##### Table of Contents






This amendment is filed to include a
previously omitted page, F-24.







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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549





Amendment No. 1 to





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,
	2001                                              
|  
|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

The aggregate market value of the
Registrants Common Stock held by non-affiliates of the
Registrant as of March 15, 2002 was approximately
$16.4 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 12,094,757
as of March 15, 2002.

Documents incorporated by reference. The
Registrants definitive proxy statement to be filed in
connection with solicitation of proxies for its Annual Meeting
of Stockholders to be held June 18, 2002 is incorporated by
reference into Part III of this Form 10-K.



---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Excludes 6,532,768 shares of Common Stock held by
	directors and officers and stockholders whose beneficial
	ownership exceeds 10% of the Common Stock outstanding on
	March 15, 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                      
|                                           | Item 13. Certain Relationships and Related Transactions                                      
|Part IV                                   
|                                           | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|EXHIBIT 3.2                               
|EXHIBIT 3.3                               
|EXHIBIT 10.51                             
|EXHIBIT 10.94                             
|EXHIBIT 10.96                             
|EXHIBIT 23.1                              



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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. Our 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,
as well as those discussed in any documents incorporated herein
by reference.

Unless otherwise indicated, all references to
Cytel are to Cytel Corporation. Epimmune Inc. was a
majority-owned subsidiary of Cytel until July 1, 1999, at
which time Cytel and Epimmune Inc. merged. All references to
we, us or our company are to
the combined entity of Cytel and Epimmune Inc.

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

Overview

We are developing novel vaccines for infectious
diseases and cancer, building on our expertise and intellectual
property in the field of T-cell recognition and activation. We
are in the research and preclinical development stage with
therapeutic vaccines for breast, colon, lung and prostate
cancers, hepatitis C, hepatitis B and HIV, and prophylactic
vaccines for hepatitis C, HIV and malaria. We expect that a
therapeutic vaccine targeting HIV will be the first of our
candidate vaccines to enter human clinical trials. We plan to
file an investigational new drug application, or IND, for this
vaccine candidate with the United States Food and Drug
Administration, or FDA, in the second quarter of 2002. We expect
to commence initial clinical studies of this vaccine candidate
approximately one month later, pending FDA review. We have a
collaboration with Genencor International, Inc. for vaccines to
treat or prevent hepatitis C virus, hepatitis B virus and human
papilloma virus.

Eliciting a strong cellular, or T-cell, immune
response is crucial for treating and preventing certain
infectious diseases and tumors. Clinicians have shown that the
cellular immune response is associated with viral clearance and
tumor regression in the subset of patients who spontaneously
clear chronic viral infection and in cancer patients who respond
to immunotherapy. 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 based on proprietary technology,
known as Epitope Identification System or 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. To date, we have
identified, evaluated and included in our patent applications
more than 54,000 epitopes, and a small subset of these
epitopes are used in our candidate vaccines. Furthermore, EIS
enables rapid immunological evaluation of the vast quantities of
genomic data now available, and we believe this will make it
feasible for us and our collaborators to develop new vaccine
candidates for complex diseases such as tuberculosis, malaria,
herpes simplex virus and chlamydia.

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | First, we select epitopes from conserved regions
	of viral or tumor-associated antigens, reducing the likelihood
	that the virus or tumor will be able to change or mutate in a
	way that makes the vaccine less effective. By comparison, there
	is evidence that the immune response elicited by vaccines that
	use whole antigens is directed largely toward variable regions
	of the antigen, allowing mutations that reduce the efficacy of
	these vaccines.

1



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| |   |                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Second, our approach allows us to combine
	selected epitopes (CTL and HTL) and to alter their composition
	to enhance immunogenicity, allowing for manipulation of the
	immune response, as appropriate, for the target disease. Similar
	engineering of the response is not possible with traditional
	approaches that use whole antigens.
|
| |  | Third, a major benefit of epitope-based,
	immune-stimulating vaccines is their safety. The possible
	pathological side effects caused by infectious agents or whole
	protein antigens, which might have their own intrinsic
	biological activity, is reduced or eliminated.                                                                
|
| |  | Finally, our approach allows us to develop
	vaccines that target multiple antigens by combining multiple
	epitopes into a single vaccine. This approach offers a simple
	alternative to traditional complex vaccines and enables the
	design of a well-characterized product, which contains minimal
	extraneous biological material.      

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

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 primarily
involved 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.
Preventive vaccines that trigger an antibody-based immune
response have been very successful in reducing the incidence of
several deadly diseases, including smallpox, polio and measles.
These vaccines 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 primarily involved 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, which are identifying structural components of
cancers and pathogens. Once inside antigen-presenting cells,
antigens are broken down into small 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. This
immune response alone, however, is often not sufficient to
eradicate the disease. Studies have analyzed the effective
cellular response in individuals who spontaneously clear chronic
viral infection, and in cancer patients who respond to
immunotherapy. This effective cellular response is comprised of
CTL and HTL directed toward multiple discrete and specific
antigen-specific epitopes. Vaccines attempt to recreate this
successful multi-specific CTL and HTL response.

To date, efforts to develop vaccines that
sufficiently stimulate these multi-specific T cell
responses to selectively and accurately target and kill diseased
cells have failed, we believe, due to one or both of the
following:



| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | the inability of drug developers to identify the
	appropriate antigens that can induce the appropriate immune
	response; and

2



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| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the inability to present these relevant antigens
	to activate T cell responses that are sufficiently potent
	and broad to adequately destroy diseased cells.

Although we have not yet initiated clinical
trials of our candidates, based on our animal study data thus
far, we believe our technology and vaccine candidates
specifically address these issues.

Our Technology and Vaccine Development
Platforms



| |                
| | ---------------
| | T Cell Vaccines

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 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).

Epitope Identification System
(EISTM).We developed and optimized EIS based
on extensive work over the past eleven years in the field of
T cell recognition and stimulation. We have issued patents
and patent applications that cover the methods employed by EIS,
as well as the epitopes we identify using EIS. With the genetic
sequence of a tumor-associated antigen, virus, bacteria or
parasite as input, we use EIS to rapidly identify
antigen-specific epitopes which meet pre-determined criteria for
conservancy, 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 which contain specified
	types of epitopes from conserved regions of the antigens.                                                                                                                                                              
|
| |  | We synthesize peptides that meet these
	requirements and perform in vitro assays to assess
	binding to human MHC molecules referred to as human leukocyte
	antigens, or HLA.                                                                                                                                                                                                               
|
| |  | We evaluate peptides for superfamily binding, an
	assessment of their ability to bind broadly within a family of
	HLA molecules, to assess binding to human MHC molecules referred
	to as human leukocyte antigens, or HLA. We identify epitopes
	from these peptides, which bind broadly within three
	superfamilies, enabling 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 or HCV,
hepatitis B virus or HBV, human papilloma virus or HPV, HIV
and malaria.

EpiGeneTMVaccines. 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 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 a traditional whole
antigen DNA vaccine.

We are advancing EpiGene candidate vaccines for
HIV and HCV in preclinical development. To be effective in
treating or preventing HIV and HCV, 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.

We expect the first of our candidate vaccines to
enter human clinical trials will be a therapeutic vaccine
targeting HIV. The vaccine incorporates multiple CTL epitopes
from six HIV associated antigens and our immune stimulation
technology called PADRE. We plan to file an IND for this vaccine
candidate with the United States Food and Drug Administration,
or FDA, in the second quarter of 2002. We expect to commence
initial clinical studies of this vaccine candidate approximately
one month later, pending FDA review.

3



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| |                        
| | -----------------------
| | Antibody Based Vaccines

We are evaluating several antibody vaccine
opportunities, primarily in collaboration with others. The
vaccines being considered target cancers, bacteria, autoimmunity
and neurologic diseases. All of these vaccine opportunities
incorporate our PADRE technology with one or more target
antigens. The PADRE technology 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 proteins traditionally used to enhance antibody vaccines:



| |   |                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | PADRE can be easily synthesized and readily
	characterized when linked to the antigen, whereas traditionally
	used proteins can complicate manufacturing;                                                                                                               
|
| |  | the antibody responses generated by PADRE are
	primarily antibodies specific to the disease-specific antigen,
	rather than antibodies to PADRE, whereas traditionally used
	proteins generate high anti-protein responses which can render
	the vaccine ineffective; and
|
| |  | PADRE could aid in the development of combination
	vaccines, unlike traditionally used proteins which can be
	difficult to effectively combine with a number of different,
	much larger protein-antigen conjugates.                                                     



| |                       
| | ----------------------
| | ImmunoSense Technology

We have developed several programs employing our
ImmunoSense technology for the discovery and validation of
antigenic proteins utilizing proteomics or genomics data derived
from tumor-associated proteins, protein targets of autoimmune
diseases, and infectious pathogens. Using ImmunoSense, we can
rapidly analyze gene sequence data for antigens recognized by
the immune system to identify new vaccine and drug targets for
diseases caused or controlled by the immune system.



| |                         
| | ------------------------
| | ImmunoStealth Technology

We are exploring opportunities, both internally
and with potential partners, for using our ImmunoStealth
technology to identify and potentially eliminate undesirable
antibody responses to proteins used as therapeutic drugs or in
consumer products. 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 and
modify them to potentially reduce or eliminate recognition by
helper T cells, thereby enhancing the safety and efficacy
of the protein based product.

4



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Vaccine Product Candidates

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

|                    |                       |                              |  |                          |                                |  |  |                      |          | 
|------------------- | --------------------- | ---------------------------- |  | ------------------------ | ------------------------------ |  |  | -------------------- | -------- | 
|Indication          |                       | Product Development Stage(1) |  | Commercialization Rights
|                    |                       |                              |  |                         
|Cancer              |                       |                              |  |                          |                                |  |  |                     
|                    | Therapeutic Vaccines  |                              |  |                          |                                |  |  |                      |         
|                    |                       | Breast                       |  |                          | Preclinical                    |  |  |                      | Epimmune | 
|                    |                       | Colon                        |  |                          | Preclinical                    |  |  |                      | Epimmune | 
|                    |                       | Lung                         |  |                          | Preclinical                    |  |  |                      | Epimmune | 
|                    |                       | Prostate                     |  |                          | Epitope/Antigen Identification |  |  |                      | Epimmune | 
|                    | Ex VivoTherapy        |                              |  | Preclinical              |                                |  |  | Takara/Nexell/Anosys |         
|Infectious Diseases |                       |                              |  |                          |                                |  |  |                     
|                    | Therapeutic Vaccines  |                              |  |                          |                                |  |  |                      |         
|                    |                       | Hepatitis B                  |  |                          | Preclinical                    |  |  |                      | Genencor | 
|                    |                       | Hepatitis C                  |  |                          | Preclinical                    |  |  |                      | Genencor | 
|                    |                       | Papilloma virus              |  |                          | Epitope/Antigen Identification |  |  |                      | Genencor | 
|                    |                       | HIV                          |  |                          | Preclinical                    |  |  |                      | Epimmune | 
|                    | Prophylactic Vaccines |                              |  |                          |                                |  |  |                      |         
|                    |                       | Hepatitis C                  |  |                          | Preclinical                    |  |  |                      | Genencor | 
|                    |                       | HIV                          |  |                          | Preclinical                    |  |  |                      | Epimmune | 
|                    |                       | Malaria                      |  |                          | Preclinical                    |  |  |                      | Epimmune | 



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | By using the term Epitope/ Antigen
	Identification, we mean 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 IND with
	regulatory authorities.

Corporate Collaborations

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

In 1994, we established a collaboration with
Takara Shuzo Co., Ltd., which focused on ex vivo cellular
therapy for treatment of cancer. Takara, who is collaborating
with Japanese investigators on the evaluation and optimization
of ex vivo cellular therapies, has rights to our
technology for ex vivo treatment of cancer in Japan.
Under the terms of the collaboration, we have a license to any
patents or know-how developed by Takara in the field. Takara
will make payments to us upon achievement of certain clinical
milestones and pay us royalties on sales of any products
resulting from the collaboration.

In February 1998, we entered into a collaboration
with G.D. Searle & Co. for the treatment of cancer
worldwide, excluding ex vivo cellular therapy in Japan.
In connection with the collaboration, Searle made a
$15 million investment in Epimmune. In November 2000, we
were notified that following the merger between Pharmacia
Corporation and Monsanto, the parent of Searle, Pharmacia would
not continue funding its cancer vaccine program. We have now
implemented an orderly conclusion to the collaboration and
transfer of applicable materials and documentation to us, and we
are now internally proceeding with the cancer program.

5



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As of December 31, 2001, Pharmacia owned
2.6% of our outstanding common stock and all of our outstanding
preferred stock.


In December 2000, we licensed gene delivery
technology from Valentis, Inc. for preventive and therapeutic
DNA vaccines against HIV and HCV. In connection with the
license, 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 Valentis
technology.

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 vivo cell therapy. In connection
with the agreement, we received an upfront license fee, half of
which was paid on signing and half of which was paid four months
after signing. We are also entitled to receive milestones and
royalties on product sales, if any products are ever developed.

In April 2001, we entered into a license and
option agreement with Elan which gives Elan an exclusive license
to use and 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.

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 milestones
and royalties on product sales, if any products are ever
developed.

In July 2001, we entered into license,
development and securities purchase agreements with Genencor
International, Inc. Pursuant to those agreements, we exclusively
licensed to Genencor our PADRE and epitope technologies for
vaccines to treat or prevent hepatitis B, hepatitis C and human
papilloma virus. Genencor will also fund research and
development activities on those programs at Epimmune for
30 months, made an initial ten percent equity investment in
Epimmune and, if certain conditions are met, has the right to
acquire up to 500,000 additional shares of Epimmune common
stock. In connection with the license agreement, Genencor paid
us an upfront license fee and will also pay us
pre-commercialization milestones and royalties on product sales,
if any products are ever developed.

In August 2001, we entered into a license
agreement with Biosite Incorporated granting Biosite a
non-exclusive license to our 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, we received an upfront license
fee.

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 vivo cell therapy. In connection
with the agreement, we received an upfront license fee and are
also entitled to receive milestones and royalties on product
sales, if any products are ever developed.

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.

Patents, Proprietary Rights and
Licenses

Our success will depend in part on our ability to
obtain patent protection for our products, both in the United
States and other countries. The patent position of biotechnology
and pharmaceutical companies is highly uncertain and involves
complex legal and factual questions. We file patent applications
as appropriate covering our proprietary technology.

6



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We have developed our vaccine patent estate over
approximately the past ten years. We have 14 issued United
States patents, 29 issued foreign patents, approximately
130 pending applications worldwide, and licenses to other
intellectual property relevant to epitope discovery and gene
delivery.

These patent applications and patents are either
owned by or are under license to us. We cannot be certain that
patents will issue from any of the applications we have filed or
licensed, or that if patents do issue, that claims allowed will
be sufficiently broad to protect our procedures 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 will provide proprietary
protection to us.

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, which could result in substantial costs to
us, may also be necessary to enforce any patents issued to us or
to determine the scope and validity of others proprietary
rights. In addition, we may have to participate in interference
proceedings declared by the United States Patent and Trademark
Office which could result in substantial costs to determine the
priority of inventions.

We also attempt to protect our proprietary
technology and processes in part by confidentiality agreements
with our collaborative partners, employees and consultants. We
cannot assure you that these agreements will not be breached,
that we will have adequate remedies for any breach, or that our
trade secrets will not otherwise become known or be
independently discovered by competitors.

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 our through contracts with third
parties, such products at a cost or in quantities which are
commercially viable.

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
FDA. 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 takes a number of
years and 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,

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| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | 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 Product License Application, or PLA, to the FDA, and
|
| |  | the FDA approval of the NDA or PLA 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.

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.

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 efficacy 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 the NDA 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 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.

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The Prescription Drug Act of 1992 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 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.

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. 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 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 novel pharmaceuticals which 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.

Our products under development address a range of
markets. Our competition will 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.

Employees

As of March 15, 2002, we employed 52
individuals full-time, of whom 39 were engaged in research
and development, 15 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.

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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.



| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | We are at an early stage of development and
	we may experience delays and other problems in developing
	products.

We are a research and development focused
company. There are many factors outside of our control that may
affect the timing of commencement and completion of clinical
trials of any of our drug candidates, and we cannot assure you
that clinical trials will commence or be completed within any
anticipated timeframe. For example, although we originally
expected to file an IND for a therapeutic vaccine candidate
targeting HIV with the FDA in the first quarter of 2002, 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 now anticipate filing an IND for this application
during the second quarter of 2002. In addition, though we expect
to file an IND for a therapeutic vaccine candidate targeting HIV
with the FDA in the second quarter of 2002 and to file an IND
with the FDA for our therapeutic lung cancer vaccine candidate
by late 2002 or early 2003, we may experience additional
unexpected delays in our research and development efforts that
would require us to delay these filings or commencement of
clinical trials of our vaccine candidates. We may not be able to
file an IND for our vaccine candidates by the indicated dates,
and even if we do, the related clinical trials may not begin one
month later, due to review by the FDA. Although we previously
indicated that Pharmacia Corporation was expected to initiate
Phase I/II human clinical trials of a drug candidate in our
cancer program by late 2000 or early 2001, Pharmacia terminated
our collaboration in the cancer field in November 2000. As a
result, the clinical trials for our cancer program did not begin
within the previously indicated timeframe. We have now
implemented an orderly conclusion to the collaboration and
transfer of applicable materials and documentation to us, and we
are now internally proceeding with the cancer program.

We cannot guarantee that our research and
development programs will be successful or that we can show that
our products are safe and effective in humans. Even if we do
receive positive data during preclinical testing and during
Phase I and II clinical trials for our therapeutic vaccine
candidate targeting HIV or any other candidates we may develop,
this data may not translate to positive Phase III pivotal
data and such data prior to Phase III pivotal data cannot
be relied upon as evidence that the clinical candidate will work.

Unacceptable toxicities or side effects may occur
at any time in the course of human clinical trials or during
commercial use. Delays in planned patient enrollment in our
clinical trials may result in increased costs, program delays or
both. The appearance of any unacceptable toxicities or side
effects could interrupt, limit, delay or cause us to terminate
the development of any of our products or, if previously
approved, require us to withdraw them from the market.

We may never obtain approvals from the FDA or
other necessary regulatory approvals to successfully
commercialize any of our products under development. This may be
because the clinical trials are not successful but it may also
be because we either are unclear on the information the FDA will
require or because we do not design our clinical trials in such
a way to provide the FDA with the information they require.
Further, we may not be able to manufacture any products in
commercial quantities in compliance with regulatory requirements
at an acceptable cost. Even if we successfully develop and
obtain approval for our products, we may fail to achieve the
necessary market acceptance of these products. Our failure to
address problems and delays relating to research and
development, regulatory approval, manufacturing and marketing
would harm our business.

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| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | If we do not successfully develop and
	commercialize our products, we may never generate significant
	revenues.

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 products
for a number of years. If we do not successfully develop and
commercialize products, we may never generate revenues that
would allow us to become profitable. Our potential vaccines
under development will require time consuming and costly
research and development efforts, preclinical studies, clinical
testing, regulatory approvals and additional investment prior to
their commercialization, which may never occur.



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | Pharmacias decision to end our
	collaboration may delay or limit our ability to develop our
	cancer epitope products.

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, and development of
one or more of those candidates (other than our therapeutic lung
cancer vaccine candidate) could be terminated, which could harm
our business.



| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot obtain and maintain
	collaboration or license agreements on acceptable terms in the
	future, we may not successfully develop some of our products or
	realize the expected value of our license
	agreements.

We rely on collaborative arrangements and expect
to continue to rely on collaborative arrangements both for
development and commercialization of pharmaceutical products. On
July 9, 2001 we entered into a collaboration with Genencor
International, Inc. under which we licensed to Genencor our
PADRE and epitope technologies for vaccines to treat or prevent
hepatitis B, hepatitis C and human papilloma virus. We cannot be
certain, however, that we will be able to enter into research
and development collaborations or any other collaborations in
the future or that any of our collaborations, including our
collaboration with Genencor, will remain in place or be
successful. We cannot be certain that we will receive royalty
revenues, license fees or milestone payments from any of our
collaborations or license arrangements because either the
milestones may not be achieved, a product may not be developed
or the agreement may be terminated. For example, our cancer
vaccine collaboration with Pharmacia was terminated. We have
licensed to third parties some of our technology in markets that
we are not pursuing ourselves or through our collaborations. As
a result, we depend on these licensees to develop and
commercialize products under the license agreements. Our
collaborative partners or licensees may pursue alternative
technologies or develop alternative compounds either on their
own or in collaboration with others in competition with
compounds developed under licenses or collaborations with us.

We do not directly control the amount or timing
of resources that our collaborators and licensees will devote to
our collaborations and out-license agreements, including the
decision whether to proceed with clinical trials. Our
collaborators and licensees may not commit sufficient resources
to research and development programs or the commercialization of
products. If our collaborators fail to conduct their activities
in a timely manner, or at all, our preclinical or clinical
development related to our partnership with them could be
delayed or terminated. If our licensees fail to conduct their
activities in a timely manner, or at all, we may not realize the
expected benefits under the applicable license agreement. The
suspension or termination of our collaborations or licenses, the
failure of such collaborations or licenses to be successful or
the delay in the development or commercialization of
pharmaceutical products pursuant to such collaborations or
licenses could harm our business.

In addition, we may be required to enter into
licenses or other collaborations with third parties in order to
access technologies that are necessary to successfully develop
certain of our products. We cannot be certain

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that we will be able to successfully negotiate
acceptable licenses or other collaborative arrangements that
will allow us to access such technologies. In addition, we
cannot be certain that any technologies accessed through such
licenses or other collaborations will help us achieve our goals.




| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | Our additional financing requirements and
	limited access to financing may adversely affect our ability to
	develop products.

As of December 31, 2001, we had
$19.5 million in cash, cash equivalents, restricted cash
and short-term investments. Our future capital requirements will
depend on many factors, including: continued scientific progress
in our drug discovery programs; the magnitude of our drug
discovery programs; our ability to establish and maintain
collaborative arrangements and license agreements; progress with
preclinical testing and clinical trials and the cost of such
trials; the time and costs involved in obtaining regulatory
approvals; the costs involved in filing, prosecuting and
enforcing patent claims; competing technological and market
developments; the cost of manufacturing scale-up; and effective
commercialization activities and arrangements.

We intend to seek additional funding through
collaborative arrangements and license agreements, research
grants or equity or debt financings, such as the private
financing that we completed in December 2001. However, we cannot
assure you that we will be able to obtain any additional
funding, and if additional financing is not available, we
anticipate that our existing resources will enable us to
maintain our current and planned operations through mid-2003. We
may not be able to obtain financing on favorable terms, if at
all, or enter into additional collaborations to reduce our
funding requirements. If we acquire funds by issuing securities,
further dilution to existing stockholders may result, as was the
case when we issued an additional 2,000,000 shares of
common stock in December 2001. If we acquire funds through
additional collaborations and license agreements, we will likely
have to relinquish some or all of the rights to products or
technologies that we may have otherwise developed ourselves. If
we are unable to obtain funding, we may be required to sell the
Company or certain of its assets or technologies or to cease
operations.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Our history of operating losses and our
	expectations of continuing losses may hurt our ability to
	continue operations.

We have experienced significant operating losses
since our inception in 1987. As of December 31, 2001, we
had an accumulated deficit of $144.4 million. 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
foreseeable future will result from research grants and contract
revenues and, if we are able to establish new collaborations,
payments under those future collaborations, including royalties
on product sales and interest income. We expect to continue to
incur substantial net operating losses that may imperil our
ability to continue operations. To achieve profitable
operations, we, alone or with partners, must successfully
identify, develop, register and market proprietary products. We
may not be able to generate sufficient product revenue to become
profitable on a sustained basis or at all.



| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The lengthy approval process and
	uncertainty of government regulatory requirements may delay or
	prevent us or our partners from commercializing
	products.

We and our partners cannot commercialize our
products if we do not receive FDA or foreign approval to market
our products. Clinical testing, manufacture, promotion and the
sale of our products are subject to extensive regulation by
numerous governmental authorities in the United States,
principally the FDA, and corresponding state and foreign
regulatory agencies. These regulations may delay or prevent us
from commercializing products. Noncompliance with applicable
requirements can result in, among other things, fines,
injunctions, seizure of products, total or partial suspension of
product marketing, failure of the government to grant pre-market
approval, withdrawal of marketing approvals and criminal
prosecution.

The regulatory process for new therapeutic drug
products, including the required preclinical studies and
clinical testing, is lengthy and expensive. We and our partners
may not receive necessary FDA or foreign clearances for any of
our potential products in a timely manner, or at all. The length
of the clinical trial process

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and the number of patients the FDA will require
to be enrolled in the clinical trials in order to establish the
safety and efficacy of our products is uncertain. In addition,
we may not provide the FDA with what they want even though we or
our collaborators believe we are doing the right studies. 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 drug compared to patients
in the control group. We and our partners may encounter
significant delays or excessive costs in our efforts to secure
necessary approvals. Regulatory requirements are evolving and
uncertain. Future United States or foreign legislative or
administrative acts could also prevent or delay regulatory
approval of our products. We and our partners may not receive
the necessary approvals for clinical trials, manufacturing or
marketing of any of our products under development. Even if we
obtain commercial regulatory approvals, the approvals may
significantly limit the indicated uses for which we may market
our products. In addition, the FDA may continually review a
product after its initial approval and commercialization. Later
discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in
restrictions on the marketing of a product or withdrawal of the
product from the market, as well as possible civil or criminal
sanctions.


To market any drug products outside of the United
States, we and our partners 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. 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.

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. Failure to comply with the FDAs GMP
requirements subjects the manufacturer to possible FDA
regulatory action. If we or our contract manufacturers or
partners, if any, fail to maintain compliance with the
FDAs GMP requirements on a continuing basis, it could
materially adversely affect our operations, commercialization
efforts and profitability.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Technological change and competition may
	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
and products that treat the indications that we are pursuing
sooner than us, 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. Many of our competitors
have substantially greater experience, financial and technical
resources and production, marketing and development capabilities
than us. In addition, we do not yet have any products in human
clinical trials and many of our competitors have 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 novel pharmaceuticals which target
the same indications 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.

Our products under development address a range of
markets. Our competition will be determined in part by the
potential indications for which our compounds are developed and
ultimately approved by regulatory

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

Our success will depend in part on our ability to
obtain patent protection for our products and processes, both in
the United States and other countries. Although we have filed
patent applications related to the methods of epitope
identification, epitope composition and epitope uses in vaccines
and diagnostics products, the patent position of biotechnology
and pharmaceutical companies is highly uncertain and involves
complex legal and factual questions. There is no consistent
policy regarding the breadth of claims allowed in biotechnology
patents. We intend to file applications and pursue patent
prosecution as appropriate for patents covering both our
products and processes. We cannot be sure that patents will
issue from any of the patent applications that we own or license
or that, if patents do issue, that claims allowed will be
sufficiently broad to protect our products and processes. For
example, even though we have issued patents and have filed
patent applications to cover the methods employed by EIS, as
well as the epitopes we identify using EIS, we cannot assure you
regarding the breadth of claims that will be allowed in these
patents. 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 under the patents will provide
proprietary protection to us.

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



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

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 FDA approval within an acceptable period of
time if required to do so, our business would be harmed.
Litigation, which could result in substantial costs to us, may
also be necessary to enforce any patents issued to us or to
determine the scope and validity of others proprietary
rights. In addition, we may have to participate in interference
proceedings declared by the United States Patent and Trademark
Office which could result in substantial costs to determine the
priority of inventions.



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our future success depends in part on the
	continued service of our key scientific and management personnel
	and our ability to identify, hire and retain additional
	personnel.

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 future success 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 the areas of our
activities, and we cannot be sure that we will be able to
continue to attract and retain such personnel necessary for the
development of our business. Because of the intense competition,
we cannot be sure that we will 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 be significantly detrimental to
our product development programs and could harm our business.

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| |                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we or our partners cannot
	cost-effectively manufacture products that use our technology in
	commercial quantities and in compliance with regulatory
	requirements, we or our partners may not be able to successfully
	commercialize the products.

To be successful, products that use our
technology 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 or
our partners demonstrated that we can manufacture commercial
quantities of product candidates that use our technology in
accordance with regulatory requirements. We intend to rely on
third-party contract manufacturers to produce materials needed
for clinical trials and 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 should encounter delays or difficulties in our relationships
with manufacturers, it may delay clinical trials, regulatory
approvals and marketing efforts for our 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 our through contracts with third
parties, such products at a cost or in quantities which are
commercially viable.



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | If we do not develop a sufficient sales and
	marketing force, we may not be able to successfully
	commercialize our products.

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.
Alternatively, we may obtain the assistance of one or more
pharmaceutical companies with a large distribution system and a
large direct sales force. Other than our agreement with Takara
and Genencor, we do not have any existing distribution
arrangements with any pharmaceutical company for our products
under development. We cannot be sure that we can establish sales
and distribution capabilities or successfully gain market
acceptance for our products. If we cannot develop sales and
distribution capabilities, we may not be able to successfully
commercialize any products we may develop.



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | Adverse determinations concerning product
	pricing, reimbursement and related matters could prevent us from
	successfully commercializing products.

Our ability to successfully commercialize our
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
we cannot be certain that adequate third-party coverage will be
available to enable us to maintain price levels sufficient to
realize an appropriate return on our investment in product
development. If we cannot obtain adequate third-party coverage
for our products, it could harm our business.



| |                                                                 
| | ----------------------------------------------------------------
| | Product liability risks may expose us to
	significant liability.

Our business exposes us to potential product
liability risks which are inherent in the testing, manufacturing
and marketing of human therapeutic products. While we currently
have product liability insurance, we cannot be sure that we can
maintain such insurance on acceptable terms or that our
insurance will provide adequate coverage against potential
liabilities.



| |                                                                      
| | ---------------------------------------------------------------------
| | 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. Although we believe that our safety
procedures for handling and disposing of these materials comply
with the standards prescribed by these laws and regulations, the
risk of accidental contamination or injury

15



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##### Table of Contents



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.


Although we believe that we are in compliance in
all material respects with applicable environmental laws and
regulations and currently do not expect to make material capital
expenditures for environmental control facilities in the near
term, we cannot be sure that compliance with environmental laws
and regulations in the future will not entail significant costs,
or that our business 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
unrelated to the operating performance of such companies. The
following factors may have a significant effect on the market
price of our common stock:



| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | announcements of technological innovations or new
	commercial 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 collaborative partners;            
|
| |  | public concern as to the clinical results and/or,
	the safety of drugs developed by us or others;  
|
| |  | announcements related to the sale of our stock;
	and                                               
|
| |  | general market conditions.                                                                         

Fluctuations in 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. 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
	could adversely affect our common stockholders.

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.

Further, pursuant to the terms of our stockholder
rights plan, we have distributed a dividend of one right for
each outstanding share of common stock. If any person or group
acquires 15% or more of our common stock, these rights will be
triggered. These rights will cause substantial dilution to the
ownership of a person or

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##### Table of Contents



group that attempts to acquire us on terms not
approved by the Board of Directors and may have the effect of
delaying or deterring hostile takeover attempts.




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

Our officers, directors and stockholders with at
least 10% of our stock together control approximately 41% of our
outstanding common stock and preferred stock, on a combined,
as-converted basis. If 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 mergers 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 could depress our
stock price.




Item 2.     Properties

We lease a 24,000 square foot administrative and
research laboratory facility in San Diego. The future minimum
rental commitment for this lease will range from approximately
$551,000 to $658,000 each year over seven years, based upon
pre-established annual rent increases. 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.

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##### Table of Contents






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  
|     |                                  |      |   |      
|2002 |                                  |      |   |       |  |  |   |     
|     | First Quarter (through March 15) |      | $ | 4.24  |  |  | $ | 2.49 | 
|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 | 
|2000 |                                  |      |   |       |  |  |   |     
|     | First Quarter                    |      | $ | 21.38 |  |  | $ | 2.00 | 
|     | Second Quarter                   |      | $ | 9.56  |  |  | $ | 3.25 | 
|     | Third Quarter                    |      | $ | 6.41  |  |  | $ | 3.78 | 
|     | Fourth Quarter                   |      | $ | 5.00  |  |  | $ | 1.59 | 

As of March 15, 2002, there were
approximately 260 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.

During the period covered by this Annual Report
on Form 10-K, we sold and issued the following securities
which were not registered under the Securities Act of 1933, as
amended, or the Securities Act:



| |                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) In January 2001, pursuant to the terms
	of a restricted stock purchase agreement, we issued 1,056,301
	shares of common stock to Emile Loria, M.D., our President and
	Chief Executive Officer.                                                                                                                                                               
|
| | (2) In July 2001, pursuant to the terms of a
	securities purchase agreement, and in connection with a license
	and collaboration agreement, we issued 1,154,797 shares of
	common stock to Genencor International, Inc. Genencor has the
	right to acquire up to 500,000 additional shares of our common
	stock under the agreement if certain conditions are met.
|
| | (3) In December 2001, pursuant to the terms
	of a share purchase agreement, we issued 2,000,000 shares of
	common stock to a group of five accredited investors at a
	purchase price of $2.50 per share. Net proceeds to us for the
	transaction totaled $4.9 million.                                                                                            

The sale and issuance of securities in the
transactions described above were deemed to be exempt from
registration under the Securities Act by virtue of
Section 4(2) and/or Regulation D promulgated
thereunder.




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,
2001, are derived from our financial statements, which 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.

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##### Table of Contents





| |                              
| | -----------------------------
| | Statement of Operations Data:

|                         |                                        |                                             |   |       |   |      |   |       |   |      |   |       |   |  |   |       |   |  |   |       |  
|------------------------ | -------------------------------------- | ------------------------------------------- | - | ----- | - | ---- | - | ----- | - | ---- | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                         |                                        | 2001                                        |   | 2000  |   | 1999 |   | 1998  |   | 1997
|                         |                                        |                                             |   |       |   |      |   |       |   |     
|                         |                                        |                                            
|                         |                                        | (In millions except for net loss per share)
|Years Ended December 31, |                                        |                                             |   |       |   |      |   |       |   |      |   |       |   |  |   |       |   |  |   |      
|                         | Operating revenues                     |                                             | $ | 8.2   |   |      | $ | 1.6   |   |      | $ | 4.2   |   |  | $ | 3.7   |   |  | $ | 5.1   |  
|                         | Net loss                               |                                             |   | (2.6  | ) |      |   | (4.7  | ) |      |   | (8.3  | ) |  |   | (21.5 | ) |  |   | (14.4 | )
|                         | Net loss per share  basic and diluted |                                             |   | (0.31 | ) |      |   | (0.68 | ) |      |   | (1.57 | ) |  |   | (4.48 | ) |  |   | (3.92 | )



| |                    
| | -------------------
| | Balance Sheet Data:

|                   |                       |               |   |      |  |      |   |      |  |      |   |      |  |  |   |      |  |  |   |      | 
|------------------ | --------------------- | ------------- | - | ---- |  | ---- | - | ---- |  | ---- | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|                   |                       | 2001          |   | 2000 |  | 1999 |   | 1998 |  | 1997
|                   |                       |               |   |      |  |      |   |      |  |     
|                   |                       |              
|                   |                       | (In millions)
|As of December 31, |                       |               |   |      |  |      |   |      |  |      |   |      |  |  |   |      |  |  |   |     
|                   | Working capital       |               | $ | 15.4 |  |      | $ | 8.2  |  |      | $ | 6.9  |  |  | $ | 9.8  |  |  | $ | 17.8 | 
|                   | Total assets          |               |   | 23.9 |  |      |   | 14.5 |  |      |   | 12.7 |  |  |   | 21.0 |  |  |   | 28.1 | 
|                   | Long-term obligations |               |   | 0.04 |  |      |   | 0.4  |  |      |   | 0.4  |  |  |   | 1.6  |  |  |   | 0.7  | 
|                   | Stockholders equity  |               |   | 19.4 |  |      |   | 12.1 |  |      |   | 10.4 |  |  |   | 14.0 |  |  |   | 24.4 | 




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. These
statements relate to future events including but not limited to
future IND filings, future clinical trials, collaborative
agreements, product development or financial performance.
Forward-looking statements typically are identified by the use
of terms such as may, will,
should, expect, plan,
anticipate, believe,
estimate, predict,
potential, continue, and similar words,
although some forward-looking statements are expressed
differently. 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.

Unless otherwise indicated, all references to
Cytel are to Cytel Corporation, all references to
Epimmune are to Epimmune Inc., a majority-owned
subsidiary of Cytel, until July 1, 1999, at which time
Cytel and Epimmune merged, and all references to the
we, us or our company are to
the combined entity of Cytel and Epimmune.

In the first quarter of 1999, Cytel completed the
sale of its Glytec carbohydrate synthesis and manufacturing
business resulting in net proceeds of approximately
$6.2 million (see Note 2 in the Consolidated Financial
Statements). In addition, Cytel announced the results from its
Cylexin Phase II/III clinical trial which indicated that
Cylexin, Cytels lead therapeutic compound, showed no
benefit over the placebo. Accordingly, Cytel terminated its
therapeutic anti-inflammatory business and, as a result, Cytel
recorded a restructuring charge of $3.7 million in the
first quarter 1999, which was subsequently reduced to
$2.7 million in the fourth quarter 1999 (see Note 2 in
the Consolidated Financial Statements). We are now focused
exclusively on the development of therapeutic and prophylactic
vaccines for the treatment and prevention of cancer and
infectious diseases.

On July 1, 1999, we completed a series of
transactions (the Exchange Transactions) in which
we: (i) transferred all of the outstanding shares of
Epimmunes Series B-1 Preferred Stock then held by
Cytel to G.D. Searle & Co. (Searle) in exchange
for all of the outstanding shares of Cytels Series B
Preferred Stock, (ii) issued 859,666 shares of Cytels
Series S Preferred Stock and 549,622 shares of Cytels
Series S-1 Preferred Stock to Searle in exchange for all
outstanding shares of Epimmunes Series B Preferred
Stock and Series B-1 Preferred Stock and (iii) issued a
total of 1,027,782 shares of Cytels Common Stock to the
holders of Common Stock of Epimmune in exchange for all
outstanding shares of Epimmunes Common Stock. The
acquisition of the minority interest in Epimmune, through the
Exchange Transaction, was accounted for as a purchase. We
recorded the acquisition of the minority interest at the fair
market value of the preferred and common stock issued, and
determined that the excess of the purchase price over the
identifiable net assets of

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$3.2 million was in-process technology based
on a discounted cash flow analysis of that technology. The
analysis, with a discount rate of 50%, was based on estimated
research and development costs for nine years and product
revenues beginning in year six, after the assumed completion of
clinical trials and product approval by the FDA. The analysis
also considered milestone payments based on scientific
accomplishments, and new collaborative revenues based on
projected future collaboration agreements.


The value of the technology was charged to
acquired in-process technology because technological feasibility
had not been achieved nor had alternative future uses for the
technology been identified.

Following the Exchange Transactions, Cytel merged
with Epimmune and changed its name to Epimmune Inc. As of
December 31, 2001, Searle (now Pharmacia) owned 2.6% of our
outstanding common stock and all of our outstanding preferred
stock.

In July 2001, we entered into license,
development and securities purchase agreements with Genencor
International, Inc. Pursuant to those agreements, we exclusively
licensed to Genencor our PADRE and epitope technologies for
vaccines to treat or prevent hepatitis B, hepatitis C and human
papilloma virus. Genencor will also fund research and
development activities on those programs at Epimmune for
30 months, made an initial ten percent equity investment in
Epimmune and, if certain conditions are met, has the right to
acquire up to 500,000 additional shares of Epimmune common
stock. In connection with the license agreement, Genencor paid
us an upfront license fee and will also pay us
pre-commercialization milestones and royalties on product sales,
if any products are ever developed.

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 working capital
received from the issuance of our equity and through
collaborations and license agreements with other companies. We
have not been profitable since our inception and expect to incur
substantial operating losses for the next several years. As of
December 31, 2001, our accumulated deficit was
approximately $144.4 million.

Results of Operations

We had total revenues of $8.2 million for
the year ended December 31, 2001, compared to
$1.6 million in 2000 and $4.2 million in 1999. Total
revenues increased 413% in 2001 compared to 2000, due primarily
to receipt of upfront, one-time payment of license fees in
connection with transactions completed in 2001 and increased
grant and contract payments in 2001 compared to 2000. Total
revenues decreased 62% in 2000 from 1999, due to a decline or
absence of research revenues and milestone payments received
from our collaborative agreement with Pharmacia in 2000 compared
to those received in 1999. Our agreement with Pharmacia was
terminated in November 2000. Included in total revenues were
research grant and contract revenues of $3.7 million in
2001, $1.6 million in 2000, and $1.7 million in 1999.

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. Research and development
expenses decreased to $6.3 million in 2000 from
$8.7 million in 1999, primarily as a result of the
discontinuation of Cytel operations during the first quarter of
1999. We expect our research and development expenses to
increase significantly in 2002 compared to 2001 levels as we
attempt to advance our product candidates in both lung cancer
and HIV to the clinic. We expect to incur costs in 2002 for,
among other things, toxicology studies, product formulation,
manufacturing of product for use in clinical trials and medical
and clinical consultant costs.

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.
General and administrative expenses were $2.3 million in
2000, a $0.2 million decrease from the $2.5 million in
general and administrative expenses in 1999. The decrease
relates to the discontinuation of

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Cytels operations during 1999 partially
offset by increased staffing and associated expenses for
business development, financial and administrative activities
after discontinuation of Cytels operations.


We had no restructuring related charges in 2001
compared to a reduction or reversal of restructuring charges of
$0.1 million in 2000. We had a reduction in restructuring
charges of $0.1 million in 2000 compared to
$2.7 million in restructuring charges in 1999 related to
the termination of non-Epimmune operations.

We had no charges to write-off of in-process
technology in 2001 or 2000. In 1999, we charged
$3.2 million to operations for the write-off of in-process
technology related to the acquisition of the minority interest
in Epimmune. The charge was based on a discounted cash flow
analysis prepared to determine the fair value of the excess of
purchase price over the identifiable assets recorded as a result
of the merger of Cytel and Epimmune.

We had no minority interest in any company during
the 2001 or 2000 periods and had a minority interest in the net
loss of a consolidated subsidiary of $0.5 million during the
1999 period.

We had negligible other income in 2001 compared
to other income of $1.6 million in 2000 and
$0.5 million in 1999. 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.
The 1999 amount relates primarily to $0.5 million from Elan
in consideration for the buyout of certain future milestone
obligations by Elan.

There was no material gain on the disposal of
assets during the 2001 or 2000 period compared to a
$3.3 million gain on disposal of assets in 1999 related to
the sale of Cytels Glytec carbohydrate synthesis and
manufacturing business, offset by the write-off of leasehold
improvements of $0.1 million.

Net interest income was $0.4 million in 2001
compared to $0.6 million in 2000 and $0.4 million in
1999. The decrease in 2001 from 2000 was based on lower average
returns on cash balances and the increase in 2000 from 1999 was
due to higher average cash balances during the 2000 period.

Liquidity and Capital Resources

The following discussion reflects historical
financial information for both Cytel and Epimmune on a combined
basis.

We have financed operations since inception
primarily through private placements of equity securities, two
public common stock offerings, revenues under collaborative
research and development agreements, grant revenues, certain
asset divestitures and interest income. Through December 2001,
we had raised approximately $163.8 million from the sale of
equity securities.

As of December 31, 2001, our cash, cash
equivalents, restricted cash and short-term investments
increased to $19.5 million as compared to
$10.1 million at December 31, 2000. The increase was
primarily due to proceeds from the sale of our common stock in
two private transactions, to Genencor in July 2001 and to a
group of accredited investors in December 2001, and from the
receipt of license fees from Genencor and other collaborators
and licensees, partially offset by cash used for our operations.
We expect to continue to use our cash investments to fund our
ongoing operations, including our vaccine research and
development programs. We had net working capital of
$15.4 million as of December 31, 2001 compared to
$8.2 million as of December 31, 2000.

For the year ended December 31, 2001, our
capital expenditures totaled $0.3 million compared to
$0.4 million for the year ended December 31, 2000 and
$0.7 million for the year ended December 31, 1999.
Capital expenditures for 2001 and 2000 were primarily for
laboratory equipment. Capital expenditures made in 1999 were
primarily for equipment, furniture and leasehold improvements
for our new laboratory and office facility, which was completed
in April 1999. Future capital expenditures will be in support of
our vaccine business and will include laboratory equipment,
leasehold improvements and furniture as we increase both office
and laboratory space to accommodate additional personnel. During
2002, we anticipate that payments related to leasehold
improvements and capital expenditures will increase
significantly over 2001 levels to a

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range of approximately $0.8 million to
$1.0 million. We will also pay approximately
$0.6 million in rent on our lease commitments during 2002.


We have financed our laboratory equipment and
research and office facilities primarily through operating lease
arrangements and a note payable. During 2001 and 2000 we made
payments under the notes payable of $0.4 million and
$0.2 million, respectively, primarily for laboratory
equipment compared to payments of $1.0 million during 1999,
primarily related to research and office facilities. We expect
to make payments of approximately $0.3 million against our
notes payable for laboratory equipment in 2002.

Payments related to capitalized patent expenses
were $0.7 million, $0.6 million and $0.9 million
for 2001, 2000 and 1999, respectively. The increase in 2001 from
2000 was primarily as a result of maturity of our portfolio
filings and pursuit of additional claims. The decrease in 2000
from 1999 was primarily attributable to the timing and nature of
the filings made. We expect payments related to patents to
increase marginally in 2002 above 2001 levels as we continue to
pursue filings and claims in our intellectual property portfolio.

We expect to incur substantial additional
research and development expenditures in connection with our
ongoing vaccine programs, including costs related to preclinical
testing, clinical trials and manufacturing, as well as marketing
and distribution expenses. We intend to seek collaborative
research and development relationships with suitable corporate
partners. We may also license to third parties some of our
technology in markets that we are not pursuing ourselves or
through our collaborations. We cannot assure you that any
agreements that may result from these discussions will
successfully reduce our funding requirements or, if entered
into, will not be terminated. We will require additional equity
or debt financing in order to pursue our research and
development programs, and we cannot assure you that these funds
will be available on favorable terms, if at all. If adequate
funds are not available we may be required to delay, scale back
or eliminate one or more of our drug discovery or development
programs or obtain funds through arrangements with collaborative
partners or others that may require us to relinquish rights to
certain of our technologies, product candidates or products that
we would not otherwise relinquish.

We anticipate revenue for 2002 to be in the range
of at least $6.0 million to $6.5 million, which
includes anticipated grant and contract 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 will rise from
$11.2 million in 2001 to between approximately
$15.5 million to $16.8 million, representing a 40% to
50% increase over 2001. The anticipated rise in expenses assumes
that we file an IND for our vaccine targeting HIV in the second
quarter of 2002 and file an IND for our lung cancer candidate in
late 2002 or early 2003. We also anticipate using some of our
cash and investments beginning in 2002 to fund our recently
announced HIV research 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 2002. We may also become liable
in 2002 for payment of license fees of up to $0.5 million,
at the option of the licensor. We have not included payment of
these potential license fees in our operating expense forecast
for 2002 as payment of those expenses is not assured.

We anticipate that our existing cash and
investments and interest earned thereon, along with the cash
receipts related to our anticipated revenue in 2002, will enable
us to maintain our current and planned operations through
mid-2003 based on our anticipated expenditures. The estimate for
the period for which we anticipate our existing resources to
enable us to maintain our current and planned operations is a
forward-looking statement that involves risks and uncertainties
as set forth herein.

Our future capital requirements will depend on
many factors, including:



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | the costs associated with our clinical trials for
	our vaccine targeting HIV which are scheduled to begin in the
	second quarter of 2002;
|
| |  | the costs associated with safety studies and
	other preclinical activities for our vaccine targeting lung
	cancer;                       
|
| |  | our ability to establish and maintain
	collaborative arrangements and license agreements;                                                

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| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | 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;
|
| |  | progress with preclinical testing and clinical
	trials;                                    
|
| |  | the time and costs involved in obtaining
	regulatory approvals;                            
|
| |  | the costs involved in filing, prosecuting and
	enforcing patent claims;                    
|
| |  | competing technological and market developments;                                           
|
| |  | changes in our existing research relationships;                                            
|
| |  | continued scientific progress in our drug
	discovery programs;                             
|
| |  | the magnitude of our drug discovery programs;                                              
|
| |  | the cost of manufacturing scale-up; and                                                    
|
| |  | effective commercialization activities and
	arrangements.                                  

As is typical in the biotechnology industry, our
commercial success will depend in part on neither infringing
patents issued to competitors nor breaching 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, and the lengthy regulatory approval
process and with 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.

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, patent costs and income taxes.
We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting
policies affect the significant judgments and estimates used in
the preparation of our consolidated financial statements (see
Note 1 to our financial statements on page F-8).



| |                    
| | -------------------
| | Revenue Recognition

We recognize 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. 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.

23



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##### Table of Contents





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

We capitalize the costs incurred to file patent
applications when we believe there is a high likelihood that the
patent will be issued 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. At
December 31, 2001, capitalized patent costs total
approximately $2.7 million (net of accumulated
amortization). In addition, we expense all costs related to
abandoned patent applications. If we elect to abandon any of our
currently issued or unissued patents, the related expense could
be material to our results of operations for the period of the
abandonment.



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




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risks

At December 31, 2001, our investment
portfolio included fixed-income securities of
$11.0 million. These securities are subject to interest
rate risk. A hypothetical 100 basis point adverse move in
interest rates along the entire interest rate yield curve would
decrease the fair value of our interest sensitive financial
instruments at December 31, 2001 by $0.6 million. 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-25.




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

None.

24



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##### Table of Contents






PART III




Item 10. Directors and Executive
Officers of the Registrant

Identification of Directors

The information required by this item is
incorporated by reference to the information set forth in the
section captioned Election of Directors, contained
in our definitive Proxy Statement for the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the end of our fiscal year
ended December 31, 2001 (the Proxy Statement).

Identification of Executive Officers

Our executive officers, their ages, and their
positions as of March 15, 2002 are as follows:

|                           |  |     |    |          |  |                                                                       
|-------------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------------------
|Name                       |  | Age |    | Position
|                           |  |     |    |         
|Emile Loria, M.D.          |  |     | 52 |          |  | President and Chief Executive Officer                                 
|Robert W. Chesnut, Ph.D.   |  |     | 58 |          |  | Executive Vice President, Research &
	Development, and Secretary      
|Alessandro D. Sette, Ph.D. |  |     | 41 |          |  | Vice President and Chief Scientific Officer                           
|Robert J. De Vaere         |  |     | 44 |          |  | Vice President, Finance & Administration, and
	Chief Financial Officer
|Michael R. McClurg         |  |     | 45 |          |  | Vice President, Business Development                                  
|Mark J. Newman, Ph.D.      |  |     | 47 |          |  | Vice President, Infectious Disease Program                            
|John D. Fikes, Ph.D.       |  |     | 41 |          |  | Vice President, Cancer Program                                        

Dr. Loria has served as our President and
Chief Executive Officer since May 2001. In addition,
Dr. Loria has been serving on our Board of Directors since
January 2001. Dr. Loria has almost 30 years of diverse
U.S. and international experience in medical and business fields
relevant to our business. From 1994 to 1995, Dr. Loria
served as Senior Vice President, Business Development, for
Biovector Therapeutics, a vaccine enterprise in France, and then
as President and Chief Executive Officer from 1995 to 2000. From
1986 to 1993, he was founder and managing director of MS Medical
Synergy, the exclusive representative of Cygnus Therapeutic
Systems in Europe, and from 1978 to 1985, Dr. Loria worked
for Hoffman La Roche-Kontron, Ciba-Geigy and Sanofi Pharma in
various marketing positions.

Dr. Chesnut has served as our Executive Vice
President of Research and Development and Secretary since July
1999. From October 1997 to July 1999, he served as Vice
President of Research and Development of Epimmune. Prior to
joining Epimmune, Dr. Chesnut was with Cytel from 1988 to
October 1997. 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.

Dr. Sette has served as our Vice President
and Chief Scientific Officer since July 1999. From October 1997
to July 1999, he served as Vice President and Chief Scientific
Officer of Epimmune. Dr. Sette was with Cytel from 1988 to
October 1997 where he was most recently Director of Immunology.
Before joining Cytel, Dr. Sette completed a post-doctoral
fellowship with Dr. Howard Grey at the National Jewish
Medical and Research Center in Denver, Colorado.

Mr. De Vaere has 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.

25



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##### Table of Contents



Mr. McClurg has 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 experience 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 in various corporate development and
scientific research capacities from August 1990 to May 1998.

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

Dr. Fikes has served as our Vice President,
Cancer Program, since January 2002. Prior to January 2002,
Dr. Fikes was Director, Cancer Program, at Epimmune since
October 1997. He was previously with Cytel since 1991, most
recently as Associate Director, Molecular Biology, and Director
of Preclinical Development. Before joining Cytel, Dr. Fikes
was a postdoctoral fellow at the Massachusetts Institute of
Technology.

Each officer serves at the discretion of the
Board of Directors.

Compliance with Section 16(a) of the
Securities Exchange Act of 1934

The information required by this item is
incorporated by reference to the information set forth in the
section entitled Compliance with the Reporting
Requirements of Section 16(a) of the Securities Exchange
Act of 1934 contained in the Proxy Statement.




Item 11.     Executive
Compensation

The information required by this item is
incorporated by reference to the information set forth in the
section captioned Executive Compensation contained
in the Proxy Statement.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information required by this item is
incorporated by reference to the information set forth in the
section captioned Security Ownership of Certain Beneficial
Owners and Management contained in the Proxy Statement.




Item 13.     Certain
Relationships and Related Transactions

The information required by this item is
incorporated by reference to the information set forth in the
section captioned Certain Transactions contained in
the Proxy Statement.

26



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##### Table of Contents






Part IV




Item 14.     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, 2001 and 2000                                                       |  |      | F-3        | 
|Consolidated Statements of Operations for each of
	the three years in the period ended December 31, 2001            |  |      | F-4        | 
|Consolidated Statements of Stockholders
	Equity for each of the three years in the period ended December
	31, 2001 |  |      | F-5 - F-6  | 
|Consolidated Statements of Cash Flows for each of
	the three years in the period ended December 31, 2001            |  |      | F-7        | 
|Notes to Consolidated Financial Statements                                                                          |  |      | F-8 - F-24 | 

(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.

(3) Listing of Exhibits

|        |       |                      |  |                                                                                                                                                                                                                                                             
|------- | ----- | -------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                     
|Number  |       | Document Description
|        |       |                     
|        | 3.1   |                      |  | Amended and Restated Certificate of
	Incorporation.(A)                                                                                                                                                                                                      
|        | 3.2   |                      |  | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                                                              
|        | 3.3   |                      |  | 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.                                                                
|        | 3.5   |                      |  | Certificate of Designation of the Series B
	Convertible Preferred Stock.(J)                                                                                                                                                                                 
|        | 3.6   |                      |  | Certificate of Amendment of Amended and Restated
	Certificate of Incorporation.(L)                                                                                                                                                                          
|        | 3.7   |                      |  | Certificate of Increase of Series A Junior
	Participating Preferred Stock.(L)                                                                                                                                                                               
|        | 3.8   |                      |  | Certificate of Amendment of Amended and Restated
	Certificate of Incorporation.(M)                                                                                                                                                                          
|        | 3.9   |                      |  | Certificate of Designations of the Series S
	and Series S-1 Preferred Stock filed with the Secretary of
	State of the State of Delaware on June 29, 1999.(P)                                                                                                
|        | 3.10  |                      |  | Certificate of Amendment of Amended and Restated
	Certificate of Incorporation.(R)                                                                                                                                                                          
|        | 3.11  |                      |  | Certificate of Decrease of Series A Junior
	Participating Preferred Stock.(R)                                                                                                                                                                               
|        | 4.1   |                      |  | Reference is made to Exhibits 3.1 through 3.11.                                                                                                                                                                                                             
|        | 4.2   |                      |  | Specimen certificate of the Common stock.(A)                                                                                                                                                                                                                
|        | 10.1  |                      |  | Form of Indemnification Agreement entered into
	between the Registrant and its directors and officers.(A)(*)                                                                                                                                                
|        | 10.5  |                      |  | Registrants 1989 Stock Plan, as amended
	through June 12, 1998 (the 1989 Plan).(L)                                                                                                                                                                       
|        | 10.6  |                      |  | Forms of Incentive Stock Option Agreement under
	the 1989 Plan.(A)                                                                                                                                                                                          
|        | 10.7  |                      |  | Form of Nonstatutory Stock Option Agreement under
	the 1989 Plan.(A)                                                                                                                                                                                        
|        | 10.19 |                      |  | Research Agreement, between the Registrant 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).(A)(1)
|        | 10.24 |                      |  | License Agreement, between the Registrant and
	Scripps, dated as of September 23, 1991 (with certain
	confidential portions deleted).(A)(1)                                                                                                                 

27



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|        |       |                      |  |                                                                                                                                                              
|------- | ----- | -------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                     
|Number  |       | Document Description
|        |       |                     
|        | 10.25 |                      |  | Research and Option Agreement, between the
	Registrant and Scripps, dated October 1, 1991 (with certain
	confidential portions deleted).(A)(1)               
|        | 10.35 |                      |  | Amendment to License Agreement between the
	Registrant and Scripps dated as of June 17, 1992 (with
	certain confidential portions deleted).(C)(2)            
|        | 10.37 |                      |  | Registrants Non-Employee Directors
	Stock Option Plan, as amended through June 12, 1998.(L)(*)                                                             
|        | 10.48 |                      |  | Second Amendment to License Agreement between the
	Registrant and Scripps dated as of June 17, 1992 (with
	certain confidential portions deleted).(G)(2)10.50
|        | 10.51 |                      |  | Directors Deferred Compensation Plan,
	effective as of March 17, 1995, as amended
	September 20, 1996.(*)                                                   
|        | 10.63 |                      |  | Lease Agreement between Epimmune, Inc. and Nexus
	Equity LLC VIII, dated as of November 1, 1998, as amended
	February 1, 1999.(N)                            
|        | 10.67 |                      |  | Preferred Stock Exchange Agreement, dated
	July 1, 1999, by and between the Company and G.D. Searle
	& Co.(P)                                                
|        | 10.68 |                      |  | Investor Rights Agreement, dated as of
	July 1, 1999, by and between the Company and G.D. Searle
	& Co.(P)                                                   
|        | 10.69 |                      |  | Letter agreement between Epimmune and
	Dr. Robert W. Chesnut regarding severance benefits dated
	February 5, 1998.(Q)(*)                                     
|        | 10.70 |                      |  | Letter agreement between Epimmune and
	Dr. Alessandro Sette regarding severance benefits dated
	February 5, 1998.(Q)(*)                                      
|        | 10.74 |                      |  | Form of Common Stock Purchase agreement dated
	February 15, 2000.(S)                                                                                         
|        | 10.75 |                      |  | Letter Agreement between Epimmune and Robert De
	Vaere dated May 4, 2000.(T)(*)                                                                              
|        | 10.76 |                      |  | Letter Agreement between Epimmune and Mark Newman
	dated May 4, 2000.(T)(*)                                                                                  
|        | 10.77 |                      |  | Form of Common Stock Purchase Agreement dated
	October 16, 2000.(U)(*)                                                                                       
|        | 10.78 |                      |  | Non-Exclusive License Agreement between Epimmune
	and Valentis, Inc., dated November 27, 2000 (with certain
	confidential portions deleted).(U)(6)           
|        | 10.79 |                      |  | Letter Agreement between Epimmune and
	Dr. Emile Loria regarding employment terms dated
	January 16, 2001.(V)(*)                                             
|        | 10.80 |                      |  | Form of Restricted Stock Purchase Agreement
	between Epimmune and Dr. Emile Loria dated January 16,
	2001.(V)(*)                                             
|        | 10.81 |                      |  | Promissory Note of Dr. Emile Loria in favor
	of Epimmune dated January 16, 2001.(V)(*)                                                                       
|        | 10.82 |                      |  | Stock Pledge Agreement by Dr. Emile Loria in
	favor of Epimmune dated January 16, 2001.(V)(*)                                                                
|        | 10.83 |                      |  | Amendment to Severance Benefits Agreement between
	Epimmune and Dr. Alessandro Sette dated March 8, 2001.(V)(*)                                              
|        | 10.84 |                      |  | Amendment to Severance Benefits Agreement between
	Epimmune and Dr. Robert W. Chesnut dated March 8,
	2001.(V)(*)                                            
|        | 10.85 |                      |  | Amendment to Severance Benefits Agreement between
	Epimmune and Dr. Mark Newman dated March 8, 2001.(V)(*)                                                   
|        | 10.86 |                      |  | Amendment to Severance Benefits Agreement between
	Epimmune and Robert De Vaere dated March 8, 2001.(V)(*)                                                   
|        | 10.87 |                      |  | Non-exclusive License Agreement between Epimmune
	and Nexell Therapeutics, Inc., dated March 28, 2001 (with
	certain confidential portions deleted).(V)(7)   
|        | 10.88 |                      |  | Non-exclusive License Agreement between Epimmune
	and Pharmexa A/ S dated June 25, 2001 (with certain
	confidential portions deleted).(X)(8)                 
|        | 10.89 |                      |  | License Agreement between Epimmune and Genencor
	International Inc. dated July 9, 2001 (with certain
	confidential portions deleted).(Y)(9)                  
|        | 10.90 |                      |  | Collaboration Agreement between Epimmune and
	Genencor International Inc. dated July 9, 2001 (with
	certain confidential portions deleted).(Y)(9)            

28



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|        |       |                      |  |                                                                                                                                                           
|------- | ----- | -------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                     
|Number  |       | Document Description
|        |       |                     
|        | 10.91 |                      |  | Securities Purchase Agreement between Epimmune
	and Genencor International Inc. dated July 9, 2001 (with
	certain confidential portions deleted).(Y)(9)   
|        | 10.92 |                      |  | Non-exclusive License Agreement between Epimmune
	and Biosite Incorporated dated August 17, 2001 (with
	certain confidential portions deleted).(Y)(9)     
|        | 10.93 |                      |  | Non-exclusive License Agreement between Epimmune
	and Anosys Inc. dated August 31, 2001 (with certain
	confidential portions deleted).(Y)(9)              
|        | 10.94 |                      |  | Non-exclusive License Agreement between Epimmune
	and Bavarian Nordic A/S dated November 28, 2001 (with
	certain confidential portions deleted).(10)      
|        | 10.95 |                      |  | Form of Share Purchase Agreement dated
	December 18, 2001.(Z)                                                                                             
|        | 10.96 |                      |  | 2000 Stock Plan as amended.*                                                                                                                              
|        | 10.97 |                      |  | 2001 Employee Stock Purchase Plan.(W)*                                                                                                                    
|        | 21.1  |                      |  | Subsidiaries of the Registrant.(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 on Form 10-K.                                                                  
|        |       |                      |  |                                                                                                                                                           
|        | *     |                      |  | Executive Compensation Plans and
	Arrangements                                                                                                            
|        | (A)   |                      |  | Incorporated by reference to the Companys
	Form S-1 Registration Statement and Amendments thereto
	(File No. 33-43356).                                  
|        | (C)   |                      |  | 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.            
|        | (G)   |                      |  | 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.            
|        | (J)   |                      |  | 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.            
|        | (L)   |                      |  | 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.       
|        | (M)   |                      |  | 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.
|        | (N)   |                      |  | 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.            
|        | (P)   |                      |  | Incorporated by reference to the Companys
	Form 8-K, filed on July 16, 1999.                                                                             
|        | (Q)   |                      |  | 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.       
|        | (R)   |                      |  | 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.
|        | (S)   |                      |  | 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.            
|        | (T)   |                      |  | 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.       
|        | (U)   |                      |  | 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.            
|        | (V)   |                      |  | 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.         
|        | (W)   |                      |  | Incorporated by reference to the Companys
	Form S-8 filed on June 27, 2001 (File
	No. 333-63950).                                                        
|        | (X)   |                      |  | 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.       
|        | (Y)   |                      |  | 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.

29



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|        |      |                      |  |                                                                                                                                                                                                               
|------- | ---- | -------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |                     
|Number  |      | Document Description
|        |      |                     
|        | (Z)  |                      |  | Incorporated by reference to the Companys
	Form S-3, filed on January 10, 2002.                                                                                                                              
|        | (1)  |                      |  | Certain confidential portions deleted pursuant to
	Order Granting Application Under the Securities Act of 1933 and
	Rule 406 Thereunder Respecting Confidential Treatment dated
	November 21, 1991.           
|        | (2)  |                      |  | Certain confidential portions deleted pursuant to
	Order Granting Application Under the Securities Exchange Act of
	1934 and Rule 24b-2 Thereunder Respecting Confidential
	Treatment dated May 15, 1996.     
|        | (6)  |                      |  | Certain confidential portions deleted pursuant to
	Order Granting Application Under the Securities Exchange Act of
	1934 and Rule 24b-2 Thereunder Respecting Confidential
	Treatment dated July 5, 2001.     
|        | (7)  |                      |  | Certain confidential portions deleted pursuant to
	Order Granting Application Under the Securities Exchange Act of
	1934 and Rule 24b-2 Thereunder Respecting Confidential
	Treatment dated August 8, 2001.   
|        | (8)  |                      |  | Certain confidential portions deleted pursuant to
	Order Granting Application Under the Securities Exchange Act of
	1934 and Rule 24b-2 Thereunder Respecting Confidential
	Treatment dated September 4, 2001.
|        | (9)  |                      |  | Certain confidential portions deleted pursuant to
	Order Granting Application Under the Securities Exchange Act of
	1934 and Rule 24b-2 Thereunder Respecting Confidential
	Treatment dated January 29, 2002. 
|        | (10) |                      |  | Confidential Treatment has been requested with
	respect to certain portions of this exhibit. Omitted portions
	have been filed separately with the Securities and Exchange
	Commission.                       

(b) Reports on Form 8-K

Form 8-K filed on December 19, 2001
attaching a press release announcing the completion of our
private financing.

(c) Exhibits

The response to this portion of Item 14 is
submitted as Item 14(a)(3).

(d) Financial Statement Schedules

The consolidated financial statement schedules
required by this Item are listed under Item 14(a)(2).

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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 4th day of
April, 2002.









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






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

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




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                                                         |  | April 4, 2002
|                                           
|/s/ ROBERT J. DE VAERERobert J. De Vaere    |  | Vice President, Finance and Administration, Chief
	Financial Officer, Assistant Secretary (Principal Financial and
	Accounting Officer) |  | April 4, 2002
|                                           
|HOWARD E. GREENE, JR.*Howard E. Greene, Jr. |  | Chairman of the Board and Director                                                                                                      |  | April 4, 2002
|                                           
|WILLIAM T. COMER*William T. Comer, Ph.D.    |  | Director                                                                                                                                |  | April 4, 2002
|                                           
|MICHAEL G. GREY*Michael G. Grey             |  | Director                                                                                                                                |  | April 4, 2002
|                                           
|GEORGES HIBON*Georges Hibon                 |  | Director                                                                                                                                |  | April 4, 2002
|                                           
|JOHN P. MCKEARN*John P. McKearn, Ph.D.      |  | Director                                                                                                                                |  | April 4, 2002
|                                           
|MICHAEL ROSSMichael Ross, Ph.D.             |  | Director                                                                                                                                |  | April 4, 2002









|     |                        | 
|---- | ---------------------- | 
|*By: | /s/ ROBERT J. DE VAERE | 




|                   | 
|------------------ | 
|                   | 
|                  
|Robert J. De Vaere | 
|                  
|                  
|Attorney-in-Fact   | 
|                  

31



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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, 2001 and 2000                                                       |  |      | F-3 | 
|Consolidated Statements of Operations for each of
	the three years in the period ended December 31, 2001            |  |      | F-4 | 
|Consolidated Statements of Stockholders
	Equity for each of the three years in the period ended December
	31, 2001 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for each of
	the three years in the period ended December 31, 2001            |  |      | F-7 | 
|Notes to Consolidated Financial Statements                                                                          |  |      | F-8 | 

F-1



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##### 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, 2001 and
2000, and the related consolidated statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2001. 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, 2001 and 2000, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.



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

San Diego, California

February 21, 2002


F-2



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##### Table of Contents



EPIMMUNE INC.

CONSOLIDATED BALANCE SHEETS

|                                      |                                                                                                                                                                                                              |              |            |              |   |   |            |              |  
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------ | ---------- | ------------ | - | - | ---------- | ------------ | -
|                                      |                                                                                                                                                                                                              |             
|                                      |                                                                                                                                                                                                              | December 31,
|                                      |                                                                                                                                                                                                              |             
|                                      |                                                                                                                                                                                                              | 2001         |            | 2000        
|                                      |                                                                                                                                                                                                              |              |            |             
|ASSETS                               
|Current assets:                       |                                                                                                                                                                                                              |              |            |              |   |   |            |             
|                                      | Cash and cash equivalents                                                                                                                                                                                    |              | $          | 8,038,000    |   |   | $          | 4,181,000    |  
|                                      | Short-term investments                                                                                                                                                                                       |              |            | 10,998,000   |   |   |            | 5,412,000    |  
|                                      | Prepaids and other current assets                                                                                                                                                                            |              |            | 707,000      |   |   |            | 507,000      |  
|                                      |                                                                                                                                                                                                              |              |            |              |   |   |            |             
|Total current assets                  |                                                                                                                                                                                                              |              | 19,743,000 |              |   |   | 10,100,000 |             
|Restricted cash                       |                                                                                                                                                                                                              |              | 472,000    |              |   |   | 472,000    |             
|Property and equipment, net           |                                                                                                                                                                                                              |              | 984,000    |              |   |   | 966,000    |             
|Patents, net                          |                                                                                                                                                                                                              |              | 2,711,000  |              |   |   | 2,948,000  |             
|                                      |                                                                                                                                                                                                              |              |            |              |   |   |            |             
|                                      |                                                                                                                                                                                                              | $            | 23,910,000 |              |   | $ | 14,486,000 |             
|                                      |                                                                                                                                                                                                              |              |            |              |   |   |            |             
|LIABILITIES AND STOCKHOLDERS
	EQUITY
|Current liabilities:                  |                                                                                                                                                                                                              |              |            |              |   |   |            |             
|                                      | Accounts payable and accrued liabilities                                                                                                                                                                     |              | $          | 1,475,000    |   |   | $          | 1,004,000    |  
|                                      | Deferred contract revenues                                                                                                                                                                                   |              |            | 2,308,000    |   |   |            | 229,000      |  
|                                      | Accrued payroll and related expenses                                                                                                                                                                         |              |            | 222,000      |   |   |            | 241,000      |  
|                                      | Current portion of notes payable                                                                                                                                                                             |              |            | 345,000      |   |   |            | 413,000      |  
|                                      |                                                                                                                                                                                                              |              |            |              |   |   |            |             
|Total current liabilities             |                                                                                                                                                                                                              |              | 4,350,000  |              |   |   | 1,887,000  |             
|Deferred rent                         |                                                                                                                                                                                                              |              | 166,000    |              |   |   | 119,000    |             
|Notes payable, less current portion   |                                                                                                                                                                                                              |              | 43,000     |              |   |   | 389,000    |             
|Stockholders equity:                 |                                                                                                                                                                                                              |              |            |              |   |   |            |             
|                                      | Preferred stock, $.01 par value, 10,000,000
	shares authorized, 1,409,288 shares issued and outstanding at
	December 31, 2001 and 2000. Liquidation preference of
	$10,000,000 at December 31, 2001 and 2000 |              |            | 14,000       |   |   |            | 14,000       |  
|                                      | Common stock, $.01 par value, 25,000,000 shares
	authorized at December 31, 2001 and 2000; 12,094,757 and
	7,847,343 shares issued and outstanding at December 31,
	2001 and 2000, respectively              |              |            | 121,000      |   |   |            | 78,000       |  
|                                      | Additional paid-in capital                                                                                                                                                                                   |              |            | 166,772,000  |   |   |            | 153,726,000  |  
|                                      | Note receivable from employee                                                                                                                                                                                |              |            | (2,641,000   | ) |   |            |             |  
|                                      | Deferred compensation                                                                                                                                                                                        |              |            | (569,000     | ) |   |            | (6,000       | )
|                                      | Accumulated deficit                                                                                                                                                                                          |              |            | (144,369,000 | ) |   |            | (141,725,000 | )
|                                      | Accumulated other comprehensive income                                                                                                                                                                       |              |            | 23,000       |   |   |            | 4,000        |  
|                                      |                                                                                                                                                                                                              |              |            |              |   |   |            |             
|Total stockholders equity            |                                                                                                                                                                                                              |              | 19,351,000 |              |   |   | 12,091,000 |             
|                                      |                                                                                                                                                                                                              |              |            |              |   |   |            |             
|                                      |                                                                                                                                                                                                              | $            | 23,910,000 |              |   | $ | 14,486,000 |             
|                                      |                                                                                                                                                                                                              |              |            |              |   |   |            |             

See accompanying notes.

F-3



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##### Table of Contents



EPIMMUNE INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                    |                                                                  |                          |   |            |   |      |   |            |   |  |   |             |  
|------------------- | ---------------------------------------------------------------- | ------------------------ | - | ---------- | - | ---- | - | ---------- | - |  | - | ----------- | -
|                    |                                                                  |                         
|                    |                                                                  | Years Ended December 31,
|                    |                                                                  |                         
|                    |                                                                  | 2001                     |   | 2000       |   | 1999
|                    |                                                                  |                          |   |            |   |     
|Revenues:           |                                                                  |                          |   |            |   |      |   |            |   |  |   |            
|                    | License fees and milestones                                      |                          | $ | 3,750,000  |   |      | $ |           |   |  | $ | 2,500,000   |  
|                    | Research grants and contract revenue                             |                          |   | 1,831,000  |   |      |   | 1,603,000  |   |  |   | 1,668,000   |  
|                    | Related party revenue                                            |                          |   | 2,585,000  |   |      |   |           |   |  |   |            |  
|                    |                                                                  |                          |   |            |   |      |   |            |   |  |   |            
|                    | Total revenues                                                   |                          |   | 8,166,000  |   |      |   | 1,603,000  |   |  |   | 4,168,000   |  
|Costs and expenses: |                                                                  |                          |   |            |   |      |   |            |   |  |   |            
|                    | Research and development                                         |                          |   | 7,870,000  |   |      |   | 6,285,000  |   |  |   | 8,716,000   |  
|                    | General and administrative                                       |                          |   | 3,363,000  |   |      |   | 2,305,000  |   |  |   | 2,508,000   |  
|                    | Restructuring costs                                              |                          |   |           |   |      |   | (100,000   | ) |  |   | 2,707,000   |  
|                    | Write-off of in-process technology                               |                          |   |           |   |      |   |           |   |  |   | 3,154,000   |  
|                    |                                                                  |                          |   |            |   |      |   |            |   |  |   |            
|                    | Total costs and expenses                                         |                          |   | 11,233,000 |   |      |   | 8,490,000  |   |  |   | 17,085,000  |  
|                    |                                                                  |                          |   |            |   |      |   |            |   |  |   |            
|                    | Loss from operations                                             |                          |   | (3,067,000 | ) |      |   | (6,887,000 | ) |  |   | (12,917,000 | )
|                    | Minority interest in net loss of consolidated
	subsidiary        |                          |   |           |   |      |   |           |   |  |   | 523,000     |  
|                    | Interest income, net                                             |                          |   | 424,000    |   |      |   | 564,000    |   |  |   | 367,000     |  
|                    | Other income, net                                                |                          |   | (1,000     | ) |      |   | 1,581,000  |   |  |   | 544,000     |  
|                    | Gain on sales and disposal of assets                             |                          |   |           |   |      |   | 5,000      |   |  |   | 3,218,000   |  
|                    |                                                                  |                          |   |            |   |      |   |            |   |  |   |            
|                    | Net loss                                                         |                          | $ | (2,644,000 | ) |      | $ | (4,737,000 | ) |  | $ | (8,265,000  | )
|                    |                                                                  |                          |   |            |   |      |   |            |   |  |   |            
|                    | Net loss per share  basic and diluted                           |                          | $ | (.31       | ) |      | $ | (.68       | ) |  | $ | (1.57       | )
|                    |                                                                  |                          |   |            |   |      |   |            |   |  |   |            
|                    | Shares used in computing net loss per
	share  basic and diluted |                          |   | 8,533,968  |   |      |   | 6,971,186  |   |  |   | 5,257,635   |  
|                    |                                                                  |                          |   |            |   |      |   |            |   |  |   |            

See accompanying notes.

F-4



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##### Table of Contents



EPIMMUNE INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                             |                                                                                        |                 |           |         |  |              |        |            |  |         |           |           |  |              |        |        |  |   |             |           |  |   |   |   |  |   |        |        |  
|---------------------------- | -------------------------------------------------------------------------------------- | --------------- | --------- | ------- |  | ------------ | ------ | ---------- |  | ------- | --------- | --------- |  | ------------ | ------ | ------ |  | - | ----------- | --------- |  | - | - | - |  | - | ------ | ------ | -
|                             |                                                                                        |                 |           |         |  |              |        |            |  |         |           |          
|                             |                                                                                        |                 |           |         |  | Common Stock |        |            |  |         |           |          
|                             |                                                                                        |                 |           |         |  |              |        | Note       |  |        
|                             |                                                                                        | Preferred Stock |           |         |  | Additional   |        | Receivable |  |        
|                             |                                                                                        |                 |           | Common  |  |              |        | Paid-in    |  | from    |           | Deferred 
|                             |                                                                                        | Shares          |           | Amount  |  | Shares       |        | Amount     |  | Capital |           | Employee  |  | Compensation
|                             |                                                                                        |                 |           |         |  |              |        |            |  |         |           |           |  |             
|Balance at December 31, 1998 |                                                                                        |                 | 659,898   |         |  | $            | 7,000  |            |  |         | 4,987,453 |           |  | $            | 50,000 |        |  | $ | 142,642,000 |           |  | $ |  |   |  | $ |       |       
|                             | Issuance of common stock for cash                                                      |                 |           |        |  |              |        |           |  |         |           | 33,910    |  |              |        | 1,000  |  |   |             | 202,000   |  |   |   |  |  |   |        |       |  
|                             | Issuance of common stock in exchange for Epimmune
	common stock                        |                 |           |        |  |              |        |           |  |         |           | 1,027,582 |  |              |        | 9,000  |  |   |             | 1,792,000 |  |   |   |  |  |   |        |       |  
|                             | Issuance of Cytel Series S and S-1 preferred
	stock net of retirement of Series B      |                 |           | 749,390 |  |              |        | 7,000      |  |         |           |          |  |              |        |       |  |   |             | 2,499,000 |  |   |   |  |  |   |        |       |  
|                             | Issuance of warrants to former employees as part
	of separation agreements             |                 |           |        |  |              |        |           |  |         |           |          |  |              |        |       |  |   |             | 258,000   |  |   |   |  |  |   |        |       |  
|                             | Unrealized losses on available-for- sale
	securities                                   |                 |           |        |  |              |        |           |  |         |           |          |  |              |        |       |  |   |             |          |  |   |   |  |  |   |        |       |  
|                             | Net loss                                                                               |                 |           |        |  |              |        |           |  |         |           |          |  |              |        |       |  |   |             |          |  |   |   |  |  |   |        |       |  
|                             |                                                                                        |                 |           |         |  |              |        |            |  |         |           |           |  |              |        |        |  |   |             |           |  |   |   |   |  |   |        |       
|Balance at December 31, 1999 |                                                                                        |                 | 1,409,288 |         |  |              | 14,000 |            |  |         | 6,048,945 |           |  |              | 60,000 |        |  |   | 147,393,000 |           |  |   |  |   |  |   |       |       
|                             | Issuance of common stock for cash                                                      |                 |           |        |  |              |        |           |  |         |           | 98,398    |  |              |        | 1,000  |  |   |             | 29,000    |  |   |   |  |  |   |        |       |  
|                             | Issuance of common stock in conjunction with
	private placement, net of issuance costs |                 |           |        |  |              |        |           |  |         |           | 1,700,000 |  |              |        | 17,000 |  |   |             | 6,252,000 |  |   |   |  |  |   |        |       |  
|                             | Deferred compensation related to consultant stock
	options                             |                 |           |        |  |              |        |           |  |         |           |          |  |              |        |       |  |   |             | 23,000    |  |   |   |  |  |   |        | (6,000 | )
|                             | Issuance of warrants to former employees as part
	of separation agreement              |                 |           |        |  |              |        |           |  |         |           |          |  |              |        |       |  |   |             | 29,000    |  |   |   |  |  |   |        |       |  
|                             | Unrealized gains on available-for- sale securities                                     |                 |           |        |  |              |        |           |  |         |           |          |  |              |        |       |  |   |             |          |  |   |   |  |  |   |        |       |  
|                             | Net loss                                                                               |                 |           |        |  |              |        |           |  |         |           |          |  |              |        |       |  |   |             |          |  |   |   |  |  |   |        |       |  
|                             |                                                                                        |                 |           |         |  |              |        |            |  |         |           |           |  |              |        |        |  |   |             |           |  |   |   |   |  |   |        |       
|Balance at December 31, 2000 |                                                                                        |                 | 1,409,288 |         |  |              | 14,000 |            |  |         | 7,847,343 |           |  |              | 78,000 |        |  |   | 153,726,000 |           |  |   |  |   |  |   | (6,000 | )     

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                             |                                                                                        |             |              |               |   |               |         |               |   |   |            |            |   |   |             |            |  
|---------------------------- | -------------------------------------------------------------------------------------- | ----------- | ------------ | ------------- | - | ------------- | ------- | ------------- | - | - | ---------- | ---------- | - | - | ----------- | ---------- | -
|                             |                                                                                        |             |              | Accumulated   |   |               |         |              
|                             |                                                                                        |             |              | Other         |   | Total         |         | Other        
|                             |                                                                                        | Accumulated |              | Comprehensive |   | Stockholders |         | Comprehensive
|                             |                                                                                        | Deficit     |              | Income        |   | Equity        |         | Loss         
|                             |                                                                                        |             |              |               |   |               |         |              
|Balance at December 31, 1998 |                                                                                        | $           | (128,723,000 | )             |   | $             |        |               |   | $ | 13,976,000 |            |   | $ | (21,505,000 | )         
|                             |                                                                                        |             |              |               |   |               |         |               |   |   |            |            |   |   |             |           
|                             | Issuance of common stock for cash                                                      |             |              |              |   |               |         |              |   |   |            | 203,000    |   |   |             |            |  
|                             | Issuance of common stock in exchange for Epimmune
	common stock                        |             |              |              |   |               |         |              |   |   |            | 1,801,000  |   |   |             |            |  
|                             | Issuance of Cytel Series S and S-1 preferred
	stock net of retirement of Series B      |             |              |              |   |               |         |              |   |   |            | 2,506,000  |   |   |             |            |  
|                             | Issuance of warrants to former employees as part
	of separation agreements             |             |              |              |   |               |         |              |   |   |            | 258,000    |   |   |             |            |  
|                             | Unrealized losses on available-for- sale
	securities                                   |             |              |              |   |               |         | (57,000       | ) |   |            | (57,000    | ) |   |             | (57,000    | )
|                             | Net loss                                                                               |             |              | (8,265,000    | ) |               |         |              |   |   |            | (8,265,000 | ) |   |             | (8,265,000 | )
|                             |                                                                                        |             |              |               |   |               |         |               |   |   |            |            |   |   |             |           
|Balance at December 31, 1999 |                                                                                        |             | (136,988,000 | )             |   |               | (57,000 | )             |   |   | 10,422,000 |            |   | $ | (8,322,000  | )         
|                             |                                                                                        |             |              |               |   |               |         |               |   |   |            |            |   |   |             |           
|                             | Issuance of common stock for cash                                                      |             |              |              |   |               |         |              |   |   |            | 30,000     |   |   |             |            |  
|                             | Issuance of common stock in conjunction with
	private placement, net of issuance costs |             |              |              |   |               |         |              |   |   |            | 6,269,000  |   |   |             |            |  
|                             | Deferred compensation related to consultant stock
	options                             |             |              |              |   |               |         |              |   |   |            | 17,000     |   |   |             |            |  
|                             | Issuance of warrants to former employees as part
	of separation agreement              |             |              |              |   |               |         |              |   |   |            | 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 |                                                                                        |             | (141,725,000 | )             |   |               | 4,000   |               |   |   | 12,091,000 |            |   | $ | (4,676,000  | )         
|                             |                                                                                        |             |              |               |   |               |         |               |   |   |            |            |   |   |             |           

F-5



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##### Table of Contents



EPIMMUNE INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (Continued)

|                             |                                                                                      |                 |           |        |  |              |        |            |  |         |            |           |   |              |         |        |  |   |             |           |   |   |            |            |   |   |          |          |  
|---------------------------- | ------------------------------------------------------------------------------------ | --------------- | --------- | ------ |  | ------------ | ------ | ---------- |  | ------- | ---------- | --------- | - | ------------ | ------- | ------ |  | - | ----------- | --------- | - | - | ---------- | ---------- | - | - | -------- | -------- | -
|                             |                                                                                      |                 |           |        |  |              |        |            |  |         |            |          
|                             |                                                                                      |                 |           |        |  | Common Stock |        |            |  |         |            |          
|                             |                                                                                      |                 |           |        |  |              |        | Note       |  |        
|                             |                                                                                      | Preferred Stock |           |        |  | Additional   |        | Receivable |  |        
|                             |                                                                                      |                 |           | Common |  |              |        | Paid-in    |  | from    |            | Deferred 
|                             |                                                                                      | Shares          |           | Amount |  | Shares       |        | Amount     |  | Capital |            | Employee  |   | Compensation
|                             |                                                                                      |                 |           |        |  |              |        |            |  |         |            |           |   |             
|                             | Exercise of stock options                                                            |                 |           |       |  |              |        |           |  |         |            | 27,753    |   |              |         |       |  |   |             | 11,000    |   |   |            |           |   |   |          |         |  
|                             | Repurchase of restricted stock                                                       |                 |           |       |  |              |        |           |  |         |            | (20,041   | ) |              |         |       |  |   |             | (3,000    | ) |   |            |           |   |   |          |         |  
|                             | Issuance of common stock for cash, net of
	issuance costs of $61,000                 |                 |           |       |  |              |        |           |  |         |            | 2,000,000 |   |              |         | 20,000 |  |   |             | 4,919,000 |   |   |            |           |   |   |          |         |  
|                             | Issuance of common stock in connection with
	collaboration agreement                 |                 |           |       |  |              |        |           |  |         |            | 1,154,797 |   |              |         | 12,000 |  |   |             | 4,618,000 |   |   |            |           |   |   |          |         |  
|                             | Issuance of common stock for the employee stock
	purchase plan                       |                 |           |       |  |              |        |           |  |         |            | 28,604    |   |              |         |       |  |   |             | 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  |  
|                             | Deferred compensation related to consultant stock
	options                           |                 |           |       |  |              |        |           |  |         |            |          |   |              |         |       |  |   |             | 13,000    |   |   |            |           |   |   |          |         |  
|                             | Unrealized gains on available-for- sale securities                                   |                 |           |       |  |              |        |           |  |         |            |          |   |              |         |       |  |   |             |          |   |   |            |           |   |   |          |         |  
|                             | Net loss                                                                             |                 |           |       |  |              |        |           |  |         |            |          |   |              |         |       |  |   |             |          |   |   |            |            |   |   |          |          |  
|                             |                                                                                      |                 |           |        |  |              |        |            |  |         |            |           |   |              |         |        |  |   |             |           |   |   |            |            |   |   |          |         
|Balance at December 31, 2001 |                                                                                      |                 | 1,409,288 |        |  | $            | 14,000 |            |  |         | 12,094,757 |           |   | $            | 121,000 |        |  | $ | 166,772,000 |           |   | $ | (2,641,000 | )          |   | $ | (569,000 | )       
|                             |                                                                                      |                 |           |        |  |              |        |            |  |         |            |           |   |              |         |        |  |   |             |           |   |   |            |            |   |   |          |         

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                             |                                                                                      |             |              |               |   |               |        |               |  |   |            |            |   |   |            |            |  
|---------------------------- | ------------------------------------------------------------------------------------ | ----------- | ------------ | ------------- | - | ------------- | ------ | ------------- |  | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                             |                                                                                      |             |              | Accumulated   |   |               |        |              
|                             |                                                                                      |             |              | Other         |   | Total         |        | Other        
|                             |                                                                                      | Accumulated |              | Comprehensive |   | Stockholders |        | Comprehensive
|                             |                                                                                      | Deficit     |              | Income        |   | Equity        |        | Loss         
|                             |                                                                                      |             |              |               |   |               |        |              
|                             | Exercise of stock options                                                            |             |              |              |   |               |        |              |  |   |            | 11,000     |   |   |            |            |  
|                             | Repurchase of restricted stock                                                       |             |              |              |   |               |        |              |  |   |            | (3,000     | ) |   |            |            |  
|                             | Issuance of common stock for cash, net of
	issuance costs of $61,000                 |             |              |              |   |               |        |              |  |   |            | 4,939,000  |   |   |            |            |  
|                             | Issuance of common stock in connection with
	collaboration agreement                 |             |              |              |   |               |        |              |  |   |            | 4,630,000  |   |   |            |            |  
|                             | Issuance of common stock for the employee stock
	purchase plan                       |             |              |              |   |               |        |              |  |   |            | 73,000     |   |   |            |            |  
|                             | Issuance of restricted stock for note                                                |             |              |              |   |               |        |              |  |   |            |           |   |   |            |            |  
|                             | Deferred compensation in connection with the
	issuance of stock options to employees |             |              |              |   |               |        |              |  |   |            |           |   |   |            |            |  
|                             | Amortization of deferred compensation                                                |             |              |              |   |               |        |              |  |   |            | 222,000    |   |   |            |            |  
|                             | Deferred compensation related to consultant stock
	options                           |             |              |              |   |               |        |              |  |   |            | 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 |                                                                                      | $           | (144,369,000 | )             |   | $             | 23,000 |               |  | $ | 19,351,000 |            |   | $ | (2,625,000 | )         
|                             |                                                                                      |             |              |               |   |               |        |               |  |   |            |            |   |   |            |           

See accompanying notes.

F-6



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##### Table of Contents



EPIMMUNE INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                           |                                                |                                          |            |         |           |      |            |         |          |   |            |            |            |  
|------------------------------------------------------------------------------------------ | ---------------------------------------------- | ---------------------------------------- | ---------- | ------- | --------- | ---- | ---------- | ------- | -------- | - | ---------- | ---------- | ---------- | -
|                                                                                           |                                                |                                         
|                                                                                           |                                                | Years Ended December 31,                
|                                                                                           |                                                |                                         
|                                                                                           |                                                | 2001                                     |            | 2000    |           | 1999
|                                                                                           |                                                |                                          |            |         |           |     
|Operating activities                                                                       |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|Net loss                                                                                   |                                                | $                                        | (2,644,000 | )       |           | $    | (4,737,000 | )       |          | $ | (8,265,000 | )         
|Adjustments to reconcile net loss to net cash
	provided by (used in) operating activities: |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|                                                                                           | Depreciation and amortization                  |                                          |            | 578,000 |           |      |            | 537,000 |          |   |            | 577,000    |           
|                                                                                           | Amortization of deferred compensation          |                                          |            | 235,000 |           |      |            | 17,000  |          |   |            |           |           
|                                                                                           | Deferred rent                                  |                                          |            | 47,000  |           |      |            | 64,000  |          |   |            | 56,000     |           
|                                                                                           | Write-off of abandoned patents                 |                                          |            | 625,000 |           |      |            |        |          |   |            |           |           
|                                                                                           | Minority interest in consolidated subsidiary   |                                          |            |        |           |      |            |        |          |   |            | (523,000   | )         
|                                                                                           | Stock warrants relating to severance agreement |                                          |            |        |           |      |            | 29,000  |          |   |            |           |           
|                                                                                           | (Gain) loss on disposal of assets              |                                          |            |        |           |      |            | (5,000  | )        |   |            | (3,218,000 | )         
|                                                                                           | Write-off of in-process technology             |                                          |            |        |           |      |            |        |          |   |            | 3,154,000  |           
|                                                                                           | Changes in operating assets and liabilities:   |                                          |            |         |           |      |            |         |          |   |            |            |           
|                                                                                           |                                                | Other current assets                     |            |         | (200,000  | )    |            |         | (46,000  | ) |            |            | 697,000    |  
|                                                                                           |                                                | Accounts payable and accrued liabilities |            |         | 471,000   |      |            |         | 34,000   |   |            |            | (1,451,000 | )
|                                                                                           |                                                | Deferred revenue                         |            |         | 2,079,000 |      |            |         | 191,000  |   |            |            | (477,000   | )
|                                                                                           |                                                | Accrued payroll and related expense      |            |         | (19,000   | )    |            |         | 29,000   |   |            |            | (205,000   | )
|                                                                                           |                                                | Accrued restructuring                    |            |         |          |      |            |         | (342,000 | ) |            |            | 915,000    |  
|                                                                                           |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|Net cash provided by (used in) operating
	activities                                       |                                                |                                          | 1,172,000  |         |           |      | (4,229,000 | )       |          |   | (8,740,000 | )         
|Investing activities                                                                       |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|Purchases of available-for-sale securities                                                 |                                                |                                          | (7,626,000 | )       |           |      | (3,742,000 | )       |          |   | (2,470,000 | )         
|Maturities of available-for-sale securities                                                |                                                |                                          | 2,059,000  |         |           |      | 4,803,000  |         |          |   | 1,085,000  |           
|Sales of available-for-sale securities                                                     |                                                |                                          |           |         |           |      |           |         |          |   | 4,133,000  |           
|Proceeds from the sale of equipment                                                        |                                                |                                          |           |         |           |      | 5,000      |         |          |   | 3,687,000  |           
|Proceeds from the sale of patents (net of fees)                                            |                                                |                                          |           |         |           |      |           |         |          |   | 3,035,000  |           
|Purchases of property and equipment                                                        |                                                |                                          | (293,000   | )       |           |      | (356,000   | )       |          |   | (739,000   | )         
|Construction in progress                                                                   |                                                |                                          | (10,000    | )       |           |      |           |         |          |   |           |           
|Patents                                                                                    |                                                |                                          | (682,000   | )       |           |      | (578,000   | )       |          |   | (878,000   | )         
|Deposits and other assets                                                                  |                                                |                                          |           |         |           |      |           |         |          |   | 23,000     |           
|Repayment of note                                                                          |                                                |                                          |           |         |           |      |           |         |          |   | 519,000    |           
|                                                                                           |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|Net cash (used in) provided by investing
	activities                                       |                                                |                                          | (6,552,000 | )       |           |      | 132,000    |         |          |   | 8,395,000  |           
|Financing activities                                                                       |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|Principal payments under equipment notes payable
	and note payable to bank                 |                                                |                                          | (413,000   | )       |           |      | (230,000   | )       |          |   | (1,001,000 | )         
|Proceeds from the issuance of equipment notes
	payable                                     |                                                |                                          |           |         |           |      | 366,000    |         |          |   | 510,000    |           
|Net proceeds from issuance of common stock                                                 |                                                |                                          | 9,650,000  |         |           |      | 6,299,000  |         |          |   | 203,000    |           
|                                                                                           |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|Net cash provided by (used in) financing
	activities                                       |                                                |                                          | 9,237,000  |         |           |      | 6,435,000  |         |          |   | (288,000   | )         
|                                                                                           |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|Increase (decrease) in cash and cash
	equivalents                                          |                                                |                                          | 3,857,000  |         |           |      | 2,338,000  |         |          |   | (633,000   | )         
|Cash and cash equivalents at beginning of year                                             |                                                |                                          | 4,181,000  |         |           |      | 1,843,000  |         |          |   | 2,476,000  |           
|                                                                                           |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|Cash and cash equivalents at end of year                                                   |                                                | $                                        | 8,038,000  |         |           | $    | 4,181,000  |         |          | $ | 1,843,000  |           
|                                                                                           |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|Supplemental disclosure of cash flow
	information                                          |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|Interest paid                                                                              |                                                | $                                        | 59,000     |         |           | $    | 69,000     |         |          | $ | 111,000    |           
|                                                                                           |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|Supplemental disclosure of non-cash investing
	and financing activities                    |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|Asset write down in accrued restructuring                                                  |                                                | $                                        |           |         |           | $    |           |         |          | $ | 593,000    |           
|                                                                                           |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|Assumption of debt by Nextran                                                              |                                                | $                                        |           |         |           | $    |           |         |          | $ | 838,000    |           
|                                                                                           |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|Exchange of common and preferred stock, for
	minority interest in Epimmune                 |                                                | $                                        |           |         |           | $    |           |         |          | $ | 4,307,000  |           
|Unrealized gains (losses) on
	available-for-sale securities                                |                                                | $                                        | 19,000     |         |           | $    | 61,000     |         |          | $ | (57,000    | )         
|                                                                                           |                                                |                                          |            |         |           |      |            |         |          |   |            |           
|Sale of restricted common stock for stockholder
	note receivable                           |                                                | $                                        | 2,641,000  |         |           | $    |           |         |          | $ |           |           
|                                                                                           |                                                |                                          |            |         |           |      |            |         |          |   |            |           

See accompanying notes.

F-7



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##### Table of Contents



EPIMMUNE INC.






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


December 31, 2001


1.     Summary of
significant accounting policies



| |                                    
| | -----------------------------------
| | Organization and business
	activity

Cytel Corporation was incorporated in Delaware on
July 10, 1987. 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.
Unless otherwise indicated, all references to Cytel
are to predecessor Cytel Corporation; all references to
Epimmune are to Epimmune Inc., a majority-owned
subsidiary of Cytel until July 1, 1999. All references to
the Company are to the combined entity of Cytel and
Epimmune.



| |                            
| | ---------------------------
| | Principles of consolidation

On July 1, 1999, the Company completed a
series of transactions (the Exchange Transactions)
in which it: (i) transferred all of the outstanding shares
of Epimmunes Series B-1 Preferred Stock then held by
Cytel to G.D. Searle & Co. (Searle) in
exchange for all of the outstanding shares of Cytels
Series B Preferred Stock, (ii) issued 859,666 shares
of Cytels Series S Preferred Stock and 549,622 shares
of Cytels Series S-1 Preferred Stock to Searle in
exchange for all outstanding shares of Epimmunes
Series B Preferred Stock and Series B-1 Preferred
Stock and (iii) issued a total of 1,027,782 shares of
Cytels Common Stock to the holders of Common Stock of
Epimmune in exchange for all outstanding shares of
Epimmunes Common Stock. The acquisition of the minority
interest in Epimmune, through the exchange transaction, was
accounted for as a purchase. The Company recorded the
acquisition of the minority interest at the fair market value of
the preferred and common stock issued, and determined that the
excess of the purchase price over the identifiable net assets of
$3.2 million was in-process technology based on a
discounted cash flow analysis of that technology. The analysis,
with a discount rate of 50%, was based on estimated research and
development costs for nine years and product revenues beginning
in year six, after the assumed completion of clinical trials and
product approval by the FDA. The analysis also considered
milestone payments based on scientific accomplishments and new
collaborative revenues based on projected future collaboration
agreements. The value of the technology was charged to acquired
in-process technology because technological feasibility had not
been achieved nor had alternative future uses for the technology
been identified. Following the Exchange Transactions, Cytel
merged with Epimmune and changed its name to Epimmune Inc. As of
December 31, 2001, Pharmacia, the parent of Searle owned
2.6% of the Companys outstanding common stock and all of
the Companys outstanding preferred stock.



| |                 
| | ----------------
| | Use of estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
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.

F-8



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



1.     Summary of
significant accounting policies (continued)




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



| |                             
| | ----------------------------
| | 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. 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 $870,000 and $577,000 at
December 31, 2001 and 2000, respectively.



| |              
| | -------------
| | Deferred rent

Rent expense is recognized on a straight-line
basis over the term of the lease. Accordingly, rent expense
incurred in excess of rent paid is reflected as deferred rent
until April 2004.



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

In March 2000, the Financial Accounting Standards
Board issued FASB Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation, an
interpretation of APB 25 (FIN 44 or the
Interpretation). The Interpretation, which has been
adopted prospectively as of July 1, 2000, requires that
stock options that have been modified to reduce the exercise
price be accounted for under

F-9



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



1.     Summary of
significant accounting policies (continued)


the provisions of variable accounting. Management
believes the Companys accounting for its stock options is
in compliance with the guidelines provided in FIN 44, and
therefore, the adoption of FIN 44 did not affect the
Companys results of operations for the years ended
December 31, 2001 and 2000.



| |                              
| | -----------------------------
| | 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
$4.3 million, $4.5 million and $4.9 million for
2001, 2000 and 1999, respectively.



| |                                      
| | -------------------------------------
| | Research grants and contract
	revenue

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



| |                   
| | ------------------
| | Net loss per share

Basic and diluted net loss per common share are
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.

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

|                                                                                 |  |                          |            |      |  |      |            |   |  |   |            |  
|-------------------------------------------------------------------------------- |  | ------------------------ | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                                 |  |                         
|                                                                                 |  | Years Ended December 31,
|                                                                                 |  |                         
|                                                                                 |  | 2001                     |            | 2000 |  | 1999
|                                                                                 |  |                          |            |      |  |     
|Net loss applicable to common stockholders                                       |  | $                        | (2,644,000 | )    |  | $    | (4,737,000 | ) |  | $ | (8,265,000 | )
|                                                                                 |  |                          |            |      |  |      |            |   |  |   |            |  
|Weighted average shares used in computing net
	loss per share, basic and diluted |  |                          | 8,533,968  |      |  |      | 6,971,186  |   |  |   | 5,257,635  |  
|                                                                                 |  |                          |            |      |  |      |            |   |  |   |            |  
|Net loss per common share, basic and diluted                                     |  | $                        | (0.31      | )    |  | $    | (0.68      | ) |  | $ | (1.57      | )
|                                                                                 |  |                          |            |      |  |      |            |   |  |   |            |  

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 3,560,789, 876,157, and 791,310 for the years
ended December 31, 2001, 2000, and 1999, respectively.



| |                     
| | --------------------
| | Comprehensive income

As of January 1, 1998, the Company adopted
SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income (loss) and its

F-10



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



1.     Summary of
significant accounting policies (continued)


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. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments
and hedging activities. The Statement will require the
recognition of all derivatives on the consolidated balance sheet
at fair value. The FASB subsequently delayed implementation of
the standard for the financial years beginning after
June 15, 2000. The Company adopted the new Statement
effective January 1, 2001. The impact on the consolidated
financial statements was not material.

The FASB has issued SFAS No. 141, Business
Combinations, which requires that the purchase method of
accounting be used for all business combinations subsequent to
June 30, 2001 and specifies criteria for recognizing
intangible assets acquired in a business combination. The impact
on the consolidated financial statements was not material.

The 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 intends to adopt the new Statement effective
January 1, 2002. The impact on the consolidated financial
statements is not expected to be 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 intends to adopt the new
Statement effective January 1, 2002. The impact on the
consolidated financial statements is not expected to be material.



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

F-11



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2.     Discontinuance
of Cytel operations and sale of certain related assets



| |                                    
| | -----------------------------------
| | Discontinuance of Cytel
	operations

On March 29, 1999, Cytel announced the
results from Phase II/ III clinical trials of its lead
therapeutic compound, Cylexin, showing no benefit over placebo.
Accordingly, Cytel terminated its therapeutic anti-inflammatory
business and recorded a charge of $3.4 million as of
December 31, 1998, representing the book value of its cell
adhesion patent portfolio. This charge was recorded in
accordance with SFAS 121 after Cytel determined that its
intangible assets were permanently impaired.

Based on the determination to terminate
Cytels businesses and focus future operations on Epimmune,
Cytel recorded a restructuring charge of $3.7 million in
the first quarter 1999. This restructuring charge was reduced to
$2.7 million in the fourth quarter 1999, primarily due to
early terminations and subsequent subleasing of facility leases
and auction proceeds received for sale of assets. During 2000,
the Company made payments totaling $242,000 related to final
shut-down costs for Cytel and made a further $100,000 reduction
in accrued restructuring due to a favorable IRS ruling relating
to potential tax liability regarding Cytels employee stock
purchase plan.



| |                                                                      
| | ---------------------------------------------------------------------
| | Sale of the Glytec carbohydrate synthesis
	and manufacturing business

On February 28, 1999, Cytel licensed its
proprietary carbohydrate synthesis and manufacturing
intellectual property assets to Baxter Healthcare
Corporations Nextran unit (Nextran) for
exclusive use in xenotransplantation. Cytel received total
consideration of $4.0 million, of which $3.2 million
was cash and $0.8 million was assignment of certain
liabilities to Nextran. Additionally, Nextran assumed the
facility lease and certain personnel and fixed assets related to
this manufacturing operation. On March 26, 1999, Cytel sold
the remainder of its Glytec carbohydrate synthesis and
manufacturing intellectual property assets to Neose
Technologies, Inc. (Neose). Neose paid Cytel
$3.5 million cash and paid an additional $1.5 million
into escrow, the release of which was conditioned on the
Companys satisfaction of certain matters relating to the
patents and licenses acquired by Neose. As a result of the
transactions with Nextran and Neose, the Company recorded a gain
on sale and disposal of assets of approximately
$3.2 million in 1999.

During 2000, the Company was paid
$1.1 million in satisfaction of certain matters under the
escrow agreement with Neose, which has been recorded in other
income.

3.     Short-term
investments

The following tables summarize available-for-sale
securities:

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

|                      |  |                               |           |                  |  |                  |       |            |  |   |   |  |  |   |           | 
|--------------------- |  | ----------------------------- | --------- | ---------------- |  | ---------------- | ----- | ---------- |  | - | - |  |  | - | --------- | 
|                      |  |                              
|                      |  | Available-for-Sale Securities
|                      |  |                              
|                      |  |                               |           | Gross Unrealized |  | Gross Unrealized |       | Estimated 
|                      |  | Cost                          |           | Gains            |  | Losses           |       | Fair Value
|                      |  |                               |           |                  |  |                  |       |           
|December 31, 2000     |  |                               |           |                  |  |                  |       |            |  |   |   |  |  |   |           | 
|Corporate Obligations |  | $                             | 5,408,000 |                  |  | $                | 4,000 |            |  | $ |  |  |  | $ | 5,412,000 | 
|                      |  |                               |           |                  |  |                  |       |            |  |   |   |  |  |   |           | 
|                      |  | $                             | 5,408,000 |                  |  | $                | 4,000 |            |  | $ |  |  |  | $ | 5,412,000 | 
|                      |  |                               |           |                  |  |                  |       |            |  |   |   |  |  |   |           | 

F-12



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                   
|-- | ----------------------------------
|3. | Short-term investments (continued)

The amortized cost and estimated fair value of
debt securities at December 31, 2001, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities because the issuers of the securities may
have the right to prepay obligations without prepayment
penalties.

|                            |  |                   |            |            |  |   |            | 
|--------------------------- |  | ----------------- | ---------- | ---------- |  | - | ---------- | 
|                            |  |                  
|                            |  | December 31, 2001
|                            |  |                  
|                            |  |                   |            | Estimated 
|                            |  | Cost              |            | Fair Value
|                            |  |                   |            |           
|Due in one year or less     |  | $                 | 10,552,000 |            |  | $ | 10,573,000 | 
|Due after one to four years |  |                   | 423,000    |            |  |   | 425,000    | 
|                            |  |                   |            |            |  |   |            | 
|                            |  | $                 | 10,975,000 |            |  | $ | 10,998,000 | 
|                            |  |                   |            |            |  |   |            | 

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,
|                         |  |                        
|                         |  | 2001                    |       | 2000 |  | 1999
|                         |  |                         |       |      |  |     
|Gross gains              |  | $                       | 2,000 |      |  | $    | 4,000 |  |  | $ | 5,000  |  
|Gross losses             |  |                         |      |      |  |      |      |  |  |   | (2,000 | )
|                         |  |                         |       |      |  |      |       |  |  |   |        |  
|Total net realized gains |  | $                       | 2,000 |      |  | $    | 4,000 |  |  | $ | 3,000  |  
|                         |  |                         |       |      |  |      |       |  |  |   |        |  

4.     Balance sheet
information

Prepaids and other current assets consist of the
following:

|                                               |  |              |         |      |  |   |         | 
|---------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2001         |         | 2000
|                                               |  |              |         |     
|Investment income and grant revenue receivable |  | $            | 401,000 |      |  | $ | 323,000 | 
|Contract revenue receivable                    |  |              | 189,000 |      |  |   | 125,000 | 
|Prepaid expenses                               |  |              | 117,000 |      |  |   | 59,000  | 
|                                               |  |              |         |      |  |   |         | 
|                                               |  | $            | 707,000 |      |  | $ | 507,000 | 
|                                               |  |              |         |      |  |   |         | 

Property and equipment consist of the following:

|                                               |  |              |           |      |  |   |           |  
|---------------------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2001         |           | 2000
|                                               |  |              |           |     
|Furniture and equipment                        |  | $            | 1,392,000 |      |  | $ | 1,178,000 |  
|Leasehold improvements                         |  |              | 309,000   |      |  |   | 219,000   |  
|                                               |  |              |           |      |  |   |           |  
|                                               |  |              | 1,701,000 |      |  |   | 1,397,000 |  
|Less accumulated depreciation and amortization |  |              | (717,000  | )    |  |   | (431,000  | )
|                                               |  |              |           |      |  |   |           |  
|                                               |  | $            | 984,000   |      |  | $ | 966,000   |  
|                                               |  |              |           |      |  |   |           |  

Depreciation expense for the years ended
December 31, 2001, 2000 and 1999 was $286,000, $207,000 and
$224,000, respectively.

F-13



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                       
|-- | --------------------------------------
|4. | Balance sheet information
	(continued)

Accounts payable and accrued liabilities consist
of the following:

|                                  |  |              |           |      |  |   |           | 
|--------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                  |  |             
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2001         |           | 2000
|                                  |  |              |           |     
|Trade accounts payable            |  | $            | 1,341,000 |      |  | $ | 935,000   | 
|Directors deferred compensation   |  |              | 132,000   |      |  |   | 60,000    | 
|Miscellaneous accrued liabilities |  |              | 2,000     |      |  |   | 9,000     | 
|                                  |  |              |           |      |  |   |           | 
|                                  |  | $            | 1,475,000 |      |  | $ | 1,004,000 | 
|                                  |  |              |           |      |  |   |           | 

5.     Additional
statement of operations information

As a result of the events described in
Note 1, the Company is presenting additional information
related to the operations of Cytel and Epimmune. As of
July 1, 1999, Cytel and Epimmune merged.

Consolidated Statement of Operations

Year Ended December 31, 1999


|                    |                                                           |             |   |               |   |               |   |            |   |  |   |         |  |  |   |             |  
|------------------- | --------------------------------------------------------- | ----------- | - | ------------- | - | ------------- | - | ---------- | - |  | - | ------- |  |  | - | ----------- | -
|                    |                                                           | Cytel       |   |               |   | Consolidating |   |           
|                    |                                                           | Corporation |   | Epimmune Inc. |   | Entries       |   | Total     
|                    |                                                           |             |   |               |   |               |   |           
|Revenues:           |                                                           |             |   |               |   |               |   |            |   |  |   |         |  |  |   |            
|                    | Research and development                                  |             | $ | 500,000       |   |               | $ | 2,000,000  |   |  | $ |        |  |  | $ | 2,500,000   |  
|                    | Research grants and other income                          |             |   | 25,000        |   |               |   | 1,643,000  |   |  |   |        |  |  |   | 1,668,000   |  
|                    |                                                           |             |   |               |   |               |   |            |   |  |   |         |  |  |   |            
|                    | Total revenues                                            |             |   | 525,000       |   |               |   | 3,643,000  |   |  |   |        |  |  |   | 4,168,000   |  
|Costs and expenses: |                                                           |             |   |               |   |               |   |            |   |  |   |         |  |  |   |            
|                    | Research and development                                  |             |   | 3,042,000     |   |               |   | 5,674,000  |   |  |   |        |  |  |   | 8,716,000   |  
|                    | General and administrative                                |             |   | 870,000       |   |               |   | 1,638,000  |   |  |   |        |  |  |   | 2,508,000   |  
|                    | Restructuring costs                                       |             |   | 2,707,000     |   |               |   |           |   |  |   |        |  |  |   | 2,707,000   |  
|                    | Write-off of in-process technology                        |             |   |              |   |               |   | 3,154,000  |   |  |   |        |  |  |   | 3,154,000   |  
|                    |                                                           |             |   |               |   |               |   |            |   |  |   |         |  |  |   |            
|                    | Total costs and expenses                                  |             |   | 6,619,000     |   |               |   | 10,466,000 |   |  |   |        |  |  |   | 17,085,000  |  
|                    |                                                           |             |   |               |   |               |   |            |   |  |   |         |  |  |   |            
|                    | Loss from operations                                      |             |   | (6,094,000    | ) |               |   | (6,823,000 | ) |  |   |        |  |  |   | (12,917,000 | )
|                    | Minority interest in net loss of consolidated
	subsidiary |             |   |              |   |               |   |           |   |  |   | 523,000 |  |  |   | 523,000     |  
|                    | Interest income (expense)                                 |             |   | (44,000       | ) |               |   | 411,000    |   |  |   |        |  |  |   | 367,000     |  
|                    | Other income (expense), net                               |             |   | 550,000       |   |               |   | (6,000     | ) |  |   |        |  |  |   | 544,000     |  
|                    | Gain (loss) on sales and disposal of assets               |             |   | 3,296,000     |   |               |   | (78,000    | ) |  |   |        |  |  |   | 3,218,000   |  
|                    |                                                           |             |   |               |   |               |   |            |   |  |   |         |  |  |   |            
|                    | Net loss                                                  |             | $ | (2,292,000    | ) |               | $ | (6,496,000 | ) |  | $ | 523,000 |  |  | $ | (8,265,000  | )
|                    |                                                           |             |   |               |   |               |   |            |   |  |   |         |  |  |   |            

6.     Stockholders
equity

Preferred
stock

As of December 31, 2001, 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 upon the
closing of a financing in which the Company receives gross
proceeds of at least $15,000,000. The

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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                  
|-- | ---------------------------------
|6. | Stockholders equity
	(continued)

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, 2001, the Series S
Preferred conversion price was $5.7611 and the Series S-1
Preferred conversion price was $7.0958. As of December 31,
2001, 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, 2001.



| |                
| | ---------------
| | Stock issuances

During 2001, the Company sold and issued the
following securities which were not registered under the
Securities Act of 1933, as amended, or the Securities Act:

In July 2001, pursuant to the terms of a
securities purchase agreement, and in connection with a license
and collaboration agreement, the Company issued 1,154,797 shares
of common stock to Genencor International, Inc. for net proceeds
of $4.6 million. Genencor also has the right to acquire up
to 500,000 additional shares of common stock in connection with
the agreement. The purchase right is exercisable the date of the
filing of an Investigational New Drug Application covering a
collaboration product between the Company and Genencor and
expires 30 days following such filing. The purchase right
has an exercise price equal to the lesser of the closing price
on the NASDAQ one day before the exercise date or $6.05. No
value has been recorded in connection with the purchase right as
of December 31, 2001.

In December 2001, pursuant to the terms of a
share purchase agreement, the Company issued 2,000,000 shares of
common stock to a group of accredited investors at a purchase
price of $2.50 per share. The Company received net proceeds of
$4.9 million.



| |               
| | --------------
| | 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

F-15



---



##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                  
|-- | ---------------------------------
|6. | Stockholders equity
	(continued)

purchase date. As of December 31, 2001,
28,604 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.

Stock
plans



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

In November 1989, Cytel adopted a Stock Plan (the
Plan), under which options may be granted to
employees, directors, consultants or advisors of Cytel. The 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 Plan have a term in excess of ten years from
the date of grant. Shares and options issued under the Plan vest
over varying periods of one to six years. Effective June 9,
2000 with the approval of the Companys 2000 Plan, the Plan
was discontinued resulting in cancellation of remaining
available shares, and any shares granted under the Plan that in
the future are cancelled or expire will not be available for
re-grant. As of December 31, 2001, options to purchase
513,938 shares of common stock were outstanding under the 1989
Plan.



| |                
| | ---------------
| | 1997 Stock Plan

In December 1997, Epimmune adopted a Stock Plan
(Epimmune Stock Plan), under which options were
granted to employees, directors, and consultants of Epimmune
Inc. The Epimmune Stock 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 Epimmune Stock Plan have a
term in excess of ten years from the date of grant. Options
issued under the Epimmune Stock Plan vest over varying periods
of one to four years. Effective with the Exchange Transaction,
the Company assumed 423,283 options granted under the Epimmune
Stock Plan. Options that terminate will not be available for
future grant. As of December 31, 2001, options to purchase
214,252 shares of common stock were outstanding under the
Epimmune Stock Plan.



| |                
| | ---------------
| | 2000 Stock Plan

In June 2000, the Company adopted a Stock Plan
(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 Epimmune.
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

F-16



---



##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                  
|-- | ---------------------------------
|6. | Stockholders equity
	(continued)

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. As of December 31, 2001, options to purchase
811,424 shares of common stock were outstanding and 388,576
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 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 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, 2001:

|                             |                       |        |           |               |   |   |       |       | 
|---------------------------- | --------------------- | ------ | --------- | ------------- | - | - | ----- | ----- | 
|                             |                       |        |           | Weighted     
|                             |                       | Shares |           | Average Price
|                             |                       |        |           |              
|Balance at December 31, 1998 |                       |        | 558,258   |               |   | $ | 13.88 |      
|                             | Granted               |        |           | 453,754       |   |   |       | 3.38  | 
|                             | Assumed from Epimmune |        |           | 423,283       |   |   |       | 0.27  | 
|                             | Exercised             |        |           | (25,023       | ) |   |       | 0.40  | 
|                             | Cancelled             |        |           | (355,910      | ) |   |       | 12.36 | 
|                             |                       |        |           |               |   |   |       |      
|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  |      
|                             |                       |        |           |               |   |   |       |      

F-17



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                  
|-- | ---------------------------------
|6. | Stockholders equity
	(continued)

As of December 31, 2001, 388,576 shares are
available for future issuance under the 2000 Stock Plan. The
following is a summary of the options outstanding under all of
the Companys stock option plans as of December 31,
2001:

|                         |  |             |           |                |  |                |      |             |  |                  |       |  |  |  |         |  |  |   |       | 
|------------------------ |  | ----------- | --------- | -------------- |  | -------------- | ---- | ----------- |  | ---------------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                         |  |             |           | 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 - $2.50            |  |             | 300,776   |                |  |                | 5.96 |             |  | $                | 0.96  |  |  |  | 215,418 |  |  | $ | 0.35  | 
|$2.56 - $2.85            |  |             | 639,424   |                |  |                | 9.25 |             |  |                  | 2.63  |  |  |  | 136,064 |  |  |   | 2.60  | 
|$3.05 - $6.00            |  |             | 420,584   |                |  |                | 8.20 |             |  |                  | 3.94  |  |  |  | 188,386 |  |  |   | 3.94  | 
|$10.50 - $42.88          |  |             | 178,830   |                |  |                | 3.01 |             |  |                  | 14.70 |  |  |  | 169,294 |  |  |   | 14.82 | 
|                         |  |             |           |                |  |                |      |             |  |                  |       |  |  |  |         |  |  |   |       | 
|Total                    |  |             | 1,539,614 |                |  |                |      |             |  |                  |       |  |  |  | 709,162 |  |  |   |       | 
|                         |  |             |           |                |  |                |      |             |  |                  |       |  |  |  |         |  |  |   |       | 
|Weighted averages        |  |             |           |                |  |                | 7.60 |             |  | $                | 4.07  |  |  |  |         |  |  | $ | 5.19  | 

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 2001, 2000,
and 1999: 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 139%, 142%, and
135% for 2001, 2000, and 1999, 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:

|                             |  |      |            |      |  |      |            |   |  |   |             |  
|---------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ----------- | -
|                             |  | 2001 |            | 2000 |  | 1999
|                             |  |      |            |      |  |     
|Pro forma net loss           |  | $    | (3,391,000 | )    |  | $    | (5,227,000 | ) |  | $ | (11,225,000 | )
|Pro forma net loss per share |  | $    | (0.40      | )    |  | $    | (0.75      | ) |  | $ | (2.13       | )

The weighted average fair value of options
granted during 2001, 2000 and 1999 was $2.47, $5.86 and $3.02,
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 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.

F-18



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                  
|-- | ---------------------------------
|6. | Stockholders equity
	(continued)

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, 2001, 803,251
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 year ended December 31, 2001,
the Company recorded $127,000 of compensation expense and as of
December 31, 2001, had $402,000 of deferred compensation
expense related to unvested shares on its balance sheet. 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 year ended December 31, 2001, the
Company recorded $95,000 of compensation expense related to the
note and as of December 31, 2001, had $302,000 of accrued,
deferred compensation expense which it will recognize monthly
until the note matures in January 2005.

7.     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
advances under the credit line totaled $366,000 and $750,000 at
December 31, 2000 and 1999, respectively. The capital
equipment financed secures 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,
2001.

Equipment loans and notes payable consist of the
following:

|                                                                                                                          |  |              |         |      |  |   |         | 
|------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                                                                                                                          |  |             
|                                                                                                                          |  | December 31,
|                                                                                                                          |  |             
|                                                                                                                          |  | 2001         |         | 2000
|                                                                                                                          |  |              |         |     
|Equipment loan payable in monthly installments of
	principal and interest of $23,600, at 9.25% interest, due August
	2002 |  | $            | 183,000 |      |  | $ | 436,000 | 
|Equipment loan payable in monthly installments of
	principal and interest of $14,600, at 9.44% interest, due March
	2003  |  |              | 206,000 |      |  |   | 366,000 | 
|                                                                                                                          |  |              |         |      |  |   |         | 
|                                                                                                                          |  | $            | 389,000 |      |  | $ | 802,000 | 
|                                                                                                                          |  |              |         |      |  |   |         | 

Future annual principal payments on equipment
loans and notes payable are as follows at December 31, 2001:

|     |  |   |         | 
|---- |  | - | ------- | 
|2002 |  | $ | 346,000 | 
|2003 |  |   | 43,000  | 
|     |  |   |         | 
|     |  | $ | 389,000 | 
|     |  |   |         | 

F-19



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     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 for the years ended
December 31, 2001, 2000 and 1999 was $582,000, $582,000 and
$1.7 million, respectively.

Future minimum lease payments under operating
leases at December 31, 2001 are as follows:

|           |                              |           |           |           | 
|---------- | ---------------------------- | --------- | --------- | --------- | 
|           |                              | Operating
|           |                              | Leases   
|Year       |                              |          
|           |                              |          
|2002       |                              | $         | 551,000   |          
|2003       |                              |           | 568,000   |          
|2004       |                              |           | 585,000   |          
|2005       |                              |           | 602,000   |          
|2006       |                              |           | 620,000   |          
|Thereafter |                              |           | 1,462,000 |          
|           |                              |           |           |          
|           | Total minimum lease payments |           | $         | 4,388,000 | 
|           |                              |           |           |          

9.     Revenues under
collaborative research and development agreements



| |                  
| | -----------------
| | G.D. Searle & Co.

In September 1997, Searle purchased 317,460
shares of Cytel common stock for $5.0 million. Cytel
transferred $6.5 million in cash and $1.5 million in
other assets to capitalize Epimmune.

In February 1998, Epimmune entered into a
collaborative research and development agreement with Searle to
develop immune-stimulating products for the treatment of cancer.
Under the terms of the agreement, Epimmune has granted Searle
exclusive worldwide rights to its epitope and PADRE technologies
in the cancer field, excluding rights previously granted to
Takara Shuzo Co., Ltd. Biomedical Group (Takara) for the ex
vivo treatment of cancer in Japan. As part of the February
1998 agreement, Searle purchased 1,032,149 shares of
Epimmunes Series B convertible preferred stock for
$6.1 million and 659,898 shares of Cytels
Series B convertible preferred stock for $3.9 million.
Cytel simultaneously purchased 659,898 shares of Epimmunes
Series B-1 convertible preferred stock for
$3.9 million.

In July 1999, as a result of the Exchange
Transaction, the Company transferred all of the outstanding
shares of Epimmunes Series B-1 Preferred Stock then
held by Cytel to Searle in exchange for all of the outstanding
shares of Cytels Series B Preferred Stock, and issued
859,666 shares of Cytels Series S Preferred Stock and
549,622 shares of Cytels Series S-1 Preferred Stock
to Searle in exchange for all outstanding shares of
Epimmunes Series B Preferred Stock and
Series B-1 Preferred Stock.

In August 1999, the Company received a
$2.0 million milestone payment as a result of Searles
acceptance of a lead product candidate for breast, lung and
colon cancers.

In November 2000, the Company was notified by
Pharmacia, that following the merger between Pharmacia and
Monsanto, the parent of Searle, they would not continue funding
their cancer vaccine program.

The Company has now implemented an orderly
conclusion to the collaboration and transfer of applicable
materials and documentation from Pharmacia and is now internally
proceeding with the cancer program. As of

F-20



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                                              
|-- | -----------------------------------------------------------------------------
|9. | Revenues under collaborative research and
	development agreements (continued)

December 31, 2001, Pharmacia owned 2.6% of
the outstanding common stock of the Company and all of the
preferred stock.



| |                      
| | ---------------------
| | Takara Shuzo Co., Ltd

Under two agreements with Takara, which were
assigned to Epimmune in October 1997, Epimmunes technology
is being applied to fungal disease targets and ex vivo
cellular therapy for the treatment of cancer. Under the
anti-fungal collaboration initiated in June 1994, Takara
obtained rights to any anti-fungal products resulting from the
collaboration for commercialization in Japan. Epimmune has the
right to develop products in North America, and the companies
share rights in the rest of the world. Research in the
anti-fungal field, using Epimmune technology is now being
conducted independently by Takara in Japan. Under the
ex vivo cellular therapy collaboration initiated in
October 1994, Takara obtained rights to Epimmunes
technology relevant to the development of ex vivo cellular
therapies for the treatment of cancer in Japan. Takara will make
payments upon achievement of certain clinical milestones and pay
royalties to Epimmune on sales from products resulting from the
collaboration under both agreements, if any products are
developed and commercialized.



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

In July 1998, Cytel entered into an exclusive
sublicense and option agreement with Elan International Services
Ltd. (Elan), a subsidiary of Elan Corporation, plc., granting
Elan rights to patents involving use of antibodies that bind
VLA-4 integrin for the treatment of inflammatory conditions. In
connection with this agreement, which included the grant of an
exclusive sublicense, Elan made a $4.0 million equity
investment in Cytel, based on the fair value of the stock, of
which $2.6 million was allocated to the purchase price of
285,714 shares of the Companys common stock and
$1.4 million was allocated to the rights granted under the
exclusive sublicense and option agreement. In addition, Elan has
an option to enter into a nonexclusive sublicense for patent
rights to other VLA-4 blocking compounds.

In June 1999, Cytel entered a further agreement
eliminating milestone obligations under the July 1998 agreement.
Under the terms of the agreement, Cytel received
$0.5 million, which was recorded as other income.

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.



| |                         
| | ------------------------
| | 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 vivo cell 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.



| |             
| | ------------
| | 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

F-21



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                                              
|-- | -----------------------------------------------------------------------------
|9. | Revenues under collaborative research and
	development agreements (continued)

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.



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

In July 2001, the Company entered into license,
development and securities purchase agreements with Genencor
International, Inc. Pursuant to those agreements, the Company
exclusively licensed to Genencor its PADRE and epitope
technologies for vaccines to treat or prevent hepatitis B,
hepatitis C and human papilloma virus. Genencor will also
fund research and development activities on those programs at
Epimmune for 30 months, made an initial ten percent equity
investment in Epimmune and, if certain conditions are met, has
the right to acquire up to 500,000 additional shares of Epimmune
common stock. In connection with the license agreement, Genencor
paid the Company an upfront license fee and will also pay the
Company pre-commercialization milestones and royalties on
product sales, if any products are ever developed. The license
fee is being amortized into revenue over the life of the
agreement.



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



| |            
| | -----------
| | 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 vivo cell therapy. 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.



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

F-22



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

10.     Income
taxes

Significant components of the Companys
deferred tax assets as of December 31, 2001 and 2000 are
shown below. A valuation allowance of $61,037,000 at
December 31, 2001 and $59,895,000 at December 31, 2000
has been recognized to offset the deferred tax assets as
realization of such assets is uncertain.

|                                            |                                  |      |             |            |   |   |             |            |  
|------------------------------------------- | -------------------------------- | ---- | ----------- | ---------- | - | - | ----------- | ---------- | -
|                                            |                                  | 2001 |             | 2000      
|                                            |                                  |      |             |           
|Deferred tax liabilities:                   |                                  |      |             |            |   |   |             |           
|                                            | Patents expensed for tax         |      | $           | (834,000   | ) |   | $           | (832,000   | )
|                                            |                                  |      |             |            |   |   |             |           
|Total deferred tax liabilities              |                                  |      | (834,000    | )          |   |   | (832,000    | )         
|Deferred tax assets:                        |                                  |      |             |            |   |   |             |           
|                                            | Capitalized research expenses    |      |             | 670,000    |   |   |             | 833,000    |  
|                                            | Net operating loss carryforwards |      |             | 51,610,000 |   |   |             | 50,797,000 |  
|                                            | Research and development credits |      |             | 8,497,000  |   |   |             | 8,949,000  |  
|                                            | Other, net                       |      |             | 1,094,000  |   |   |             | 148,000    |  
|                                            |                                  |      |             |            |   |   |             |           
|Total deferred tax assets                   |                                  |      | 61,871,000  |            |   |   | 60,727,000  |           
|Valuation allowance for deferred tax assets |                                  |      | (61,037,000 | )          |   |   | (59,895,000 | )         
|                                            |                                  |      |             |            |   |   |             |           
|Net deferred tax assets                     |                                  | $    |            |            |   | $ |            |           
|                                            |                                  |      |             |            |   |   |             |           

At December 31, 2001, the Company has
federal and California net operating loss carryforwards of
approximately $130,731,000 and $101,815,000, 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 2003,
unless previously utilized. The California tax loss
carryforwards will continue to expire in 2001. The Company also
has federal and California research and development tax credit
carryforwards of $6,595,000 and $2,925,000, 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.

11.     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,
2001, 2000 and 1999.

F-23



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12.     Unaudited
quarterly financial information

The following tables present unaudited quarterly
financial information, for the eight quarters ended
December 31, 2001. 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 generally accepted accounting
principles. 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, 2001 |                                     |             |   |             |   |             |   |             |   |  |   |      |  |  |   |      
|                             | Revenues                            |             | $ | 0.8         |   |             | $ | 1.5         |   |  | $ | 4.3  |  |  | $ | 1.6   |  
|                             | Income (loss) from operations       |             |   | (1.5        | ) |             |   | (0.9        | ) |  |   | 1.2  |  |  |   | (1.8  | )
|                             | Net income (loss)                   |             |   | (1.4        | ) |             |   | (0.8        | ) |  |   | 1.3  |  |  |   | (1.7  | )
|                             | Basic net income (loss) per share   |             |   | (0.19       | ) |             |   | (0.10       | ) |  |   | 0.15 |  |  |   | (0.18 | )
|                             | Diluted net income (loss) per share |             |   | (0.19       | ) |             |   | (0.10       | ) |  |   | 0.12 |  |  |   | (0.18 | )

|                             |                                     |             |   |             |   |             |   |             |   |  |   |       |   |  |   |       |  
|---------------------------- | ----------------------------------- | ----------- | - | ----------- | - | ----------- | - | ----------- | - |  | - | ----- | - |  | - | ----- | -
|                             |                                     | 1st Quarter |   | 2nd Quarter |   | 3rd Quarter |   | 4th Quarter
|                             |                                     |             |   |             |   |             |   |            
|Year Ended December 31, 2000 |                                     |             |   |             |   |             |   |             |   |  |   |       |   |  |   |      
|                             | Revenues                            |             | $ | 0.3         |   |             | $ | 0.4         |   |  | $ | 0.5   |   |  | $ | 0.4   |  
|                             | Income (loss) from operations       |             |   | (1.8        | ) |             |   | (1.6        | ) |  |   | (1.6  | ) |  |   | (1.9  | )
|                             | Net income (loss)                   |             |   | (0.7        | ) |             |   | (1.5        | ) |  |   | (1.5  | ) |  |   | (1.0  | )
|                             | Basic net income (loss) per share   |             |   | (0.11       | ) |             |   | (0.21       | ) |  |   | (0.21 | ) |  |   | (0.14 | )
|                             | Diluted net income (loss) per share |             |   | (0.11       | ) |             |   | (0.21       | ) |  |   | (0.21 | ) |  |   | (0.14 | )

13.     Subsequent
events

In January 2002, the Company entered into a
research agreement with Rhein Biotech to combine the
Companys PADRE technology with Rhein Biotechs
vaccine technologies to improve existing vaccines and develop
new ones.

F-24