
such director served during the year.




Item 11.Executive
Compensation

Director Compensation

Non-employee directors are paid $2,000 per
meeting attended in person and $500 per meeting attended by
phone as compensation for their service on the board. Directors
are not compensated for actions taken by written consent. The
members of the board are eligible for reimbursement of expenses
incurred in connection with their service on the board. Under
the Directors Deferred Compensation Plan, participating
directors may elect on an annual basis to defer all of their
cash compensation in a deferred compensation account pursuant to
which the deferred fees are credited in the form of share units
having a value equal to shares of our common stock share units,
based on the market price of the stock at the time the deferred
fees are earned. We will continue to credit share units to the
participants deferred compensation accounts on a quarterly
basis. When a participant ceases serving as a director, the
participant shall be entitled to receive the value of his or her
account either in a single lump-sum payment or in equal annual
installments, as determined by us, in our sole discretion. No
participant entitled to receive a payment of benefits shall
receive payment in the form of our common stock.

Directors are currently eligible to receive
option grants under our stock option plan in accordance with the
policy regarding non-employee director compensation adopted by
the board of directors in 1999. This policy

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calls for each non-employee director to be
granted annual options to purchase 5,000 shares of our common
stock as of the date of each annual meeting of our stockholders.
The shares subject to such option are to vest monthly over a
twelve-month period, provided the director remains a director
upon the date of his re-election to our board. Newly appointed
or elected non-employee directors are eligible for a
20,000-share option grant under this policy with monthly vesting
over a forty-eight month period. In December 2001,
Mr. Greene, Mr. Grey and Dr. Comer were granted
options under our stock option plan to purchase 10,000 shares of
our common stock, representing option grants for 2000 and 2001,
at an exercise price of $2.85 per share. In December 2001,
Dr. McKearn and Mr. Hibon, as newly elected directors,
were granted options under our stock option plan to purchase
20,000 shares of our common stock at an exercise price of $2.85
per share. In June 2002, the board granted Dr. Ross an
option to purchase 20,000 shares of our common stock at $1.80
per share in accordance with the policy applicable to newly
appointed non-employee directors. In addition, in June 2002, the
board granted annual options to purchase 5,000 shares of our
common stock in connection with the annual meeting of our
stockholders to the following non-employee directors:
Mr. Greene, Dr. Comer, Mr. Grey, Mr. Hibon,
Dr. McKearn and Dr. Ross at an exercise price of $1.80
per share.


Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the Securities Exchange Act
of 1934, as amended, or the Exchange Act, requires our directors
and executive officers, and persons who own more than 10% of a
registered class of our equity securities, to file with the SEC
initial reports of ownership and reports in changes in ownership
of our common stock and other of our equity securities. Specific
due dates for these reports have been established, and we are
required to disclose any failure to file by these dates during
2002. Our officers, directors and greater than 10% stockholders
are required by the SEC regulations to furnish us with copies of
all Section 16(a) forms they file.

Compensation of Executive Officers

The following table shows for the fiscal years
ended December 31, 2002, 2001, and 2000, compensation
awarded or paid to, or earned by our Chief Executive Officer and
our four other most highly compensated executive officers and
one former officer, Dr. Sette who resigned in October 2002.
These individuals are referred to as the named executive
officers. During the last three fiscal years, none of the
executive officers received any restricted stock awards or
long-term incentive payouts; provided, however, Dr. Loria
purchased stock from us in 2001 that is subject to vesting.

Summary Compensation Table

|                            |                                    |                     |      |            |  |            |         |                     |  |         |         |              |  |  |   |   |  |  |   |         |  |  |       |         | 
|--------------------------- | ---------------------------------- | ------------------- | ---- | ---------- |  | ---------- | ------- | ------------------- |  | ------- | ------- | ------------ |  |  | - | - |  |  | - | ------- |  |  | ----- | ------- | 
|                            |                                    |                     |      |            |  |            |         |                     |  |        
|                            |                                    |                     |      |            |  |            |         | Long-Term           |  |        
|                            |                                    |                     |      |            |  |            |         | Compensation Awards |  |        
|                            |                                    |                     |      |            |  |           
|                            |                                    | Annual Compensation |      | Restricted |  | Securities |         |                    
|                            |                                    |                     |      | Stock      |  | Underlying |         | All Other          
|                            |                                    |                     |      | Salary     |  | Bonus      |         | Awards              |  | Options |         | Compensation
|Name and Principal Position |                                    | Year                |      | ($)        |  | ($)(1)     |         | ($)                 |  | (#)     |         | ($)(2)      
|                            |                                    |                     |      |            |  |            |         |                     |  |         |         |             
|Dr. Emile Loria(3)(4)       |                                    |                     | 2002 |            |  |            | 300,000 |                     |  |         | 100,098 |              |  |  | 0 |   |  |  | 0 |         |  |  | 8,528 |        
|                            | President, Chief Executive Officer |                     |      | 2001       |  |            |         | 162,500             |  |         |         | 352,592      |  |  |   | 0 |  |  |   | 0       |  |  |       | 208,729 | 
|                            |                                    |                     | 2000 |            |  |            | 0       |                     |  |         | 0       |              |  |  | 0 |   |  |  | 0 |         |  |  | 0     |        
|Dr. Robert W. Chesnut       |                                    |                     | 2002 |            |  |            | 245,000 |                     |  |         | 98      |              |  |  | 0 |   |  |  | 0 |         |  |  | 2,150 |        
|                            | Executive Vice President,          |                     |      | 2001       |  |            |         | 231,008             |  |         |         | 120,000      |  |  |   | 0 |  |  |   | 120,000 |  |  |       | 2,419   | 
|                            | Research and Development           |                     |      | 2000       |  |            |         | 218,203             |  |         |         | 0            |  |  |   | 0 |  |  |   | 0       |  |  |       | 2,012   | 
|                            | and Secretary                      |                     |      |            |  |            |         |                     |  |         |         |              |  |  |   |   |  |  |   |         |  |  |       |         | 
|Dr. Alessandro D. Sette(5)  |                                    |                     | 2002 |            |  |            | 189,026 |                     |  |         | 0       |              |  |  | 0 |   |  |  | 0 |         |  |  | 430   |        
|                            | Vice President and Chief           |                     |      | 2001       |  |            |         | 178,500             |  |         |         | 50,000       |  |  |   | 0 |  |  |   | 85,000  |  |  |       | 431     | 
|                            | Scientific Officer                 |                     |      | 2000       |  |            |         | 168,732             |  |         |         | 0            |  |  |   | 0 |  |  |   | 0       |  |  |       | 348     | 
|Mr. Robert J. De Vaere(6)   |                                    |                     | 2002 |            |  |            | 185,000 |                     |  |         | 98      |              |  |  | 0 |   |  |  | 0 |         |  |  | 398   |        
|                            | Vice President, Finance and        |                     |      | 2001       |  |            |         | 168,000             |  |         |         | 115,000      |  |  |   | 0 |  |  |   | 105,000 |  |  |       | 402     | 
|                            | Administration, Chief Financial    |                     |      | 2000       |  |            |         | 93,235              |  |         |         | 0            |  |  |   | 0 |  |  |   | 75,000  |  |  |       | 176     | 
|                            | Officer                            |                     |      |            |  |            |         |                     |  |         |         |              |  |  |   |   |  |  |   |         |  |  |       |         | 

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##### Table of Contents



|                            |                            |                     |      |            |  |            |         |                     |  |         |    |              |  |  |   |   |  |  |   |        |  |  |     |     | 
|--------------------------- | -------------------------- | ------------------- | ---- | ---------- |  | ---------- | ------- | ------------------- |  | ------- | -- | ------------ |  |  | - | - |  |  | - | ------ |  |  | --- | --- | 
|                            |                            |                     |      |            |  |            |         |                     |  |        
|                            |                            |                     |      |            |  |            |         | Long-Term           |  |        
|                            |                            |                     |      |            |  |            |         | Compensation Awards |  |        
|                            |                            |                     |      |            |  |           
|                            |                            | Annual Compensation |      | Restricted |  | Securities |         |                    
|                            |                            |                     |      | Stock      |  | Underlying |         | All Other          
|                            |                            |                     |      | Salary     |  | Bonus      |         | Awards              |  | Options |    | Compensation
|Name and Principal Position |                            | Year                |      | ($)        |  | ($)(1)     |         | ($)                 |  | (#)     |    | ($)(2)      
|                            |                            |                     |      |            |  |            |         |                     |  |         |    |             
|Dr. Mark J. Newman          |                            |                     | 2002 |            |  |            | 185,000 |                     |  |         | 98 |              |  |  | 0 |   |  |  | 0 |        |  |  | 597 |    
|                            | Vice President, Infectious |                     |      | 2001       |  |            |         | 168,000             |  |         |    | 50,000       |  |  |   | 0 |  |  |   | 95,000 |  |  |     | 602 | 
|                            | Disease Programs           |                     |      | 2000       |  |            |         | 160,000             |  |         |    | 0            |  |  |   | 0 |  |  |   | 0      |  |  |     | 483 | 
|Mr. Michael R. McClurg(7)   |                            |                     | 2002 |            |  |            | 175,000 |                     |  |         | 98 |              |  |  | 0 |   |  |  | 0 |        |  |  | 540 |    
|                            | Vice President, Business   |                     |      | 2001       |  |            |         | 37,805              |  |         |    | 0            |  |  |   | 0 |  |  |   | 75,000 |  |  |     | 135 | 
|                            | Development                |                     |      | 2000       |  |            |         | 0                   |  |         |    | 0            |  |  |   | 0 |  |  |   | 0      |  |  |     | 0   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | All officers of the Company were granted a stock
    bonus award of 100 shares of our common stock in exchange for
    the termination of their participation in the 2002 Management
    Bonus Plan. The fair market value of our common stock on
    December 16, 2002, the issuance date, was $0.98 per share,
    or $98 for each award.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(2) | All other compensation consists of life insurance
    premiums paid by us unless otherwise noted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(3) | Dr. Loria joined as our President and Chief
    Executive Officer in June 2001 at an annual salary of $300,000.
    Dr. Loria received a signing bonus of $125,000 and was
    eligible to earn a performance bonus equal to two percent of any
    proceeds received by us from any public or private equity
    financing or other transaction pursuant to which we received
    funding (other than research funding) that was completed by us
    between January 16, 2001 and January 16, 2002. During
    the period from January 16, 2001 and January 16, 2002,
    we completed transactions in which we received total funding of
    $16,379,581 making Dr. Loria eligible for bonus payments of
    $327,592 under the provisions of this agreement. Dr. Loria
    was paid a bonus of $227,592 in 2001 and the remaining accrued
    balance of $100,000 was paid in January 2002. Other compensation
    includes a 2002 payment of $7,470 to independent tax accountants
    for the preparation of a 2001 foreign tax return, and 2001
    payments of $204,427 for relocation to San Diego, California
    made by us to Dr. Loria.
|   
|(4) | Dr. Loria joined as our President and Chief
    Executive Officer in June 2001. In connection with his
    employment offer letter and joining our board of directors in
    January 2001, and as an inducement to accept the offer, we sold
    Dr. Loria 1,056,301 shares of our common stock at a
    purchase price of $2.50 per share, the closing price of our
    common stock on the Nasdaq National Market on the date of
    purchase. The shares are subject to vesting in equal daily
    installments during the four-year period following the date of
    purchase, and we have a right to purchase any unvested shares at
    the purchase price paid by Dr. Loria in the event of
    termination of Dr. Lorias service to Epimmune.
    Dr. Loria issued us a promissory note for $2,641,000, the
    aggregate purchase price of the shares, which is secured by a
    pledge of the shares. The closing price of our common stock on
    the Nasdaq National Market as of December 31, 2002 was
    $0.92.                                                                                                                    
|   
|(5) | Dr. Sette resigned as our Vice President and
    Chief Scientific Officer in October 2002. His 2002 salary
    includes $30,693 for accrued vacation paid to Dr. Sette
    upon his resignation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(6) | Mr. De Vaere joined us as our Vice
    President, Finance and Chief Financial Officer in May 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(7) | Mr. McClurg joined us as our Vice President,
    Business Development in October 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Stock Option Grants and Exercises

We currently grant options to our executive
officers under our 2000 Stock Plan and have previously granted
options under our 1997 Stock Plan and our 1989 Stock Option
Plan, which terminated in 1999. As of December 31, 2002,
options to purchase a total of 199,488 shares were outstanding
under the 1997 Stock Plan, options to purchase a total of
501,044 shares were outstanding under the 1989 Stock Option
Plan, options to purchase a total of 7,140 shares were
outstanding under the 1994 Non-Employee Directors Stock
Option Plan and options to purchase a total of 977,224 shares
were outstanding under the 2000 Stock Plan. On December 16,
2002 we granted stock bonus awards of 600 shares to our
executive officers from the 2000 Plan. There are no options
available for grant under the 1997 Stock Plan, the 1989 Stock
Option Plan or the 1994

37



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##### Table of Contents



Non-Employee Directors Stock Option Plan,
and options to purchase 222,176 shares remain available for
grant under the 2000 Stock Plan.


Options granted under the 1989 Stock Option Plan
prior to 1996 generally vested 20% at the end of the first year
of the optionees employment and thereafter daily at the
rate of 20% per year during such period of employment. Options
granted under the 1989 Stock Option Plan after November 1996 and
options granted under the 2000 Stock Plan generally vest 25% at
the end of the first year of the optionees employment and
thereafter daily at the rate of 25% per year during such period
of employment. Options granted under the subsidiarys plan
which we assumed generally vest 25% at the end of the first year
of the optionees employment and thereafter monthly at the
rate of 25% per year during such period of employment.

The potential realizable value shown in the table
below is calculated based on the terms of the option at its time
of grant (10 years in the case of all options). It is
calculated by assuming that the stock price on the date of grant
appreciates at the indicated annual rate, compounded annually
for the entire term of the option and that the option is
exercised and sold on the last day of its term for the
appreciated stock price. These amounts represent certain assumed
rates of appreciation, in accordance with rules of the SEC, and
do not reflect our estimate or projection of future stock price
performance. Actual gains, if any, are dependent on the actual
future performance of our common stock, and no gain to the
optionee is possible unless the stock price increases over the
option term, which will benefit all stockholders.

There were no option grants to the named
executive officers in 2002.

Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year-End Option Values

The following table sets forth summary
information with respect to exercisable and unexercisable stock
options held as of December 31, 2002 by each of the named
executive officers. None of the named executive officers
exercised options in fiscal year ended December 31, 2002.
The value of the stock options are calculated using the fair
market value of our common stock on December 31, 2002
($0.92 per share) minus the exercise price of the options. We
have included in the calculation of unexercisable options
certain options that are immediately exercisable, but are
subject to our right to repurchase unvested shares upon
termination of employment.

|                           |  |             |   |          |  |                           |   |                           |  |  |          |        |  |   |         |     
|-------------------------- |  | ----------- | - | -------- |  | ------------------------- | - | ------------------------- |  |  | -------- | ------ |  | - | ------- | ----
|                           |  |             |   |          |  | Number of Securities      |   | Value of Unexercised     
|                           |  |             |   |          |  | Underlying Unexercised    |   | In-the-Money             
|                           |  |             |   |          |  | Options at December 31,   |   | Options at December 31,  
|                           |  | Shares      |   |          |  | 2002(1)                   |   | 2002                     
|                           |  | Acquired    |   | Value    |  |                           |   |                          
|Name                       |  | on Exercise |   | Realized |  | Exercisable/Unexercisable |   | Exercisable/Unexercisable
|                           |  |             |   |          |  |                           |   |                          
|Dr. Emile Loria            |  |             |  |          |  |                           |  |                           |  |  | /       |       |  |   | /      |    
|Dr. Robert W. Chesnut      |  |             |  |          |  |                           |  |                           |  |  | 110,964/ | 78,486 |  |   | /      |    
|Dr. Alessandro D. Sette(2) |  |             |  |          |  |                           |  |                           |  |  | 76,349/  | 55,317 |  |   | /      |    
|Mr. Robert J. De Vaere     |  |             |  |          |  |                           |  |                           |  |  | 94,610/  | 85,390 |  |   | /      |    
|Dr. Mark J. Newman         |  |             |  |          |  |                           |  |                           |  |  | 120,859/ | 56,607 |  | $ | 26,851/ | $571
|Mr. Michael R. McClurg     |  |             |  |          |  |                           |  |                           |  |  | 22,856/  | 52,144 |  |   | /      |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reflects shares vested and unvested at
    December 31, 2002. Certain options granted under the former
    subsidiarys stock plan are immediately exercisable, but
    are subject to our right to repurchase unvested shares on
    termination of employment. Such unvested shares are therefore
    considered unexercisable.                                                                                                                                                                  
|   
|(2) | Dr. Sette resigned as our Vice President and
    Chief Scientific Officer, effective October 31, 2002, at
    which time we entered into a Separation Agreement and a
    Consulting Agreement with Dr. Sette. Under the terms of
    these agreements, his outstanding stock options at
    October 31, 2002 were converted from Incentive Stock
    Options to Non-Qualifying Stock Options and will continue to
    vest as long as he continues to provide consulting services to
    Epimmune.

38



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##### Table of Contents



Employment, Change of Control and Separation
Agreements

In March 2001, the severance agreement with
Dr. Chesnut, originally entered into in February 1998, was
amended. Under the agreement, as amended, in the event that
Dr. Chesnut is terminated without cause, he shall receive a
lump-sum payment equal to six months of his then effective
annual base salary and all of his unvested stock options shall
immediately accelerate by six months. If Dr. Chesnut is
terminated without cause within one year following a change of
control of Epimmune, he shall receive a lump-sum payment equal
to twelve months of his then effective annual base salary, and
all of his unvested stock options shall immediately vest and
become exercisable.

In May 2000, we entered into severance benefits
agreements with Dr. Newman, Vice President Infectious Disease
Program, and Mr. Robert De Vaere, Vice President, Finance
and Administration and Chief Financial Officer. In March 2001,
the severance agreements with Dr. Newman and Mr. De
Vaere were amended. In March 2002, we entered into severance
benefits agreements with Mr. Michael McClurg, Vice President,
Business Development, and Dr. Fikes, Vice President, Cancer
Program. Under the agreements, as amended, in the event Dr.
Newman, Mr. De Vaere, Mr. McClurg or Dr. Fikes is
terminated without cause within one year following a change of
control of Epimmune, he shall receive a lump-sum payment equal
to twelve months of his annual base salary, and all of his
unvested stock options shall immediately vest and become
exercisable.

In January 2001, we entered into an employment
agreement with Dr. Emile Loria, one of our directors, for
the position of President and Chief Executive Officer,
contingent upon obtaining satisfactory approval to work in the
United States. Dr. Loria subsequently obtained such
approval in June 2001. The agreement provided an annual salary
of $300,000 for Dr. Loria. In addition, Dr. Loria was
eligible to earn a performance bonus equal to two percent of any
proceeds received by us from any public or private equity
financing or other transaction pursuant to which we received
funding (other than research funding) that was completed by us
between January 16, 2001 and January 16, 2002. We also
agreed to pay Dr. Loria a signing bonus of $125,000,
certain of his relocation expenses, including the costs of
moving household goods to San Diego, temporary furnished living
accommodations in San Diego for six months, automobile rental
costs in San Diego for up to six months and cost of up to three
trips for him and his family to and from France (such expenses
were approximately $200,000), and agreed to pay him $60,000 to
assist him in his relocation.

In addition, in January 2001, we sold
Dr. Loria 1,056,301 shares of our common stock at the
closing price of such common stock as reported by the Nasdaq
National Market on the date of purchase, which was $2.50 per
share. These shares vest in equal daily installments over the
four-year period following the purchase date and we have a right
to purchase any unvested shares at the purchase price paid by
Dr. Loria in the event of termination of Dr. Lorias
service to us. Dr. Loria purchased the shares with a
promissory note in the principal amount of $2,641,000, which is
secured by a pledge of the shares. The note bears interest at
the rate of 5.61% per year, compounded annually. The principal
and interest is due on January 16, 2005. As of
December 31, 2002, there was $2,932,000 in principal and
interest outstanding under the note.

Under the terms of the employment agreement,
Dr. Loria is entitled to continued salary payments for
twelve months in the event he is terminated without cause or
voluntarily resigns for good reason. In addition, if
Dr. Loria is terminated without cause or voluntarily
resigns for good reason following a change in control of
Epimmune, then Dr. Loria is entitled to receive a lump sum
payment equal to one year of his base salary and all of the
unvested shares he initially purchased from us will become fully
vested.

In October 2002, Alessandro D. Sette, Ph.D., Vice
President and Chief Scientific Officer of Epimmune tendered his
resignation, effective October 31, 2002, to pursue academic
research, and we entered into a Separation Agreement with
Dr. Sette. Dr. Sette has agreed to perform certain
consulting services for us for a year after his separation date.

In March 2003, the Compensation Committee of our
board of directors approved a 2003 bonus plan for the officers
of the Company under which the officers would be eligible for
bonuses up to their annual salary. Any payment of such bonuses
will be subject to and based on the performance evaluations by
the Compensation Committee of or the board of directors, at
their complete discretion.

39



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##### Table of Contents



Compensation Committee Interlocks and Insider
Participation

Mr. Greene, a member of the Compensation
Committee, is Chairman of our board of directors.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

Equity Compensation Plan Information

The following table sets forth certain
information as of December 31, 2002 regarding our equity
compensation plans that were approved by our stockholders.

|                                                   |  |                      |           |                   |  |                      |       |  |  |  |         | 
|-------------------------------------------------- |  | -------------------- | --------- | ----------------- |  | -------------------- | ----- |  |  |  | ------- | 
|                                                   |  | (a)                  |           | (b)               |  | (c)                 
|                                                   |  |                      |           |                   |  | Number of Securities
|                                                   |  |                      |           |                   |  | Remaining Available 
|                                                   |  |                      |           | Weighted-average  |  | for Issuance Under  
|                                                   |  | Number of Securities |           | Exercise Price of |  | Equity Compensation 
|                                                   |  | to be Issued Upon    |           | Outstanding       |  | Plans (Excluding    
|                                                   |  | Exercise of Options, |           | Options, Warrants |  | Securities Reflected
|Name of Plan                                       |  | Warrants and Rights  |           | and Rights        |  | in Column (a))      
|                                                   |  |                      |           |                   |  |                     
|1989 Stock Option Plan                             |  |                      | 501,044   |                   |  | $                    | 7.46  |  |  |  | 0       | 
|1994 Non-Employee Directors Stock Option
    Plan |  |                      | 7,140     |                   |  | $                    | 20.31 |  |  |  | 0       | 
|1997 Stock Plan                                    |  |                      | 199,488   |                   |  | $                    | 0.34  |  |  |  | 0       | 
|2000 Stock Plan                                    |  |                      | 977,224   |                   |  | $                    | 2.61  |  |  |  | 222,176 | 
|Total                                              |  |                      | 1,684,896 |                   |  | $                    | 3.86  |  |  |  | 222,176 | 

The following table sets forth certain
information regarding the ownership of our common stock as of
February 15, 2003 by (i) each director and nominee;
(ii) each of the executive officers named in the summary
compensation table; (iii) all executive officers and
directors as a group; and (iv) all those known by us to be
beneficial owners of more than five percent of our common stock:

|                                                                                     |  |                         |           |            |  |  |      |  
|------------------------------------------------------------------------------------ |  | ----------------------- | --------- | ---------- |  |  | ---- | -
|                                                                                     |  |                        
|                                                                                     |  | Beneficial Ownership(1)
|                                                                                     |  |                        
|                                                                                     |  | Number of               |           | Percent of
|Beneficial Owner                                                                     |  | Shares                  |           | Shares    
|                                                                                     |  |                         |           |           
|State of Wisconsin Investment Board
    121 East Wilson Street
    Madison, WI 53702 |  |                         | 1,892,477 |            |  |  | 15.5 | %
|Pharmacia Corporation(2)
    5200 Old Orchard Road
    Skokie, IL 60077              |  |                         | 1,925,908 |            |  |  | 14.0 | %
|Genencor International, Inc.
    200 Meridian Centre Blvd.
    Rochester, NY 14618   |  |                         | 1,342,324 |            |  |  | 11.0 | %
|International Biotechnology Trust plc
    71 Kingsway
    London, WC2B 6ST, England  |  |                         | 1,267,992 |            |  |  | 10.4 | %
|Dr. Emile Loria(3)                                                                   |  |                         | 1,056,401 |            |  |  | 8.7  | %
|Mr. Peter Allard                                                                     |  |                         | 982,300   |            |  |  | 8.1  | %
|Dr. Robert W. Chesnut(4)                                                             |  |                         | 445,302   |            |  |  | 3.6  | %
|Dr. Alessandro D. Sette (4)(5)                                                       |  |                         | 408,759   |            |  |  | 3.3  | %
|Mr. Howard E. (Ted) Greene,
    Jr.(4)(6)                                          |  |                         | 168,100   |            |  |  | 1.4  | %
|Dr. Mark J. Newman(4)                                                                |  |                         | 141,521   |            |  |  | 1.2  | %
|Mr. Robert J. De Vaere(4)                                                            |  |                         | 110,497   |            |  |  | *    |  
|Dr. John D. Fikes(4)                                                                 |  |                         | 109,334   |            |  |  | *    |  

40



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##### Table of Contents



|                                                                    |  |                         |           |            |  |  |      |  
|------------------------------------------------------------------- |  | ----------------------- | --------- | ---------- |  |  | ---- | -
|                                                                    |  |                        
|                                                                    |  | Beneficial Ownership(1)
|                                                                    |  |                        
|                                                                    |  | Number of               |           | Percent of
|Beneficial Owner                                                    |  | Shares                  |           | Shares    
|                                                                    |  |                         |           |           
|Dr. William T. Comer(4)                                             |  |                         | 41,983    |            |  |  | *    |  
|Mr. Michael Grey(4)                                                 |  |                         | 32,500    |            |  |  | *    |  
|Mr. Michael R. McClurg(4)                                           |  |                         | 28,447    |            |  |  | *    |  
|Dr. John P. McKearn(4)                                              |  |                         | 12,500    |            |  |  | *    |  
|Mr. Georges Hibon(4)                                                |  |                         | 11,667    |            |  |  | *    |  
|Dr. Michael J. Ross(4)                                              |  |                         | 12,500    |            |  |  | *    |  
|All executive officers and directors as a group
    (13 persons)(7) |  |                         | 2,575,761 |            |  |  | 20.0 | %



---



| |   |                       
| | - | ----------------------
| | * | Less than one percent.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This table is based upon information supplied by
    officers, directors and principal stockholders and on any
    Schedules 13D or 13G filed with the Securities and Exchange
    Commission (the SEC). Unless otherwise indicated in
    the footnotes to this table and subject to community property
    laws where applicable, each stockholder named in this table has
    sole voting and investment power with respect to the shares
    indicated as beneficially owned. Applicable percentage ownership
    is based on 12,182,919 shares of Common Stock outstanding
    on February 15, 2003, as adjusted by the rules promulgated
    by the SEC.
|   
|(2) | Includes 1,608,448 shares of Common Stock
    issuable upon conversion of shares of Series S Preferred
    Stock and Series S-1 Preferred Stock held by Pharmacia
    Corporation, formerly G.D. Searle, provided that Pharmacia
    is not entitled to vote such shares to the extent that the total
    number of shares of voting capital stock held by Pharmacia and
    its affiliates would exceed 19.9%. Pharmacia owns 100% of the
    outstanding shares of the Series S Preferred Stock and
    Series S-1 Preferred Stock. The Series S Preferred
    Stock and Series S-1 Preferred Stock are convertible into
    Common Stock at any time.        
|   
|(3) | Of the shares held by Dr. Loria,
    506,099 shares were subject to a right of repurchase in
    favor of the Company as of February 15, 2003.
    Dr. Lorias 506,099 shares vest ratably in equal daily
    installments until January 16, 2005, at which point all of
    Dr. Lorias shares will be vested, provided
    Dr. Lorias service to the Company is not terminated.                                                                                                                                                                                                                                                                              
|   
|(4) | Includes shares, which certain executive officers
    and directors of the Company have the right to acquire within
    60 days after February 15, 2003 pursuant to
    outstanding options, as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                        



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Dr. Robert W. Chesnut, 123,698 shares; 
     Dr. William T. Comer, 41,069 shares; 
     Mr. Robert J. De Vaere, 107,792 shares; 
     Dr. John D. Fikes, 94,908 shares; 
     Mr. Howard E. (Ted) Greene, Jr.,
    36,070 shares; 
     Mr. Michael G. Grey, 32,500 shares; 
     Mr. Georges Hibon, 11,667 shares; 
     Mr. Michael R. McClurg, 28,347; 
     Dr. John P. McKearn, 12,500 shares; 
     Dr. Mark J. Newman, 130,582 shares; 
     Dr. Michael J. Ross, 8,750; 
     Dr. Alessandro D. Sette, 85,606 shares; and 
     All executive officers and directors as a group,
    714,489 shares.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | Includes 141,575 shares held in trust for
    the benefit of Dr. Settes family. Dr. Sette is a
    trustee of such trust and has voting and investment power with
    respect to such shares and may be deemed to be the beneficial
    owner of such shares. Dr. Sette resigned as our Vice
    President and Chief Scientific Officer, effective
    October 31, 2002, at which time we entered into a
    Separation Agreement and a Consulting Agreement with Dr. Sette.
    Under the terms of these agreements, his outstanding stock
    options at October 31, 2002 were converted from Incentive
    Stock Options to Non-Qualifying Stock Options and will continue
    to vest as long as he continues to provide consulting services
    to Epimmune.

41



---



##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6) | Includes 129,745 shares held in trust for
    the benefit of Mr. Greene and his wife and 2,285 shares
    held in trust for the benefit of Mr. Greenes
    children. Mr. Greene is a trustee of both trusts.
    Mr. Greene acting as trustee has voting and investment
    power with respect to such shares and may be deemed to be the
    beneficial owner of such shares.
|   
|(7) | Includes shares described in notes (3)
    through (6) above.                                                                                                                                                                                                                                                                                                                  




Item 13.     Certain
Relationships and Related Transactions

Our bylaws provide that we will indemnify our
directors and executive officers and may indemnify our other
officers, employees and other agents to the fullest extent
permitted by Delaware law. We are also empowered under our
bylaws to enter into indemnification contracts with our
directors and officers and to purchase insurance on behalf of
any person whom it is required or permitted to indemnify.
Pursuant to this provision, we have entered into indemnity
agreements with each of our directors and executive officers.

In addition, our certificate of incorporation
provides that to the fullest extent permitted by Delaware law,
our directors will not be liable for monetary damages for breach
of the directors fiduciary duty of care to us and our
stockholders. This provision in the certificate of incorporation
does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other
forms of non-monetary relief would remain available under
Delaware law. Each director will continue to be subject to
liability for breach of the directors duty of loyalty to
us, for acts or omissions not in good faith or involving
intentional misconduct or knowing violations of law, for acts or
omissions that the director believes to be contrary to our best
interests or our stockholders, for any transaction from which
the director derived an improper personal benefit, for acts or
omissions involving a reckless disregard for the directors
duty to us or our stockholders when the director was aware or
should have been aware of a risk of serious injury to us or our
stockholders, for acts or omissions that constitute an unexcused
pattern of inattention that amounts to an abdication of the
directors duty to us or our stockholders, for improper
transactions between the director and us, and for improper
distributions to stockholders and loans to directors and
officers. This provision also does not affect a directors
responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.

We have entered into certain additional
transactions with our directors and officers, as described under
the captions Executive Compensation and
Employment Agreements.

As of December 31, 2002, Genencor held 11.0%
of our common stock.




PART IV






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

(a) Evaluation of Disclosure Controls and
Procedures

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

(b) Changes in Internal Controls

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

42



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##### Table of Contents








|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a)(1) Index to Financial
Statements

The consolidated financial statements required by
this item are submitted in a separate section beginning on
page F-1 of this Report.

|                                                                                                                          |  |      |     | 
|------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                          |  | Page
|                                                                                                                          |  |     
|Report of Ernst & Young LLP, Independent
    Auditors                                                                     |  |      | F-2 | 
|Consolidated Balance Sheets as of
    December 31, 2002 and 2001                                                          |  |      | F-3 | 
|Consolidated Statements of Operations for each of
    the three years in the period ended December 31, 2002               |  |      | F-4 | 
|Consolidated Statements of Stockholders
    Equity for each of the three years in the period ended
    December 31, 2002 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for each of
    the three years in the period ended December 31, 2002               |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                                                |  |      | F-7 | 

(2) Index to Financial Statement
Schedules

The consolidated financial statement schedules
required by this item are omitted because they are not
applicable or the required information is shown in the Financial
Statements or the notes thereto.

(b) Reports on
Form 8-K

No reports on Form 8-K were filed during the
last quarter of the period covered by this report.

(c) Listing of Exhibits

|        |   |     |  |                      |  |                                                                                                                                                               
|------- | - | --- |  | -------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |     |  |                     
|Number  |   |     |  | Document Description
|        |   |     |  |                     
|        | 3 | .1  |  |                      |  | Amended and Restated Certificate of Incorporation
    filed with the Secretary of State of Delaware on
    December 2, 1991.(1)                               
|        | 3 | .2  |  |                      |  | Certificate of Designation of Series A
    Junior Participating Preferred Stock filed with the Secretary of
    State of Delaware on April 2, 1993.           
|        | 3 | .3  |  |                      |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation filed with the Secretary of State
    of Delaware on July 5, 1995.          
|        | 3 | .4  |  |                      |  | Certificate of Increase of Series A Junior
    Participating Preferred Stock filed with the Secretary of State
    of Delaware on July 5, 1995.               
|        | 3 | .5  |  |                      |  | Certificate of Increase of Series A Junior
    Participating Preferred Stock filed with the Secretary of State
    of Delaware on July 2, 1998.(5)            
|        | 3 | .6  |  |                      |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation filed with the Secretary of State
    of Delaware on July 2, 1998.(5)       
|        | 3 | .7  |  |                      |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation filed with the Secretary of State
    of Delaware on November 12, 1998.(6)  
|        | 3 | .8  |  |                      |  | Certificate of Designations of the Series S
    and Series S-1 Preferred Stock filed with the Secretary of
    State of Delaware on June 29, 1999.(8)         
|        | 3 | .9  |  |                      |  | Certificate of Ownership and Merger filed with
    the Secretary of State of Delaware on July 1, 1999.(8)                                                     
|        | 3 | .10 |  |                      |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation filed with the Secretary of State
    of Delaware on September 23, 1999.(10)
|        | 3 | .11 |  |                      |  | Certificate of Decrease of Series A Junior
    Participating Preferred Stock filed with the Secretary of State
    of Delaware on September 23, 1999.(10)     
|        | 3 | .12 |  |                      |  | Amended and Restated Bylaws of the
    Registration.(19)                                                                                                      

43



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##### Table of Contents



|        |    |     |  |                      |  |                                                                                                                                                                                                                                                                   
|------- | -- | --- |  | -------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |                     
|Number  |    |     |  | Document Description
|        |    |     |  |                     
|        | 3  | .13 |  |                      |  | Rights Agreement dated March 19, 1993
    between Registrant and American Stock Transfer & Trust
    Company, as amended on June 29, 1999, February 15,
    2000, July 9, 2001 and December 18, 2001.(19)                                                         
|        | 4  | .1  |  |                      |  | Reference is made to Exhibits 3.1 through
    3.13.                                                                                                                                                                                                               
|        | 4  | .2  |  |                      |  | Specimen certificate of the Common stock.(1)                                                                                                                                                                                                                      
|        | 10 | .1  |  |                      |  | Form of Indemnification Agreement entered into
    between Epimmune and its directors and officers.(1)                                                                                                                                                            
|        | 10 | .2  |  |                      |  | Registrants 1989 Stock Plan, as amended
    through June 12, 1998 (the 1989 Plan).(5)                                                                                                                                                                          
|        | 10 | .3  |  |                      |  | Forms of Incentive Stock Option Agreement under
    the 1989 Plan.(1)                                                                                                                                                                                             
|        | 10 | .4  |  |                      |  | Form of Nonstatutory Stock Option Agreement under
    the 1989 Plan.(1)                                                                                                                                                                                           
|        | 10 | .5  |  |                      |  | Research Agreement, between Epimmune and The
    Scripps Research Institute, formerly Scripps Clinic and Research
    Foundation (Scripps), dated as of September 1,
    1990, as amended August 5, 1991 (with certain confidential
    portions deleted).(1)(A)
|        | 10 | .6  |  |                      |  | License Agreement, between Epimmune and Scripps,
    dated as of September 23, 1991 (with certain confidential
    portions deleted).(1)(A)                                                                                                                       
|        | 10 | .7  |  |                      |  | Research and Option Agreement, between Epimmune
    and Scripps, dated October 1, 1991 (with certain
    confidential portions deleted).(1)(A)                                                                                                                    
|        | 10 | .8  |  |                      |  | Amendment to License Agreement between Epimmune
    and Scripps dated as of June 17, 1992 (with certain
    confidential portions deleted).(I)(B)                                                                                                                 
|        | 10 | .9  |  |                      |  | Registrants 1994 Non-Employee
    Directors Stock Option Plan, as amended through
    June 12, 1998.(5)                                                                                                                                                         
|        | 10 | .10 |  |                      |  | Second Amendment to License Agreement between
    Epimmune and Scripps dated as of June 17, 1992 (with
    certain confidential portions deleted.(I)(B)                                                                                                           
|        | 10 | .11 |  |                      |  | Directors Deferred Compensation Plan,
    effective as of March 17, 1995, as amended
    September 20, 1996 and July 13, 1999.(23)                                                                                                                               
|        | 10 | .12 |  |                      |  | Lease Agreement between Epimmune Inc. and Nexus
    Equity LLC VIII, dated as of November 1, 1998, as amended
    February 1, 1999.(7)                                                                                                                            
|        | 10 | .13 |  |                      |  | Preferred Stock Exchange Agreement, dated
    July 1, 1999, by and between the Company and
    G.D. Searle & Co.(8)                                                                                                                                               
|        | 10 | .14 |  |                      |  | Investor Rights Agreement, dated as of
    July 1, 1999, by and between the Company and
    G.D. Searle & Co.(8)                                                                                                                                                  
|        | 10 | .15 |  |                      |  | Letter agreement between Epimmune and
    Dr. Robert W. Chesnut regarding severance benefits
    dated February 5, 1998.(9)                                                                                                                                       
|        | 10 | .16 |  |                      |  | Letter agreement between Epimmune and
    Dr. Alessandro Sette regarding severance benefits dated
    February 5, 1998.(9)                                                                                                                                        
|        | 10 | .17 |  |                      |  | Form of Common Stock Purchase agreement dated
    February 15, 2000.(11)                                                                                                                                                                                          
|        | 10 | .18 |  |                      |  | Letter Agreement between Epimmune and Robert
    De Vaere dated May 4, 2000.(12)                                                                                                                                                                                  
|        | 10 | .19 |  |                      |  | Letter Agreement between Epimmune and Mark Newman
    dated May 4, 2000.(12)                                                                                                                                                                                      
|        | 10 | .20 |  |                      |  | Form of Common Stock Purchase Agreement dated
    October 16, 2000.(13)                                                                                                                                                                                           
|        | 10 | .21 |  |                      |  | Non-Exclusive License Agreement between Epimmune
    and Valentis, Inc., dated November 27, 2000 (with certain
    confidential portions deleted).(13)(C)                                                                                                         
|        | 10 | .22 |  |                      |  | Letter Agreement between Epimmune and
    Dr. Emile Loria regarding employment terms dated
    January 16, 2001.(14)                                                                                                                                              
|        | 10 | .23 |  |                      |  | Form of Restricted Stock Purchase Agreement
    between Epimmune and Dr. Emile Loria dated January 16,
    2001.(14)                                                                                                                                              
|        | 10 | .24 |  |                      |  | Promissory Note of Dr. Emile Loria in favor
    of Epimmune dated January 16, 2001.(14)                                                                                                                                                                           
|        | 10 | .25 |  |                      |  | Stock Pledge Agreement by Dr. Emile Loria in
    favor of Epimmune dated January 16, 2001.(14)                                                                                                                                                                    

44



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##### Table of Contents



|        |    |     |  |                      |  |                                                                                                                                                                  
|------- | -- | --- |  | -------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |                     
|Number  |    |     |  | Document Description
|        |    |     |  |                     
|        | 10 | .26 |  |                      |  | Amendment to Severance Benefits Agreement between
    Epimmune and Dr. Alessandro Sette dated March 8,
    2001.(14)                                             
|        | 10 | .27 |  |                      |  | Amendment to Severance Benefits Agreement between
    Epimmune and Dr. Robert W. Chesnut dated March 8,
    2001.(14)                                            
|        | 10 | .28 |  |                      |  | Amendment to Severance Benefits Agreement between
    Epimmune and Dr. Mark Newman dated                                                                         
|        |    |     |  |                      |  | March 8, 2001.(14)                                                                                                                                               
|        | 10 | .29 |  |                      |  | Amendment to Severance Benefits Agreement between
    Epimmune and Robert De Vaere dated March 8, 2001.(14)                                                      
|        | 10 | .30 |  |                      |  | Non-exclusive License Agreement between Epimmune
    and Nexell Therapeutics, Inc., dated March 28, 2001 (with
    certain confidential portions deleted).(14)(D)
|        | 10 | .31 |  |                      |  | Non-exclusive License Agreement between Epimmune
    and Pharmexa A/ S dated June 25, 2001 (with certain
    confidential portions deleted).(16)(E)              
|        | 10 | .32 |  |                      |  | License Agreement between Epimmune and Genencor
    International Inc. dated July 9, 2001 (with certain
    confidential portions deleted).(16)(E)               
|        | 10 | .33 |  |                      |  | Collaboration Agreement between Epimmune and
    Genencor International Inc. dated July 9, 2001 (with
    certain confidential portions deleted).(17)(F)         
|        | 10 | .34 |  |                      |  | Securities Purchase Agreement between Epimmune
    and Genencor International Inc. dated July 9, 2001 (with
    certain confidential portions deleted).(17)(F)   
|        | 10 | .35 |  |                      |  | Non-exclusive License Agreement between Epimmune
    and Biosite Incorporated dated August 17, 2001 (with
    certain confidential portions deleted).(17)(F)     
|        | 10 | .36 |  |                      |  | Non-exclusive License Agreement between Epimmune
    and Anosys Inc. dated August 31, 2001 (with certain
    confidential portions deleted).(17)(F)              
|        | 10 | .37 |  |                      |  | Non-exclusive License Agreement between Epimmune
    and Bavarian Nordic A/ S dated November 28, 2001 (with
    certain confidential portions deleted).(19)(G)   
|        | 10 | .38 |  |                      |  | Form of Share Purchase Agreement dated
    December 18, 2001.(18)                                                                                                
|        | 10 | .39 |  |                      |  | 2000 Stock Plan as amended.(19)                                                                                                                                  
|        | 10 | .40 |  |                      |  | 2001 Employee Stock Purchase Plan.(15)                                                                                                                           
|        | 10 | .41 |  |                      |  | Letter Agreement between Epimmune and Michael
    McClurg dated March 29, 2002.(20)                                                                              
|        | 10 | .42 |  |                      |  | Letter Agreement between Epimmune and
    Dr. John Fikes dated March 29, 2002.(20)                                                                               
|        | 10 | .43 |  |                      |  | Separation Agreement dated October 14, 2002
    between Epimmune and Dr. Sette.(21)                                                                              
|        | 10 | .44 |  |                      |  | Material Transfer Agreement dated
    October 14, 2002 between Epimmune and Dr. Sette.(21)                                                                       
|        | 10 | .45 |  |                      |  | First Amendment to the Collaboration Agreement
    dated October 16, 2002 between Epimmune and Genencor
    International, Inc.(22)(H)                           
|        | 10 | .46 |  |                      |  | First Amendment to the License Agreement dated
    October 16, 2002 between Epimmune and Genencor
    International, Inc.(23)                                    
|        | 10 | .47 |  |                      |  | First Amendment to the Non-Exclusive License
    Agreement dated October 18, 2002 between Epimmune and
    Valentis, Inc.(23)(H)                                 
|        | 10 | .48 |  |                      |  | Non-Exclusive License Agreement dated
    October 28, 2002 between Epimmune and Valentis, Inc.(23)(H)                                                            
|        | 21 | .1  |  |                      |  | Subsidiaries of Epimmune.(J)                                                                                                                                     
|        | 23 | .1  |  |                      |  | Consent of Ernst & Young, LLP,
    Independent Auditors.                                                                                                         
|        | 25 | .1  |  |                      |  | Power of Attorney. Reference is made to the
    signature page of this report.                                                                                   
|        | 99 | .1  |  |                      |  | Certification pursuant to Section 906 of the
    Public Company Accounting Reform and Investor Protection Act of
    2002 (18 U.S.C. §1350, as adopted)          
|        | 99 | .2  |  |                      |  | Certification pursuant to Section 302 of the
    Public Company Accounting Reform and Investor Protection Act of
    2002 (18 U.S.C. §1350, as adopted)          

45



---



##### Table of Contents





---



| |     |                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the Companys
    Form S-1 Registration Statement and Amendments thereto
    (File No. 33-43356).                                  
|
| | (2) | Incorporated by reference to the Companys
    Annual Report on Form 10-K, for the fiscal year ended
    December 31, 1992, filed on March 26, 1993.            
|
| | (3) | Incorporated by reference to the Companys
    Annual Report on Form 10-K, for the fiscal year ended
    December 31, 1995, filed on March 22, 1996.            
|
| | (4) | Incorporated by reference to the Companys
    Annual Report on Form 10-K for the fiscal year ended
    December 31, 1997 filed on March 31, 1998.              
|
| | (5) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q, for the quarterly period
    ended June 30, 1998, filed on August 14, 1998.       
|
| | (6) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q, for the quarterly period
    ended September 30, 1998, filed on November 16, 1998.
|
| | (7) | Incorporated by reference to the Companys
    Annual Report on Form 10-K, for the fiscal year ended
    December 31, 1998, filed on April 15, 1999.            
|
| | (8) | Incorporated by reference to the Companys
    Form 8-K, filed on July 16, 1999.                                                                                
|
| | (9) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q, for the quarterly period
    ended June 30, 1999, filed on August 16, 1999.       



|     |                                                                                                                                                                 
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q, for the quarterly period
    ended September 30, 1999, filed on November 15, 1999.
|    
|(11) | Incorporated by reference to the Companys
    Annual Report on Form 10-K, for the fiscal year ended
    December  31, 1999, filed on March 17, 2000.           
|    
|(12) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q, for the quarterly period
    ended June 30, 2000, filed on August 14, 2000.       
|    
|(13) | Incorporated by reference to the Companys
    Annual Report on Form 10-K, for the fiscal year ended
    December 31, 2000, filed on March 29, 2001.            
|    
|(14) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q, for the quarterly period
    ended March 31, 2001, filed on May 11, 2001.         
|    
|(15) | Incorporated by reference to the Companys
    Form S-8 filed on June 27, 2001 (File
    No. 333-63950).                                                        
|    
|(16) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q, for the quarterly period
    ended June 30, 2001, filed on August 13, 2001.       
|    
|(17) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q, for the quarterly period
    ended September 30, 2001, filed on November 14, 2001.
|    
|(18) | Incorporated by reference to the Companys
    Form S-3, filed on January 10, 2002.                                                                             
|    
|(19) | Incorporated by reference to the Companys
    Annual Report on Form 10-K, for the fiscal year ended
    December 31, 2001, filed on March 29, 2002.            
|    
|(20) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q, for the quarterly period
    ended March 31, 2002, filed on May 13, 2002.         
|    
|(21) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q, for the quarterly period
    ended September 30, 2002, filed on October 16, 2002. 
|    
|(22) | Incorporated by reference to the Companys
    Registration Statement on Form S-1, filed on
    October 24, 2002.                                               
|    
|(23) | Incorporated by reference to Amendment No. 1
    to the Companys Registration Statement on Form S-1/
    A, filed on November 6, 2002.                         



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on November 21, 1991.

46



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##### Table of Contents





|    |                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(B) | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on May 15, 1996.



|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(C) | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on July 5, 2001.  
|   
|(D) | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on August 8, 2001.



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(E) | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on September 4, 2001.
|   
|(F) | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on January 29, 2002. 



|    |                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(G) | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on May 14, 2002.



|    |                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(H) | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on November 5, 2002.



|    |                  
|--- | -----------------
|(I) | Previously filed.

47



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 28th day of
March 2003.



| |              
| | -------------
| | EPIMMUNE INC.



| |    |                
| | -- | ---------------
| | By | /s/ EMILE LORIA

| |                                                    
| | ---------------------------------------------------
| | Emile Loria, M.D.                                  
| | President, Chief Executive Officer and
    Director

KNOW ALL MEN BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints Emile
Loria, M.D. and Robert De Vaere, and each of them, his
attorney-in-fact, with the full power of substitution, for him
in any and all capacities, to sign any amendments to this
Report, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                               |  |                                                                                                                                             |  |                |  | 
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                               |  |                                                                                                                                             |  |               
|Signature                                      |  | Title                                                                                                                                       |  | Date          
|                                               |  |                                                                                                                                             |  |               
|                                              
|/s/ EMILE LORIAEmile Loria, M.D.               |  | President(Principal Executive Officer),
    Chief Executive Officer, and Director                                                           |  | March 28, 2003
|                                              
|/s/ ROBERT J. DE VAERERobert J. De Vaere       |  | Vice President, Finance and Administration Chief
    Financial Officer, Assistant Secretary(Principal Financial and
    Accounting Officer) |  | March 28, 2003
|                                              
|/s/ HOWARD E. GREENE, JR.Howard E. Greene, Jr. |  | Chairman of the Board and Director                                                                                                          |  | March 28, 2003
|                                              
|/s/ WILLIAM T. COMERWilliam T. Comer, Ph.D.    |  | Director                                                                                                                                    |  | March 28, 2003
|                                              
|/s/ MICHAEL G. GREYMichael G. Grey             |  | Director                                                                                                                                    |  | March 28, 2003
|                                              
|Georges Hibon                                  |  | Director                                                                                                                                    |  | March 28, 2003
|                                              
|John P. McKearn, Ph.D.                         |  | Director                                                                                                                                    |  | March 28, 2003
|                                              
|/s/ MICHAEL J. ROSSMichael J. Ross             |  | Director                                                                                                                                    |  | March 28, 2003

48



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##### Table of Contents



EPIMMUNE INC.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                          |  |      |     | 
|--------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                          |  | Page
|                                                                                                          |  |     
|Report of Ernst & Young LLP, Independent
    Auditors                                                     |  |      | F-2 | 
|Consolidated Balance Sheets as of
    December 31, 2002 and 2001                                          |  |      | F-3 | 
|Consolidated Statements of Operations for the
    Years Ended December 31, 2002, 2001 and 2000            |  |      | F-4 | 
|Consolidated Statements of Stockholders
    Equity for the Years Ended December 31, 2002, 2001, and 2000 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2002, 2001 and 2000            |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                                |  |      | F-7 | 

F-1



---



##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

The Board of Directors and Stockholders

Epimmune Inc.


We have audited the accompanying consolidated
balance sheets of Epimmune Inc. as of December 31, 2002 and
2001, and the related consolidated statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2002. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Epimmune Inc. at
December 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.



| |                  
| | -----------------
| | ERNST & YOUNG LLP

San Diego, California

February 21, 2003


F-2



---



##### Table of Contents



EPIMMUNE INC.

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                                                                      |              |            |              |   |   |            |              |  
|---------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ---------- | ------------ | - | - | ---------- | ------------ | -
|                                         |                                                                                                                                                                                                                      |             
|                                         |                                                                                                                                                                                                                      | December 31,
|                                         |                                                                                                                                                                                                                      |             
|                                         |                                                                                                                                                                                                                      | 2002         |            | 2001        
|                                         |                                                                                                                                                                                                                      |              |            |             
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                                                                      |              |            |              |   |   |            |             
|                                         | Cash and cash equivalents                                                                                                                                                                                            |              | $          | 9,745,000    |   |   | $          | 8,038,000    |  
|                                         | Short-term investments                                                                                                                                                                                               |              |            |             |   |   |            | 10,998,000   |  
|                                         | Prepaids and other current assets                                                                                                                                                                                    |              |            | 708,000      |   |   |            | 707,000      |  
|                                         |                                                                                                                                                                                                                      |              |            |              |   |   |            |             
|Total current assets                     |                                                                                                                                                                                                                      |              | 10,453,000 |              |   |   | 19,743,000 |             
|Restricted cash                          |                                                                                                                                                                                                                      |              | 472,000    |              |   |   | 472,000    |             
|Property and equipment, net              |                                                                                                                                                                                                                      |              | 1,363,000  |              |   |   | 984,000    |             
|Patents, net                             |                                                                                                                                                                                                                      |              | 3,240,000  |              |   |   | 2,711,000  |             
|                                         |                                                                                                                                                                                                                      |              |            |              |   |   |            |             
|                                         |                                                                                                                                                                                                                      | $            | 15,528,000 |              |   | $ | 23,910,000 |             
|                                         |                                                                                                                                                                                                                      |              |            |              |   |   |            |             
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                                                                      |              |            |              |   |   |            |             
|                                         | Accounts payable and accrued liabilities                                                                                                                                                                             |              | $          | 1,336,000    |   |   | $          | 1,475,000    |  
|                                         | Deferred contract revenues                                                                                                                                                                                           |              |            | 1,114,000    |   |   |            | 2,308,000    |  
|                                         | Accrued payroll and related expenses                                                                                                                                                                                 |              |            | 252,000      |   |   |            | 222,000      |  
|                                         | Current portion of notes payable                                                                                                                                                                                     |              |            | 43,000       |   |   |            | 345,000      |  
|                                         |                                                                                                                                                                                                                      |              |            |              |   |   |            |             
|Total current liabilities                |                                                                                                                                                                                                                      |              | 2,745,000  |              |   |   | 4,350,000  |             
|Deferred rent                            |                                                                                                                                                                                                                      |              | 197,000    |              |   |   | 166,000    |             
|Notes payable, less current portion      |                                                                                                                                                                                                                      |              |           |              |   |   | 43,000     |             
|Stockholders equity:                    |                                                                                                                                                                                                                      |              |            |              |   |   |            |             
|                                         | Preferred stock, $.01 par value, 10,000,000
    shares authorized, 1,409,288 shares issued and outstanding at
    December 31, 2002 and 2001 Liquidation preference of
    $10,000,000 at December 31, 2002 and 2001 |              |            | 14,000       |   |   |            | 14,000       |  
|                                         | Common stock, $.01 par value, 25,000,000 shares
    authorized at December 31, 2002 and 2001; 12,153,462 and
    12,094,757 shares issued and outstanding at December 31,
    2002 and 2001, respectively            |              |            | 122,000      |   |   |            | 121,000      |  
|                                         | Additional paid-in capital                                                                                                                                                                                           |              |            | 166,454,000  |   |   |            | 166,772,000  |  
|                                         | Note receivable from employee                                                                                                                                                                                        |              |            | (2,932,000   | ) |   |            | (2,641,000   | )
|                                         | Deferred compensation                                                                                                                                                                                                |              |            | (203,000     | ) |   |            | (569,000     | )
|                                         | Accumulated deficit                                                                                                                                                                                                  |              |            | (150,869,000 | ) |   |            | (144,369,000 | )
|                                         | Accumulated other comprehensive income                                                                                                                                                                               |              |            |             |   |   |            | 23,000       |  
|                                         |                                                                                                                                                                                                                      |              |            |              |   |   |            |             
|Total stockholders equity               |                                                                                                                                                                                                                      |              | 12,586,000 |              |   |   | 19,351,000 |             
|                                         |                                                                                                                                                                                                                      |              |            |              |   |   |            |             
|                                         |                                                                                                                                                                                                                      | $            | 15,528,000 |              |   | $ | 23,910,000 |             
|                                         |                                                                                                                                                                                                                      |              |            |              |   |   |            |             

See accompanying notes.

F-3



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##### Table of Contents



EPIMMUNE INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |            |  
|------------------- | ----------------------------------------------------------------- | ------------------------ | - | ---------- | - | ---- | - | ---------- | - |  | - | ---------- | -
|                    |                                                                   |                         
|                    |                                                                   | Years Ended December 31,
|                    |                                                                   |                         
|                    |                                                                   | 2002                     |   | 2001       |   | 2000
|                    |                                                                   |                          |   |            |   |     
|Revenues:           |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Research grants and contract revenue                              |                          | $ | 1,899,000  |   |      | $ | 1,831,000  |   |  | $ | 1,603,000  |  
|                    | License fees and milestones                                       |                          |   | 487,000    |   |      |   | 3,750,000  |   |  |   |           |  
|                    | Related party revenue                                             |                          |   | 4,684,000  |   |      |   | 2,585,000  |   |  |   |           |  
|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Total revenues                                                    |                          |   | 7,070,000  |   |      |   | 8,166,000  |   |  |   | 1,603,000  |  
|Costs and expenses: |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Research and development                                          |                          |   | 11,257,000 |   |      |   | 7,870,000  |   |  |   | 6,285,000  |  
|                    | General and administrative                                        |                          |   | 2,887,000  |   |      |   | 3,363,000  |   |  |   | 2,305,000  |  
|                    | Restructuring costs                                               |                          |   |           |   |      |   |           |   |  |   | (100,000   | )
|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Total costs and expenses                                          |                          |   | 14,144,000 |   |      |   | 11,233,000 |   |  |   | 8,490,000  |  
|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Loss from operations                                              |                          |   | (7,074,000 | ) |      |   | (3,067,000 | ) |  |   | (6,887,000 | )
|                    | Interest income, net                                              |                          |   | 587,000    |   |      |   | 424,000    |   |  |   | 564,000    |  
|                    | Other (expense) income, net                                       |                          |   | (13,000    | ) |      |   | (1,000     | ) |  |   | 1,581,000  |  
|                    | Gain on sales and disposal of assets                              |                          |   |           |   |      |   |           |   |  |   | 5,000      |  
|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Net loss                                                          |                          | $ | (6,500,000 | ) |      | $ | (2,644,000 | ) |  | $ | (4,737,000 | )
|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Net loss per share-basic and diluted                              |                          | $ | (0.57      | ) |      | $ | (0.31      | ) |  | $ | (0.68      | )
|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Shares used in computing net loss per share-basic
    and diluted |                          |   | 11,446,387 |   |      |   | 8,533,968  |   |  |   | 6,971,186  |  
|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |           

See accompanying notes.

F-4



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##### Table of Contents



EPIMMUNE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

For the Three Years Ended December 31,
2002


|                             |                                                                                           |                 |           |              |  |            |        |            |  |          |            |             |   |               |         |               |  |               |             |           |   |      |            |            |   |   |          |          |   |   |              |            |   |   |         |         |   |   |            |            |   |   |            |            |  
|---------------------------- | ----------------------------------------------------------------------------------------- | --------------- | --------- | ------------ |  | ---------- | ------ | ---------- |  | -------- | ---------- | ----------- | - | ------------- | ------- | ------------- |  | ------------- | ----------- | --------- | - | ---- | ---------- | ---------- | - | - | -------- | -------- | - | - | ------------ | ---------- | - | - | ------- | ------- | - | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                             |                                                                                           |                 |           |              |  |            |        | Note       |  |          |            |             |   | Accumulated   |         |               |  |              
|                             |                                                                                           | Preferred Stock |           | Common Stock |  | Additional |        | Receivable |  |          |            |             |   | Other         |         | Total         |  | Other        
|                             |                                                                                           |                 |           |              |  | Paid-in    |        | from       |  | Deferred |            | Accumulated |   | Comprehensive |         | Stockholders |  | Comprehensive
|                             |                                                                                           | Shares          |           | Amount       |  | Shares     |        | Amount     |  | Capital  |            | Employee    |   | Compensation  |         | Deficit       |  | Income        |             | Equity    |   | Loss
|                             |                                                                                           |                 |           |              |  |            |        |            |  |          |            |             |   |               |         |               |  |               |             |           |   |     
|Balance at December 31, 1999 |                                                                                           |                 | 1,409,288 |              |  | $          | 14,000 |            |  |          | 6,048,945  |             |   | $             | 60,000  |               |  | $             | 147,393,000 |           |   | $    |           |            |   | $ |         |          |   | $ | (136,988,000 | )          |   | $ | (57,000 | )       |   | $ | 10,422,000 |            |   | $ | (8,322,000 | )         
|                             |                                                                                           |                 |           |              |  |            |        |            |  |          |            |             |   |               |         |               |  |               |             |           |   |      |            |            |   |   |          |          |   |   |              |            |   |   |         |         |   |   |            |            |   |   |            |           
|                             | Issuance of common stock for cash                                                         |                 |           |             |  |            |        |           |  |          |            | 98,398      |   |               |         | 1,000         |  |               |             | 29,000    |   |      |            |           |   |   |          |         |   |   |              |           |   |   |         |        |   |   |            | 30,000     |   |   |            |            |  
|                             | Issuance of common stock in conjunction with
    private placement, net of issuance costs |                 |           |             |  |            |        |           |  |          |            | 1,700,000   |   |               |         | 17,000        |  |               |             | 6,252,000 |   |      |            |           |   |   |          |         |   |   |              |           |   |   |         |        |   |   |            | 6,269,000  |   |   |            |            |  
|                             | Deferred compensation related to consultant stock
    options                             |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             | 23,000    |   |      |            |           |   |   |          | (6,000   | ) |   |              |           |   |   |         |        |   |   |            | 17,000     |   |   |            |            |  
|                             | Issuance of warrants to former employees as part
    of separation agreement              |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             | 29,000    |   |      |            |           |   |   |          |         |   |   |              |           |   |   |         |        |   |   |            | 29,000     |   |   |            |            |  
|                             | Unrealized gains on available-for- sale securities                                        |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             |          |   |      |            |           |   |   |          |         |   |   |              |           |   |   |         | 61,000  |   |   |            | 61,000     |   |   |            | 61,000     |  
|                             | Net loss                                                                                  |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             |          |   |      |            |           |   |   |          |         |   |   |              | (4,737,000 | ) |   |         |        |   |   |            | (4,737,000 | ) |   |            | (4,737,000 | )
|                             |                                                                                           |                 |           |              |  |            |        |            |  |          |            |             |   |               |         |               |  |               |             |           |   |      |            |            |   |   |          |          |   |   |              |            |   |   |         |         |   |   |            |            |   |   |            |           
|Balance at December 31, 2000 |                                                                                           |                 | 1,409,288 |              |  |            | 14,000 |            |  |          | 7,847,343  |             |   |               | 78,000  |               |  |               | 153,726,000 |           |   |      |           |            |   |   | (6,000   | )        |   |   | (141,725,000 | )          |   |   | 4,000   |         |   |   | 12,091,000 |            |   | $ | (4,676,000 | )         
|                             |                                                                                           |                 |           |              |  |            |        |            |  |          |            |             |   |               |         |               |  |               |             |           |   |      |            |            |   |   |          |          |   |   |              |            |   |   |         |         |   |   |            |            |   |   |            |           
|                             | Exercise of stock options                                                                 |                 |           |             |  |            |        |           |  |          |            | 27,753      |   |               |         |              |  |               |             | 11,000    |   |      |            |           |   |   |          |         |   |   |              |           |   |   |         |        |   |   |            | 11,000     |   |   |            |            |  
|                             | Repurchase of restricted stock                                                            |                 |           |             |  |            |        |           |  |          |            | (20,041     | ) |               |         |              |  |               |             | (3,000    | ) |      |            |           |   |   |          |         |   |   |              |           |   |   |         |        |   |   |            | (3,000     | ) |   |            |            |  
|                             | Issuance of common stock for cash, net of
    issuance costs of $61,000                   |                 |           |             |  |            |        |           |  |          |            | 2,000,000   |   |               |         | 20,000        |  |               |             | 4,919,000 |   |      |            |           |   |   |          |         |   |   |              |           |   |   |         |        |   |   |            | 4,939,000  |   |   |            |            |  
|                             | Issuance of common stock in connection with
    collaboration agreement                   |                 |           |             |  |            |        |           |  |          |            | 1,154,797   |   |               |         | 12,000        |  |               |             | 4,618,000 |   |      |            |           |   |   |          |         |   |   |              |           |   |   |         |        |   |   |            | 4,630,000  |   |   |            |            |  
|                             | Issuance of common stock for the employee stock
    purchase plan                         |                 |           |             |  |            |        |           |  |          |            | 28,604      |   |               |         |              |  |               |             | 73,000    |   |      |            |           |   |   |          |         |   |   |              |           |   |   |         |        |   |   |            | 73,000     |   |   |            |            |  
|                             | Issuance of restricted stock for note                                                     |                 |           |             |  |            |        |           |  |          |            | 1,056,301   |   |               |         | 11,000        |  |               |             | 2,630,000 |   |      |            | (2,641,000 | ) |   |          |         |   |   |              |           |   |   |         |        |   |   |            |           |   |   |            |            |  
|                             | Deferred compensation in connection with the
    issuance of stock options to employees   |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             | 785,000   |   |      |            |           |   |   |          | (785,000 | ) |   |              |           |   |   |         |        |   |   |            |           |   |   |            |            |  
|                             | Amortization of deferred compensation                                                     |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             |          |   |      |            |           |   |   |          | 222,000  |   |   |              |           |   |   |         |        |   |   |            | 222,000    |   |   |            |            |  
|                             | Deferred compensation related to consultant stock
    options                             |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             | 13,000    |   |      |            |           |   |   |          |         |   |   |              |           |   |   |         |        |   |   |            | 13,000     |   |   |            |            |  
|                             | Unrealized gains on available-for- sale securities                                        |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             |          |   |      |            |           |   |   |          |         |   |   |              |           |   |   |         | 19,000  |   |   |            | 19,000     |   |   |            | 19,000     |  
|                             | Net loss                                                                                  |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             |          |   |      |            |            |   |   |          |          |   |   |              | (2,644,000 | ) |   |         |        |   |   |            | (2,644,000 | ) |   |            | (2,644,000 | )
|                             |                                                                                           |                 |           |              |  |            |        |            |  |          |            |             |   |               |         |               |  |               |             |           |   |      |            |            |   |   |          |          |   |   |              |            |   |   |         |         |   |   |            |            |   |   |            |           
|Balance at December 31, 2001 |                                                                                           |                 | 1,409,288 |              |  |            | 14,000 |            |  |          | 12,094,757 |             |   |               | 121,000 |               |  |               | 166,772,000 |           |   |      | (2,641,000 | )          |   |   | (569,000 | )        |   |   | (144,369,000 | )          |   |   | 23,000  |         |   |   | 19,351,000 |            |   | $ | (2,625,000 | )         
|                             |                                                                                           |                 |           |              |  |            |        |            |  |          |            |             |   |               |         |               |  |               |             |           |   |      |            |            |   |   |          |          |   |   |              |            |   |   |         |         |   |   |            |            |   |   |            |           
|                             | Issuance costs related to private placement                                               |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             | (14,000   | ) |      |            |           |   |   |          |         |   |   |              |           |   |   |         |        |   |   |            | (14,000    | ) |   |            |            |  
|                             | Exercise of stock options                                                                 |                 |           |             |  |            |        |           |  |          |            | 14,764      |   |               |         |              |  |               |             | 4,000     |   |      |            |           |   |   |          |         |   |   |              |           |   |   |         |        |   |   |            | 4,000      |   |   |            |            |  
|                             | Issuance of common stock in connection with
    employee stock purchase plan              |                 |           |             |  |            |        |           |  |          |            | 43,341      |   |               |         | 1,000         |  |               |             | 59,000    |   |      |            |           |   |   |          |         |   |   |              |           |   |   |         |        |   |   |            | 60,000     |   |   |            |            |  
|                             | Issuance of common stock in connection with stock
    bonus award                         |                 |           |             |  |            |        |           |  |          |            | 600         |   |               |         |              |  |               |             | 1,000     |   |      |            |           |   |   |          |         |   |   |              |           |   |   |         |        |   |   |            | 1,000      |   |   |            |            |  
|                             | Interest on note receivable from employee                                                 |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             |          |   |      |            | (291,000   | ) |   |          |         |   |   |              |           |   |   |         |        |   |   |            | (291,000   | ) |   |            |            |  
|                             | Deferred compensation in connection with the
    issuance of stock options to employees   |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             | (395,000  | ) |      |            |           |   |   |          | 267,000  |   |   |              |           |   |   |         |        |   |   |            | (128,000   | ) |   |            |            |  
|                             | Amortization of deferred compensation                                                     |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             |          |   |      |            |           |   |   |          | 99,000   |   |   |              |           |   |   |         |        |   |   |            | 99,000     |   |   |            |            |  
|                             | Deferred compensation related to consultant stock
    options                             |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             | 27,000    |   |      |            |           |   |   |          |         |   |   |              |           |   |   |         |        |   |   |            | 27,000     |   |   |            |            |  
|                             | Unrealized loss on available-for-sale securities                                          |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             |          |   |      |            |           |   |   |          |         |   |   |              |           |   |   |         | (23,000 | ) |   |            | (23,000    | ) |   |            | (23,000    | )
|                             | Net loss                                                                                  |                 |           |             |  |            |        |           |  |          |            |            |   |               |         |              |  |               |             |          |   |      |            |            |   |   |          |          |   |   |              | (6,500,000 | ) |   |         |        |   |   |            | (6,500,000 | ) |   |            | (6,500,000 | )
|                             |                                                                                           |                 |           |              |  |            |        |            |  |          |            |             |   |               |         |               |  |               |             |           |   |      |            |            |   |   |          |          |   |   |              |            |   |   |         |         |   |   |            |            |   |   |            |           
|Balance at December 31, 2002 |                                                                                           |                 | 1,409,288 |              |  | $          | 14,000 |            |  |          | 12,153,462 |             |   | $             | 122,000 |               |  | $             | 166,454,000 |           |   | $    | (2,932,000 | )          |   | $ | (203,000 | )        |   | $ | (150,869,000 | )          |   | $ |        |         |   | $ | 12,586,000 |            |   | $ | (6,523,000 | )         
|                             |                                                                                           |                 |           |              |  |            |        |            |  |          |            |             |   |               |         |               |  |               |             |           |   |      |            |            |   |   |          |          |   |   |              |            |   |   |         |         |   |   |            |            |   |   |            |           

See accompanying notes.

F-5



---



##### Table of Contents



EPIMMUNE INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                              |                                                |                                          |            |          |            |      |            |         |           |   |            |         |          |  
|--------------------------------------------------------------------------------------------- | ---------------------------------------------- | ---------------------------------------- | ---------- | -------- | ---------- | ---- | ---------- | ------- | --------- | - | ---------- | ------- | -------- | -
|                                                                                              |                                                |                                         
|                                                                                              |                                                | Years Ended December 31,                
|                                                                                              |                                                |                                         
|                                                                                              |                                                | 2002                                     |            | 2001     |            | 2000
|                                                                                              |                                                |                                          |            |          |            |     
|Operating activities                                                                          |                                                |                                          |            |          |            |      |            |         |           |   |            |        
|Net loss                                                                                      |                                                | $                                        | (6,500,000 | )        |            | $    | (2,644,000 | )       |           | $ | (4,737,000 | )      
|Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                                                |                                          |            |          |            |      |            |         |           |   |            |        
|                                                                                              | Depreciation and amortization                  |                                          |            | 777,000  |            |      |            | 578,000 |           |   |            | 537,000 |         
|                                                                                              | Stock based compensation                       |                                          |            | (1       | )          |      |            | 235,000 |           |   |            | 17,000  |         
|                                                                                              | Deferred rent                                  |                                          |            | 31,000   |            |      |            | 47,000  |           |   |            | 64,000  |         
|                                                                                              | Write-off of abandoned patents                 |                                          |            | 232,000  |            |      |            | 625,000 |           |   |            |        |         
|                                                                                              | Interest on note held by stock holder          |                                          |            | (291,000 | )          |      |            |        |           |   |            |        |         
|                                                                                              | Stock warrants relating to severance agreement |                                          |            |         |            |      |            |        |           |   |            | 29,000  |         
|                                                                                              | Loss (Gain) on disposal of assets              |                                          |            | 3,000    |            |      |            |        |           |   |            | (5,000  | )       
|                                                                                              | Changes in operating assets and liabilities:   |                                          |            |          |            |      |            |         |           |   |            |         |         
|                                                                                              |                                                | Other current assets                     |            |          | (1,000     | )    |            |         | (200,000  | ) |            |         | (46,000  | )
|                                                                                              |                                                | Accounts payable and accrued liabilities |            |          | (140,000   | )    |            |         | 471,000   |   |            |         | 34,000   |  
|                                                                                              |                                                | Deferred revenue                         |            |          | (1,194,000 | )    |            |         | 2,079,000 |   |            |         | 191,000  |  
|                                                                                              |                                                | Accrued payroll and related expense      |            |          | 30,000     |      |            |         | (19,000   | ) |            |         | 29,000   |  
|                                                                                              |                                                | Accrued restructuring                    |            |          |           |      |            |         |          |   |            |         | (342,000 | )
|                                                                                              |                                                |                                          |            |          |            |      |            |         |           |   |            |        
|Net cash (used in) provided by operating
    activities                                       |                                                |                                          | (7,054,000 | )        |            |      | 1,172,000  |         |           |   | (4,229,000 | )      
|Investing activities                                                                          |                                                |                                          |            |          |            |      |            |         |           |   |            |        
|Purchases of available-for-sale securities                                                    |                                                |                                          | (1,614,000 | )        |            |      | (7,626,000 | )       |           |   | (3,742,000 | )      
|Maturities of available-for-sale securities                                                   |                                                |                                          | 12,588,000 |          |            |      | 2,059,000  |         |           |   | 4,803,000  |        
|Proceeds from the sale of equipment                                                           |                                                |                                          |           |          |            |      |           |         |           |   | 5,000      |        
|Purchases of property and equipment                                                           |                                                |                                          | (735,000   | )        |            |      | (293,000   | )       |           |   | (356,000   | )      
|Construction in progress                                                                      |                                                |                                          |           |          |            |      | (10,000    | )       |           |   |           |        
|Patents                                                                                       |                                                |                                          | (1,183,000 | )        |            |      | (682,000   | )       |           |   | (578,000   | )      
|                                                                                              |                                                |                                          |            |          |            |      |            |         |           |   |            |        
|Net cash provided by (used in) investing
    activities                                       |                                                |                                          | 9,056,000  |          |            |      | (6,552,000 | )       |           |   | 132,000    |        
|Financing activities                                                                          |                                                |                                          |            |          |            |      |            |         |           |   |            |        
|Principal payments under equipment notes payable
    and note payable to bank                 |                                                |                                          | (345,000   | )        |            |      | (413,000   | )       |           |   | (230,000   | )      
|Proceeds from the issuance of equipment notes
    payable                                     |                                                |                                          |           |          |            |      |           |         |           |   | 366,000    |        
|Net proceeds from issuance of common stock                                                    |                                                |                                          | 50,000     |          |            |      | 9,650,000  |         |           |   | 6,299,000  |        
|                                                                                              |                                                |                                          |            |          |            |      |            |         |           |   |            |        
|Net cash (used in) provided by financing
    activities                                       |                                                |                                          | (295,000   | )        |            |      | 9,237,000  |         |           |   | 6,435,000  |        
|                                                                                              |                                                |                                          |            |          |            |      |            |         |           |   |            |        
|Increase in cash and cash equivalents                                                         |                                                |                                          | 1,707,000  |          |            |      | 3,857,000  |         |           |   | 2,338,000  |        
|Cash and cash equivalents at beginning of year                                                |                                                |                                          | 8,038,000  |          |            |      | 4,181,000  |         |           |   | 1,843,000  |        
|                                                                                              |                                                |                                          |            |          |            |      |            |         |           |   |            |        
|Cash and cash equivalents at end of year                                                      |                                                | $                                        | 9,745,000  |          |            | $    | 8,038,000  |         |           | $ | 4,181,000  |        
|                                                                                              |                                                |                                          |            |          |            |      |            |         |           |   |            |        
|Supplemental disclosure of cash flow
    information                                          |                                                |                                          |            |          |            |      |            |         |           |   |            |        
|Interest paid                                                                                 |                                                | $                                        | 22,000     |          |            | $    | 59,000     |         |           | $ | 69,000     |        
|                                                                                              |                                                |                                          |            |          |            |      |            |         |           |   |            |        
|Supplemental disclosure of non-cash investing
    and financing activities                    |                                                |                                          |            |          |            |      |            |         |           |   |            |        
|Unrealized (losses) gains on
    available-for-sale securities                                |                                                | $                                        | (23,000    | )        |            | $    | 19,000     |         |           | $ | 61,000     |        
|                                                                                              |                                                |                                          |            |          |            |      |            |         |           |   |            |        
|Sale of restricted common stock for stockholder
    note receivable                           |                                                | $                                        |           |          |            | $    | 2,641,000  |         |           | $ |           |        
|                                                                                              |                                                |                                          |            |          |            |      |            |         |           |   |            |        

See accompanying notes.

F-6



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##### Table of Contents



EPIMMUNE INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2002


1.     Summary of
significant accounting policies



| |                                       
| | --------------------------------------
| | Organization and Business
    Activity

Epimmune Inc. (the Company) was
incorporated in Delaware on July 10, 1987 as Cytel
Corporation. On July 1, 1999, Cytel merged with its
majority-owned subsidiary, Epimmune Inc., and changed its name
from Cytel Corporation to Epimmune Inc. The Company is focused
on the development of therapeutic and prophylactic vaccines for
the treatment and prevention of infectious diseases and cancer.



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements include the
accounts of the Company and Cytel Corporation. All significant
intercompany accounts and transactions have been eliminated.



| |                      
| | ---------------------
| | Basis of Presentation

The accompanying consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern. This basis of accounting
contemplates the recovery of the Companys assets and the
satisfaction of its liabilities in the normal course of
business. Through December 31, 2002, the Company has an
accumulated deficit of $150.9 million. Successful
completion of the Companys transition to commercialization
and to attaining profitable operations is dependent upon
achieving a level of revenues adequate to support the
Companys cost structure and, if necessary, obtaining
additional financing and/or reducing expenditures. Management
has a plan in place to reduce cash outflows, including;
personnel salary reductions and other reductions in marketing
and administrative expenses if the anticipated increase and the
license revenues are not achieved. Based on its existing working
capital, management believes that this plan to reduce cash
outflows, if necessary to implement, would enable the Company to
fund operations through December 31, 2003.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash and cash equivalents consist primarily of
cash, certificates of deposit, treasury securities and
repurchase agreements with original maturities at the date of
acquisition of less than three months.



| |                       
| | ----------------------
| | Short-term Investments

The Company has classified its investments as
available-for-sale and accordingly carries them at fair value.
Unrealized holding gains or losses on these securities are
included in comprehensive income. The amortized cost of debt
securities in this category is adjusted for amortization of
premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and
losses are also included in interest income. The cost of
securities sold is based on the specific-identification method.
At December 31, 2002, the Company had no short-term
investments in its portfolio.

F-7



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



1.     Summary of
significant accounting
policies  (Continued)




| |                             
| | ----------------------------
| | Concentration of Credit Risk

The Company invests its excess cash in United
States government securities and debt instruments of financial
institutions and corporations with strong credit ratings. The
Company has established guidelines relative to diversification
and maturities that maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take
advantage of trends in yields and interest rates. Management
attempts to schedule the maturities of the Companys
investments to coincide with the Companys expected cash
requirements.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment is stated at cost and
depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from three to
seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful
life of the assets or the lease term.



| |             
| | ------------
| | Patent Costs

Patent costs are amortized on a straight-line
basis over ten years. The patent costs are shown net of
accumulated amortization of $1,166,000 and $870,000 at
December 31, 2002 and 2001, respectively.



| |                                         
| | ----------------------------------------
| | Research Grants and Contract
    Revenue

Research grants and contract revenue represent
research and development revenues primarily from the National
Institutes of Health. Revenues from grants are recognized on a
percentage-of-completion basis as related costs are incurred.



| |                              
| | -----------------------------
| | License Revenues and Expenses

The Company recognizes revenues pursuant to Staff
Accounting Bulletin No. 101, Revenue
Recognition. Collaboration revenues are earned and
recognized as research costs are incurred in accordance with the
provisions of each agreement. Fees paid to initiate research
projects are deferred and recognized over the project period.
Milestone payments are recognized as revenue upon the completion
of the milestone when the milestone event was substantive, its
achievability was not reasonably assured at inception and the
Companys performance obligations after milestone
achievement will continue to be funded at a comparable level
before the milestone achievement. The Company defers revenue
recognition until performance obligations have been completed
and collectibility is reasonably assured.

Research and development costs are expensed as
incurred. Expenses under research grants and contracts, which
are included in research and development, were approximately
$5.1 million, $4.3 million and $4.5 million for
2002, 2001 and 2000, respectively.



| |                   
| | ------------------
| | Net Loss Per Share

Basic and diluted net loss per common share is
presented in conformity with SFAS No. 128, Earnings
per Share. In accordance with SFAS No. 128, basic
and diluted loss per share has been computed using the weighted
average number of shares outstanding during the period, less
shares subject to repurchase.

F-8



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



1.     Summary of
significant accounting
policies  (Continued)


The following table presents the calculation of
net loss per share:

|                                                                                    |  |                          |            |      |  |      |            |   |  |   |            |  
|----------------------------------------------------------------------------------- |  | ------------------------ | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                                    |  |                         
|                                                                                    |  | Years Ended December 31,
|                                                                                    |  |                         
|                                                                                    |  | 2002                     |            | 2001 |  | 2000
|                                                                                    |  |                          |            |      |  |     
|Net loss applicable to common stockholders                                          |  | $                        | (6,500,000 | )    |  | $    | (2,644,000 | ) |  | $ | (4,737,000 | )
|                                                                                    |  |                          |            |      |  |      |            |   |  |   |            |  
|Weighted average shares used in computing net
    loss per share, basic and diluted |  |                          | 11,446,387 |      |  |      | 8,533,968  |   |  |   | 6,971,186  |  
|                                                                                    |  |                          |            |      |  |      |            |   |  |   |            |  
|Net loss per common share, basic and diluted                                        |  | $                        | (0.57      | )    |  | $    | (0.31      | ) |  | $ | (0.68      | )
|                                                                                    |  |                          |            |      |  |      |            |   |  |   |            |  

The Company has excluded all preferred stock,
outstanding stock options and warrants, and shares subject to
repurchase from the calculation of diluted loss per common share
because all such securities are antidilutive for all periods
presented. The total number of shares excluded from the
calculation of diluted net loss per share, prior to the
application of the treasury stock method for options and
warrants, was 4,078,664, 4,197,277, and 2,947,138 for the years
ended December 31, 2002, 2001, and 2000, respectively.



| |                                            
| | -------------------------------------------
| | Accounting for Stock-based
    Compensation

The Company has elected to follow Accounting
Principles Board Opinion No. 25 Accounting for Stock
Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options
because the alternative fair value accounting provided for under
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123) requires use of
option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the
exercise price of the Companys employee stock options
equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

Deferred compensation for options granted to
non-employees has been determined in accordance with
SFAS 123 and Emerging Issues Task Force No. 96-18 as
the fair value of the consideration received or the fair value
of the equity instruments issued, whichever is more reliably
measured. Deferred charges for options granted to non-employees
are periodically re-measured as the underlying options vest.

Adjusted pro forma information regarding net
income or loss is required by SFAS 123, and has been
determined as if the Company had accounted for its employee
stock options under the fair-value method of that Statement. The
fair value for these options was estimated at the date of grant
using the Black-Scholes method for option pricing
with the following weighted average assumptions for 2002, 2001,
and 2000: risk-free interest rates of 6%; dividend yield of 0;
and a weighted average expected life for all options of six
years. The volatility factor assumptions of the expected market
price of the Companys common stock were 135%, 139%, and
142% for 2002, 2001, and 2000, respectively.

For purposes of adjusted pro forma disclosures,
the estimated fair value of the option is amortized to expense
over the options vesting period. The effects of applying
SFAS 123 for pro forma information is not likely to be
representative of the effects on pro forma income/(loss) in
future years. The Companys adjusted pro forma information
is as follows:

|                             |  |      |            |      |  |      |            |   |  |   |            |  
|---------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                             |  | 2002 |            | 2001 |  | 2000
|                             |  |      |            |      |  |     
|Pro forma net loss           |  | $    | (7,258,000 | )    |  | $    | (3,391,000 | ) |  | $ | (5,227,000 | )
|Pro forma net loss per share |  | $    | (0.63      | )    |  | $    | (0.40      | ) |  | $ | (0.75      | )

F-9



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



1.     Summary of
significant accounting
policies  (Continued)




| |                     
| | --------------------
| | Comprehensive Income

The Company follows the provisions of
SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130, which provides rules for
the reporting and display of comprehensive income (loss) and its
components. The Company has disclosed its comprehensive income
(loss) in the statement of stockholders equity.



| |                  
| | -----------------
| | Reclassifications

Certain prior year amounts have been reclassified
to conform with the current year presentation.



| |                                       
| | --------------------------------------
| | Effect of New Accounting
    Standards

The Financial Accounting Standards Board
(FASB) has issued SFAS No. 142, Goodwill
and Other Intangible Assets, which establishes a new basis for
accounting for intangible assets deemed to have indefinite
lives. Such assets are no longer amortized but are reviewed
annually for impairment, or more frequently, if indicators of
impairment arise. Intangible assets with definite useful lives
will continue to be amortized over their respective estimated
useful lives. This Statement is required to be adopted by
companies for fiscal years beginning after December 15,
2001. The Company adopted the new Statement effective
January 1, 2002. The impact on the consolidated financial
statements was not material.

The FASB has issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets,
which supersedes, with exceptions, SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. SFAS No. 144
retains the basic indicators of impairment recognition and
undiscounted cash-flow measurement model of
SFAS No. 121; however, it removes goodwill from the
scope of the analysis, as the accounting for goodwill is now
subject to the provisions of SFAS Nos. 141 and 142.
SFAS No. 144 also provides additional guidance on
differentiating between assets held and used, held for sale, and
held for disposal other than by sale. This Statement is required
to be adopted by companies for fiscal years beginning after
December 15, 2001. The Company adopted the new Statement
effective January 1, 2002. The impact on the consolidated
financial statements was immaterial.



| |                          
| | -------------------------
| | Fourth Quarter Adjustment

During the fourth quarter of 2001, the Company
recorded a charge of $492,000 to Research and Development to
write off certain patent costs previously capitalized. The
write-off was comprised of certain patent costs for which the
Company had abandoned the underlying patent due to its evolving
business focus as well as certain costs no longer specifically
attributable to identifiable patents.



| |                                         
| | ----------------------------------------
| | Recently Issued Accounting
    Standards

In October 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. This statement supercedes
SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of), and amends APB Opinion No. 30,
Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions). SFAS No. 144
requires that long-lived assets that are to be disposed of by
sale be measured at the lower of book value or fair value less
costs to sell. SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 for (a) recognition
and measurement of the impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to
be disposed of by sale. This statement also retains APB Opinion
No. 30s requirement that companies report
discontinued operations separately from continuing operations.
All provisions of SFAS No. 144 were effective for us
on January 1, 2002. The adoption of

F-10



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



1.     Summary of
significant accounting
policies  (Continued)


SFAS No. 144 did not have an impact on
our consolidated financial position or results of operations,
and we do not expect any impact in the foreseeable future.

In June 2002, the FASB issued
SFAS No. 146 Accounting for Costs Associated
with Exit or Disposal Activities. This statement
supercedes Emerging Issues Task Force (EITF) Issue
No. 94-3 Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under
EITF Issue No. 94-3, a liability is recognized at the date
an entity commits to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and
recorded at fair value. The provisions of SFAS No. 146
will be effective for any exit and disposal activities initiated
after December 31, 2002.

In December 2002, the FASB issued
SFAS No. 148 Accounting for Stock-Based
Compensation- Transition and Disclosure- an amendment of FASB
Statement No. 123. This statement amends
SFAS No. 123 Accounting for Stock Based
Compensationto provide alternative methods of
voluntarily transitioning to the fair value based method of
accounting for stock-based employee compensation. SFAS 148
also amends the disclosure requirements of SFAS 123 to
require disclosure of the method used to account for stock-based
employee compensation and the effect of the method on reported
results in both annual and interim financial statements. The
disclosure provisions are effective for us beginning with our
year ended December 31, 2002. We have not yet completed the
final evaluation of the options presented by SFAS 148.
However, within fiscal year 2003, we expect to reach a
determination of whether and, if so, when to change our existing
accounting for stock-based compensation to the fair value method
in accordance with the transition alternatives of SFAS 148.

In November 2002, EITF reached consensus on EITF
Issue No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables, which addresses how to account
for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The
final consensus of EITF Issue No. 00-21 will be applicable
to agreements entered into in fiscal periods beginning after
June 15, 2003, with early adoption permitted. Additionally,
companies will be permitted to apply the consensus guidance to
all existing arrangements as the cumulative effect of a change
in accounting principle in accordance with APB Opinion
No. 20, Accounting Changes.

2.     Short-term
Investments

The Company did not hold any short-term
investments at December 31, 2002. The following table
summarizes available-for-sale securities at December 31,
2001:

|                      |  |                               |            |                  |  |                  |        |                |  |   |   |  |  |   |            | 
|--------------------- |  | ----------------------------- | ---------- | ---------------- |  | ---------------- | ------ | -------------- |  | - | - |  |  | - | ---------- | 
|                      |  |                              
|                      |  | Available-for-Sale Securities
|                      |  |                              
|                      |  |                               |            | Gross Unrealized |  | Gross Unrealized |        | Estimated Fair
|                      |  | Cost                          |            | Gains            |  | Losses           |        | Value         
|                      |  |                               |            |                  |  |                  |        |               
|December 31, 2001     |  |                               |            |                  |  |                  |        |                |  |   |   |  |  |   |            | 
|Corporate Obligations |  | $                             | 10,975,000 |                  |  | $                | 23,000 |                |  | $ |  |  |  | $ | 10,998,000 | 
|                      |  |                               |            |                  |  |                  |        |                |  |   |   |  |  |   |            | 
|                      |  | $                             | 10,975,000 |                  |  | $                | 23,000 |                |  | $ |  |  |  | $ | 10,998,000 | 
|                      |  |                               |            |                  |  |                  |        |                |  |   |   |  |  |   |            | 

F-11



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



2.     Short-term
Investments  (Continued)


The gross realized gains and losses on sales of
available-for-sale securities, which are included in investment
income, are as follows:

|                                |  |                         |         |      |  |      |       |  |  |   |       | 
|------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                |  |                        
|                                |  | Year Ended December 31,
|                                |  |                        
|                                |  | 2002                    |         | 2001 |  | 2000
|                                |  |                         |         |      |  |     
|Gross gains                     |  | $                       |        |      |  | $    | 2,000 |  |  | $ | 4,000 | 
|Gross losses                    |  |                         | (18,000 | )    |  |      |      |  |  |   |      | 
|                                |  |                         |         |      |  |      |       |  |  |   |       | 
|Total net realized (loss) gains |  | $                       | (18,000 | )    |  | $    | 2,000 |  |  | $ | 4,000 | 
|                                |  |                         |         |      |  |      |       |  |  |   |       | 

3.     Balance Sheet
Information

Prepaids and other current assets consist of the
following:

|                               |  |              |         |      |  |   |         | 
|------------------------------ |  | ------------ | ------- | ---- |  | - | ------- | 
|                               |  |             
|                               |  | December 31,
|                               |  |             
|                               |  | 2002         |         | 2001
|                               |  |              |         |     
|Accounts receivable            |  | $            | 516,000 |      |  | $ | 377,000 | 
|Prepaid expenses               |  |              | 181,000 |      |  |   | 118,000 | 
|Investment interest receivable |  |              | 11,000  |      |  |   | 212,000 | 
|                               |  |              |         |      |  |   |         | 
|                               |  | $            | 708,000 |      |  | $ | 707,000 | 
|                               |  |              |         |      |  |   |         | 

Property and equipment consist of the following:

|                                               |  |              |           |      |  |   |           |  
|---------------------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |           | 2001
|                                               |  |              |           |     
|Furniture and equipment                        |  | $            | 1,869,000 |      |  | $ | 1,392,000 |  
|Leasehold improvements                         |  |              | 455,000   |      |  |   | 309,000   |  
|                                               |  |              | 2,324,000 |      |  |   | 1,701,000 |  
|Less accumulated depreciation and amortization |  |              | (961,000  | )    |  |   | (717,000  | )
|                                               |  |              |           |      |  |   |           |  
|                                               |  | $            | 1,363,000 |      |  | $ | 984,000   |  
|                                               |  |              |           |      |  |   |           |  

Depreciation expense for the years ended
December 31, 2002, 2001 and 2000 was $354,000, $286,000 and
$207,000, respectively.

Accounts payable and accrued liabilities consist
of the following:

|                                               |  |              |           |      |  |   |           | 
|---------------------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |           | 2001
|                                               |  |              |           |     
|Trade accounts payable and accrued liabilities |  | $            | 1,272,000 |      |  | $ | 1,343,000 | 
|Directors deferred compensation                |  |              | 64,000    |      |  |   | 132,000   | 
|                                               |  |              |           |      |  |   |           | 
|                                               |  | $            | 1,336,000 |      |  | $ | 1,475,000 | 
|                                               |  |              |           |      |  |   |           | 

4.     Stockholders
Equity



| |                
| | ---------------
| | Preferred Stock

As of December 31, 2002, the Company had
10,000,000 preferred shares authorized and 859,666 shares of
Series S Preferred and 549,622 shares of Series S-1
Preferred issued and outstanding. The Series S and
Series S-1 Preferred is convertible into common stock at
the option of the holder or will automatically convert

F-12



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



4.     Stockholders
Equity  (Continued)


upon the closing of a financing in which the
Company receives gross proceeds of at least $15,000,000. The
number of common shares into which such Series S and
Series S-1 Preferred will convert is determined by dividing
the original issue price by the then conversion price. The
conversion price of the Series S Preferred is adjusted for
any sales of securities below the then conversion price while
the Series S-1 Preferred conversion price is fixed. As of
December 31, 2002, the Series S Preferred conversion
price was $5.7611 and the Series S-1 Preferred conversion
price was $7.0958. As of December 31, 2002, the
Series S Preferred would convert into 1,058,826 shares
of common stock and the Series S-1 Preferred would convert
into 549,622 shares of common stock. The Company cannot pay
dividends on any common stock if any of the Series S or
Series S-1 Preferred stock is outstanding unless such
dividend is also paid on the Preferred stock on an as-converted
basis. The Series S and Series S-1 Preferred shares
have a liquidation preference over the common stock of the
Company, which was equal to $10,000,000 at December 31,
2002.

Stock
Warrants

In June 1999, September 1999 and May 2000, the
Company issued warrants to purchase 235,200, 5,804 and
4,960 shares, respectively, of Common Stock with an
exercise price of $1.875 to former officers of Cytel. The
warrants were issued in connection with severance agreements and
were recorded at their fair value on the date of grant. The
expense associated with the issuance of the warrants was
included as part of the restructuring charge. The warrants
issued in June and September 1999 will expire June 2003, and the
warrants issued in May 2000 will expire May 2004.

Employee
Stock Purchase Plan

In October 1991, Cytel adopted an Employee Stock
Purchase Plan (the ESPP) whereby employees, at their
option, could purchase shares of Cytel common stock through
payroll deductions at the lower of 85% of the fair market value
on the plan offering date or 85% of the fair market value of the
common stock at the purchase date. The ESPP was terminated in
July 1999. As of the termination date of the ESPP, 85,558 shares
of common stock had been issued under the Stock Plan.

In March 2001, the Company reserved 300,000
shares of common stock upon the adoption of the Employee Stock
Purchase Plan (the Purchase Plan) whereby employees,
at their option, could purchase annually up to 5,000 shares
of Epimmune common stock through payroll deductions at the lower
of 85% of the fair market value on the plan offering date or 85%
of the fair market value of the common stock at the purchase
date. As of December 31, 2002, 71,945 shares of common
stock had been issued under the Purchase Plan.

Directors
Deferred Compensation Plan

Under the Directors Deferred Compensation
Plan, participating directors may elect on an annual basis, to
defer all of their cash compensation, for service on the
Companys board, in a deferred compensation account
pursuant to which the deferred fees are credited in the form of
share units having a value equal to shares of the Companys
common stock (Share Units), based on the market
price of the stock at the time the deferred fees are earned. The
Company will continue to credit Share Units to the
participants deferred compensation accounts on a quarterly
basis. When a participant ceases serving as a director, the
participant shall be entitled to receive the value of his or her
account either in a single lump-sum payment or in equal annual
installments, as determined by the Company in its sole
discretion. No participant entitled to receive a payment of
benefits shall receive payment in the form of the Companys
common stock. For the years ended December 31, 2002, 2001
and 2000 the Company recorded a benefit (expense) of
$68,000, ($72,000) and $4,000, respectively, related to the
Directors Deferred Compensation Plan.

F-13



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



4.     Stockholders
Equity  (Continued)


Stock
Plans



| |                
| | ---------------
| | 1989 Stock Plan

In November 1989, the Company adopted a Stock
Plan (the 1989 Plan), under which options may be
granted to employees, directors, consultants or advisors. The
1989 Plan provided for the grant of both incentive stock options
and nonstatutory stock options. The exercise price of an
incentive stock option is not less than the fair market value of
the common stock on the date of grant. The exercise price of
nonstatutory options is not less than 85% of the fair market
value of the common stock on the date of grant. No options
granted under the 1989 Plan have a term in excess of ten years
from the date of grant. Shares and options issued under the 1989
Plan vest over varying periods of one to six years. Effective
June 9, 2000 with the approval of the Companys 2000
Plan, the 1989 Plan was discontinued resulting in cancellation
of remaining available shares, and any shares granted under the
1989 Plan that in the future are cancelled or expire will not be
available for re-grant. As of December 31, 2002, options to
purchase 508,184 shares of common stock were outstanding under
the 1989 Plan.

1997
Stock Plan

In December 1997, the Company adopted a Stock
Plan (the 1997 Plan), under which options were
granted to employees, directors, and consultants of the Company.
The 1997 Plan provided for the grant of both incentive stock
options and nonstatutory stock options. The exercise price of an
incentive stock option was not less than the fair market value
of the common stock on the date of grant. The exercise price of
nonstatutory options was not less than 85% of the fair market
value of the common stock on the date of grant. No options
granted under the 1997 Plan have a term in excess of ten years
from the date of grant. Options issued under the 1997 Plan vest
over varying periods of one to four years. Options that
terminate will not be available for future grant. As of
December 31, 2002, options to purchase 199,488 shares of
common stock were outstanding under the 1997 Plan.

2000
Stock Plan

In June 2000, the Company adopted a Stock Plan
(the 2000 Stock Plan), and reserved
700,000 shares for issuance under the plan. Options under
the plan may be granted to employees, directors, consultants or
advisors of the Company. The 2000 Stock Plan provides for the
grant of both incentive stock options and nonstatutory stock
options. The exercise price of an incentive stock option is not
less than the fair market value of the common stock on the date
of the grant. The exercise price of nonstatutory options is also
not less than the fair market value of the common stock on the
date of grant. No options granted under the 2000 Stock Plan have
a term in excess of ten years from the date of grant. Options
issued under the 2000 Stock Plan may vest over varying periods
of up to four years. On December 4, 2001 the Board of
Directors of Epimmune approved increasing the number of shares
reserved for issuance under the 2000 Stock Plan by
500,000 shares. On December 16, 2002 we granted stock
bonus awards of 600 shares to our executive officers from
the 2000 Plan. As of December 31, 2002, options to purchase
977,224 shares of common stock were outstanding and
222,176 shares were available for future grant under the
2000 Stock Plan.

Stock Option
Repricing

In June 1998, the stockholders approved an Option
Exchange Program for certain options under the 1989 Plan. These
options vest over a six-year period in accordance with a
schedule developed by management, in conjunction with the State
of Wisconsin Investment Board, a major stockholder of the
Company. On the date of approval, all current employees were
eligible to participate; however, options granted to outside
directors and consultants to the Company were excluded from the
exchange. There were 546,962 options eligible for

F-14



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



4.     Stockholders
Equity  (Continued)


participation, of which 303,145 options were
repriced. The effective exchange price was $10.7188. Eligible
employees who elected to participate forfeited a total of 42,879
shares. These shares were permanently canceled and not returned
to the Plan for future grant. The Option Exchange Program
imposes restrictive vesting provisions. If the holder exercises
vested options before the sixth year, then the remaining
unvested options do not vest until the end of the sixth year, at
which time all remaining shares will be fully vested.

The following table summarizes stock option
activity under all stock option plans for the three years ended
December 31, 2002:

|                             |           |        |           |               |   |   |      |      | 
|---------------------------- | --------- | ------ | --------- | ------------- | - | - | ---- | ---- | 
|                             |           |        |           | Weighted     
|                             |           | Shares |           | Average Price
|                             |           |        |           |              
|Balance at December 31, 1999 |           |        | 1,054,362 |               |   | $ | 4.76 |     
|                             | Granted   |        |           | 120,500       |   |   | $    | 6.24 | 
|                             | Exercised |        |           | (98,398       | ) |   | $    | 0.31 | 
|                             | Cancelled |        |           | (61,432       | ) |   | $    | 9.23 | 
|                             |           |        |           |               |   |   |      |     
|Balance at December 31, 2000 |           |        | 1,015,032 |               |   | $ | 5.10 |     
|                             | Granted   |        |           | 786,000       |   |   | $    | 2.65 | 
|                             | Exercised |        |           | (27,753       | ) |   | $    | 0.40 | 
|                             | Cancelled |        |           | (233,665      | ) |   | $    | 4.21 | 
|                             |           |        |           |               |   |   |      |     
|Balance at December 31, 2001 |           |        | 1,539,614 |               |   | $ | 4.07 |     
|                             | Granted   |        |           | 194,520       |   |   | $    | 2.03 | 
|                             | Exercised |        |           | (15,364       | ) |   | $    | 0.28 | 
|                             | Cancelled |        |           | (33,874       | ) |   | $    | 4.74 | 
|                             |           |        |           |               |   |   |      |     
|Balance at December 31, 2002 |           |        | 1,684,896 |               |   | $ | 3.86 |     
|                             |           |        |           |               |   |   |      |     

The following is a summary of the options
outstanding under all of the Companys stock option plans
as of December 31, 2002:

|                         |  |             |           |                |  |                |      |             |  |                |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ----------- | --------- | -------------- |  | -------------- | ---- | ----------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |             |           |                |  |                |      |             |  | Weighted      
|                         |  |             |           | Weighted       |  |                |      |             |  | Average       
|                         |  |             |           | Average        |  | Weighted       |      |             |  | Exercise Price
|                         |  | Options     |           | Remaining Life |  | Average        |      | Options     |  | of Options    
|Range of Exercise Prices |  | Outstanding |           | in Years       |  | Exercise Price |      | Exercisable |  | Exercisable   
|                         |  |             |           |                |  |                |      |             |  |               
|$ 0.16                   |  |             | 84,367    |                |  |                | 4.96 |             |  | $              | 0.16  |  |  |  | 84,367    |  |  | $ | 0.16  | 
|$ 0.48                   |  |             | 115,108   |                |  |                | 5.88 |             |  |                | 0.48  |  |  |  | 115,108   |  |  |   | 0.48  | 
|$ 1.35 - $ 3.37          |  |             | 1,133,737 |                |  |                | 8.29 |             |  |                | 2.63  |  |  |  | 524,312   |  |  |   | 2.74  | 
|$ 3.75 - $ 6.00          |  |             | 176,119   |                |  |                | 7.11 |             |  |                | 5.01  |  |  |  | 129,455   |  |  |   | 4.90  | 
|$10.50 - $16.25          |  |             | 146,829   |                |  |                | 2.04 |             |  |                | 11.00 |  |  |  | 140,735   |  |  |   | 10.94 | 
|$18.82 - $42.88          |  |             | 28,736    |                |  |                | 2.08 |             |  |                | 33.16 |  |  |  | 28,736    |  |  |   | 33.16 | 
|                         |  |             |           |                |  |                |      |             |  |                |       |  |  |  |           |  |  |   |       | 
|Total                    |  |             | 1,684,896 |                |  |                |      |             |  |                |       |  |  |  | 1,022,713 |  |  |   |       | 
|                         |  |             |           |                |  |                |      |             |  |                |       |  |  |  |           |  |  |   |       | 
|Weighted averages        |  |             |           |                |  |                | 7.19 |             |  | $              | 3.86  |  |  |  |           |  |  | $ | 4.53  | 

The weighted average fair value of options
granted during 2002, 2001 and 2000 was $1.87, $2.47 and $5.86,
respectively.

In March 1993, the Company adopted a Stockholder
Rights Plan. The Plan provides for the distribution of a
preferred stock purchase right (Rights) as a
dividend for each share of the Companys common stock

F-15



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



4.     Stockholders
Equity  (Continued)


held as of the record date at the close of
business on April 8, 1993. Under certain conditions
involving an acquisition by any person or group of 15% or more
of the common stock, the Rights permit the holders (other than
the 15% holder) to purchase one one-hundredth of a share of
Series A Preferred Stock at a price of $80 per one
one-hundredth of a preferred share per Right. Each one
one-hundredth of a share of preferred stock has rights,
privileges and preferences which make its value approximately
equal to the value of a common share. In addition, in the event
of certain business combinations, the Rights permit the purchase
of the common stock of an acquirer at a 50% discount. Under
certain conditions, the Rights may be redeemed by the Board of
Directors at a price of $.01 per Right. The Rights have no
voting privileges and are attached to and automatically trade
with the Companys common stock. The Rights will expire on
March 19, 2003.

On January 16, 2001, the Company entered
into an employment agreement with Dr. Emile Loria for the
position of President and Chief Executive Officer.
Dr. Loria was elected to the Companys Board of
Directors. Also on January 16, 2001, the Company entered
into a Restricted Stock Purchase agreement with Dr. Loria
for the purchase of 1,056,301 common shares at $2.50 per share.
The shares vest daily over a four-year period and unvested
shares are subject to a repurchase option in favor of the
Company. As of December 31, 2002, 539,356 shares were
subject to the repurchase option. A promissory note with an
interest rate of 5.61% was issued for the purchase price of the
shares, which note is secured by the shares issued to
Dr. Loria. Principal and interest under the promissory note
will be due and payable four years from the date of the note.

The Company is recording monthly compensation
expense related to the shares sold to Dr. Loria based on
the provisions of EITF 95-16, Accounting for Stock
Compensation Arrangements with Employer Loan features under
APB 25. For the years ended December 31, 2002
and 2001, the Company recorded a benefit of $127,000 and a
charge of $127,000 of compensation expense respectively. For the
years ended December 31, 2002 the Company had $0 and
$402,000 of deferred compensation expense related to unvested
shares on its balance sheet respectively. The Company will
continue to record compensation expense based on the difference
between the exercise price and current fair market value of the
vested shares until the note is paid off.

The Company is also recording compensation
expense related to the below market interest rate the promissory
note bears. For the years ended December 31, 2002 and 2001,
the Company recorded $99,000 and $95,000 of compensation expense
related to the note respectively. In addition, the Company had
$203,000 and $302,000 of accrued, deferred compensation expense
for the years ended December 31, 2002 and 2001
respectively, which it will recognize monthly until the note
matures in January 2005.



| |                                        
| | ---------------------------------------
| | Shares Reserved for Future
    Issuance

The following shares of common stock are reserved
for future issuance at December 31, 2002:

|                                                   |  |  |           | 
|-------------------------------------------------- |  |  | --------- | 
|Options granted and outstanding                    |  |  | 1,684,896 | 
|Options authorized for future grants               |  |  | 222,176   | 
|Employee stock purchase plan for future purchases  |  |  | 228,055   | 
|Stock warrants                                     |  |  | 245,964   | 
|Stock acquisition rights under existing agreements |  |  | 1,000,000 | 
|Conversion of preferred stock                      |  |  | 1,608,448 | 
|                                                   |  |  |           | 
|                                                   |  |  | 4,989,539 | 
|                                                   |  |  |           | 

F-16



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     Equipment
Loans and Notes Payable

In August 1998, Epimmune entered into a
$1,150,000 loan and security agreement, as amended for capital
equipment purchases and certain tenant improvements. These funds
were used primarily for enhancement and upgrades of our
scientific information management systems databases. Total
cumulative advances drawn under the credit line totaled
$1,032,000 at December 31, 2002 and 2001. The capital
equipment financed collateralizes all borrowings. The terms of
the credit line contain a financial covenant requiring the
Company to maintain minimum liquidity equal to nine months cash
burn, which the Company was in compliance with at
December 31, 2002.

Equipment loans and notes payable consist of the
following:

|                                                                                                                                |  |              |        |      |  |   |         | 
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------- | 
|                                                                                                                                |  |             
|                                                                                                                                |  | December 31,
|                                                                                                                                |  |             
|                                                                                                                                |  | 2002         |        | 2001
|                                                                                                                                |  |              |        |     
|Equipment loan payable in monthly installments of
    principal and interest of $14,600, at 9.44% interest, due March
    2003  |  | $            | 43,000 |      |  | $ | 206,000 | 
|Equipment loan payable in monthly installments of
    principal and interest of $23,600, at 9.25% interest, due August
    2002 |  |              |       |      |  |   | 183,000 | 
|                                                                                                                                |  |              |        |      |  |   |         | 
|                                                                                                                                |  | $            | 43,000 |      |  | $ | 389,000 | 
|                                                                                                                                |  |              |        |      |  |   |         | 

The future annual principal payments on equipment
loans and notes payable are due during 2003.

6.     Commitments

The Company leases its office and research
facility under an operating lease that expires in March 2009.
Under this operating lease, the Company pays taxes, insurance
and maintenance expenses related to the premises.
Epimmunes facility lease requires a letter of credit of
$472,000 to secure the performance of the Companys lease
obligation and is reflected as restricted cash. Rent expense was
$582,000 for each the years ended December 31, 2002, 2001
and 2000.

Future minimum lease payments under operating
leases at December 31, 2002 are as follows:

|                             |  |           |           | 
|---------------------------- |  | --------- | --------- | 
|                             |  | Operating
|Year                         |  | Leases   
|                             |  |          
|2003                         |  | $         | 568,000   | 
|2004                         |  |           | 585,000   | 
|2005                         |  |           | 602,000   | 
|2006                         |  |           | 620,000   | 
|2007                         |  |           | 639,000   | 
|Thereafter                   |  |           | 823,000   | 
|                             |  |           |           | 
|Total minimum lease payments |  | $         | 3,837,000 | 
|                             |  |           |           | 

7.     Revenues Under
Collaborative Research and Development Agreements



| |                      
| | ---------------------
| | Elan Corporation, plc

In April 2001, the Company entered into a license
and option agreement with Elan, which gives Elan an exclusive
license to use and evaluate the Companys PADRE technology
in animal studies and Phase I clinical trials for prevention and
treatment of neurodegenerative conditions including
Alzheimers Disease. Elan also has the right to negotiate
an exclusive license for continued development and
commercialization of products using the technology in that
field. In connection with the agreement, the Company received an
upfront license fee.

F-17



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



7.     Revenues Under
Collaborative Research and Development
Agreements  (Continued)




| |                         
| | ------------------------
| | Nexell Therapeutics Inc.

In March 2001, the Company entered into a license
agreement with Nexell Therapeutics Inc. granting Nexell a
non-exclusive license to certain cancer antigens and associated
technology for use in ex vivocell therapy. In connection
with the agreement, the Company received an upfront license fee,
half of which was paid on signing and half of which was paid
four months after signing. The Company is entitled to receive
milestones and royalties on product sales, if any products are
ever developed. In May 2002, Nexell publicly announced that they
were winding down their operations.



| |             
| | ------------
| | Pharmexa A/S

In June 2001, the Company entered into a license
agreement with Pharmexa A/S granting Pharmexa a non-exclusive
license to the Companys PADRE technology for use in
connection with Pharmexas AutoVacTM technology
for controlling autoimmune diseases. In connection with the
agreement, the Company received an upfront license fee and is
also entitled to receive milestones and royalties on product
sales, if any products are ever developed. The upfront license
fee was recognized as revenue during 2001 as the Company had no
on-going obligations.



| |                             
| | ----------------------------
| | Genencor International, Inc.

In July 2001, the Company entered into a
collaboration with Genencor International, Inc. for vaccines to
treat or prevent hepatitis B virus, hepatitis C virus
and human papilloma virus. Pursuant to the agreement, Epimmune
exclusively licensed to Genencor its PADRE and epitope
technologies for vaccines to treat or prevent hepatitis B,
hepatitis C and human papilloma virus. In connection with
this collaboration, the Company received an upfront license fee,
which is being amortized over the collaboration term. In
addition, Genencor made an initial ten percent equity investment
in Epimmune common stock at a premium to the market price and,
if certain conditions are met, has the right to acquire up to
500,000 additional shares of Epimmune common stock. Under the
agreement with Genencor, the Company may receive a total of
approximately $60 million in payments, including the
initial equity investment but excluding royalties. In January
2002, Epimmune received a payment from Genencor for achievement
of the first milestone, identification of a product candidate to
treat chronic hepatitis B infection. In addition, Genencor fully
funds Epimmunes research in these specific indications and
is obligated to pay the Company royalties on sales of any
products that may be developed under the collaboration. The
initial collaboration had a term through September 2003, and in
October 2002, was extended to September 2004. Genencor has the
right to terminate if the Company breaches its obligations under
the collaboration agreement or upon certain force majeure
events. The upfront license fee is being amortized into revenue
over the estimated life of the agreement. The milestone payment
was recognized as revenue when received. The collaboration
revenues are being recognized as incurred. All revenues from
Genencor are included in related party revenue.



| |                     
| | --------------------
| | Biosite Incorporated

In August 2001, the Company entered into a
license agreement with Biosite Incorporated granting Biosite a
non-exclusive license to the Companys PADRE technology for
use in connection with Biosites antibody technology which
can be used to determine a new molecules function and its
utility as a target for diagnostic or therapeutic products. In
connection with the agreement, the Company received an upfront
license fee, which was recognized as revenue during 2001, as the
Company had no on-going obligations.

F-18



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



7.     Revenues Under
Collaborative Research and Development
Agreements  (Continued)




| |            
| | -----------
| | Anosys Inc.

In August 2001, the Company entered into a
license agreement with Anosys Inc., formerly AP Cells, granting
Anosys a non-exclusive license to certain cancer antigens and
associated technology for use in ex vivocell therapy. In
connection with the agreement, the Company received an upfront
license fee, which was recognized as revenue during 2001, as the
Company had no on-going obligations. The Company is also
entitled to receive milestones and royalties on product sales,
if any products are ever developed.



| |                    
| | -------------------
| | Bavarian Nordic A/S

In November 2001, the Company entered into a
collaboration agreement with Bavarian Nordic A/S to combine its
technology and expertise in the fields of T cell epitope
identification and vaccine design with Bavarian Nordics
vaccine delivery technology and manufacturing expertise to
develop vaccines for the treatment or prevention of HIV
infection. The Company did not record revenue on Bavarian Nordic
for the years ended December 31, 2002 and 2001.



| |                
| | ---------------
| | Aventis Pasteur

In July 2002, the Company entered into an
evaluation and license option agreement with Aventis Pasteur
Limited, which gives Aventis, for a limited period of time, the
right to exercise its option to license from Epimmune certain
epitopes from two cancer associated antigens. Aventis will
evaluate the epitopes for possible integration into its pox
virus therapeutic cancer vaccine program. In the event Aventis
exercises its option under the agreement, the parties have
agreed to negotiate an exclusive license to use the epitopes in
connection with its proprietary pox virus delivery system in
several cancer fields. The Company received an evaluation
license fee, which is being amortized into revenue over the
evaluation period, and the Company is further entitled to
receive a license fee if Aventis exercises its option. In the
event Aventis exercises its option, and the parties successfully
negotiate a license agreement, the Company may be entitled to
receive commercialization milestone payments and royalties on
product sales if Aventis develops products using Epimmunes
technology.



| |                                    
| | -----------------------------------
| | Immuno-Designed Molecules,
    S.A.

In October 2002, the Company entered into an
evaluation and license option agreement with Immuno-Designed
Molecules, S.A. for certain cancer antigens for use in
IDMs ex vivocancer therapy program. Under the
terms of the agreement, IDM had 120 days from the date of
the option agreement to evaluate the epitopes and exercise its
option to license certain patented and non-patented rights to
Epimmunes universal cancer epitope packages for use in
ex vivocancer therapy. In February 2003, IDM exercised
its option and the Company is negotiating a license agreement
with IDM pursuant to which IDM will be granted a non-exclusive
license to use the epitopes in connection with its
DendritophageTMex vivo technology. The
Company received an evaluation license fee when it entered into
the evaluation, which is being amortized into revenue over the
evaluation period. The Company also received a license fee when
IDM exercised its option. In the event the parties enter into a
license agreement, the Company may be entitled to receive
commercialization milestone payments and royalties on product
sales if IDM develops products using Epimmunes technology.

8.     Income
Taxes

Significant components of the Companys
deferred tax assets as of December 31, 2002 and 2001 are
shown below. A valuation allowance of $64,187,000 at
December 31, 2002 and $61,037,000 at December 31, 2001
has been recognized to offset the deferred tax assets as
realization of such assets is uncertain.

F-19



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



8.     Income
Taxes  (Continued)


|                                            |                                  |      |             |            |   |   |             |            |  
|------------------------------------------- | -------------------------------- | ---- | ----------- | ---------- | - | - | ----------- | ---------- | -
|                                            |                                  | 2002 |             | 2001      
|                                            |                                  |      |             |           
|Deferred tax liabilities:                   |                                  |      |             |            |   |   |             |           
|                                            | Patents expensed for tax         |      | $           | (1,098,000 | ) |   | $           | (834,000   | )
|                                            |                                  |      |             |            |   |   |             |           
|Total deferred tax liabilities              |                                  |      | (1,098,000  | )          |   |   | (834,000    | )         
|Deferred tax assets:                        |                                  |      |             |            |   |   |             |           
|                                            | Capitalized research expenses    |      |             | 605,000    |   |   |             | 670,000    |  
|                                            | Net operating loss carryforwards |      |             | 54,732,000 |   |   |             | 51,610,000 |  
|                                            | Research and development credits |      |             | 9,410,000  |   |   |             | 8,497,000  |  
|                                            | Other, net                       |      |             | 538,000    |   |   |             | 1,094,000  |  
|                                            |                                  |      |             |            |   |   |             |           
|Total deferred tax assets                   |                                  |      | 65,285,000  |            |   |   | 61,871,000  |           
|Valuation allowance for deferred tax assets |                                  |      | (64,187,000 | )          |   |   | (61,037,000 | )         
|                                            |                                  |      |             |            |   |   |             |           
|Net deferred tax assets                     |                                  | $    |            |            |   | $ |            |           
|                                            |                                  |      |             |            |   |   |             |           

At December 31, 2002, the Company has
federal and California net operating loss carryforwards of
approximately $138,888,000 and $106,465,000, respectively. The
difference between the federal and California tax loss
carryforwards is primarily attributable to the capitalization of
research and development expenses for California tax purposes
and expiration of the California tax loss carryforwards. The
federal tax loss carryforwards will begin expiring in 2006,
unless previously utilized. The California tax loss
carryforwards will continue to expire in 2004. The Company also
has federal and California research and development tax credit
carryforwards of $7,230,000 and $3,352,000, respectively. The
federal research and development tax credit carryforwards will
begin expiring in 2003 unless previously utilized. Pursuant to
Internal Revenue Code Sections 382 and 383, the annual use
of the Companys net operating loss and credit
carryforwards will be limited because of greater than 50%
cumulative changes in ownership, which occurred during 1989 and
1994. However, the Company believes that these limitations will
not have a material impact on the financial statements.

9.     401(k)
Plan

The Company has a defined contribution plan, the
Epimmune Inc. 401(k) Plan, which covers all full-time employees
of the Company. This plan allows each eligible employee to
voluntarily make pre-tax deferred salary contributions. The
Company may make contributions in amounts as determined by the
Board of Directors. The Company did not make any matching
contributions for the years ended December 31, 2002, 2001
and 2000.

10.     Unaudited
Quarterly Financial Information

The following tables present unaudited quarterly
financial information, for the eight quarters ended
December 31, 2002. We believe this information reflects all
adjustments (consisting only of normal recurring adjustments)
that we consider necessary for a fair presentation of such
information in accordance with accounting principles generally
accepted in the United States. The results for any quarter are
not necessarily indicative of results for any future period (in
millions, except per share data):

|                             |                                      |             |   |             |   |             |   |             |   |  |   |       |   |  |   |       |  
|---------------------------- | ------------------------------------ | ----------- | - | ----------- | - | ----------- | - | ----------- | - |  | - | ----- | - |  | - | ----- | -
|                             |                                      | 1st Quarter |   | 2nd Quarter |   | 3rd Quarter |   | 4th Quarter
|                             |                                      |             |   |             |   |             |   |            
|Year Ended December 31, 2002 |                                      |             |   |             |   |             |   |             |   |  |   |       |   |  |   |      
|                             | Revenues                             |             | $ | 2.0         |   |             | $ | 1.8         |   |  | $ | 1.7   |   |  | $ | 1.6   |  
|                             | Loss from operations                 |             |   | (1.3        | ) |             |   | (2.3        | ) |  |   | (1.6  | ) |  |   | (1.8  | )
|                             | Net loss                             |             |   | (1.1        | ) |             |   | (2.2        | ) |  |   | (1.5  | ) |  |   | (1.7  | )
|                             | Basic and diluted net loss per share |             |   | (0.09       | ) |             |   | (0.19       | ) |  |   | (0.13 | ) |  |   | (0.15 | )

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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



10.     Unaudited
Quarterly Financial
Information  (Continued)


|                             |                                     |             |   |             |   |             |   |             |   |  |   |      |  |  |   |       |  
|---------------------------- | ----------------------------------- | ----------- | - | ----------- | - | ----------- | - | ----------- | - |  | - | ---- |  |  | - | ----- | -
|                             |                                     | 1st Quarter |   | 2nd Quarter |   | 3rd Quarter |   | 4th Quarter
|                             |                                     |             |   |             |   |             |   |            
|Year Ended December 31, 2001 |                                     |             |   |             |   |             |   |             |   |  |   |      |  |  |   |      
|                             | Revenues                            |             | $ | 0.8         |   |             | $ | 1.5         |   |  | $ | 4.3  |  |  | $ | 1.6   |  
|                             | (Loss) income from operations       |             |   | (1.5        | ) |             |   | (0.9        | ) |  |   | 1.2  |  |  |   | (1.8  | )
|                             | Net (loss) income                   |             |   | (1.4        | ) |             |   | (0.8        | ) |  |   | 1.3  |  |  |   | (1.7  | )
|                             | Basic net (loss) income per share   |             |   | (0.19       | ) |             |   | (0.10       | ) |  |   | 0.15 |  |  |   | (0.18 | )
|                             | Diluted net (loss) income per share |             |   | (0.19       | ) |             |   | (0.10       | ) |  |   | 0.12 |  |  |   | (0.18 | )

11.     Subsequent
Events

In January 2003, the Company entered into an
option and license agreement with Beckman Coulter, Inc. under
which Beckman Coulter may acquire a non-exclusive license to
certain Epimmune epitopes. Beckman Coulter may use these
epitopes for research and diagnostic applications in connection
with their MHC Tetramer and other immune response monitoring
technologies. Under the terms of the agreement, Epimmune is
entitled to annual option fees. The annual option fees will be
amortized into revenue over twelve months. Beckman Coulter may
acquire non-exclusive, worldwide licenses to specific epitopes
covered by Epimmune patent rights or know-how in certain
infectious diseases and cancer indications. In the event that
Beckman Coulter exercises its option to acquire a license to any
specific epitope, Epimmune will be entitled to additional
license fees for each epitope and royalties on product sales in
the event any products are commercialized using the
Companys technology.

In February 2003, the Company announced that it
had reached a preliminary agreement with Anosys, Inc., a private
company, to merge their operations to create a combined company
focused on the field of immunotherapeutics and products for the
treatment of cancer and infectious diseases. The all-stock
transaction is subject to the parties entering into a definitive
merger agreement, approval by the shareholders of both
companies, obtaining commitments for capital resources to fund
the combined companys operations and various other
conditions that must be satisfied prior to closing the merger.
The newly formed entity will be headquartered in San Diego.

F-21