##### Table of Contents









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,
    2003                                             
|  
|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.    þ

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

The aggregate market value of the
Registrants Common Stock held by non-affiliates of the
Registrant as of June 30, 2003 was approximately
$8.7 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
13,525,622 as of March 15, 2004.



---

* Excludes 6,042,889 shares of Common
Stock held by directors and officers and stockholders whose
ownership exceeds 10% of the Common Stock outstanding on
June 30, 2003. 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           
|              | Item 9(A). Controls and Procedures                                                                     
|              | Item 10. Directors and Executive Officers of the Registrant                                            
|              | Item 11. Executive Compensation                                                                        
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|              | Item 13. Certain Relationships and Related Transactions                                                
|              | Item 14. Principal Accountant Fees and Services                                                        
|PART IV      
|              | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES   
|EXHIBIT 10.47
|EXHIBIT 14.1 
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 



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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. These
statements reflect managements current views with respect
to future events and financial performance and actual results
could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, without
limitation, those discussed in the description of our business
below and the sections entitled Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and in our other SEC
filings.

Epimmune® and PADRE® are our trademarks
and EIS and ImmunoSense are our service marks.

Overview

We are developing therapeutic vaccines that use
multiple epitopes, or protein fragments, to specifically
activate the bodys immune system for the more effective
management of infectious diseases and cancer. In September 2002,
we commenced a Phase I/II clinical trial of our
therapeutic, multi-epitope vaccine candidate EP HIV-1090 in
patients infected with HIV 1, which is the predominant
strain of HIV in North America and Western Europe. Patients
enrolled in the trial are immunized while receiving multiple
antiretroviral drugs. In January 2004, we announced that we had
completed patient enrollment in the trial and that all of the
patients in the final dose group had received their initial
vaccinations. The primary objective of this trial is to
determine the safety and the effect on the immune system, or
immunogenicity, of the EP HIV-1090 vaccine. The vaccine
candidate is designed to induce a sufficiently potent immune
response so that the patients immune system can control
the virus, allowing the patient to suspend or stop taking
antiretroviral drugs that have serious side effects and can
induce drug resistance when taken over time. In February 2003,
we also commenced two Phase I/II clinical trials of our
therapeutic, multi-epitope vaccine candidate EP-2101, one in
patients with lung cancer and one in patients with colorectal
cancer. The primary objective of these trials is to determine
the safety and immunogenicity of the EP-2101 vaccine. In
addition, we are conducting research and preclinical development
of vaccines to treat breast, prostate and other cancers and
vaccines for the prevention of HIV and malaria under contracts
from the National Institutes of Health, or NIH.

In July 2001, we entered into a collaboration
with Genencor International, Inc. for vaccines to treat or
prevent hepatitis B virus, hepatitis C virus and human
papilloma virus. In February 2004, we announced that we had
earned a milestone payment from Genencor as a result of Genencor
filing an Investigational New Drug Application, or IND, for a
vaccine to treat hepatitis B, the lead program in the
collaboration. In March 2004, Genencor assigned its rights under
our collaboration to Innogenetics NV. In connection with the
assignment by Genencor, we extended the collaboration term with
Innogenetics through September 2005. Innogenetics will have the
right to terminate the collaboration early, upon three months
written notice.

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

Our vaccines are composed of proprietary epitopes
that can stimulate specific T cell immune responses. We can
rapidly identify such epitopes from any protein or gene sequence
using EIS, our Epitope Identification System, which enables the
rapid identification of novel epitopes that can stimulate
specific CTL and HTL immune responses. These epitopes can be
identified from any protein or gene sequence. In an attempt to
establish a broad patent position, we have identified, evaluated
and disclosed in our patent applications more than
72,000 epitopes. We also make analogs of the epitopes we
discover by selectively altering their

1



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composition to increase vaccine potency, and we
apply for patent protection for these analogs. We select a small
subset of these epitopes and analogs, typically 10 to 50, to
develop each of our vaccine candidates.


In September 2003, we announced and completed a
reduction of our work force aimed at focusing our efforts on our
most advanced clinical programs and our sponsored and partnered
programs. We reduced our research and administrative staff by
11 individuals or 23%, which resulted in a one-time
restructuring charge of approximately $336,000 in the third
quarter ending September 30, 2003.

In September 2003, Dr. Loria, our chief
executive officer, surrendered an aggregate of
963,740 shares of our common stock at the fair market value
of $3.17 per share, in exchange for the prepayment of the
outstanding principal and interest under the promissory note
dated January 16, 2001 issued by Dr. Loria to us. This
event resulted in a non cash, stock-based compensation charge of
approximately $645,000 in the third quarter ended
September 30, 2003.

Market Opportunities



| |    
| | ---
| | HIV

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

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

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



| |                           
| | --------------------------
| | Lung and Colorectal Cancer

The World Health Organization (WHO) predicts
that by 2020 there will be 15 million cases of cancer every
year. In the United States approximately 1.25 million new
cases of cancer are diagnosed annually and cancer is, by 2020,
expected to surpass heart disease as the primary cause of death
in adults. Of the various cancers, the four most common types
include lung, breast, prostate and colorectal cancer. These four
cancers have the greatest incidence of new cases and are
responsible for the highest combined mortality, approxi-

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mately 58.1% of all cancer deaths worldwide. In
the United States alone, there were an estimated 147,500 new
cases of colorectal cancer diagnosed in 2003 and colorectal
cancer represents the third highest incidence of any cancer for
American men. In 2003, an estimated 57,000 deaths in the
United States were attributed to colorectal cancer. Cancer of
the lungs continues to be a major health problem with a very
high mortality rate and represents the leading cause of cancer
death in the United States. Approximately 171,900 new lung
cancer cases were diagnosed in the United States in 2003, and an
estimated 157,200 patients died from lung cancer. In
addition nearly 75% of cancers are expected to occur in
individuals over the age of 55 and demographic trends clearly
show an aging population.


The current course of treatment for lung cancer
includes surgery, if possible, followed by various regimens of
radiation and chemotherapy to try to destroy cancer cells that
have spread. Chemotherapy causes well-known adverse side effects
such as hair loss, decreased function of various organs, and a
substantial suppression of the immune system, leading to
susceptibility to other diseases. The side effects of these
treatments, combined with relatively low success rates for most
cancers, have led to the need for development of different
methods of treatment. The unmet needs for more effective cancer
treatments provide a significant market potential for emerging
therapeutics. Current pharmaceutical therapies for lung cancer
include taxanes, platinum-based drugs and nucleoside analogs,
with combined sales exceeding $2.3 billion in 2001. Drug
therapies for colorectal cancer had combined sales in excess of
$700 million in 2001. According to a PhRMA 2003
report on pharmaceutical drug development, there were 395 new
product candidates in clinical development for the treatment of
cancer and at least 30 companies were developing more than
50 vaccines against various cancers.

The Immune Response

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

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

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

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

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



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

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

Our Approach

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

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



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

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Our Vaccine Product Candidates

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

|                      |                      |                              |                                        |                   |             
|--------------------- | -------------------- | ---------------------------- | -------------------------------------- | ----------------- | ------------
|                      |                      |                              |                                        | Commercialization
|Indication            |                      | Product Development Stage(1) |                                        | Rights           
|                      |                      |                              |                                        |                  
|Infectious Diseases   |                      |                              |                                        |                  
|Therapeutic Vaccines  |                      |                              |                                        |                  
|                      | HIV                  |                              | Phase I/II Clinical Trial              |                   | Epimmune    
|                      | Hepatitis B          |                              | Phase I Clinical Trial                 |                   | Innogenetics
|                      | Hepatitis C          |                              | Preclinical                            |                   | Innogenetics
|                      | Papilloma virus      |                              | Preclinical                            |                   | Innogenetics
|Prophylactic Vaccines |                      |                              |                                        |                  
|                      | HIV                  |                              | Preclinical/ Phase I Clinical Trial(2) |                   | Epimmune    
|                      | Malaria              |                              | Preclinical                            |                   | Epimmune    
|                      | Hepatitis C          |                              | Preclinical                            |                   | Innogenetics
|Cancer                |                      |                              |                                        |                  
|Therapeutic Vaccines  |                      |                              |                                        |                  
|                      | Colorectal           |                              | Phase I/ II Clinical Trial             |                   | Epimmune    
|                      | Lung                 |                              | Phase I/II Clinical Trial              |                   | Epimmune    
|                      | Breast               |                              | Preclinical                            |                   | Epimmune    
|                      | Prostate             |                              | Epitope/ Antigen Identification        |                   | Epimmune    
|Ex Vivo Immunotherapy |                      |                              |                                        |                  
|                      | Various Solid Tumors |                              | Preclinical                            |                   | Anosys      
|                      | Various Solid Tumors |                              | Preclinical                            |                   | IDM         



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | By using the term Epitope/ Antigen
    Identification, we mean that we are discovering, evaluating and
    selecting epitopes for inclusion in candidate vaccines that
    would be advanced to preclinical development. By using the term
    Preclinical, we mean that we have identified and selected
    specific epitope compositions for inclusion in a vaccine and are
    conducting preclinical testing aimed at optimizing the
    construction, formulation and manufacture of the vaccine and
    toxicology studies with the objective of filing an
    investigational new drug application or IND with regulatory
    authorities.
|   
|(2) | Phase I clinical trial being conducted by
    the NIH and HIV Vaccine Trials Network, or HVTN.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



| |                            
| | ---------------------------
| | Therapeutic Vaccine for HIV

We commenced our Phase I/II clinical trial
of our EP HIV-1090 therapeutic, multi-epitope vaccine in
HIV-1-infected patients in September 2002. The initial
Phase I/II trial is a double blind, placebo-controlled,
dose escalation study and includes approximately
40 patients. In January 2004, we announced that we had
completed patient enrollment in the trial and that all of the
patients in the final dose group had received their initial
vaccinations. The primary objective of this study is to
determine the safety and the immunogenicity of the vaccine as
measured by the quantity and breadth of CTLs generated. We
expect to present interim safety and immunogenicity results of
this trial in July 2004.

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

Patients enrolled in the trial are immunized
while receiving multiple antiretroviral drugs, a regimen termed
highly active antiretroviral therapy, to reduce the suppressive
effects that HIV has on the immune

5



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system. The goal of our vaccine is to induce a
sufficiently potent immune response so that the patients
immune system can control the virus, allowing the patient to
suspend or stop taking the antiretroviral drugs that can have
serious side effects and induce drug resistance when taken over
time.




| |                                                       
| | ------------------------------------------------------
| | Therapeutic Vaccine for Lung and Colorectal
    Cancer

We commenced our Phase I/II clinical trial
of our EP-2101 therapeutic, multi-epitope vaccine in lung and
colorectal cancer patients in February 2003. The primary
objectives of this initial Phase I/ II trial will be to
determine the safety and immunogenicity of the EP-2101 vaccine.
Completion of the Phase I/ II trial and final data are now
expected in the third quarter of 2004. This initial clinical
trial will involve approximately 20-25 cancer patients who have
had surgery to remove the majority of the cancer cells. Patients
who have had surgery to remove the majority of the cancer cells
generally have normal immune system function.

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

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



| |               
| | --------------
| | Other Vaccines

In February 2004, we announced that we had earned
a milestone payment from Genencor as a result of Genencor filing
an IND for a vaccine to treat hepatitis B, the lead program
in the collaboration. In April 2003, we announced that the NIH
held an active IND to test our EP HIV-1090 vaccine for the
prevention of HIV infection. The HVTN is conducting the
Phase I trial.

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

Our Technology



| |                                        
| | ---------------------------------------
| | Epitope Identification System
    (EIS)

We developed and optimized our EIS based on
extensive work over the past eleven years in the field of
T cell recognition and stimulation. Our intellectual
property portfolio includes one issued patent and several
pending patent applications having claims directed to methods of
using sequence motifs to identify and make peptide epitopes.
With the genetic sequence of a tumor-associated antigen, virus,
bacteria or parasite as input,

6



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we use EIS to rapidly identify antigen-specific
epitopes that meet pre-determined criteria for broad
conservation, binding, population coverage and immunogenicity.




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

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



| |                       
| | ----------------------
| | Multi-Epitope Vaccines

Our candidate vaccines for each infectious
disease and cancer 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 a
multi-epitope vaccine. In the case of our initial HIV vaccine
candidate, EP HIV-1090, we used proprietary processes to
combine the selected epitopes in a specific, optimized sequence
and formed an epigene. In animal models, epigene vaccines have
elicited strong multi-specific T cell responses that are
both stronger and broader than the responses generated by whole
antigen DNA vaccines.

The first of our candidate vaccines to enter
human clinical trials was our EP HIV-1090 therapeutic
vaccine targeting HIV. The vaccine incorporates multiple CTL
epitopes from six HIV associated antigens and our PADRE
universal helper T cell epitope. We began a Phase I/II
clinical trial of our EP HIV-1090 therapeutic,
multi-epitope vaccine in HIV-1 infected patients in September
2002. In January 2004, we announced that we had completed
patient enrollment in the trial and that all of the patients in
the final dose group had received their initial vaccinations.
Also, in April 2003, the NIH and HVTN began a Phase I
clinical trial of our EP HIV-1090 vaccine for the
prevention of HIV infection.

In addition to the Phase I/II clinical trial
for our HIV vaccine, we are conducting a Phase I/II
clinical trial of our EP 2101 vaccine in lung cancer and
colorectal cancer patients. We have also assisted in advancing a
partnered program in hepatitis B into a Phase I clinical
trial and are advancing other epigene candidate vaccines for
HIV, hepatitis C virus and human papilloma virus in
preclinical development. To be effective in treating or
preventing HIV, hepatitis B virus, hepatitis C virus and
human papilloma virus, vaccines should target multiple strains
of the virus and induce T cells directed at conserved
regions of the virus. Our candidate vaccines incorporate
epitopes, which are selected from multiple viral proteins and
from highly conserved regions of the virus.



| |      
| | -----
| | PADRE

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

7



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PADRE offers several advantages over the
immunogenic carrier proteins traditionally used to enhance
antibody vaccines:




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

We use our PADRE technology in all of our
T cell vaccines and have licensed this technology to
several of our corporate collaborators.



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

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

Collaborations and Licenses

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



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

Genencor
International, Inc.In July 2001,
we entered into a collaboration with Genencor
International, Inc. pursuant to which we exclusively
licensed to Genencor our PADRE and epitope technologies for
vaccines to treat or prevent hepatitis B, hepatitis C
and human papilloma virus. In connection with this
collaboration, we received an upfront license fee. In addition,
Genencor made an initial ten percent equity investment in our
common stock at a premium to the market price. Under our
agreement with Genencor, we may receive a total of approximately
$60 million in payments, including the initial equity
investment but excluding royalties. In January 2002, we received
a payment from Genencor for achievement of our first milestone,
identification of a product candidate to treat chronic
hepatitis B infection. In February 2004, we announced that
we had earned a milestone payment form Genencor as a result of
Genencor filing an IND for a vaccine to treat hepatitis B.
In addition, Genencor fully funds our research in these specific
indications and is obligated to pay us royalties on sales of any
products that may be developed under the collaboration. The
initial collaboration had a term through September 2003, and in
October 2002, was extended to September 2004. In March 2004,
Genencor assigned its rights under our collaboration to
Innogenetics NV. In connection with the assignment by
Genencor, we extended the collaboration term with Innogenetics
through September 2005. In addition, Genencor agreed not to sell
or otherwise dispose of any of our common stock they held,
without our prior approval, for a minimum of twelve months.
Innogenetics has the right to terminate the

8



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agreement early, upon three months written
notice, if we breach our obligations under the collaboration
agreement or upon certain force majeure events.


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

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



| |                          
| | -------------------------
| | License Option Agreements

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

Merck & Co.In April 2003, we entered into an agreement with
Merck & Co., Inc. under which Merck will evaluate
select Epimmune epitopes in connection with technology
controlled by Merck for the development of certain vaccines.
Under the terms of the agreement, we will provide Merck a
limited number of our proprietary analog, or modified, epitopes,
which will then be evaluated in connection with delivery
technologies owned or controlled by Merck to determine the
activity of the Epimmune epitopes. We received an evaluation
license fee in connection with the agreement. Merck has an
option to enter into licensing discussions with us for the
development of the Epimmune epitopes for use in vaccines for the
treatment of certain diseases.



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

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

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

Anosys Inc.In
August 2001, we entered into a license agreement with Anosys
Inc., formerly AP Cells, granting Anosys a non-exclusive license
to certain cancer antigens and associated technology for use in
ex vivocell therapy. In connection with the
agreement, we received an upfront license fee and are also
entitled to receive milestone and royalty payments on product
sales, if any products are developed. In September 2003, we
received a milestone payment under the agreement as a result of
Anosys filing of an IND for a product incorporating the
technology we licensed them.

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Immuno-Designed Molecules,
S.A.In February 2003, we entered into
a license agreement with Immuno-Designed Molecules, S.A., or
IDM, whereby we granted IDM a non-exclusive license to certain
patented and non-patented rights to our universal cancer epitope
packages for use in connection with IDMs
DendritophageTMex vivotechnology. In
connection with the agreement, we received an upfront license
fee and are also entitled to receive commercialization milestone
payments and royalties on product sales if IDM develops products
using our technology.

Amgen.In September
2003, we entered into an agreement with Amgen Inc. under which
Amgen acquired a non-exclusive license to our PADRE technology
for research use. In connection with the agreement, we received
a license fee.



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

In September 2003, we were awarded a
$16.7 million, five-year contract from the National
Institute of Allergy and Infectious Diseases, or NIAID, an
institute of the National Institutes of Health, or NIH, for the
design and development of prophylactic HIV vaccines for clinical
evaluation by the NIAID-sponsored HIV Vaccine Trials Network, or
HVTN. The award was made under the NIAIDs HIV Vaccine
Design and Development Teams, or HVDDT, program whose goal is to
fund development of promising vaccine concepts with plans for
targeted testing in humans. Epimmune will lead a consortium that
includes Bavarian Nordic A/S in Denmark and SRI International
and Althea Technologies, both in the U.S. Epimmune will use
its proprietary epitope technology to identify epitopes, or
protein fragments, from conserved regions of multiple
HIV virus proteins for use in candidate vaccines.

In July 2003, we received a grant from the
National Cancer Institute, or NCI, an institute of the NIH, to
support continued epitope analog identification and preclinical
development of multi-epitope, analog based cancer vaccines. The
grant has a total potential value of approximately
$0.6 million over two years. The activities funded by this
grant complement current studies and Phase I/II clinical
trials we are conducting by providing analog epitopes that
extend vaccine coverage to larger segments of the population.
The grant was made under the NCIs Flexible System to
Advance Innovative Research for Cancer Drug Discovery by Small
Business, or FLAIR program.

In October 2002, we were awarded a contract from
NIAID to conduct research and development aimed at developing a
malaria vaccine. The award is part of the NIAIDs
Millennium Vaccine Initiative that solicits vaccine technology
from the private sector to accelerate the development of
effective vaccines for malaria and tuberculosis. The program is
composed of a Phase A feasibility study and an option for a
Phase B development program for a total potential value of
$3.5 million over five years. We are working with
investigators at the Naval Medical Research Center on the
program.

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

Patents, Proprietary Rights and
Licenses

Our success will depend in part on our ability to
obtain patents having claims directed to our products and
processes, both in the United States and other countries. The
patent position of biotechnology and pharmaceutical companies is
highly uncertain and involves complex legal and factual
questions. We file patent applications, as we believe
appropriate, that cover our proprietary technology.

We have developed our patent portfolio over
approximately the past eleven years. The patents and patent
applications in our patent portfolio include claims directed to
epitope identification, epitope analogs, methods for identifying
epitopes and epitope analogs, vaccine design, specific vaccines,
our PADRE universal HTL epitope and ImmunoStealth epitope
modification technologies. As of March 15, 2004, our
intellectual

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property portfolio, including licenses to
intellectual property relevant to epitope discovery and gene
delivery, included 19 issued United States patents, 103
granted foreign patents, 59 applications pending in the
United States and 153 foreign applications pending.


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

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

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

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

Competition

The biotechnology industry continues to undergo
rapid change and competition is intense and is expected to
increase. Our competitors may succeed in developing technologies
and products that are more effective or affordable than any of
the products we are developing or which would render our
technology and products obsolete and noncompetitive. We compete
with many public and private companies, including pharmaceutical
companies, chemical companies, specialized biotechnology
companies and academic institutions. There are 27 drugs
currently approved in the United States for HIV infection/ AIDS,
and according to a PhRMA 2003 report on
pharmaceutical drug development, there were 83 new product
candidates in clinical development for HIV and related
conditions, including 15 HIV vaccines. In addition, according to
the PhRMA 2003 report, there were 395 new product
candidates in clinical development for the treatment of cancer,
and at least 30 companies were developing more than
50 vaccines against various cancers. Many of our
competitors have substantially greater experience, financial and
technical resources and production, marketing and development
capabilities than us. In addition, many of our competitors have
significantly greater experience conducting preclinical studies
and clinical trials of new products, and in obtaining regulatory
approvals for such products. Accordingly, some of our
competitors may succeed in obtaining, developing and
commercializing products more rapidly or effectively than us, or
in developing technology and products that would render our
technology and products obsolete or noncompetitive. We are aware
of companies that are pursuing the development of
pharmaceuticals that target the same diseases that we are
targeting. These and other efforts by potential competitors may
be successful, and other technologies may be developed to
compete with our technologies. If

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we cannot successfully respond to technological
change in a timely manner, our commercialization efforts may be
harmed.


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

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

Government Regulation

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

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



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

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

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

Clinical trials involve the administration of the
drug under the supervision of a qualified principal investigator
to healthy volunteers or to patients identified as ones with the
condition for which the drug is

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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, be repeated or subdivided. Phase I involves the
initial introduction of the drug into healthy human subjects and
often into patients as well. In Phase I, the drug is tested
for safety (adverse effects), dosage tolerance, metabolism,
distribution, excretion and clinical pharmacology. Phase II
involves studies in a limited patient population to:



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

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

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

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

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

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

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

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previously unknown problems with a product,
manufacturer or facility may result in restrictions on such
product or manufacturer, including withdrawal of the product
from the market.


Manufacturing

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

Employees

As of March 15, 2004, we employed
36 individuals full-time, of whom 27 were engaged in
research and development, and 10 of whom hold Ph.D. or M.D.
degrees. A significant number of our management and professional
employees have had prior experience with pharmaceutical,
biotechnology or medical product companies. None of our
employees are covered by collective bargaining agreements, and
management considers relations with our employees to be good.

Available Information

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

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RISK FACTORS

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

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

We will continue to spend substantial amounts on
research and development, including amounts spent for
manufacturing clinical supplies, conducting clinical trials for
our product candidates and advancing development of certain
sponsored and partnered programs. Therefore, we will need to
obtain additional funding. We do not have committed external
sources of funding and may not be able to obtain any additional
funding, especially if volatile market conditions persist for
biotechnology companies. If we are unable to obtain additional
funding, we will be required to delay, further reduce the scope
of or eliminate one or more of our research and development
projects, sell the Company or certain of its assets or
technologies, or dissolve and liquidate all of its assets. As of
December 31, 2003, we had approximately $6.4 million
in cash and cash equivalents. Our future operational and capital
requirements will depend on many factors, including:



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

We intend to seek additional funding through
collaboration and license agreements, government research grants
or equity or debt financings. In the event we are able to obtain
financing, it may not be on favorable terms. In addition, we may
not be able to enter into additional collaborations to reduce
our funding requirements. If we acquire funds by issuing
securities, dilution to existing stockholders will result, in
addition to the dilution that occurred as a result of our
September 2003 financing. If we raise funds through additional
collaborations and license agreements, we will likely have to
relinquish some or all of the rights to product candidates or
technologies that we may have otherwise developed ourselves. If
we are unable to obtain funding, we may be required to engage in
another restructuring, cease development of some product

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candidates, further reduce the scope of our
operations, sell the Company or certain of its assets or
technologies or cease operations.


We may not meet all of The Nasdaq National
Markets continued listing requirements and we may be
delisted, which could reduce the liquidity of our common stock
and adversely affect our ability to raise additional necessary
capital.

In order to continue trading on The Nasdaq
National Market, we must comply with The Nasdaq National
Markets continued listing requirements, which require that
we maintain a minimum stockholders equity of
$10.0 million and a minimum closing bid price of
$1.00 per share. As of December 31, 2003, our
stockholders equity was $9.7 million, which did not
satisfy the $10.0 million continued listing requirement. We
are currently evaluating several alternatives to regain
compliance with these criteria, but there can be no assurance
that we will be successful in our efforts. If we fail to satisfy
The Nasdaq National Markets continued listing
requirements, our common stock may be delisted from The Nasdaq
National Market. The delisting of our common stock may result in
the trading of the stock on The Nasdaq SmallCap Market or the
OTC Bulletin Board. Consequently, a delisting of our common
stock from The Nasdaq National Market may reduce the liquidity
of our common stock and adversely affect our ability to raise
additional necessary capital.

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

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



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

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

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Some of our programs are funded by the
government and the government may not allocate funds for these
programs in future fiscal years.

We fund certain of our research and development
related to our HIV, cancer and malaria programs pursuant to
multi-year grants and contracts from the government. The
government is under no obligation to and may not fund these
programs over their full term which would have a significant
impact on our ability to continue development of our HIV, cancer
and malaria programs.

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

We have experienced significant operating losses
since our inception in 1987. As of December 31, 2003, we
had an accumulated deficit of $157.9 million. We expect to
continue to incur substantial operating expenses and net
operating losses for the foreseeable future, which may hurt our
ability to continue operations. We have not generated revenues
from the commercialization of any product. All of our revenues
to date have consisted of contract research and development
revenues, license and milestone payments, research grants,
certain asset divestitures and interest income. We expect that
substantially all of our revenues for the foreseeable future
will result from similar sources. To achieve profitable
operations, we, alone or with collaborators, must successfully
identify, develop, register and market proprietary products. We
do not expect to generate revenues from the commercialization of
any product for at least six years (and this would assume
approval of either our HIV or lung and colorectal product
candidates, which may not occur). We may not be able to generate
sufficient product revenue to become profitable. Even if we do
achieve profitability, we may not be able to sustain or increase
our profitability on a quarterly or yearly basis.

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

Our common stock is expressly subordinate to our
series S and series S-1 preferred stock in the event
of our liquidation, dissolution or winding up. With respect to
our series S preferred, any merger or sale of substantially all
of our assets shall be considered a deemed liquidation. 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.

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

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

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

Our success will depend in part on our ability to
obtain and enforce claims in our patents directed to our
products, technologies and processes, both in the United States
and other countries. Although we have filed

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




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

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

The biotechnology industry continues to undergo
rapid change, and competition is intense and is expected to
increase. Our competitors may succeed in developing
technologies, vaccines or other therapeutic products that are
more effective than any of the products we are developing, which
would render our technology and products obsolete and
noncompetitive.

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

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



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

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

Our vaccines under development address a range of
cancer and infectious disease markets. The competition in these
markets is extremely formidable. There are 27 drugs
currently approved in the United States for HIV and according to
a PhRMA 2003 report on pharmaceutical drug development,
there were 83 new product candidates in clinical development for
HIV and related conditions, including 15 HIV vaccines. In

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addition, according to the PhRMA 2003 report,
there were 395 new product candidates in clinical development
for the treatment of cancer, and at least 30 companies were
developing more than 50 vaccines against various cancers.
An important factor in competition may be the timing of market
introduction of our vaccines and competitive products.
Accordingly, the relative speed with which we can develop
vaccines, complete the clinical trials and approval processes
and supply commercial quantities of the vaccines to the market
are expected to be important competitive factors. We expect that
competition among products approved for sale will be based,
among other things, on product effectiveness, safety,
reliability, availability, price and patent position.


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

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

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

The enforcement, defense and prosecution of
intellectual property rights, United States Patent and Trademark
Office interference proceedings and related legal and
administrative proceedings in the United States and elsewhere
involve complex legal and factual questions. As a result, these
proceedings are costly and time-consuming, and their outcome is
uncertain. Litigation may be necessary to:



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

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

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

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

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

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

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

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

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

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

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

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

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

If we cannot obtain and maintain strategic
collaborations on acceptable terms in the future, we may not be
able to develop products in markets where it would be too costly
or complex to do so on our own.

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

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

Our collaborations and license arrangements
generally pose the following risks:



| |   |                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | collaborators and licensees may not pursue
    further development and commercialization of potential products
    resulting from our collaborations or may elect not to renew
    research and development programs;                                                          
|
| |  | collaborators and licensees may delay clinical
    trials, under fund a clinical trial program, stop a clinical
    trial or abandon a product candidate, repeat or conduct new
    clinical trials or require new formulation of a product
    candidate for clinical testing;

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






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

We lease a 24,000 square foot administrative
and research laboratory facility in San Diego under an
operating lease that expires in March 2009. 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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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 
|     |                                  |      |   |     
|2004 |                                  |      |   |      |  |  |   |     
|     | First Quarter (through March 15) |      | $ | 2.99 |  |  | $ | 1.76 | 
|2003 |                                  |      |   |      |  |  |   |     
|     | First Quarter                    |      | $ | 1.25 |  |  | $ | 0.75 | 
|     | Second Quarter                   |      | $ | 2.07 |  |  | $ | 0.76 | 
|     | Third Quarter                    |      | $ | 4.29 |  |  | $ | 1.01 | 
|     | Fourth Quarter                   |      | $ | 3.21 |  |  | $ | 1.50 | 
|2002 |                                  |      |   |      |  |  |   |     
|     | First Quarter                    |      | $ | 4.24 |  |  | $ | 2.30 | 
|     | Second Quarter                   |      | $ | 2.75 |  |  | $ | 1.40 | 
|     | Third Quarter                    |      | $ | 2.10 |  |  | $ | 1.17 | 
|     | Fourth Quarter                   |      | $ | 1.50 |  |  | $ | 0.85 | 

As of March 15, 2004, 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.

For information concerning prior stockholder
approval of and other matters relating to our equity incentive
plans, see Equity Compensation Plan Information
under Item 12 in this Annual Report on Form 10-K.

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 September 2003, pursuant to the terms
    of a unit purchase agreement, we issued 2,168,961 shares of
    common stock and warrants to purchase 542,238 shares of
    common stock to a group of nine accredited investors. The
    purchase price of each unit, which is the combination of one
    share of common stock and 25% of a warrant, was $1.86725 for
    gross proceeds to us for the transaction of $4.05 million.
    Our sale of the common stock and warrants was exempt from
    registration requirements under the Securities Act pursuant to
    Rule 506 thereof because each of the purchasers of
    securities was an accredited investor.

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

Please read the following selected financial data
in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the Consolidated Financial Statements and related notes
included elsewhere in this annual report on Form 10-K.

|                                       |  |                                              |       |      |  |      |       |      |  |      |       |   |  |   |       |   |  |   |       |  
|-------------------------------------- |  | -------------------------------------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                       |  |                                             
|                                       |  | Years Ended December 31,                    
|                                       |  |                                             
|Statement of Operations Data:          |  | 2003                                         |       | 2002 |  | 2001 |       | 2000 |  | 1999
|                                       |  |                                              |       |      |  |      |       |      |  |     
|                                       |  |                                             
|                                       |  | (In millions, except for net loss per share)
|Operating revenues                     |  | $                                            | 7.2   |      |  | $    | 7.1   |      |  | $    | 8.2   |   |  | $ | 1.6   |   |  | $ | 4.2   |  
|Net loss                               |  |                                              | (7.1  | )    |  |      | (6.5  | )    |  |      | (2.6  | ) |  |   | (4.7  | ) |  |   | (8.3  | )
|Net loss per share  basic and diluted |  |                                              | (0.58 | )    |  |      | (0.57 | )    |  |      | (0.31 | ) |  |   | (0.68 | ) |  |   | (1.57 | )

|                      |  |                    |      |      |  |      |      |      |  |      |      |  |  |   |      |  |  |   |      | 
|--------------------- |  | ------------------ | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | - | ---- |  |  | - | ---- | 
|                      |  |                   
|                      |  | As of December 31,
|                      |  |                   
|Balance Sheet Data:   |  | 2003               |      | 2002 |  | 2001 |      | 2000 |  | 1999
|                      |  |                    |      |      |  |      |      |      |  |     
|                      |  |                   
|                      |  | (In millions)     
|Working capital       |  | $                  | 4.8  |      |  | $    | 7.7  |      |  | $    | 15.4 |  |  | $ | 8.2  |  |  | $ | 6.9  | 
|Total assets          |  |                    | 12.7 |      |  |      | 15.5 |      |  |      | 23.9 |  |  |   | 14.5 |  |  |   | 12.7 | 
|Long-term obligations |  |                    |     |      |  |      |     |      |  |      | 0.04 |  |  |   | 0.4  |  |  |   | 0.4  | 
|Stockholders equity  |  |                    | 9.7  |      |  |      | 12.6 |      |  |      | 19.4 |  |  |   | 12.1 |  |  |   | 10.4 | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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.
Our actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences
include, without limitation, those discussed below and in the
section entitled Risk Factors.

Since 1997, we have devoted substantially all of
our resources to the discovery and development of potential
therapeutic and prophylactic products. To date, we have not
received any revenues from the sale of products. We have funded
our research and development primarily from equity-derived
working capital, through strategic alliances and collaborations
with other companies and through government research funding,
primarily from the National Institutes of Health in the form of
grants and contracts. We have not been profitable since our
inception and expect to incur substantial operating losses for
at least the next several years. As of December 31, 2003,
our accumulated deficit was approximately $157.9 million.

In July 2001, we entered into a collaboration
agreement with Genencor. The revenue that we recognize from
Genencor includes milestone payments, recognition of upfront
license fees over the term of the contract and contract revenue
to support our research and development activities over the term
of the collaboration. As of December 31, 2003, Genencor
owned approximately 10.0% of our common stock and was therefore
considered a related party for financial reporting
purposes. Therefore, all payments that we have received under
this agreement are itemized under the category, Related
Party Revenue.

In February 2003, we preliminarily agreed with
Anosys, Inc. to merge our operations to create a combined
company focused on the field of immunotherapeutics and products
for the treatment of cancer and infectious diseases. In August
2003, we announced that the merger agreement between Epimmune
and Anosys was terminated. In connection with the termination of
the merger agreement, we recorded a charge of $0.5 million
during the second quarter of 2003, which is included in general
and administrative costs, to write-off costs we had incurred in
connection with the proposed merger.

In September 2003, we announced a reduction of
our work force aimed at focusing our efforts on our most
advanced clinical programs and our sponsored and partnered
programs. We reduced our research and administrative staff by
11 individuals or 23%, which resulted in a one-time
restructuring charge of approximately $336,000 in the third
quarter of 2003.

In September 2003, Dr. Loria, our President
and CEO surrendered an aggregate of 963,740 shares of our
common stock, including 250,139 unvested shares, at the fair
market value of $3.17 per share, in exchange for

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the prepayment of the outstanding principal and
interest under a promissory note issued by Dr. Loria in
January 2001 for the purchase of 1,056,301 shares of our
common stock at a purchase price of $2.50 per share. The
aggregate value of the shares surrendered was $3,055,000. The
remaining 92,561 unvested shares will vest in equal daily
installments between September 29, 2003 and
January 15, 2005. We continue to have the right to purchase
any unvested shares at the purchase price paid by Dr. Loria
in the event of termination of Dr. Lorias service
to us.


In connection with this transaction, we recorded
a non-cash, stock-based compensation charge of approximately
$645,000 in the third quarter of 2003 based on the difference
between the fair market price on September 29, 2003 and the
exercise price of the shares surrendered by Dr. Loria. We
will also recognize an additional $62,000 in non-cash,
stock-based compensation charges ratably over the period from
September 29, 2003 to January 15, 2005 as the
remaining 92,561 unvested shares vest.

Subsequent Events

In March 2004, Genencor assigned its rights under
our collaboration to Innogenetics NV. In connection with the
assignment by Genencor, we extended the collaboration term with
Innogenetics through September 2005. Innogenetics will have the
right to terminate the collaboration early, upon three months
written notice.

Significant Accounting Policies

Our discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On
an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, patents and income taxes. We
base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting
policies affect the significant judgments and estimates used in
the preparation of our consolidated financial statements (see
Note 1 to our financial statements).



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

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



| |        
| | -------
| | Patents

We capitalize the costs incurred to file patent
applications when we believe there is a high likelihood that the
patent will issue and there will be future economic benefit
associated with the patent. These costs are

24



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##### Table of Contents



amortized over a ten-year life from the date of
patent filing. We expense all costs related to abandoned patent
applications. In addition, we review the carrying value of
patents for indicators of impairment on a periodic basis. If we
elect to abandon any of our currently issued or unissued patents
or we determine that the carrying value is impaired, the related
expense could be material to our results of operations for the
period of the abandonment.




| |                  
| | -----------------
| | Investment Policy

The primary objective of our investment
activities is to preserve principal while at the same time
achieving competitive yields, without significantly increasing
risk. To achieve this objective, we primarily invest in cash and
money market accounts as well as A1 or P1 or higher rated debt
securities with maturities of less than two years, with the
weighted average maturity not to exceed eighteen months. We also
attempt to minimize our portfolio risk by placing constraints on
how much of our portfolio may be held in a specific type of
investment such as asset-backed securities or collateralized
mortgage obligations as well as limiting our holdings in any one
issuer. At December 31, 2003, our investment portfolio
included only cash and money market accounts and had no
fixed-income securities.

Results of Operations

We had total revenue of $7.2 million for the
year ended December 31, 2003 and $7.1 million for the
year December 31, 2002. A decrease of $1.2 million in
related party revenue from Genencor in 2003 was offset by an
increase of $0.6 million in licensing fees and milestone
revenue and a $0.6 million increase in grant and contract
revenue during 2003. The decrease of $1.2 million in
related party revenue in the year ended December 31, 2003,
compared to the year ended December 31, 2002, was primarily
due to the shift in focus of our collaboration with Genencor
from scientific research activities, the part of the
collaboration in which we are most involved, to preclinical
development on the lead program in support of a late 2003
Investigational New Drug, or IND, filing by Genencor, lower
non-recurring milestone payments received in 2003 compared to
2002, and an increase in the time period during which the
license fees previously paid by Genencor are being amortized due
to the extension of the collaboration term. The change in the
estimated life of the license occurred due to the extension of
the collaboration term from September 1, 2003 to
September 1, 2004. The agreement term was extended in
October of 2002. In March 2004, Genencor assigned its rights
under our collaboration to Innogenetics NV. In connection
with the assignment by Genencor, we extended the collaboration
term with Innogenetics through September 2005. Innogenetics will
have the right to terminate the collaboration early, upon three
months written notice. The increase of $0.6 million in
licensing fees and milestone revenue in the year ended
December 31, 2003, compared to the year ended
December 31, 2002 was due to the receipt of one-time
payments for license fees and milestones during 2003 under the
terms of our agreement with Anosys, and an increase in licensing
revenue as a result of amortization of evaluation fees and
license fees received from Aventis, IDM, Beckman Coulter,
Merck and Amgen in 2003, compared to 2002. The increase of
$0.6 million in grant and contract revenue in the year
ended December 31, 2003, compared to the year ended
December 31, 2002 was due to higher reimbursable expenses
on several existing grants and contracts during 2003 than in
2002 and reimbursement of expenses on a new contract we received
in September of 2003 from the NIH to develop a preventive
HIV vaccine.

Our revenue of $7.1 million for the year
ended December 31, 2002 compares to total revenue of
$8.2 million for the year ended December 31, 2001. The
decrease of 13% in 2002 relates primarily to a reduction of
$3.2 million in license fees and milestone payments we
received compared to 2001, partially offset by an increase of
$2.1 million in related party revenue we received in 2002
compared to 2001. License fee and milestone revenue for the year
ended December 31, 2001 included recognition of
non-recurring license fees associated with numerous license
agreements we entered into during that period, including
agreements with Biosite, Anosys, Nexell and Pharmexa. For the
year ended December 31, 2002, we received $1.9 million
in research grants and contract revenue compared to
$1.8 million received in the year ended December 31,
2001. We had related party revenue of $4.7 million in the
year ended December 31, 2002 compared to $2.6 million
of related party revenue in the year ended December 31,
2001. The increase in related party revenue was due

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to reimbursement for expenditures on our Genencor
collaboration and amortization of license fees associated with
the Genencor collaboration that was entered into in July 2001.


Research and development expenses decreased to
$10.5 million in the year ended December 31, 2003 from
$11.3 million in the year ended December 31, 2002. The
decrease in the year ended December 31, 2003 relates
primarily to lower outside costs related to preclinical
activities such as formulation and toxicology studies for our
HIV and lung and colorectal cancer programs, which are now in
clinical trials, lower scientific supplies costs related to
completion of preclinical activities, lower patent and
intellectual property related expenses, and reduced labor costs
related to our work force reduction, partially offset by higher
costs associated with outside research support related to our
High Throughput Screening contract with the NIH and outside
research and development support on a new contract we received
in September of 2003 from the NIH to develop a preventive HIV
vaccine.

Research and development expenses increased to
$11.3 million in the year ended December 31, 2002 from
$7.9 million in the year ended December 31, 2001. The
increase in 2002 relates primarily to an increase of
$1.6 million in outside costs related to preclinical
activities such as formulation and toxicology studies for our
HIV and lung and colorectal cancer programs, an increase of
$0.6 million in labor and related costs, including
recruitment and relocation as a result of an increase in our
personnel responsible for research and development activities,
an increase of $0.4 million associated with amortization
and other costs related to increased spending to prosecute our
patent portfolio and an increase of $0.3 million on
scientific supplies due to increased research and development
efforts and our collaboration with Genencor. We expect to
continue to incur costs in 2004 for, among other things, outside
costs related to clinical trials and development activities for
our new NIH contract for a preventive HIV vaccine, product
formulation and manufacturing of product for use in clinical
trials, medical and clinical consultant costs and product
development costs for additional vaccine candidates.

General and administrative costs were
approximately $3.6 million in the year ended
December 31, 2003 compared to $2.9 million in the year
ended December 31, 2002. The increase in the year ended
December 31, 2003 was due to recognition of non-cash,
stock-based compensation charges in connection with the
prepayment of a promissory note by our CEO in September 2003,
other non-cash, stock-based compensation expenses related to a
higher stock price for variable stock equity instruments, and
the write off of legal, investment banking, accounting and other
expenses related to our proposed merger with Anosys, which was
terminated. The increases were partially offset by a reduction
in consultant fees and other outside costs, and a reduction in
travel expenses.

General and administrative costs were
approximately $2.9 million in the year ended
December 31, 2002 and $3.4 million in the year ended
December 31, 2001. The decrease in 2002 was primarily due
to $0.6 million less paid for bonuses in 2002 compared to
2001, a benefit of $0.3 million of stock compensation
related to a lower stock price for variable stock equity
instruments, and a decrease of $0.1 million in legal
expenses in 2002 compared to 2001. These decreases were
partially offset by a $0.3 million increase in payroll and
related expenses and a $0.1 million increase in consultant
expenses in 2002 compared to 2001.

In September 2003, we announced a reduction of
our work force aimed at reducing our cash burn and focusing our
efforts on our most advanced clinical programs and our sponsored
and partnered programs. We reduced our research and
administrative staff by 11 individuals or 23%, which
resulted in a one-time restructuring charge of approximately
$336,000 in the year ended December 31, 2003. We had no
restructuring related charges in 2002 or 2001.

Net interest income was approximately
$0.2 million in 2003 compared to $0.6 million in 2002
and $0.4 million in 2001. Interest income during 2003
includes approximately $0.1 million of interest accrued on
the note issued for the purchase in January 2001 of our common
stock by Dr. Loria, our president and chief executive
officer, compared to approximately $0.3 million of interest
accrued on the note in 2002. We had lower average cash balances
and rates of return in the year ended December 31, 2003,
compared to the year ended December 31, 2002. Higher
average cash balances in 2002 were offset by lower average
returns than in 2001 due to lower interest rates.

26



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

Liquidity and Capital Resources

We have financed operations since inception
primarily through private placements of our equity securities,
two public common stock offerings, license fees, revenues under
collaborative research and development agreements, grant
revenues, capital and operating lease transactions, certain
asset divestitures and interest income. Through December 2003,
we have raised approximately $165.1 million from the sale
of equity securities, of which $30.1 million was raised to
fund the business since the formation of our business related to
immunotherapy. As of December 31, 2003, we had
15,193,916 shares outstanding on an as-converted to common
stock basis, assuming conversion of the series S
and S-1 preferred shares.

As of December 31, 2003, our cash and cash
equivalents were $6.4 million compared to $9.7 million
at December 31, 2002. The decrease was primarily due to
$6.1 million of cash used to fund the Companys
research and development and clinical activities and
$0.8 million of cash for capitalized patent costs. Our
operating expenses were offset by license fees, milestone
payments and grant and contract revenues we received. We expect
to continue to use our cash and cash equivalents to fund our
ongoing and future clinical trials, as well as our drug research
and development programs. We expect our net cash burn rate to
decrease in 2004 compared to 2003 due to increased reimbursement
of research and development costs as a result of a new contract
we received in September of 2003 from the NIH to develop a
preventive HIV vaccine. We had net working capital of
$4.8 million as of December 31, 2003 compared to
$7.7 million as of December 31, 2002.

Capital expenditures for the year ended
December 31, 2003 were $0.1 million compared to
$0.7 million for the year ended December 31, 2002 and
$0.3 million for the year ended December 31, 2001. The
expenditures for 2003 were primarily for small laboratory
equipment. The expenditures for 2002 were primarily for
laboratory equipment to increase and improve immunological
screening throughput, to build out additional laboratory space
to accommodate additional employees and for information
technology equipment and upgrades to accommodate new employees.
Capital expenditures for 2001 were primarily for laboratory
equipment. In the past, we have financed our laboratory
equipment and research and office facilities primarily through
operating lease arrangements and a note payable. During 2003,
2002 and 2001 we made payments under the notes payable of
$0.04 million, $0.3 million and $0.4 million,
respectively. During 2003, we fully paid off our outstanding
note payable. During 2004, we anticipate that payments related
to capital expenditures will increase modestly compared to 2003
levels to a range of approximately $0.3 million to
$0.4 million, primarily for the purchase of equipment to
support our clinical trials. We will also pay approximately
$0.6 million in rent on our lease commitments during 2004.
The future minimum rental commitment for the lease of our
facility will range from approximately $0.6 million to
$0.7 million each year over six years, based upon
pre-established annual rent increases.

Payments related to capitalized patent expenses
were approximately $0.8 million, $1.2 million and
$0.7 million for 2003, 2002 and 2001, respectively. The
decrease in 2003 compared to 2002 is due primarily to
consolidation of our patent portfolio with one outside law firm
to limit administrative redundancies as well as bringing certain
administrative tasks in house to limit outside legal expenses.
The increase in 2002 compared to 2001 was primarily as a result
of maturity of our portfolio filings and pursuit of additional
claims. We expect payments related to patents to be relatively
flat in 2004 compared to 2003 as we anticipate seeing a full
year of benefit of our portfolio consolidation with one outside
law firm, and as we continue to perform administrative tasks in
house whenever possible as we pursue filings and claims in our
intellectual property portfolio.

Although we expect our net cash burn to decrease
in 2004, we expect to incur higher research and development
expenditures in 2004 compared to 2003 levels in connection with
our ongoing drug research and development programs, including
costs related to clinical trials, research and development
activities on sponsored programs and contracts, preclinical
testing of product candidates and manufacturing of clinical
supplies. We intend to seek collaborative research and
development relationships with suitable corporate

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partners and U.S. government agencies. We
have in the past and may in the future also license to third
parties some of our technology in markets that we are not
pursuing ourselves or through our collaborations. Any agreements
that may result from these discussions may not successfully
reduce our funding requirements or, if entered into, may be
terminated.


We currently anticipate that total revenue for
2004 will be in the range of $8.5 million to
$10.0 million, which includes anticipated grant and
contract revenue, related party revenue and certain license
fees. Our estimate assumes that we recognize revenue from
milestone or licensing payments under existing agreements with
third parties related to the licensing of our technology. We
also anticipate that operating expenses for the full year 2004
will rise from $14.4 million in 2003 to between
approximately $14.5 million and $15.5 million,
representing a 1% to 8% increase over 2003. The anticipated rise
in expenses relates to our ongoing Phase I/II clinical
trials targeting HIV, lung cancer and colorectal cancer and an
increase in expenses under funded grants and contracts from the
NIH. We also anticipate using some of our cash in 2004 to fund
certain activities in our collaboration with Bavarian Nordic. We
will share equally with Bavarian Nordic in all research related
expenses not covered under our HIV vaccine contract from the NIH
and have included these anticipated expenditures in our
operating expense forecast for 2004. We will also become liable
in 2004 for payment of license fees of up to $0.1 million.

With existing cash and interest earned thereon,
along with receipts from existing contracts, we expect to be
able to maintain our current level of operations through 2004
and into the second quarter of 2005, based on anticipated
expenditures. We will continue to spend substantial amounts on
research and development, including amounts spent for
manufacturing clinical supplies, conducting clinical trials for
our product candidates and advancing development of certain
sponsored and partnered programs. Therefore, we will need to
obtain additional funding. We do not have committed external
sources of funding and may not be able to obtain any additional
funding, especially if volatile market conditions persist for
biotechnology companies. If we are unable to obtain additional
funding, we will be required to delay, further reduce the scope
of or eliminate one or more of our research and development
projects, sell the Company or certain of its assets or
technologies, or dissolve and liquidate all of its assets. As of
December 31, 2003, we had approximately $6.4 million
in cash and cash equivalents. Our future operational and capital
requirements will depend on many factors, including:



| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | whether we are able to secure additional
    financing on favorable terms, or at all;                                                                                 
|
| |  | the costs associated with our clinical trials for
    our vaccine targeting HIV, which began in September 2002,
    including the status of our contract with the NIH;
|
| |  | the costs associated with our clinical trials for
    our vaccine targeting lung and colorectal cancer, which began in
    February 2003;                             
|
| |  | progress with other preclinical testing and
    clinical trials in the future;                                                                                        
|
| |  | our ability to establish and maintain
    collaboration and license agreements and any government
    contracts and grants;                                           
|
| |  | the actual revenue we receive under our
    collaboration and license agreements;                                                                                     
|
| |  | the actual costs we incur under our research
    collaboration with Bavarian Nordic;                                                                                  
|
| |  | the actual payment of license fees which may
    become payable at the option of the licensor;                                                                        
|
| |  | the time and costs involved in obtaining
    regulatory approvals;                                                                                                    
|
| |  | the costs involved in filing, prosecuting,
    enforcing and defending patent claims and any other proprietary
    rights;                                            
|
| |  | competing technological and market developments;                                                                                                                      
|
| |  | changes in our existing research relationships;                                                                                                                       

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| |   |                                                                      
| | - | ---------------------------------------------------------------------
| |  | continued scientific progress in our drug
    discovery programs; and
|
| |  | the magnitude of our drug discovery and
    development programs.    

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

Contractual Obligations

The following table summarizes our contractual
obligations at December 31, 2003, and the effect such
obligations are expected to have on our liquidity and cash flows
in future periods.

|                                      |  |                        |       |           |  |       |     |       |  |           |       |  |  |   |       |  |  |   |       | 
|------------------------------------- |  | ---------------------- | ----- | --------- |  | ----- | --- | ----- |  | --------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                      |  |                       
|                                      |  | Payments Due by Period
|                                      |  |                       
|                                      |  |                        |       | Less than |  | Years |     | Years |  | More than
|                                      |  | Total                  |       | 1 Year    |  | 2-3   |     | 4-5   |  | 5 Years  
|                                      |  |                        |       |           |  |       |     |       |  |          
|                                      |  |                       
|                                      |  | (unaudited)           
|                                      |  | (in thousands)        
|Operating lease obligations(1)        |  | $                      | 3,270 |           |  | $     | 585 |       |  | $         | 1,222 |  |  | $ | 1,297 |  |  | $ | 166   | 
|Licensing and purchase obligations(2) |  |                        | 1,580 |           |  |       | 94  |       |  |           | 189   |  |  |   | 327   |  |  |   | 970   | 
|Deferred compensation                 |  |                        | 50    |           |  |       | 48  |       |  |           | 2     |  |  |   |      |  |  |   |      | 
|                                      |  |                        |       |           |  |       |     |       |  |           |       |  |  |   |       |  |  |   |       | 
|Total                                 |  | $                      | 4,900 |           |  | $     | 727 |       |  | $         | 1,413 |  |  | $ | 1,624 |  |  | $ | 1,136 | 
|                                      |  |                        |       |           |  |       |     |       |  |           |       |  |  |   |       |  |  |   |       | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Facilities lease, which expires in March 2009                                                                                                                                                                                                                                                                                                                                     
|   
|(2) | Licensing and purchase obligations includes an
    estimate of $1,540,000 for future payment obligations under
    existing license agreements which may become due and payable in
    the periods specified based on projected achievement of
    triggering events, although there can be no assurance such
    events will be achieved in the projected time frames, if at all.

Recently Issued Accounting Standards

In June 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 146
Accounting for Costs Associated with Exit or Disposal
Activities. This statement supercedes Emerging Issues
Task Force (EITF) Issue No. 94-3 Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under
EITF Issue No. 94-3, a liability is recognized at the date
an entity commits to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and
recorded at fair value. The provisions of SFAS No. 146
will be effective for any exit and disposal activities initiated
after December 31, 2002. We adopted these provisions during
2003 and accounted for our work force reduction in September
2003 based on the provisions of SFAS No. 146.

In December 2002, the FASB issued
SFAS No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of FASB Statement No. 123. This
statement amends SFAS No. 123 Accounting for
Stock Based Compensationto provide alternative
methods of voluntarily transitioning to the fair value based
method of accounting for stock-based employee compensation.
SFAS No. 148 also amends the disclosure requirements
of SFAS No. 123 to require disclosure of the method
used to account for stock-based employee compensation and the
effect of the method on reported results in both annual and
interim financial statements. The disclosure provisions became
effective for us beginning with

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##### Table of Contents



the year ended December 31, 2002. We elected
to continue to follow the provisions of the Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employeesin
accounting for stock based compensation.


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

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity. This Statement establishes standards for
how we classify and measure certain financial instruments with
characteristics of both liabilities and equity. It requires that
we classify a financial instrument within its scope as a
liability. Some of the provisions of this Statement are
consistent with the current definition of liabilities in FASB
Concepts Statement No. 6, Elements of Financial
Statements.The remaining provisions of this Statement
are consistent with the FASBs proposal to revise that
definition to encompass certain obligations that a reporting
entity can or must settle by issuing its own equity shares,
depending on the nature of the relationship established between
the holder and the issuer. This Statement is effective for
financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003.






|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risks

At December 31, 2003, our investment
portfolio included only cash and money market accounts and had
no fixed-income securities. There would be no material impact to
our investment portfolio, in the short term, associated with any
change in interest rates and any decline in interest rates over
time will reduce our interest income, while increases in
interest rates over time will increase our interest income.






|        |                                                             
|------- | ------------------------------------------------------------
|Item 8. | Consolidated Financial Statements and
    Supplementary Data

The financial statements and supplemental data
required by this item are set forth at the pages indicated in
Item 15(a)(1) of this annual report.






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

None.






|           |                        
|---------- | -----------------------
|Item 9(A). | Controls and Procedures

(a) Evaluation of Disclosure Controls and
Procedures

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

(b) Changes in Internal Controls

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

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PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The following table sets forth information
regarding our current directors and executive officers as of
March 15, 2004:

|                                  |  |     |    |          |  |                                                                            
|--------------------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------------------
|Name                              |  | Age |    | Position
|                                  |  |     |    |         
|Directors:                        |  |     |    |          |  |                                                                            
|Howard E. (Ted)
    Greene, Jr. |  |     | 61 |          |  | Chairman of the Board of Directors                                         
|William T. Comer, Ph.D.           |  |     | 68 |          |  | Director                                                                   
|Georges Hibon                     |  |     | 66 |          |  | Director                                                                   
|Michael G. Grey                   |  |     | 51 |          |  | Director                                                                   
|Emile Loria, M.D.                 |  |     | 54 |          |  | Director, President and Chief Executive Officer                            
|John P. McKearn, Ph.D.            |  |     | 50 |          |  | Director                                                                   
|Executive Officers:               |  |     |    |          |  |                                                                            
|Emile Loria, M.D.                 |  |     | 54 |          |  | Director, President and Chief Executive Officer                            
|Robert J. De Vaere                |  |     | 46 |          |  | Vice President, Finance and Administration, and
    Chief Financial Officer
|Mark J. Newman, Ph.D.             |  |     | 48 |          |  | Vice President, Research and Development                                   

Directors

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

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

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

Mr. Greyhas served as our director since
July 1999. Since June 2003, he has served as President of
Structural GenomiX, Inc., a privately held biotechnology
company, and has been a member of the Board of

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Directors of Structural GenomiX since September
2001. From April 2001 until June 2003, he served as Chief
Business Officer of Structural GenomiX. Between January 1999 and
September 2001, he served as President and Chief Executive
Officer of Trega Biosciences, Inc., a biotechnology
company. Prior to joining Trega, Mr. Grey served as
President of BioChem Therapeutics, Inc., a division of
BioChem Pharma, Inc., a pharmaceutical company, from
November 1994 to August 1998. During 1994, Mr. Grey served
as President and Chief Operating Officer of Ansan, Inc., a
biopharmaceutical Company. From 1974 to 1993, Mr. Grey
served in various roles with Glaxo, Inc. and Glaxo
Holdings, plc, a pharmaceutical company, culminating in his
position as Vice President, Corporate Development. Mr. Grey
serves on the Board of Directors of Achillion
Pharmaceuticals, Inc.


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

Dr. McKearnhas served as our director since
April 2000. Dr. McKearn has been the Chief Scientific
Officer and a director of Kalypsys Inc., a privately held
biotechnology company, since July 2003. Prior to that, he was
with Pharmacia Corporation, formerly G.D. Searle and Co., a
pharmaceutical company, since 1987. From August 2000 until June
2003, he served as Senior Vice President, Pharmacia Discovery
Research, responsible for research activities in cardiovascular
diseases, arthritis and oncology. Prior to that he served as
Vice President, Searle Discovery Research from 1999 to 2000,
Executive Director of Oncology from 1995 to 1999, and directed
all arthritis, inflammation and oncology research from 1987 to
1995. Dr. McKearn was a Senior Scientist at
E.I. DuPont de Nemours and Company, a pharmaceutical
company, from 1985 to 1987 and a member of the Basel Institute
for Immunology from 1982 to 1985.

Executive Officers

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

Dr. Newmanhas served as our Vice
President, Infectious Disease Program since March 1999 and
became our Vice President, Research and Development in September
2003. Prior to joining Epimmune, Dr. Newman served as Vice
President of Research and Development of Vaxcel, Inc., a
vaccine delivery/adjuvant company, from January 1995 to March
1999. Prior to joining Vaxcel, he was Associate Vice President,
Research and Development for Apollon, Inc., a DNA vaccine
company. He also previously held the position of Senior Director
at Cambridge Biotech Corporation.

Board Committees and Meetings

During the fiscal year ended December 31,
2003, the Board held sixteen meetings. Our Board of Directors
currently has an Audit Committee, a Compensation Committee and a
Nominating Committee.

The Audit Committee is comprised of three
independent non-employee directors: Mr. Greene;
Mr. Grey; and Dr. Comer. The Board of Directors has
adopted an Audit Committee Charter, which among other
responsibilities, requires that this committee monitor our
financial reporting process and internal control systems, review
audit and management reports and review and approve the
engagement of the independent auditors. The Audit Committee met
two times prior to March 29, 2003 to plan for and discuss
the 2002 annual audit with our independent auditors. The Audit
Committee met four times after March 29, 2003, to review

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and discuss our first, second and third quarter
financial results and financial statements to be included in our
Form 10-Q filings and also acted by unanimous written
consent one time during 2003. The Audit Committee met two times
following the 2003 fiscal year end to discuss the 2003 annual
audit with our independent auditors. The Audit Committee
recommends the independent auditors to the Board and provides a
direct line of communication between the auditors and the Board.
The independent auditors separately meet with the Audit
Committee, with and without our management present, to review
and discuss various matters, including our financial statements,
the report of the independent auditors on the results, scope and
terms of their work and their recommendations concerning the
Companys financial practices and procedures. All members
of the Audit Committee are independent, as defined in
Rule 4200(a)(14) of the National Association of Securities
Dealers, Inc. (NASD) listing standards. In
addition, our Board of Directors believes that Mr. Greene
is an audit committee financial expert. An audit committee
financial expert is a person who has (i) an understanding
of generally accepted accounting principles and financial
statements, (ii) the ability to assess the general
application of said principles in connection with the accounting
for estimates, accruals and reserves, (iii) experience
preparing, auditing, analyzing or evaluating financial
statements of comparable breadth and complexity to ours or
experience supervising others who do, and (iv) an
understanding of internal controls and procedures.


The Compensation Committee is comprised of three
independent non-employee directors: Mr. Greene;
Dr. Comer; and Dr. McKearn. This Committee administers
our stock option plans, stock purchase plan and 401(k) plan,
approves salaries, bonuses and other compensation arrangements
for our officers and performs such other functions regarding
compensation as our Board of Directors may delegate. The
Compensation Committee held six meetings and acted by unanimous
written consent four times during 2003.

The Nominating Committee is composed of two
independent non-employee directors: Mr. Grey and
Dr. McKearn. The Board of Directors has adopted a
Nominating Committee Charter, which among other responsibilities
requires that the Nominating Committee interview, evaluate,
nominate and recommend individuals for membership on our Board
and committees thereof and nominates specific individuals to be
elected as our officers by the Board.

During the fiscal year ended December 31,
2003, all of the Companys directors attended or
participated in 75% or more of the aggregate of (i) the
total number of meetings of the Board and (ii) the total
number of meetings held by all committees of the Board on which
such director served during the year.

On December 9, 2003, we adopted a Code of
Business Conduct and Ethics applicable to all of our officers,
directors and employees. The Code of Business Conduct is filed
herewith as Exhibit 14.1. If we make any substantive
amendments to the Code of Business Conduct or grant any waiver
from a provision of the code to any executive officer or
director, we will promptly disclose the nature of the amendment
or waiver on our website at www.epimmune.com.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Director Compensation

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

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Directors are currently eligible to receive
option grants under our stock option plan in accordance with the
policy regarding non-employee director compensation adopted by
the Board of Directors in 1999. This policy calls for each
non-employee director to be granted annual options to purchase
5,000 shares of our common stock as of the date of each
annual meeting of our stockholders. The shares subject to such
option are to vest monthly over a twelve-month period, provided
the director remains a director upon the date of his re-election
to our Board. Newly appointed or elected non-employee directors
are eligible for a 20,000-share option grant under this policy
with monthly vesting over a forty-eight month period. In July
2003, the Board granted annual options to purchase
5,000 shares of our common stock in connection with the
annual meeting of our stockholders to the following non-employee
directors: Mr. Greene, Dr. Comer, Mr. Grey,
Mr. Hibon, Dr. McKearn and former Board member
Dr. Michael Ross at an exercise price of $1.70 per
share.

Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the Securities Exchange Act
of 1934, as amended, or the Exchange Act, requires our directors
and executive officers, and persons who own more than 10% of a
registered class of our equity securities, to file with the SEC
initial reports of ownership and reports in changes in ownership
of our common stock and other of our equity securities. Specific
due dates for these reports have been established, and we are
required to disclose any failure to file by these dates during
2003. Our officers, directors and greater than 10% stockholders
are required by the SEC regulations to furnish us with copies of
all Section 16(a) forms they file.

Compensation of Executive Officers

The following table shows for the fiscal years
ended December 31, 2003, 2002 and 2001, compensation
awarded or paid to, or earned by our Chief Executive Officer and
our two other most highly compensated executive officers and two
former officers, Dr. Chesnut and Mr. McClurg whose
employment with us terminated in September 2003. These
individuals are referred to as the named executive
officers. During the last three fiscal years, none of the
executive officers received any restricted stock awards or
long-term incentive payouts; provided, however, Dr. Loria
purchased stock from us in 2001 that is subject to vesting.

Summary Compensation Table

|                            |                                    |                     |      |            |  |            |         |                     |  |              |         |         |  |  |   |   |  |  |         |         |  |  |         |       | 
|--------------------------- | ---------------------------------- | ------------------- | ---- | ---------- |  | ---------- | ------- | ------------------- |  | ------------ | ------- | ------- |  |  | - | - |  |  | ------- | ------- |  |  | ------- | ----- | 
|                            |                                    |                     |      |            |  |            |         |                     |  |             
|                            |                                    |                     |      |            |  |            |         | Long-Term           |  |             
|                            |                                    |                     |      |            |  |            |         | Compensation Awards |  |             
|                            |                                    |                     |      |            |  |           
|                            |                                    | Annual Compensation |      | Restricted |  | Securities |         |                    
|                            |                                    |                     |      | Stock      |  | Underlying |         | All Other          
|                            |                                    |                     |      | Bonus      |  | Awards     |         | Options             |  | Compensation
|Name and Principal Position |                                    | Year                |      | Salary($)  |  | ($)(1)     |         | ($)                 |  | (#)          |         | ($)(2) 
|                            |                                    |                     |      |            |  |            |         |                     |  |              |         |        
|Dr. Emile Loria(3)(4)       |                                    |                     | 2003 |            |  |            | 350,000 |                     |  |              | 25,000  |         |  |  | 0 |   |  |  | 500,000 |         |  |  | 3,568   |      
|                            | President, Chief Executive Officer |                     |      | 2002       |  |            |         | 300,000             |  |              |         | 100,098 |  |  |   | 0 |  |  |         | 0       |  |  |         | 8,528 | 
|                            |                                    |                     | 2001 |            |  |            | 162,500 |                     |  |              | 352,592 |         |  |  | 0 |   |  |  | 0       |         |  |  | 208,729 |      
|Dr. Mark J. Newman          |                                    |                     | 2003 |            |  |            | 195,833 |                     |  |              | 25,000  |         |  |  | 0 |   |  |  | 50,000  |         |  |  | 724     |      
|                            | Vice President, Research and       |                     |      | 2002       |  |            |         | 185,000             |  |              |         | 98      |  |  |   | 0 |  |  |         | 0       |  |  |         | 597   | 
|                            | Development & Asst. Secretary      |                     |      | 2001       |  |            |         | 168,000             |  |              |         | 50,000  |  |  |   | 0 |  |  |         | 95,000  |  |  |         | 602   | 
|Mr. Robert J. De Vaere      |                                    |                     | 2003 |            |  |            | 195,000 |                     |  |              | 25,000  |         |  |  | 0 |   |  |  | 50,000  |         |  |  | 724     |      
|                            | Vice President, Finance and        |                     |      | 2002       |  |            |         | 185,000             |  |              |         | 98      |  |  |   | 0 |  |  |         | 0       |  |  |         | 398   | 
|                            | Administration, Chief Financial    |                     |      | 2001       |  |            |         | 168,000             |  |              |         | 115,000 |  |  |   | 0 |  |  |         | 105,000 |  |  |         | 402   | 
|                            | Officer and Secretary              |                     |      |            |  |            |         |                     |  |              |         |         |  |  |   |   |  |  |         |         |  |  |         |       | 
|Dr. Robert W. Chesnut(5)    |                                    |                     | 2003 |            |  |            | 337,658 |                     |  |              | 0       |         |  |  | 0 |   |  |  | 0       |         |  |  | 2,112   |      
|                            | Former Executive Vice President,   |                     |      | 2002       |  |            |         | 245,000             |  |              |         | 98      |  |  |   | 0 |  |  |         | 0       |  |  |         | 2,150 | 
|                            | Research and Development           |                     |      | 2001       |  |            |         | 231,008             |  |              |         | 120,000 |  |  |   | 0 |  |  |         | 120,000 |  |  |         | 2,419 | 
|                            | and Secretary                      |                     |      |            |  |            |         |                     |  |              |         |         |  |  |   |   |  |  |         |         |  |  |         |       | 
|Mr. Michael R. McClurg(6)   |                                    |                     | 2003 |            |  |            | 216,179 |                     |  |              | 0       |         |  |  | 0 |   |  |  | 0       |         |  |  | 360     |      
|                            | Former Vice President, Business    |                     |      | 2002       |  |            |         | 175,000             |  |              |         | 98      |  |  |   | 0 |  |  |         | 0       |  |  |         | 540   | 
|                            | Development                        |                     |      | 2001       |  |            |         | 37,805              |  |              |         | 0       |  |  |   | 0 |  |  |         | 75,000  |  |  |         | 135   | 

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---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | All officers of the Company were granted a stock
    bonus award during 2002 of 100 shares of our common stock
    in exchange for the termination of their participation in the
    2002 Management Bonus Plan. The fair market value of our common
    stock on December 16, 2002, the issuance date, was
    $0.98 per share, or $98 for each award.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(2) | All other compensation consists of life insurance
    premiums paid by us unless otherwise noted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(3) | Dr. Loria joined as our President and Chief
    Executive Officer in June 2001 at an annual salary of $300,000.
    Dr. Loria received a signing bonus of $125,000 and was
    eligible to earn a performance bonus equal to two percent of any
    proceeds received by us from any public or private equity
    financing or other transaction pursuant to which we received
    funding (other than research funding) that was completed by us
    between January 16, 2001 and January 16, 2002. During
    the period from January 16, 2001 and January 16, 2002,
    we completed transactions in which we received total funding of
    $16,379,581 making Dr. Loria eligible for bonus payments of
    $327,592 under the provisions of this agreement. Dr. Loria
    was paid a bonus of $227,592 in 2001 and the remaining accrued
    balance of $100,000 was paid in January 2002. Other compensation
    includes payments of $2,181 and $7,470 in 2003 and 2002,
    respectively, to independent tax accountants for the preparation
    of 2002 and 2001 foreign tax returns, and 2001 payments of
    $204,427 for relocation to San Diego, California made by us
    to Dr. Loria.
|   
|(4) | Dr. Loria joined as our President and Chief
    Executive Officer in June 2001. In connection with his
    employment offer letter and joining our Board of Directors in
    January 2001, and as an inducement to accept the offer, we sold
    Dr. Loria 1,056,301 shares of our common stock at a
    purchase price of $2.50 per share, the closing price of our
    common stock on the Nasdaq National Market on the date of
    purchase. The shares are subject to vesting in equal daily
    installments during the four-year period following the date of
    purchase, and we have a right to purchase any unvested shares at
    the purchase price paid by Dr. Loria in the event of
    termination of Dr. Lorias service to Epimmune.
    Dr. Loria issued us a promissory note for $2,641,000, the
    aggregate purchase price of the shares, which is secured by a
    pledge of the shares. In September 2003, Dr. Loria
    surrendered an aggregate of 963,740 shares of our common
    stock at the fair market value of $3.17 per share, in
    exchange for the prepayment of the outstanding principal and
    interest under the promissory note.                       
|   
|(5) | Dr. Chesnut was our Executive Vice
    President, Research and Development until his employment with
    Epimmune terminated in September 2003. His 2003 salary includes
    $122,500 for severance and $47,114 for accrued vacation paid to
    Dr. Chesnut upon his termination.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(6) | Mr. McClurg joined us as our Vice President,
    Business Development in October 2001. Mr. McClurgs
    employment with Epimmune terminated in September 2003. His 2003
    salary includes $87,500 for severance and $8,647 for accrued
    vacation paid to him upon his termination.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Stock Option Grants and Exercises

We currently grant options to our executive
officers under our 2000 Stock Plan and have previously granted
options under our 1997 Stock Plan and our 1989 Stock Option
Plan, which terminated in 1999. As of December 31, 2003,
options to purchase a total of 154,213 shares were
outstanding under the 1997 Stock Plan, options to purchase a
total of 368,229 shares were outstanding under the 1989
Stock Option Plan, options to purchase a total of
7,140 shares were outstanding under the 1994 Non-Employee
Directors Stock Option Plan and options to purchase a
total of 1,467,870 shares were outstanding under the 2000
Stock Plan. On December 16, 2002 we granted stock bonus
awards of 600 shares to our executive officers from the
2000 Plan. There are no options available for grant under the
1997 Stock Plan, the 1989 Stock Option Plan or the 1994
Non-Employee Directors Stock Option Plan. In December
2003, the Board approved an amendment to the 2000 Stock Plan to
include a 1,000,000 increase in the number of shares reserved
for issuance under the plan and instructed management to include
a proposal on the ballot at its next annual shareholders meeting
to approve the increase. As of December 31, 2003, options
to purchase 1,467,870 shares of common stock were
outstanding and 106,523 shares were available for future
grant under the 2000 Stock Plan. In addition, as of
December 31, 2003, options to purchase
1,000,000 shares of common stock had been granted, which are

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##### Table of Contents



contingent on shareholder approval of the
1,000,000 shares increase in the number of shares reserved
for issuance under the 2000 Stock Plan.


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

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

The following tables show for the fiscal year
ended December 31, 2003, certain information regarding
options granted to, exercised by, and held at year-end by the
Named Executive Officers:

Options Granted in Last Fiscal Year

|                          |  |                   |         |                      |  |             |       |                        |  |                |         |        |  |  |          |  |  |  |         |  |  |  |           | 
|------------------------- |  | ----------------- | ------- | -------------------- |  | ----------- | ----- | ---------------------- |  | -------------- | ------- | ------ |  |  | -------- |  |  |  | ------- |  |  |  | --------- | 
|                          |  |                   |         |                      |  |            
|                          |  | Individual Grants |         |                     
|                          |  |                   |         | Potential Realizable
|                          |  | Number            |         | % Total              |  |             |       | Value at Assumed      
|                          |  | of                |         | Options              |  |             |       | Annual Rates of Stock 
|                          |  | Securities        |         | Granted to           |  |             |       | Price Appreciation for
|                          |  | Underlying        |         | Employees            |  | Exercise or |       |                        |  | Option Term(2)
|                          |  | Options           |         | In Fiscal            |  | Base Price  |       | Expiration             |  |               
|Name                      |  | Granted           |         | Year(1)              |  | ($/Sh)      |       | Date                   |  | 5%($)          |         | 10%($)
|                          |  |                   |         |                      |  |             |       |                        |  |                |         |       
|Dr. Emile Loria           |  |                   | 500,000 |                      |  |             | 58.75 | %                      |  |                | 1.54000 |        |  |  | 09/08/13 |  |  |  | 484,249 |  |  |  | 1,227,182 | 
|Dr. Mark J. Newman        |  |                   | 35,000  |                      |  |             | 4.11  | %                      |  |                | 1.54000 |        |  |  | 09/08/13 |  |  |  | 33,897  |  |  |  | 85,903    | 
|                          |  |                   | 15,000  |                      |  |             | 1.76  | %                      |  |                | 2.11000 |        |  |  | 11/07/13 |  |  |  | 19,905  |  |  |  | 50,442    | 
|Mr. Robert J. De Vaere    |  |                   | 50,000  |                      |  |             | 5.88  | %                      |  |                | 1.54000 |        |  |  | 09/08/13 |  |  |  | 48,425  |  |  |  | 122,718   | 
|Dr. Robert W. Chesnut(3)  |  |                   |        |                      |  |             |      |                        |  |                |        |        |  |  |         |  |  |  |        |  |  |  |          | 
|Mr. Michael R. McClurg(4) |  |                   |        |                      |  |             |      |                        |  |                |        |        |  |  |         |  |  |  |        |  |  |  |          | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on 851,000 options granted in 2003 under
    the 2000 Plan, including grants to executive officers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(2) | The potential realizable value is calculated
    based on the terms of the option at its time of grant
    (10 years in the case of all options). It is calculated by
    assuming that the stock price on the date of grant appreciates
    at the indicated annual rate, compounded annually for the entire
    term of the option and that the option is exercised and sold on
    the last day of its term for the appreciated stock price. These
    amounts represent certain assumed rates of appreciation, in
    accordance with rules of the SEC, and do not reflect the
    Companys estimate or projection of future stock price
    performance. Actual gains, if any, are dependent on the actual
    future performance of the Companys Common Stock, and no
    gain to the optionee is possible unless the stock price
    increases over the option term, which will benefit all
    stockholders.
|   
|(3) | Dr. Chesnuts employment as our
    Executive Vice President, Research and Development terminated in
    September 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(4) | Mr. McClurgs employment as our Vice
    President, Business Development terminated in September 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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

The following table sets forth summary
information with respect to exercisable and unexercisable stock
options held as of December 31, 2003 by each of the named
executive officers. None of the named executive officers
exercised options in fiscal year ended December 31, 2003.
The value of the stock options is calculated using the fair
market value of our common stock on December 31, 2003
($1.81 per share) minus the exercise price of the options.

|                         |  |             |   |          |  |                           |   |                           |  |  |          |         |  |   |         |         
|------------------------ |  | ----------- | - | -------- |  | ------------------------- | - | ------------------------- |  |  | -------- | ------- |  | - | ------- | --------
|                         |  |             |   |          |  | Number of Securities      |   | Value of Unexercised     
|                         |  |             |   |          |  | Underlying Unexercised    |   | In-the-Money             
|                         |  |             |   |          |  | Options at December 31,   |   | Options at December 31,  
|                         |  | Shares      |   |          |  | 2003                      |   | 2003                     
|                         |  | Acquired    |   | Value    |  |                           |   |                          
|Name                     |  | on Exercise |   | Realized |  | Exercisable/Unexercisable |   | Exercisable/Unexercisable
|                         |  |             |   |          |  |                           |   |                          
|Dr. Emile Loria          |  |             |  |          |  |                           |  |                           |  |  | 77,975/  | 422,025 |  | $ | 21,053/ | $113,947
|Dr. Robert W. Chesnut(1) |  |             |  |          |  |                           |  |                           |  |  | 140,416/ | 140,416 |  |   | /      |        
|Dr. Mark J. Newman       |  |             |  |          |  |                           |  |                           |  |  | 156,600/ | 70,866  |  | $ | 84,553/ | $7,976  
|Mr. Robert J. De Vaere   |  |             |  |          |  |                           |  |                           |  |  | 94,610/  | 85,390  |  | $ | 2,105/  | $11,395 
|Mr. Michael R. McClurg   |  |             |  |          |  |                           |  |                           |  |  | /       |        |  |   | /      |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Dr. Chesnuts employment as our
    Executive Vice President, Research and Development terminated in
    September 2003, at which time he signed a consent to amendment
    of his vested and outstanding incentive stock options, extending
    the post-termination exercise period and permitting him to
    exercise his options until September 5, 2004 pursuant to
    Sections 422(d) and 424(h) of the Internal Revenue Code of
    1986.

Employment, Change of Control and Separation
Agreements

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

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

In addition, in January 2001, we sold
Dr. Loria 1,056,301 shares of our common stock at the
closing price of such common stock as reported by the Nasdaq
National Market on the date of purchase, which was
$2.50 per share. These shares vest in equal daily
installments over the four-year period following the purchase
date and we have a right to purchase any unvested shares at the
purchase price paid by Dr. Loria in the event of
termination of Dr. Lorias service to us.
Dr. Loria purchased the shares with a promissory note in
the principal amount of $2,641,000, which is secured by a pledge
of the shares. The note bears interest at the rate of
5.61% per year, compounded annually. In September 2003,
Dr. Loria surrendered an aggregate of 963,740 shares
of our common stock at the fair market value of $3.17 per
share, in exchange for the prepayment of the outstanding
principal and interest under the promissory note, a total of
$3,055,000.

37



---



##### Table of Contents



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

In February 2004, we entered into an accelerated
benefits agreement with Dr. Loria. Under the terms of the
agreement, if Dr. Loria is terminated without cause or
voluntarily resigns for good reason within one year following a
change of control of Epimmune, then any stock options granted to
him after December 9, 2003, which are unvested shall
immediately vest and become exercisable.

In January 2004, the Compensation Committee of
our Board of Directors approved a 2004 bonus plan for the
officers of the Company under which the officers would be
eligible for bonuses for service to the Company contingent upon
the Company reaching certain milestones in accordance with
guidelines approved by the Compensation Committee.

Compensation Committee Interlocks and Insider
Participation

Mr. Greene, a member of the Compensation
Committee, is Chairman of our Board of Directors.






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

Equity Compensation Plan Information

The following table sets forth certain
information as of December 31, 2003 regarding our equity
compensation plans that were approved by our stockholders.

|                                                           |  |                      |           |                   |  |                      |      |  |  |  |         | 
|---------------------------------------------------------- |  | -------------------- | --------- | ----------------- |  | -------------------- | ---- |  |  |  | ------- | 
|                                                           |  | (a)                  |           | (b)               |  | (c)                 
|                                                           |  |                      |           |                   |  | Number of Securities
|                                                           |  |                      |           |                   |  | Remaining Available 
|                                                           |  |                      |           | Weighted-average  |  | for Issuance Under  
|                                                           |  | Number of Securities |           | Exercise Price of |  | Equity Compensation 
|                                                           |  | to be Issued Upon    |           | Outstanding       |  | Plans (Excluding    
|                                                           |  | Exercise of Options, |           | Options, Warrants |  | Securities Reflected
|Name of Plan                                               |  | Warrants and Rights  |           | and Rights        |  | in Column (a))      
|                                                           |  |                      |           |                   |  |                     
|Equity compensation plans approved by security
    holders |  |                      | 1,997,452 |                   |  | $                    | 2.59 |  |  |  | 106,523 | 
|                                                           |  |                      |           |                   |  |                      |      |  |  |  |         | 
|Total                                                      |  |                      | 1,997,452 |                   |  | $                    | 2.59 |  |  |  | 106,523 | 
|                                                           |  |                      |           |                   |  |                      |      |  |  |  |         | 

The following table sets forth certain
information regarding the ownership of our common stock as of
February 15, 2004 by (i) each director and nominee;
(ii) each of the executive officers named in the summary
compensation table; (iii) all executive officers and
directors as a group; and (iv) all those known by us to be
beneficial owners of more than five percent of our common stock:

|                                                                                    |  |                         |           |            |  |  |      |  
|----------------------------------------------------------------------------------- |  | ----------------------- | --------- | ---------- |  |  | ---- | -
|                                                                                    |  |                        
|                                                                                    |  | Beneficial Ownership(1)
|                                                                                    |  |                        
|                                                                                    |  | Number of               |           | Percent of
|Beneficial Owner                                                                    |  | Shares                  |           | Shares    
|                                                                                    |  |                         |           |           
|Pharmacia Corporation(2)
    5200 Old Orchard Road
    Skokie, IL 60077             |  |                         | 2,020,758 |            |  |  | 13.3 | %
|Genencor International, Inc.
    200 Meridian Centre Blvd.
    Rochester, NY 14618  |  |                         | 1,342,324 |            |  |  | 9.9  | %
|International Biotechnology Trust plc
    71 Kingsway
    London, WC2B 6ST, England |  |                         | 1,267,992 |            |  |  | 9.4  | %

38



---



##### Table of Contents



|                                                                                     |  |                         |           |            |  |  |     |  
|------------------------------------------------------------------------------------ |  | ----------------------- | --------- | ---------- |  |  | --- | -
|                                                                                     |  |                        
|                                                                                     |  | Beneficial Ownership(1)
|                                                                                     |  |                        
|                                                                                     |  | Number of               |           | Percent of
|Beneficial Owner                                                                     |  | Shares                  |           | Shares    
|                                                                                     |  |                         |           |           
|RAM Trading Ltd.
    2100 Enterprise Avenue
    Geneva, IL 60134                     |  |                         | 803,320   |            |  |  | 5.9 | %
|Mr. Peter Allard
    Seaview, Chancery Lane
    Christ Church, Barbados, West Indies |  |                         | 770,773   |            |  |  | 5.7 | %
|Dr. Robert W. Chesnut(3)(4)                                                          |  |                         | 327,050   |            |  |  | 2.4 | %
|Dr. Emile Loria(4)(5)                                                                |  |                         | 243,140   |            |  |  | 1.8 | %
|Dr. Mark J. Newman(4)                                                                |  |                         | 185,596   |            |  |  | 1.4 | %
|Mr. Howard E. (Ted)
    Greene, Jr.(4)(6)                                          |  |                         | 174,350   |            |  |  | 1.3 | %
|Mr. Robert J. De Vaere(4)                                                            |  |                         | 173,035   |            |  |  | 1.3 | %
|Dr. William T. Comer(4)                                                              |  |                         | 44,662    |            |  |  | *   |  
|Mr. Michael Grey(4)                                                                  |  |                         | 38,750    |            |  |  | *   |  
|Dr. John P. McKearn(4)                                                               |  |                         | 22,500    |            |  |  | *   |  
|Mr. Georges Hibon(4)                                                                 |  |                         | 21,667    |            |  |  | *   |  
|Mr. Michael R. McClurg(4)(7)                                                         |  |                         | 100       |            |  |  | *   |  
|All executive officers and directors as a group
    (10 persons)(8)                  |  |                         | 1,230,850 |            |  |  | 8.4 | %



---



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



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This table is based upon information supplied by
    officers, directors and principal stockholders and on any
    Schedules 13D or 13G filed with the Securities and Exchange
    Commission, or the SEC. Unless otherwise indicated in the
    footnotes to this table and subject to community property laws
    where applicable, each stockholder named in this table has sole
    voting and investment power with respect to the shares indicated
    as beneficially owned. Applicable percentage ownership is based
    on 13,525,622 shares of Common Stock outstanding on
    February 15, 2004, as adjusted by the rules promulgated by
    the SEC.
|   
|(2) | Includes 1,703,298 shares of Common Stock
    issuable upon conversion of shares of Series S Preferred
    Stock and Series S-1 Preferred Stock held by Pharmacia
    Corporation, formerly G.D. Searle, provided that Pharmacia is
    not entitled to vote such shares to the extent that the total
    number of shares of voting capital stock held by Pharmacia and
    its affiliates would exceed 19.9%. Pharmacia owns 100% of the
    outstanding shares of the Series S Preferred Stock and
    Series S-1 Preferred Stock. The Series S Preferred
    Stock and Series S-1 Preferred Stock are convertible into
    Common Stock at any time.        
|   
|(3) | Dr. Chesnuts employment as our
    Executive Vice President, Research and Development terminated in
    September 2003, at which time he signed a consent to amendment
    of his vested and outstanding incentive stock options, extending
    the post-termination exercise period and permitting him to
    exercise his options until September 5, 2004 pursuant to
    Sections 422(d) and 424(h) of the Internal Revenue Code of
    1986.                                                                                                                                                                                                               
|   
|(4) | Includes shares, which certain executive officers
    and directors of the Company have the right to acquire within
    60 days after February 15, 2004 pursuant to
    outstanding options, as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                        



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Dr. Robert W. Chesnut, 140,416 shares;
    
     Dr. William T. Comer, 43,748 shares; 
     Mr. Robert J. De Vaere, 167,679 shares; 
     Mr. Howard E. (Ted) Greene, Jr.,
    42,320 shares; 
     Mr. Michael G. Grey, 38,750 shares; 
     Mr. Georges Hibon, 21,667 shares; 
     Dr. Emile Loria, 150,479 shares; 
     Dr. John P. McKearn, 22,500 shares; 
     Dr. Mark J. Newman, 169,657 shares; 
     All executive officers and directors as a group,
    797,216 shares.

39



---



##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | Of the shares held by Dr. Loria,
    65,280 shares were subject to a right of repurchase in
    favor of the Company as of February 15, 2004.
    Dr. Lorias 65,280 shares vest ratably in equal
    daily installments until January 16, 2005, at which point
    all of Dr. Lorias shares will be vested, provided
    Dr. Lorias service to the Company is not terminated.
|   
|(6) | Includes 129,745 shares held in trust for
    the benefit of Mr. Greene and his wife and
    2,285 shares held in trust for the benefit of
    Mr. Greenes children. Mr. Greene is a trustee of
    both trusts. Mr. Greene acting as trustee has voting and
    investment power with respect to such shares and may be deemed
    to be the beneficial owner of such shares. 
|   
|(7) | Mr. McClurgs employment as our Vice
    President, Business Development terminated in September 2003.                                                                                                                                                                                                                                                                          
|   
|(8) | Includes shares described in notes (3)
    through (6) above.                                                                                                                                                                                                                                                                                                                   






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

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

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

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

As of December 31, 2003, Genencor held
approximately 10.0% of our common stock.

40



---



##### Table of Contents








|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The following table sets forth the aggregate fees
billed or to be billed by Ernst & Young LLP to us for
the fiscal year ended December 31, 2003:

|                      |  |      |         |      |  |   |         | 
|--------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                      |  | 2003 |         | 2002
|                      |  |      |         |     
|Audit Fees(1)         |  | $    | 127,000 |      |  | $ | 159,000 | 
|Audit Related Fees(2) |  |      | 9,000   |      |  |   |        | 
|Tax Related Fees(3)   |  |      | 27,000  |      |  |   | 28,000  | 
|All Other Fees        |  |      |        |      |  |   |        | 
|                      |  |      |         |      |  |   |         | 
|                      |  | $    | 163,000 |      |  | $ | 187,000 | 
|                      |  |      |         |      |  |   |         | 



---



|    |                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Audit fees relate to the audit of our
    consolidated financial statements, reviews of our consolidated
    financial statements included in our Form 10-Qs for
    2003, accounting consultations and review of documents filed
    with the SEC.
|   
|(2) | Audit related fees relate primarily to due
    diligence associated with a proposed business combination.                                                                                                                                           
|   
|(3) | Tax related fees are for services related to tax
    compliance, tax advice and tax planning.                                                                                                                                                       

All fees described above were approved in advance
by our Audit Committee.

Pre-Approval Policies and Procedures

Our Audit Committee has adopted a policy and
procedures for the pre-approval of audit and non-audit services
rendered by Ernst & Young. The policy generally
pre-approves specified services in the defined categories of
audit services, audit-related services, and tax services up to
specified amounts. Pre-approval may also be given as part of our
Audit Committees approval of the scope of the engagement
of the independent auditor or on an individual explicit
case-by-case basis before the independent auditor is engaged to
provide each service. The pre-approval of services may be
delegated to one or more of our Audit Committees members,
but the decision must be reported to the full Audit Committee at
its next scheduled meeting.




PART IV






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



|       |                              
|------ | -----------------------------
|(a)(1) | Index to Financial Statements

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

|                                                                                                                          |  |      |            | 
|------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | 
|                                                                                                                          |  | Page
|                                                                                                                          |  |     
|Report of Ernst & Young
    LLP, Independent Auditors                                                                     |  |      | F-2        | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                          |  |      | F-3        | 
|Consolidated Statements of Operations for each of
    the three years in the period ended December 31, 2003               |  |      | F-4        | 
|Consolidated Statements of Stockholders
    Equity for each of the three years in the period ended
    December 31, 2003 |  |      | F-5        | 
|Consolidated Statements of Cash Flows for each of
    the three years in the period ended December 31, 2003               |  |      | F-6        | 
|Notes to Consolidated Financial Statements                                                                                |  |      | F-7 - F-23 | 



|    |                                           
|--- | ------------------------------------------
|(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.

41



---



##### Table of Contents





|    |         
|--- | --------
|(3) | Exhibits

The response to this portion of Item 15 is
submitted as Item 15(c).



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

Form 8-K filed on November 10, 2003
attaching a press release announcing our financial results for
the third quarter ended September 30, 2003.



|    |                    
|--- | -------------------
|(c) | Listing of Exhibits

|        |    |     |  |                      |  |                                                                                                                                                                                                                                                                   
|------- | -- | --- |  | -------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |                     
|Number  |    |     |  | Document Description
|        |    |     |  |                     
|        | 3  | .1  |  |                      |  | Amended and Restated Certificate of Incorporation
    filed with the Secretary of State of Delaware on
    December 2, 1991.(1)                                                                                                                                   
|        | 3  | .2  |  |                      |  | Certificate of Designation of Series A
    Junior Participating Preferred Stock filed with the Secretary of
    State of Delaware on April 2, 1993.                                                                                                               
|        | 3  | .3  |  |                      |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation filed with the Secretary of State
    of Delaware on July 5, 1995.                                                                                                              
|        | 3  | .4  |  |                      |  | Certificate of Increase of Series A Junior
    Participating Preferred Stock filed with the Secretary of State
    of Delaware on July 5, 1995.                                                                                                                   
|        | 3  | .5  |  |                      |  | Certificate of Increase of Series A Junior
    Participating Preferred Stock filed with the Secretary of State
    of Delaware on July 2, 1998.(5)                                                                                                                
|        | 3  | .6  |  |                      |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation filed with the Secretary of State
    of Delaware on July 2, 1998.(5)                                                                                                           
|        | 3  | .7  |  |                      |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation filed with the Secretary of State
    of Delaware on November 12, 1998.(6)                                                                                                      
|        | 3  | .8  |  |                      |  | Certificate of Designations of the Series S
    and Series S-1 Preferred Stock filed with the Secretary of
    State of Delaware on June 29, 1999.(8)                                                                                                             
|        | 3  | .9  |  |                      |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation filed with the Secretary of State
    of Delaware on July 1, 1999.(8A)                                                                                                          
|        | 3  | .10 |  |                      |  | Certificate of Amendment of Amended and Restated
    Certificate of Incorporation filed with the Secretary of State
    of Delaware on September 23, 1999.(9)                                                                                                     
|        | 3  | .11 |  |                      |  | Certificate of Decrease of Series A Junior
    Participating Preferred Stock filed with the Secretary of State
    of Delaware on September 23, 1999.(9)                                                                                                          
|        | 3  | .12 |  |                      |  | Amended and Restated Bylaws of the
    Registration.(18)                                                                                                                                                                                                          
|        | 3  | .13 |  |                      |  | Rights Agreement dated March 19, 1993
    between Registrant and American Stock Transfer & Trust
    Company, as amended on June 29, 1999, February 15,
    2000, July 9, 2001 and December 18, 2001.(18)                                                         
|        | 4  | .1  |  |                      |  | Reference is made to Exhibits 3.1 through
    3.13.                                                                                                                                                                                                               
|        | 4  | .2  |  |                      |  | Specimen certificate of the Common stock.(1)                                                                                                                                                                                                                      
|        | 10 | .1  |  |                      |  | Form of Indemnification Agreement entered into
    between Epimmune and its directors and officers.(1)(*)                                                                                                                                                         
|        | 10 | .2  |  |                      |  | Registrants 1989 Stock Plan, as amended
    through June 12, 1998 (the 1989 Plan).(5)                                                                                                                                                                          
|        | 10 | .3  |  |                      |  | Forms of Incentive Stock Option Agreement under
    the 1989 Plan.(1)                                                                                                                                                                                             
|        | 10 | .4  |  |                      |  | Form of Nonstatutory Stock Option Agreement under
    the 1989 Plan.(1)                                                                                                                                                                                           
|        | 10 | .5  |  |                      |  | Research Agreement, between Epimmune and The
    Scripps Research Institute, formerly Scripps Clinic and Research
    Foundation (Scripps), dated as of September 1,
    1990, as amended August 5, 1991 (with certain confidential
    portions deleted).(1)(A)
|        | 10 | .6  |  |                      |  | License Agreement, between Epimmune and Scripps,
    dated as of September 23, 1991 (with certain confidential
    portions deleted).(1)(A)                                                                                                                       

42



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##### Table of Contents



|        |    |     |  |                      |  |                                                                                                                                                               
|------- | -- | --- |  | -------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |                     
|Number  |    |     |  | Document Description
|        |    |     |  |                     
|        | 10 | .7  |  |                      |  | Research and Option Agreement, between Epimmune
    and Scripps, dated October 1, 1991 (with certain
    confidential portions deleted).(1)(A)                
|        | 10 | .8  |  |                      |  | Amendment to License Agreement between Epimmune
    and Scripps dated as of June 17, 1992 (with certain
    confidential portions deleted).(1)(B)             
|        | 10 | .9  |  |                      |  | Registrants 1994 Non-Employee
    Directors Stock Option Plan, as amended through
    June 12, 1998.(5)(*)                                                  
|        | 10 | .10 |  |                      |  | Second Amendment to License Agreement between
    Epimmune and Scripps dated as of June 17, 1992 (with
    certain confidential portions deleted.(1)(B)       
|        | 10 | .11 |  |                      |  | Directors Deferred Compensation Plan,
    effective as of March 17, 1995, as amended
    September 20, 1996 and July 13, 1999.(22)(*)                        
|        | 10 | .12 |  |                      |  | Lease Agreement between Epimmune Inc. and Nexus
    Equity LLC VIII, dated as of November 1, 1998, as amended
    February 1, 1999.(7)                        
|        | 10 | .13 |  |                      |  | Preferred Stock Exchange Agreement, dated
    July 1, 1999, by and between the Company and G.D.
    Searle & Co.(8)                                           
|        | 10 | .14 |  |                      |  | Investor Rights Agreement, dated as of
    July 1, 1999, by and between the Company and G.D.
    Searle & Co.(8)                                              
|        | 10 | .15 |  |                      |  | Form of Common Stock Purchase agreement dated
    February 15, 2000.(10)                                                                                      
|        | 10 | .16 |  |                      |  | Letter Agreement between Epimmune and Robert De
    Vaere dated May 4, 2000.(11)(*)                                                                           
|        | 10 | .17 |  |                      |  | Letter Agreement between Epimmune and Mark Newman
    dated May 4, 2000.(11)(*)                                                                               
|        | 10 | .18 |  |                      |  | Form of Common Stock Purchase Agreement dated
    October 16, 2000.(12)                                                                                       
|        | 10 | .19 |  |                      |  | Non-Exclusive License Agreement between Epimmune
    and Valentis, Inc., dated November 27, 2000 (with
    certain confidential portions deleted).(12)(C)     
|        | 10 | .20 |  |                      |  | Letter Agreement between Epimmune and
    Dr. Emile Loria regarding employment terms dated
    January 16, 2001.(13)(*)                                       
|        | 10 | .21 |  |                      |  | Form of Restricted Stock Purchase Agreement
    between Epimmune and Dr. Emile Loria dated January 16,
    2001.(13)(*)                                       
|        | 10 | .22 |  |                      |  | Amendment to Severance Benefits Agreement between
    Epimmune and Dr. Mark Newman dated March 8,
    2001.(13)(*)                                            
|        | 10 | .23 |  |                      |  | Amendment to Severance Benefits Agreement between
    Epimmune and Robert De Vaere dated March 8, 2001.(13)(*)                                                
|        | 10 | .24 |  |                      |  | Non-exclusive License Agreement between Epimmune
    and Pharmexa A/S dated June 25, 2001 (with certain
    confidential portions deleted).(15)(D)            
|        | 10 | .25 |  |                      |  | License Agreement between Epimmune and Genencor
    International Inc. dated July 9, 2001 (with certain
    confidential portions deleted).(15)(D)            
|        | 10 | .26 |  |                      |  | Collaboration Agreement between Epimmune and
    Genencor International Inc. dated July 9, 2001 (with
    certain confidential portions deleted).(16)(E)      
|        | 10 | .27 |  |                      |  | Securities Purchase Agreement between Epimmune
    and Genencor International Inc. dated July 9, 2001 (with
    certain confidential portions deleted).(16)(E)
|        | 10 | .28 |  |                      |  | Non-exclusive License Agreement between Epimmune
    and Biosite Incorporated dated August 17, 2001 (with
    certain confidential portions deleted).(16)(E)  
|        | 10 | .29 |  |                      |  | Non-exclusive License Agreement between Epimmune
    and Anosys Inc. dated August 31, 2001 (with certain
    confidential portions deleted).(16)(E)           
|        | 10 | .30 |  |                      |  | Non-exclusive License Agreement between Epimmune
    and Bavarian Nordic A/ S dated November 28, 2001 (with
    certain confidential portions deleted).(18)(F)
|        | 10 | .31 |  |                      |  | Form of Share Purchase Agreement dated
    December 18, 2001.(17)                                                                                             
|        | 10 | .32 |  |                      |  | 2000 Stock Plan as amended.(18)(*)                                                                                                                            
|        | 10 | .33 |  |                      |  | 2001 Employee Stock Purchase Plan.(14)(*)                                                                                                                     
|        | 10 | .34 |  |                      |  | Letter Agreement between Epimmune and Michael
    McClurg dated March 29, 2002.(19)(*)                                                                        

43



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##### Table of Contents



|        |    |     |  |                      |  |                                                                                                                                                                                            
|------- | -- | --- |  | -------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |                     
|Number  |    |     |  | Document Description
|        |    |     |  |                     
|        | 10 | .35 |  |                      |  | Letter Agreement between Epimmune and
    Dr. John Fikes dated March 29, 2002.(19)(*)                                                                                                      
|        | 10 | .36 |  |                      |  | Separation Agreement dated October 14, 2002
    between Epimmune and Dr. Sette.(20)(*)                                                                                                     
|        | 10 | .37 |  |                      |  | Material Transfer Agreement dated
    October 14, 2002 between Epimmune and Dr. Sette.(20)                                                                                                 
|        | 10 | .38 |  |                      |  | First Amendment to the Collaboration Agreement
    dated October 16, 2002 between Epimmune and Genencor
    International, Inc.(21)(G)                                                     
|        | 10 | .39 |  |                      |  | First Amendment to the License Agreement dated
    October 16, 2002 between Epimmune and Genencor
    International, Inc.(22)                                                              
|        | 10 | .40 |  |                      |  | First Amendment to the Non-Exclusive License
    Agreement dated October 18, 2002 between Epimmune and
    Valentis, Inc.(22)(G)                                                           
|        | 10 | .41 |  |                      |  | Non-Exclusive License Agreement dated
    October 28, 2002 between Epimmune and
    Valentis, Inc.(22)(G)                                                                                  
|        | 10 | .42 |  |                      |  | Amendment to Letter Agreement between Epimmune
    and Dr. Emile Loria dated June 20, 2003.(23)(*)                                                                                         
|        | 10 | .43 |  |                      |  | Non-Exclusive License Agreement between Epimmune
    and Immuno-Designed Molecules dated July 7, 2003.(23)(H)                                                                              
|        | 10 | .44 |  |                      |  | Form of Unit Purchase Agreement dated
    September 18, 2003.(24)                                                                                                                          
|        | 10 | .45 |  |                      |  | Form of Warrant to Purchase Common Stock dated
    September 18, 2003.(24)                                                                                                                 
|        | 10 | .46 |  |                      |  | Termination of Amendment to Letter Agreement
    between Epimmune and Dr. Emile Loria dated
    September 8, 2003.(25)(*)                                                                  
|        | 10 | .47 |  |                      |  | Accelerated Benefits Agreement between Epimmune
    and Dr. Emile Loria dated February 27, 2004.(*)                                                                                        
|        | 14 | .1  |  |                      |  | Code of Business Conduct and Ethics dated
    December 9, 2003.                                                                                                                            
|        | 21 | .1  |  |                      |  | Subsidiaries of Epimmune.(I)                                                                                                                                                               
|        | 23 | .1  |  |                      |  | Consent of Ernst & Young,
    LLP, Independent Auditors.                                                                                                                                   
|        | 25 | .1  |  |                      |  | Power of Attorney. Reference is made to the
    signature page of this report.                                                                                                             
|        | 31 | .1  |  |                      |  | Certification of Principal Executive Officer
    pursuant to Section 302 of the Public Company Accounting
    Reform and Investor Protection Act of 2002 (18 U.S.C.
    § 1350, as adopted)
|        | 31 | .2  |  |                      |  | Certification of Principal Financial Officer
    pursuant to Section 302 of the Public Company Accounting
    Reform and Investor Protection Act of 2002 (18 U.S.C.
    § 1350, as adopted)
|        | 32 | .1  |  |                      |  | Certification pursuant to Section 906 of the
    Public Company Accounting Reform and Investor Protection Act of
    2002 (18 U.S.C. § 1350, as adopted)                                   



---



|  |                                              
|- | ---------------------------------------------
|* | Executive Compensation Plans and Arrangements



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

44



---



##### Table of Contents





| |     |                                                                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | (7) | Incorporated by reference to the Companys
    Annual Report on Form 10-K, for the fiscal year ended
    December 31, 1998, filed on April 15, 1999.
|
| | (8) | Incorporated by reference to the Companys
    Form 8-K, filed on July 16, 1999.                                                                    



|     |                                                                                                                      
|---- | ---------------------------------------------------------------------------------------------------------------------
|(8A) | Incorporated by reference to the Companys
    Definitive Proxy Statement filed on Form DEF 14A on
    July 28, 1999.



| |     |                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (9) | 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.



|     |                                                                                                                                                                 
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | 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.            
|    
|(11) | 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.       
|    
|(12) | 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.            
|    
|(13) | 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.         
|    
|(14) | Incorporated by reference to the Companys
    Form S-8 filed on June 27, 2001 (File
    No. 333-63950).                                                        
|    
|(15) | 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.       
|    
|(16) | 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.
|    
|(17) | Incorporated by reference to the Companys
    Form S-3, filed on January 10, 2002.                                                                             
|    
|(18) | Incorporated by reference to the Companys
    Annual Report on Form 10-K, for the fiscal year ended
    December 31, 2001, filed on March 29, 2002.            
|    
|(19) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q, for the quarterly period
    ended March 31, 2002, filed on May 13, 2002.         
|    
|(20) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q, for the quarterly period
    ended September 30, 2002, filed on October 16, 2002. 
|    
|(21) | Incorporated by reference to the Companys
    Registration Statement on Form S-1, filed on
    October 24, 2002.                                               
|    
|(22) | Incorporated by reference to Amendment No. 1
    to the Companys Registration Statement on Form S-1/
    A, filed on November 6, 2002.                         
|    
|(23) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q, for the quarterly period
    ended June 30, 2003, filed on August 14, 2003.       
|    
|(24) | Incorporated by reference to the Companys
    Current Report on Form 8-K, filed on September 19,
    2003.                                                     
|    
|(25) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q, for the quarterly period
    ended September 30, 2003, filed on November 10, 2003.



|    |  |                                                                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) |  | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on November 21, 1991.
|   
|(B) |  | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on May 15, 1996.     
|   
|(C) |  | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on July 5, 2001.     
|   
|(D) |  | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on September 4, 2001.

45



---



##### Table of Contents





|    |  |                                                                                                                                                                      
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(E) |  | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on January 29, 2002.
|   
|(F) |  | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on May 14, 2002.    
|   
|(G) |  | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on November 5, 2002.
|   
|(H) |  | Portions of this exhibit have been granted
    confidential treatment pursuant to an order granted by the
    Securities and Exchange Commission on October 22, 2003.
|   
|(I) |  | Previously filed.                                                                                                                                                    

46



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 30th day of
March 2004.



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



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

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

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

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

|                                               |  |                                                                                                                                   |  |                |  | 
|---------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                               |  |                                                                                                                                   |  |               
|Signature                                      |  | Title                                                                                                                             |  | Date          
|                                               |  |                                                                                                                                   |  |               
|                                              
|/s/ EMILE LORIAEmile Loria, M.D.               |  | President(Principal Executive Officer),
    Chief Executive Officer and Director                                                  |  | March 30, 2004
|                                              
|/s/ ROBERT J. DE VAERERobert J. De Vaere       |  | Vice President, Finance and Administration
    Chief Financial Officer, Secretary(Principal Financial and
    Accounting Officer) |  | March 30, 2004
|                                              
|/s/ HOWARD E. GREENE, JR.Howard E. Greene, Jr. |  | Chairman of the Board and Director                                                                                                |  | March 30, 2004
|                                              
|/s/ WILLIAM T. COMERWilliam T. Comer, Ph.D.    |  | Director                                                                                                                          |  | March 30, 2004
|                                              
|/s/ MICHAEL G. GREYMichael G. Grey             |  | Director                                                                                                                          |  | March 30, 2004
|                                              
|/s/ GEORGES HIBONGeorges Hibon                 |  | Director                                                                                                                          |  | March 30, 2004
|                                              
|/s/ JOHN P. MCKEARNJohn P. McKearn, Ph.D.      |  | Director                                                                                                                          |  | March 30, 2004

47



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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, 2003 and 2002                                          |  |      | F-3 | 
|Consolidated Statements of Operations for the
    Years Ended December 31, 2003, 2002 and 2001            |  |      | F-4 | 
|Consolidated Statements of Stockholders
    Equity for the Years Ended December 31, 2003, 2002, and 2001 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2003, 2002 and 2001            |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                                |  |      | F-7 | 

F-1



---



##### Table of Contents



REPORT OF ERNST & YOUNG
LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Epimmune Inc.


We have audited the accompanying consolidated
balance sheets of Epimmune Inc. as of December 31, 2003 and
2002, and the related consolidated statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2003. 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, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

San Diego, California

February 20, 2004,





except for the first paragraph of Note 7 and
Note 11, as to which the date is March 29, 2004





F-2



---



##### Table of Contents



EPIMMUNE INC.

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                                                                       |              |            |              |   |   |            |              |  
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ---------- | ------------ | - | - | ---------- | ------------ | -
|                                         |                                                                                                                                                                                                                       |             
|                                         |                                                                                                                                                                                                                       | December 31,
|                                         |                                                                                                                                                                                                                       |             
|                                         |                                                                                                                                                                                                                       | 2003         |            | 2002        
|                                         |                                                                                                                                                                                                                       |              |            |             
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                                                                       |              |            |              |   |   |            |             
|                                         | Cash and cash equivalents                                                                                                                                                                                             |              | $          | 6,416,000    |   |   | $          | 9,745,000    |  
|                                         | Accounts Receivable                                                                                                                                                                                                   |              |            | 1,012,000    |   |   |            | 516,000      |  
|                                         | Prepaids and other current assets                                                                                                                                                                                     |              |            | 186,000      |   |   |            | 192,000      |  
|                                         |                                                                                                                                                                                                                       |              |            |              |   |   |            |             
|Total current assets                     |                                                                                                                                                                                                                       |              | 7,614,000  |              |   |   | 10,453,000 |             
|Restricted cash                          |                                                                                                                                                                                                                       |              | 472,000    |              |   |   | 472,000    |             
|Property and equipment, net              |                                                                                                                                                                                                                       |              | 1,145,000  |              |   |   | 1,363,000  |             
|Patents, net                             |                                                                                                                                                                                                                       |              | 3,462,000  |              |   |   | 3,240,000  |             
|                                         |                                                                                                                                                                                                                       |              |            |              |   |   |            |             
|                                         |                                                                                                                                                                                                                       | $            | 12,693,000 |              |   | $ | 15,528,000 |             
|                                         |                                                                                                                                                                                                                       |              |            |              |   |   |            |             
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                                                                       |              |            |              |   |   |            |             
|                                         | Accounts payable and accrued liabilities                                                                                                                                                                              |              | $          | 1,446,000    |   |   | $          | 1,336,000    |  
|                                         | Deferred contract revenues                                                                                                                                                                                            |              |            | 1,151,000    |   |   |            | 1,114,000    |  
|                                         | Accrued payroll and related expenses                                                                                                                                                                                  |              |            | 173,000      |   |   |            | 252,000      |  
|                                         | Current portion of notes payable                                                                                                                                                                                      |              |            |             |   |   |            | 43,000       |  
|                                         |                                                                                                                                                                                                                       |              |            |              |   |   |            |             
|Total current liabilities                |                                                                                                                                                                                                                       |              | 2,770,000  |              |   |   | 2,745,000  |             
|Deferred rent                            |                                                                                                                                                                                                                       |              | 212,000    |              |   |   | 197,000    |             
|Stockholders equity:                    |                                                                                                                                                                                                                       |              |            |              |   |   |            |             
|                                         | Preferred stock, $.01 par value,
    10,000,000 shares authorized, 1,409,288 shares issued
    and outstanding at December 31, 2003 and 2002. Liquidation
    preference of $10,000,000 at December 31, 2003 and 2002 |              |            | 14,000       |   |   |            | 14,000       |  
|                                         | Common stock, $.01 par value,
    25,000,000 shares authorized at December 31, 2003 and
    2002; 13,490,618 and 12,153,462 shares issued and
    outstanding at December 31, 2003 and 2002, respectively             |              |            | 135,000      |   |   |            | 122,000      |  
|                                         | Additional paid-in capital                                                                                                                                                                                            |              |            | 167,537,000  |   |   |            | 166,454,000  |  
|                                         | Note receivable from employee                                                                                                                                                                                         |              |            |             |   |   |            | (2,932,000   | )
|                                         | Deferred compensation                                                                                                                                                                                                 |              |            | (50,000      | ) |   |            | (203,000     | )
|                                         | Accumulated deficit                                                                                                                                                                                                   |              |            | (157,925,000 | ) |   |            | (150,869,000 | )
|                                         |                                                                                                                                                                                                                       |              |            |              |   |   |            |             
|Total stockholders equity               |                                                                                                                                                                                                                       |              | 9,711,000  |              |   |   | 12,586,000 |             
|                                         |                                                                                                                                                                                                                       |              |            |              |   |   |            |             
|                                         |                                                                                                                                                                                                                       | $            | 12,693,000 |              |   | $ | 15,528,000 |             
|                                         |                                                                                                                                                                                                                       |              |            |              |   |   |            |             

See accompanying notes.

F-3



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##### Table of Contents



EPIMMUNE INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |            |  
|------------------- | ----------------------------------------------------------------- | ------------------------ | - | ---------- | - | ---- | - | ---------- | - |  | - | ---------- | -
|                    |                                                                   |                         
|                    |                                                                   | Years Ended December 31,
|                    |                                                                   |                         
|                    |                                                                   | 2003                     |   | 2002       |   | 2001
|                    |                                                                   |                          |   |            |   |     
|Revenues:           |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Research grants and contract revenue                              |                          | $ | 2,521,000  |   |      | $ | 1,899,000  |   |  | $ | 1,831,000  |  
|                    | License fees and milestones                                       |                          |   | 1,118,000  |   |      |   | 487,000    |   |  |   | 3,750,000  |  
|                    | Related party revenue                                             |                          |   | 3,519,000  |   |      |   | 4,684,000  |   |  |   | 2,585,000  |  
|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Total revenues                                                    |                          |   | 7,158,000  |   |      |   | 7,070,000  |   |  |   | 8,166,000  |  
|Costs and expenses: |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Research and development                                          |                          |   | 10,495,000 |   |      |   | 11,257,000 |   |  |   | 7,870,000  |  
|                    | General and administrative                                        |                          |   | 3,567,000  |   |      |   | 2,887,000  |   |  |   | 3,363,000  |  
|                    | Restructuring costs                                               |                          |   | 336,000    |   |      |   |           |   |  |   |           |  
|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Total costs and expenses                                          |                          |   | 14,398,000 |   |      |   | 14,144,000 |   |  |   | 11,233,000 |  
|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Loss from operations                                              |                          |   | (7,240,000 | ) |      |   | (7,074,000 | ) |  |   | (3,067,000 | )
|                    | Interest income, net                                              |                          |   | 191,000    |   |      |   | 587,000    |   |  |   | 424,000    |  
|                    | Other (expense) income, net                                       |                          |   | (7,000     | ) |      |   | (13,000    | ) |  |   | (1,000     | )
|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Net loss                                                          |                          | $ | (7,056,000 | ) |      | $ | (6,500,000 | ) |  | $ | (2,644,000 | )
|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Net loss per share-basic and diluted                              |                          | $ | (0.58      | ) |      | $ | (0.57      | ) |  | $ | (0.31      | )
|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |           
|                    | Shares used in computing net loss per share-basic
    and diluted |                          |   | 12,238,745 |   |      |   | 11,446,387 |   |  |   | 8,533,968  |  
|                    |                                                                   |                          |   |            |   |      |   |            |   |  |   |           

See accompanying notes.

F-4



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##### Table of Contents



EPIMMUNE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

For the Three Years Ended December 31,
2003


|                             |                                                                                         |                 |           |              |  |            |        |            |  |          |            |           |   |              |         |         |   |   |             |            |   |   |            |            |   |   |          |          |  
|---------------------------- | --------------------------------------------------------------------------------------- | --------------- | --------- | ------------ |  | ---------- | ------ | ---------- |  | -------- | ---------- | --------- | - | ------------ | ------- | ------- | - | - | ----------- | ---------- | - | - | ---------- | ---------- | - | - | -------- | -------- | -
|                             |                                                                                         |                 |           |              |  |            |        | Note       |  |         
|                             |                                                                                         | Preferred Stock |           | Common Stock |  | Additional |        | Receivable |  |         
|                             |                                                                                         |                 |           |              |  | Paid-in    |        | from       |  | Deferred
|                             |                                                                                         | Shares          |           | Amount       |  | Shares     |        | Amount     |  | Capital  |            | Employee  |   | Compensation
|                             |                                                                                         |                 |           |              |  |            |        |            |  |          |            |           |   |             
|Balance at December 31, 2000 |                                                                                         |                 | 1,409,288 |              |  | $          | 14,000 |            |  |          | 7,847,343  |           |   | $            | 78,000  |         |   | $ | 153,726,000 |            |   | $ |           |            |   | $ | (6,000   | )       
|                             | 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 | )       
|                             | Issuance costs related to private placement                                             |                 |           |             |  |            |        |           |  |          |            |          |   |              |         |        |   |   |             | (14,000    | ) |   |            |           |   |   |          |         |  
|                             | Exercise of stock options                                                               |                 |           |             |  |            |        |           |  |          |            | 14,764    |   |              |         |        |   |   |             | 4,000      |   |   |            |           |   |   |          |         |  
|                             | Issuance of common stock in connection with
    employee stock purchase plan            |                 |           |             |  |            |        |           |  |          |            | 43,341    |   |              |         | 1,000   |   |   |             | 59,000     |   |   |            |           |   |   |          |         |  
|                             | Issuance of common stock in connection with stock
    bonus award                       |                 |           |             |  |            |        |           |  |          |            | 600       |   |              |         |        |   |   |             | 1,000      |   |   |            |           |   |   |          |         |  
|                             | Interest on note receivable from employee                                               |                 |           |             |  |            |        |           |  |          |            |          |   |              |         |        |   |   |             |           |   |   |            | (291,000   | ) |   |          |         |  
|                             | Deferred compensation in connection with the
    issuance of stock options to employees |                 |           |             |  |            |        |           |  |          |            |          |   |              |         |        |   |   |             | (395,000   | ) |   |            |           |   |   |          | 267,000  |  
|                             | Amortization of deferred compensation                                                   |                 |           |             |  |            |        |           |  |          |            |          |   |              |         |        |   |   |             |           |   |   |            |           |   |   |          | 99,000   |  
|                             | Deferred compensation related to consultant stock
    options                           |                 |           |             |  |            |        |           |  |          |            |          |   |              |         |        |   |   |             | 27,000     |   |   |            |           |   |   |          |         |  
|                             | Unrealized loss on available-for-sale securities                                        |                 |           |             |  |            |        |           |  |          |            |          |   |              |         |        |   |   |             |           |   |   |            |           |   |   |          |         |  
|                             | Net loss                                                                                |                 |           |             |  |            |        |           |  |          |            |          |   |              |         |        |   |   |             |           |   |   |            |            |   |   |          |          |  
|                             |                                                                                         |                 |           |              |  |            |        |            |  |          |            |           |   |              |         |         |   |   |             |            |   |   |            |            |   |   |          |         
|Balance at December 31, 2002 |                                                                                         |                 | 1,409,288 |              |  |            | 14,000 |            |  |          | 12,153,462 |           |   |              | 122,000 |         |   |   | 166,454,000 |            |   |   | (2,932,000 | )          |   |   | (203,000 | )       
|                             | Issuance of common stock in connection with
    employee stock purchase plan            |                 |           |             |  |            |        |           |  |          |            | 69,300    |   |              |         | 1,000   |   |   |             | 55,000     |   |   |            |           |   |   |          |         |  
|                             | Exercise of stock options                                                               |                 |           |             |  |            |        |           |  |          |            | 62,635    |   |              |         |        |   |   |             | 61,000     |   |   |            |           |   |   |          |         |  
|                             | Issuance of common stock in connection with
    private placement (net)                 |                 |           |             |  |            |        |           |  |          |            | 2,168,961 |   |              |         | 22,000  |   |   |             | 3,588,000  |   |   |            |           |   |   |          |         |  
|                             | Amortization of deferred compensation related to
    note on restricted stock           |                 |           |             |  |            |        |           |  |          |            |          |   |              |         |        |   |   |             |           |   |   |            |           |   |   |          | 66,000   |  
|                             | Interest on note receivable from employee                                               |                 |           |             |  |            |        |           |  |          |            |          |   |              |         |        |   |   |             |           |   |   |            | (123,000   | ) |   |          |         |  
|                             | Retirement of common stock in connection with
    restricted stock buyback              |                 |           |             |  |            |        |           |  |          |            | (963,740  | ) |              |         | (10,000 | ) |   |             | (2,400,000 | ) |   |            | 3,055,000  |   |   |          |         |  
|                             | Reversal of deferred compensation related to
    restricted stock buyback               |                 |           |             |  |            |        |           |  |          |            |          |   |              |         |        |   |   |             | (75,000    | ) |   |            |           |   |   |          | 75,000   |  
|                             | Deferred compensation related to restricted stock
    vesting                           |                 |           |             |  |            |        |           |  |          |            |          |   |              |         |        |   |   |             |           |   |   |            |           |   |   |          | 12,000   |  
|                             | Net reclass of vested shares from liability to
    equity                               |                 |           |             |  |            |        |           |  |          |            |          |   |              |         |        |   |   |             | (186,000   | ) |   |            |           |   |   |          |         |  
|                             | Deferred compensation related to consultant stock
    options                           |                 |           |             |  |            |        |           |  |          |            |          |   |              |         |        |   |   |             | 34,000     |   |   |            |           |   |   |          |         |  
|                             | Stock based compensation related to force
    reduction                                 |                 |           |             |  |            |        |           |  |          |            |          |   |              |         |        |   |   |             | 6,000      |   |   |            |           |   |   |          |         |  
|                             | Net loss                                                                                |                 |           |             |  |            |        |           |  |          |            |          |   |              |         |        |   |   |             |           |   |   |            |            |   |   |          |          |  
|                             |                                                                                         |                 |           |              |  |            |        |            |  |          |            |           |   |              |         |         |   |   |             |            |   |   |            |            |   |   |          |         
|Balance at December 31, 2003 |                                                                                         |                 | 1,409,288 |              |  | $          | 14,000 |            |  |          | 13,490,618 |           |   | $            | 135,000 |         |   | $ | 167,537,000 |            |   | $ |           |            |   | $ | (50,000  | )       
|                             |                                                                                         |                 |           |              |  |            |        |            |  |          |            |           |   |              |         |         |   |   |             |            |   |   |            |            |   |   |          |         

[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, 2000 |                                                                                         | $           | (141,725,000 | )             |   | $             | 4,000  |               |   | $ | 12,091,000 |            |   | $ | (4,676,000 | )         
|                             |                                                                                         |             |              |               |   |               |        |               |   |   |            |            |   |   |            |           
|                             | 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 | )         
|                             |                                                                                         |             |              |               |   |               |        |               |   |   |            |            |   |   |            |           
|                             | Issuance costs related to private placement                                             |             |              |              |   |               |        |              |   |   |            | (14,000    | ) |   |            |            |  
|                             | Exercise of stock options                                                               |             |              |              |   |               |        |              |   |   |            | 4,000      |   |   |            |            |  
|                             | Issuance of common stock in connection with
    employee stock purchase plan            |             |              |              |   |               |        |              |   |   |            | 60,000     |   |   |            |            |  
|                             | Issuance of common stock in connection with stock
    bonus award                       |             |              |              |   |               |        |              |   |   |            | 1,000      |   |   |            |            |  
|                             | Interest on note receivable from employee                                               |             |              |              |   |               |        |              |   |   |            | (291,000   | ) |   |            |            |  
|                             | Deferred compensation in connection with the
    issuance of stock options to employees |             |              |              |   |               |        |              |   |   |            | (128,000   | ) |   |            |            |  
|                             | Amortization of deferred compensation                                                   |             |              |              |   |               |        |              |   |   |            | 99,000     |   |   |            |            |  
|                             | Deferred compensation related to consultant stock
    options                           |             |              |              |   |               |        |              |   |   |            | 27,000     |   |   |            |            |  
|                             | Unrealized loss on available-for-sale securities                                        |             |              |              |   |               |        | (23,000       | ) |   |            | (23,000    | ) |   |            | (23,000    | )
|                             | Net loss                                                                                |             |              | (6,500,000    | ) |               |        |              |   |   |            | (6,500,000 | ) |   |            | (6,500,000 | )
|                             |                                                                                         |             |              |               |   |               |        |               |   |   |            |            |   |   |            |           
|Balance at December 31, 2002 |                                                                                         |             | (150,869,000 | )             |   |               |       |               |   |   | 12,586,000 |            |   | $ | (6,523,000 | )         
|                             |                                                                                         |             |              |               |   |               |        |               |   |   |            |            |   |   |            |           
|                             | Issuance of common stock in connection with
    employee stock purchase plan            |             |              |              |   |               |        |              |   |   |            | 56,000     |   |   |            |            |  
|                             | Exercise of stock options                                                               |             |              |              |   |               |        |              |   |   |            | 61,000     |   |   |            |            |  
|                             | Issuance of common stock in connection with
    private placement (net)                 |             |              |              |   |               |        |              |   |   |            | 3,610,000  |   |   |            |            |  
|                             | Amortization of deferred compensation related to
    note on restricted stock           |             |              |              |   |               |        |              |   |   |            | 66,000     |   |   |            |            |  
|                             | Interest on note receivable from employee                                               |             |              |              |   |               |        |              |   |   |            | (123,000   | ) |   |            |            |  
|                             | Retirement of common stock in connection with
    restricted stock buyback              |             |              |              |   |               |        |              |   |   |            | 645,000    |   |   |            |            |  
|                             | Reversal of deferred compensation related to
    restricted stock buyback               |             |              |              |   |               |        |              |   |   |            |           |   |   |            |            |  
|                             | Deferred compensation related to restricted stock
    vesting                           |             |              |              |   |               |        |              |   |   |            | 12,000     |   |   |            |            |  
|                             | Net reclass of vested shares from liability to
    equity                               |             |              |              |   |               |        |              |   |   |            | (186,000   | ) |   |            |            |  
|                             | Deferred compensation related to consultant stock
    options                           |             |              |              |   |               |        |              |   |   |            | 34,000     |   |   |            |            |  
|                             | Stock based compensation related to force
    reduction                                 |             |              |              |   |               |        |              |   |   |            | 6,000      |   |   |            |            |  
|                             | Net loss                                                                                |             |              | (7,056,000    | ) |               |        |              |   |   |            | (7,056,000 | ) |   |            | (7,056,000 | )
|                             |                                                                                         |             |              |               |   |               |        |               |   |   |            |            |   |   |            |           
|Balance at December 31, 2003 |                                                                                         | $           | (157,925,000 | )             |   | $             |       |               |   | $ | 9,711,000  |            |   | $ | (7,056,000 | )         
|                             |                                                                                         |             |              |               |   |               |        |               |   |   |            |            |   |   |            |           

See accompanying notes.

F-5



---



##### Table of Contents



EPIMMUNE INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                              |                                              |                                          |            |          |          |      |            |          |            |   |            |         |           |  
|--------------------------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------- | ---------- | -------- | -------- | ---- | ---------- | -------- | ---------- | - | ---------- | ------- | --------- | -
|                                                                                              |                                              |                                         
|                                                                                              |                                              | Years Ended December 31,                
|                                                                                              |                                              |                                         
|                                                                                              |                                              | 2003                                     |            | 2002     |          | 2001
|                                                                                              |                                              |                                          |            |          |          |     
|Operating activities                                                                          |                                              |                                          |            |          |          |      |            |          |            |   |            |        
|Net loss                                                                                      |                                              | $                                        | (7,056,000 | )        |          | $    | (6,500,000 | )        |            | $ | (2,644,000 | )      
|Adjustments to reconcile net loss to net cash
    (used in) provided by operating activities: |                                              |                                          |            |          |          |      |            |          |            |   |            |        
|                                                                                              | Depreciation and amortization                |                                          |            | 866,000  |          |      |            | 777,000  |            |   |            | 578,000 |          
|                                                                                              | Stock based compensation                     |                                          |            | 764,000  |          |      |            | (1,000   | )          |   |            | 235,000 |          
|                                                                                              | Deferred rent                                |                                          |            | 15,000   |          |      |            | 31,000   |            |   |            | 47,000  |          
|                                                                                              | Write-off of abandoned patents               |                                          |            | 76,000   |          |      |            | 232,000  |            |   |            | 625,000 |          
|                                                                                              | Interest on note held by stock holder        |                                          |            | (123,000 | )        |      |            | (291,000 | )          |   |            |        |          
|                                                                                              | Loss on disposal of assets                   |                                          |            | 2,000    |          |      |            | 3,000    |            |   |            |        |          
|                                                                                              | Changes in operating assets and liabilities: |                                          |            |          |          |      |            |          |            |   |            |         |          
|                                                                                              |                                              | Prepaids and other current assets        |            |          | (490,000 | )    |            |          | (1,000     | ) |            |         | (200,000  | )
|                                                                                              |                                              | Accounts payable and accrued liabilities |            |          | (76,000  | )    |            |          | (140,000   | ) |            |         | 471,000   |  
|                                                                                              |                                              | Deferred revenue                         |            |          | 37,000   |      |            |          | (1,194,000 | ) |            |         | 2,079,000 |  
|                                                                                              |                                              | Accrued payroll and related expense      |            |          | (79,000  | )    |            |          | 30,000     |   |            |         | (19,000   | )
|                                                                                              |                                              |                                          |            |          |          |      |            |          |            |   |            |        
|Net cash (used in) provided by operating
    activities                                       |                                              |                                          | (6,064,000 | )        |          |      | (7,054,000 | )        |            |   | 1,172,000  |        
|Investing activities                                                                          |                                              |                                          |            |          |          |      |            |          |            |   |            |        
|Purchases of property and equipment                                                           |                                              |                                          | (131,000   | )        |          |      | (735,000   | )        |            |   | (293,000   | )      
|Patents                                                                                       |                                              |                                          | (817,000   | )        |          |      | (1,183,000 | )        |            |   | (682,000   | )      
|Purchases of available-for-sale securities                                                    |                                              |                                          |           |          |          |      | (1,614,000 | )        |            |   | (7,626,000 | )      
|Maturities of available-for-sale securities                                                   |                                              |                                          |           |          |          |      | 12,588,000 |          |            |   | 2,059,000  |        
|Construction in progress                                                                      |                                              |                                          |           |          |          |      |           |          |            |   | (10,000    | )      
|                                                                                              |                                              |                                          |            |          |          |      |            |          |            |   |            |        
|Net cash (used in) provided by investing
    activities                                       |                                              |                                          | (948,000   | )        |          |      | 9,056,000  |          |            |   | (6,552,000 | )      
|Financing activities                                                                          |                                              |                                          |            |          |          |      |            |          |            |   |            |        
|Principal payments under equipment notes payable
    and note payable to bank                 |                                              |                                          | (43,000    | )        |          |      | (345,000   | )        |            |   | (413,000   | )      
|Net proceeds from issuance of common stock                                                    |                                              |                                          | 3,726,000  |          |          |      | 50,000     |          |            |   | 9,650,000  |        
|                                                                                              |                                              |                                          |            |          |          |      |            |          |            |   |            |        
|Net cash provided by (used in) financing
    activities                                       |                                              |                                          | 3,683,000  |          |          |      | (295,000   | )        |            |   | 9,237,000  |        
|                                                                                              |                                              |                                          |            |          |          |      |            |          |            |   |            |        
|(Decrease) increase in cash and cash equivalents                                              |                                              |                                          | (3,329,000 | )        |          |      | 1,707,000  |          |            |   | 3,857,000  |        
|Cash and cash equivalents at beginning of year                                                |                                              |                                          | 9,745,000  |          |          |      | 8,038,000  |          |            |   | 4,181,000  |        
|                                                                                              |                                              |                                          |            |          |          |      |            |          |            |   |            |        
|Cash and cash equivalents at end of year                                                      |                                              | $                                        | 6,416,000  |          |          | $    | 9,745,000  |          |            | $ | 8,038,000  |        
|                                                                                              |                                              |                                          |            |          |          |      |            |          |            |   |            |        
|Supplemental disclosure of cash flow
    information                                          |                                              |                                          |            |          |          |      |            |          |            |   |            |        
|Interest paid                                                                                 |                                              | $                                        | 5,000      |          |          | $    | 22,000     |          |            | $ | 59,000     |        
|                                                                                              |                                              |                                          |            |          |          |      |            |          |            |   |            |        
|Supplemental disclosure of non-cash investing
    and financing activities                    |                                              |                                          |            |          |          |      |            |          |            |   |            |        
|Unrealized (losses) gains on available-for-sale
    securities                                |                                              | $                                        |           |          |          | $    | 23,000     |          |            | $ | 19,000     |        
|                                                                                              |                                              |                                          |            |          |          |      |            |          |            |   |            |        
|Sale of restricted common stock for stockholder
    note receivable                           |                                              | $                                        |           |          |          | $    |           |          |            | $ | 2,641,000  |        
|                                                                                              |                                              |                                          |            |          |          |      |            |          |            |   |            |        
|Return of common stock in connection with
    restricted stock buyback                        |                                              | $                                        | 2,410,000  |          |          | $    |           |          |            | $ |           |        
|                                                                                              |                                              |                                          |            |          |          |      |            |          |            |   |            |        

See accompanying notes.

F-6



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##### Table of Contents



EPIMMUNE INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003




|   |                                               
|-- | ----------------------------------------------
|1. | Summary of Significant Accounting
    Policies



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

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



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

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



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

The accompanying consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern. This basis of accounting
contemplates the recovery of the Companys assets and the
satisfaction of its liabilities in the normal course of
business. Through December 31, 2003, the Company has an
accumulated deficit of $157.9 million. Successful
completion of the Companys transition to commercialization
and to attaining profitable operations is dependent upon
achieving a level of revenues adequate to support the
Companys cost structure and, if necessary, obtaining
additional financing and/or reducing expenditures. With existing
cash and interest earned thereon, along with receipts from
existing contracts, the Company expects to be able to maintain
its current level of operations through 2004 and into the second
quarter of 2005, based on anticipated expenditures.



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

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



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

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



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

The Company has classified its investments as
available-for-sale and accordingly carries them at fair value.
Unrealized holding gains or losses on these securities are
included in comprehensive income. The amortized cost of debt
securities in this category is adjusted for amortization of
premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and
losses are also included in interest income. The cost of
securities sold is based on the specific-identification method.
At December 31, 2003, the Company had no short-term
investments in its portfolio.



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

F-7



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                             
|-- | ------------------------------------------------------------
|1. | Summary of Significant Accounting
    Policies  (Continued)

relative to diversification and maturities that
maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and
interest rates. Management attempts to schedule the maturities
of the Companys investments to coincide with the
Companys expected cash requirements.



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

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



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

Patent costs are amortized on a straight-line
basis over ten years. The patent costs are shown net of
accumulated amortization of $1,553,000 and $1,166,000 at
December 31, 2003 and 2002, respectively.



| |                                    
| | -----------------------------------
| | Impairment of Long-lived
    Assets

If indicators of impairment exist, the Company
assesses the recoverability of the affected long-lived assets by
determining whether the carrying value of such assets can be
recovered through undiscounted future operating cash flows. If
impairment is indicated, the Company values the assets at fair
value.



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

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



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

The Company recognizes revenues pursuant to Staff
Accounting Bulletin No. 101, Revenue
Recognition. Collaboration revenues are earned and
recognized as research costs are incurred in accordance with the
provisions of each agreement. License fees are earned and
recognized in accordance with the provisions of each agreement.
Upfront license fees for perpetual licenses where the Company
has no performance obligations are recognized when received.
License fees with ongoing involvement or performance obligations
are recognized over the term of the agreement. For example, in
connection with the Companys collaboration with Genencor,
because the Company received an upfront license fee, it is being
amortized into revenue over the collaboration term. 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 and for which the
Company is reimbursed, were approximately $5.2 million,
$5.1 million and $4.3 million for 2003, 2002 and 2001,
respectively.

F-8



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                             
|-- | ------------------------------------------------------------
|1. | Summary of Significant Accounting
    Policies  (Continued)



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

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

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

|                                                                                    |  |                          |            |      |  |      |            |   |  |   |            |  
|----------------------------------------------------------------------------------- |  | ------------------------ | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                                    |  |                         
|                                                                                    |  | Years Ended December 31,
|                                                                                    |  |                         
|                                                                                    |  | 2003                     |            | 2002 |  | 2001
|                                                                                    |  |                          |            |      |  |     
|Net loss applicable to common stockholders                                          |  | $                        | (7,056,000 | )    |  | $    | (6,500,000 | ) |  | $ | (2,644,000 | )
|                                                                                    |  |                          |            |      |  |      |            |   |  |   |            |  
|Weighted average shares used in computing net
    loss per share, basic and diluted |  |                          | 12,238,745 |      |  |      | 11,446,387 |   |  |   | 8,533,968  |  
|                                                                                    |  |                          |            |      |  |      |            |   |  |   |            |  
|Net loss per common share, basic and diluted                                        |  | $                        | (0.58      | )    |  | $    | (0.57      | ) |  | $ | (0.31      | )
|                                                                                    |  |                          |            |      |  |      |            |   |  |   |            |  

The Company has excluded all preferred stock,
outstanding stock options and warrants, and shares subject to
repurchase from the calculation of diluted loss per common share
because all such securities are antidilutive for all periods
presented. The total number of shares excluded from the
calculation of diluted net loss per share, prior to the
application of the treasury stock method for options and
warrants, was 4,572,195, 4,078,664, and 4,197,277 for the years
ended December 31, 2003, 2002, and 2001, respectively.



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

The Company has elected to follow Accounting
Principles Board (APB) Opinion No. 25
Accounting for Stock Issued to Employees 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 requires use of option
valuation models that were not developed for use in valuing
employee stock options. Under APB Opinion No. 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 No. 123 and Emerging Issues Task Force
No. 96-18 as the fair value of the consideration received
or the fair value of the equity instruments issued, whichever is
more reliably measured. Deferred charges for options granted to
non-employees are periodically re-measured as the underlying
options vest.

Adjusted pro forma information regarding net
income or loss is required by SFAS No. 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 2003, 2002,
and 2001: risk-free interest rates of 4.5%, 6% and 6%,
respectively; dividend yield of 0 for all periods; 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 112%, 135%, and 139% for
2003, 2002, and 2001, 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 effect of applying
SFAS No. 123 for pro forma information is not likely
to be representative of the effects on pro forma income (loss)
in future years.

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 Companys adjusted pro forma information
is as follows:

|                             |  |      |            |      |  |      |            |   |  |   |            |  
|---------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                             |  | 2003 |            | 2002 |  | 2001
|                             |  |      |            |      |  |     
|Pro forma net loss           |  | $    | (7,807,000 | )    |  | $    | (7,258,000 | ) |  | $ | (3,391,000 | )
|Pro forma net loss per share |  | $    | (0.64      | )    |  | $    | (0.63      | ) |  | $ | (0.40      | )



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

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



| |                      
| | ---------------------
| | Restructuring Charges

On September 3, 2003, the Company announced
a reduction of its work force aimed at focusing the
Companys efforts on its most advanced clinical programs
and its sponsored and partnered programs. The Company reduced
its research and administrative staff by 11 individuals or 23%,
which resulted in a one-time restructuring charge of
approximately $336,000 in the third quarter ended
September 30, 2003. As of December 31, 2003, the
Company had made payments of $336,000 related to the work force
reduction and no balances were included in accounts payables or
accrued liabilities.



| |                      
| | ---------------------
| | Non-recurring Charges

On August 12, 2003, the Company announced
that the merger agreement between the Company and
Anosys, Inc., entered into on May 9, 2003, was
terminated. In connection with the termination of the merger
agreement, the Company recorded a charge of $0.5 million
during the second quarter ended June 30, 2003, which is
included in General and Administrative costs, to write-off costs
it had previously capitalized in connection with the proposed
merger.

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



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

In June 2002, the FASB issued
SFAS No. 146 Accounting for Costs Associated
with Exit or Disposal Activities. This statement
supercedes Emerging Issues Task Force (EITF) Issue
No. 94-3 Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under
EITF Issue No. 94-3, a liability is recognized at the date
an entity commits to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and
recorded at fair value. The provisions of SFAS No. 146
will be effective for any exit and disposal activities initiated
after December 31, 2002. The Company adopted these
provisions during 2003 and accounted for its work force
reduction in September 2003 based on the provisions of
SFAS No. 146.

In December 2002, the FASB issued
SFAS No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of FASB Statement No. 123. This
statement amends SFAS No. 123 Accounting for
Stock Based Compensationto provide alternative
methods of voluntarily

F-10



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                             
|-- | ------------------------------------------------------------
|1. | Summary of Significant Accounting
    Policies  (Continued)

transitioning to the fair value based method of
accounting for stock-based employee compensation. SFAS 148
also amends the disclosure requirements of
SFAS No. 123 to require disclosure of the method used
to account for stock-based employee compensation and the effect
of the method on reported results in both annual and interim
financial statements. The disclosure provisions are effective
for the Company beginning with its year ended December 31,
2002. The Company elected to continue to follow the provisions
of APB 25 in accounting for stock based compensation.

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

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. This Statement establishes standards for how we
classify and measure certain financial instruments with
characteristics of both liabilities and equity. It requires that
we classify a financial instrument within its scope as a
liability. Some of the provisions of this Statement are
consistent with the current definition of liabilities in FASB
Concepts Statement No. 6, Elements of Financial
Statements. The remaining provisions of this Statement are
consistent with the FASBs proposal to revise that
definition to encompass certain obligations that a reporting
entity can or must settle by issuing its own equity shares,
depending on the nature of the relationship established between
the holder and the issuer. This Statement is effective for
financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 had no material impact on our
financial position or results of operations.



|   |                       
|-- | ----------------------
|2. | Short-term Investments

The Company did not hold any short-term
investments at December 31, 2003 or 2002.

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,
|                                |  |                        
|                                |  | 2003                    |   | 2002 |  | 2001
|                                |  |                         |   |      |  |     
|Gross gains                     |  | $                       |  |      |  | $    |        |   |  | $ | 2,000 | 
|Gross losses                    |  |                         |  |      |  |      | (18,000 | ) |  |   |      | 
|                                |  |                         |   |      |  |      |         |   |  |   |       | 
|Total net realized (loss) gains |  | $                       |  |      |  | $    | (18,000 | ) |  | $ | 2,000 | 
|                                |  |                         |   |      |  |      |         |   |  |   |       | 

F-11



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                          
|-- | -------------------------
|3. | Balance Sheet Information

Prepaids and other current assets consist of the
following:

|                               |  |              |         |      |  |   |         | 
|------------------------------ |  | ------------ | ------- | ---- |  | - | ------- | 
|                               |  |             
|                               |  | December 31,
|                               |  |             
|                               |  | 2003         |         | 2002
|                               |  |              |         |     
|Prepaid expenses               |  | $            | 181,000 |      |  | $ | 181,000 | 
|Investment interest receivable |  |              | 5,000   |      |  |   | 11,000  | 
|                               |  |              |         |      |  |   |         | 
|                               |  | $            | 186,000 |      |  | $ | 192,000 | 
|                               |  |              |         |      |  |   |         | 

Property and equipment consist of the following:

|                                               |  |              |            |      |  |   |           |  
|---------------------------------------------- |  | ------------ | ---------- | ---- |  | - | --------- | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2003         |            | 2002
|                                               |  |              |            |     
|Furniture and equipment                        |  | $            | 1,960,000  |      |  | $ | 1,869,000 |  
|Leasehold improvements                         |  |              | 473,000    |      |  |   | 455,000   |  
|                                               |  |              |            |      |  |   |           |  
|                                               |  |              | 2,433,000  |      |  |   | 2,324,000 |  
|Less accumulated depreciation and amortization |  |              | (1,288,000 | )    |  |   | (961,000  | )
|                                               |  |              |            |      |  |   |           |  
|                                               |  | $            | 1,145,000  |      |  | $ | 1,363,000 |  
|                                               |  |              |            |      |  |   |           |  

Depreciation expense for the years ended
December 31, 2003, 2002 and 2001 was $346,000, $354,000 and
$286,000, respectively.

Accounts payable and accrued liabilities consist
of the following:

|                                               |  |              |           |      |  |   |           | 
|---------------------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2003         |           | 2002
|                                               |  |              |           |     
|Trade accounts payable and accrued liabilities |  | $            | 1,213,000 |      |  | $ | 1,272,000 | 
|Directors deferred compensation                |  |              | 233,000   |      |  |   | 64,000    | 
|                                               |  |              |           |      |  |   |           | 
|                                               |  | $            | 1,446,000 |      |  | $ | 1,336,000 | 
|                                               |  |              |           |      |  |   |           | 



|   |                     
|-- | --------------------
|4. | Stockholders Equity



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

As of December 31, 2003, 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 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, 2003, the Series S Preferred conversion
price was $5.2875 and the Series S-1 Preferred conversion
price was $7.0958. As of December 31, 2003, the
Series S Preferred would convert into 1,153,676 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,
2003.

F-12



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                       
|-- | --------------------------------------
|4. | Stockholders
    Equity  (Continued)



| |             
| | ------------
| | Common Stock

In September 2003, the Company completed a
private placement of 2,168,961 shares of common stock and
warrants to purchase up to 542,238 shares of common stock
to selected institutional and accredited investors, including
current shareholders, for a total purchase price of
$4.05 million. The Company received net proceeds of
$3.6 million. The purchase price of each security, which
was the combination of one share of common stock and a warrant
to purchase 25% of one share of common stock, was priced at the
market value of $1.86725, which was the sum of the average of
the closing bid price of Epimmune common stock as quoted on the
Nasdaq National Market for the five days up to and including
September 17, 2003, and $0.03125, the imputed value of a
warrant to purchase 25% of one share of common stock. In
addition, we issued warrants to purchase an aggregate of
250,000 shares of our common stock to a placement agent for
services rendered in connection with the private placement. Each
warrant, including the warrant issued to the placement agent,
has a three-year term and an exercise price equal to 125% of
$1.86725 or $2.33406 per share. The Company filed a
registration statement to permit registered resales of the
common stock and the common stock issuable upon exercise of the
warrants sold in the transaction. The registration statement was
declared effective on October 21, 2003



| |               
| | --------------
| | Stock Warrants

In May 2000, the Company issued warrants to
purchase 4,960 shares of its 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 May 2000 will
expire May 2004.

In September 2003, the Company issued warrants to
purchase 542,238 shares of common stock in connection with
its private placement to selected institutional and accredited
investors. Each warrant was priced at $0.03125, the imputed
value of a warrant to purchase 25% of one share of common stock.
In addition, we issued warrants to purchase an aggregate of
250,000 shares of our common stock to a placement agent for
services rendered in connection with the private placement. Each
warrant, including the warrant issued to the placement agent,
has a three-year term and an exercise price equal to 125% of
$1.86725 or $2.33406 per share.



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

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

In March 2001, the Company reserved
300,000 shares of common stock upon the adoption of the
Employee Stock Purchase Plan (the Purchase Plan)
whereby employees, at their option, could purchase annually up
to 5,000 shares of Epimmune common stock through payroll
deductions at the lower of 85% of the fair market value on the
plan offering date or 85% of the fair market value of the common
stock at the purchase date. As of December 31, 2003,
141,245 shares of common stock had been issued under the
Purchase Plan.

F-13



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                       
|-- | --------------------------------------
|4. | Stockholders
    Equity  (Continued)



| |                                          
| | -----------------------------------------
| | Directors Deferred Compensation
    Plan

Under the Directors Deferred Compensation
Plan, participating directors may elect on an annual basis, to
defer all of their cash compensation, for service on the
Companys Board, in a deferred compensation account
pursuant to which the deferred fees are credited in the form of
share units having a value equal to shares of the Companys
common stock (Share Units), based on the market
price of the stock at the time the deferred fees are earned. The
Company will continue to credit Share Units to the
participants deferred compensation accounts on a quarterly
basis. When a participant ceases serving as a director, the
participant shall be entitled to receive the value of his or her
account either in a single lump-sum payment or in equal annual
installments, as determined by the Company in its sole
discretion. No participant entitled to receive a payment of
benefits shall receive payment in the form of the Companys
common stock. For the years ended December 31, 2003, 2002
and 2001 the Company recorded an (expense) benefit of
($169,000), $68,000 and ($72,000), respectively, related to the
Directors Deferred Compensation Plan.



| |            
| | -----------
| | Stock Plans



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

In November 1989, the Company adopted a Stock
Plan (the 1989 Plan), under which options may be
granted to employees, directors, consultants or advisors. The
1989 Plan provided for the grant of both incentive stock options
and nonstatutory stock options. The exercise price of an
incentive stock option is not less than the fair market value of
the common stock on the date of grant. The exercise price of
nonstatutory options is not less than 85% of the fair market
value of the common stock on the date of grant. No options
granted under the 1989 Plan have a term in excess of ten years
from the date of grant. Shares and options issued under the 1989
Plan vest over varying periods of one to six years. Effective
June 9, 2000 with the approval of the Companys 2000
Plan, the 1989 Plan was discontinued resulting in cancellation
of remaining available shares, and any shares granted under the
1989 Plan that in the future are cancelled or expire will not be
available for re-grant. As of December 31, 2003, options to
purchase 375,369 shares of common stock were outstanding
under the 1989 Plan.



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

In December 1997, the Company adopted a Stock
Plan (the 1997 Plan), under which options were
granted to employees, directors, and consultants of the Company.
The 1997 Plan provided for the grant of both incentive stock
options and nonstatutory stock options. The exercise price of an
incentive stock option was not less than the fair market value
of the common stock on the date of grant. The exercise price of
nonstatutory options was not less than 85% of the fair market
value of the common stock on the date of grant. No options
granted under the 1997 Plan have a term in excess of ten years
from the date of grant. Options issued under the 1997 Plan vest
over varying periods of one to four years. Options that
terminate will not be available for future grant. As of
December 31, 2003, options to purchase 154,213 shares
of common stock were outstanding under the 1997 Plan.



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

In June 2000, the Company adopted a Stock Plan
(the 2000 Stock Plan), and reserved
700,000 shares for issuance under the plan. Options under
the plan may be granted to employees, directors, consultants or
advisors of the Company. The 2000 Stock Plan provides for the
grant of both incentive stock options and nonstatutory stock
options. The exercise price of an incentive stock option is not
less than the fair market value of the common stock on the date
of the grant. The exercise price of nonstatutory options is also
not less than the fair market value of the common stock on the
date of grant. No options granted under the 2000 Stock Plan

F-14



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                       
|-- | --------------------------------------
|4. | Stockholders
    Equity  (Continued)

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. In December 2001 the Board
amended, and the Epimmune stockholders subsequently approved,
the 2000 Plan to include a 500,000 increase in the number of
shares reserved for issuance under the 2000 Stock Plan to a
total of one million two hundred thousand (1,200,000) shares. On
December 16, 2002 the Company granted stock bonus awards of
600 shares to its executive officers from the 2000 Plan. In
June 2003 the Board amended, and the Epimmune stockholders
subsequently approved, the 2000 Plan to include a 400,000
increase in the number of shares reserved for issuance under the
2000 Stock Plan to a total of one million six hundred thousand
(1,600,000) shares. In December 2003, the Board approved an
amendment to the 2000 Stock Plan to include a 1,000,000 increase
in the number of shares reserved for issuance under the plan and
instructed management to include a proposal on the ballot at its
next annual shareholders meeting to approve the increase. As of
December 31, 2003, options to purchase
1,467,870 shares of common stock were outstanding and
106,523 shares were available for future grant under the
2000 Stock Plan. In addition, as of December 31, 2003,
options to purchase 1,000,000 shares of common stock had
been granted , which are contingent on shareholder approval of
the 1,000,000 shares increase in the number of shares
reserved for issuance under the 2000 Stock Plan.



| |                       
| | ----------------------
| | Stock Option Repricing

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

F-15



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                       
|-- | --------------------------------------
|4. | Stockholders
    Equity  (Continued)

The following table summarizes stock option
activity under all stock option plans for the three years ended
December 31, 2003:

|                             |           |        |           |               |   |   |      |      | 
|---------------------------- | --------- | ------ | --------- | ------------- | - | - | ---- | ---- | 
|                             |           |        |           | Weighted     
|                             |           | Shares |           | Average Price
|                             |           |        |           |              
|Balance at December 31, 2000 |           |        | 1,015,032 |               |   | $ | 5.10 |     
|                             | Granted   |        |           | 786,000       |   |   | $    | 2.65 | 
|                             | Exercised |        |           | (27,753       | ) |   | $    | 0.40 | 
|                             | Cancelled |        |           | (233,665      | ) |   | $    | 4.21 | 
|                             |           |        |           |               |   |   |      |     
|Balance at December 31, 2001 |           |        | 1,539,614 |               |   | $ | 4.07 |     
|                             | Granted   |        |           | 194,520       |   |   | $    | 2.03 | 
|                             | Exercised |        |           | (15,364       | ) |   | $    | 0.28 | 
|                             | Cancelled |        |           | (33,874       | ) |   | $    | 4.74 | 
|                             |           |        |           |               |   |   |      |     
|Balance at December 31, 2002 |           |        | 1,684,896 |               |   | $ | 3.86 |     
|                             | Granted   |        |           | 851,000       |   |   | $    | 1.57 | 
|                             | Exercised |        |           | (62,635       | ) |   | $    | 0.97 | 
|                             | Cancelled |        |           | (475,809      | ) |   | $    | 5.47 | 
|                             |           |        |           |               |   |   |      |     
|Balance at December 31, 2003 |           |        | 1,997,452 |               |   | $ | 2.59 |     
|                             |           |        |           |               |   |   |      |     

The following is a summary of the options
outstanding under all of the Companys stock option plans
as of December 31, 2003:

|                         |  |             |           |                |  |                |      |             |  |                |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ----------- | --------- | -------------- |  | -------------- | ---- | ----------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |             |           |                |  |                |      |             |  | 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                   |  |             | 66,724    |                |  |                | 3.96 |             |  | $              | 0.16  |  |  |  | 66,724    |  |  | $ | 0.16  | 
|$ 0.48                   |  |             | 87,489    |                |  |                | 4.99 |             |  |                | 0.48  |  |  |  | 87,489    |  |  |   | 0.48  | 
|$ 1.35 - $ 3.37          |  |             | 1,615,872 |                |  |                | 8.39 |             |  |                | 2.13  |  |  |  | 801,500   |  |  |   | 2.54  | 
|$ 3.75 - $ 6.00          |  |             | 175,500   |                |  |                | 6.11 |             |  |                | 5.01  |  |  |  | 165,014   |  |  |   | 4.97  | 
|$10.50 - $16.25          |  |             | 40,251    |                |  |                | 4.63 |             |  |                | 11.31 |  |  |  | 40,112    |  |  |   | 11.31 | 
|$18.82 - $42.88          |  |             | 11,616    |                |  |                | 1.18 |             |  |                | 29.84 |  |  |  | 11,616    |  |  |   | 29.84 | 
|                         |  |             |           |                |  |                |      |             |  |                |       |  |  |  |           |  |  |   |       | 
|Total                    |  |             | 1,997,452 |                |  |                |      |             |  |                |       |  |  |  | 1,172,455 |  |  |   |       | 
|                         |  |             |           |                |  |                |      |             |  |                |       |  |  |  |           |  |  |   |       | 
|Weighted averages        |  |             |           |                |  |                | 7.78 |             |  | $              | 2.59  |  |  |  |           |  |  | $ | 3.16  | 

The weighted average fair value of options
granted during 2003, 2002 and 2001 was $1.51, $1.87 and $2.47,
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

F-16



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                       
|-- | --------------------------------------
|4. | Stockholders
    Equity  (Continued)

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 expired on March 19, 2003.

On January 16, 2001, the Company entered
into an employment agreement with Dr. Emile Loria for the
position of President and Chief Executive Officer.
Dr. Loria was elected to the Companys Board of
Directors. Also on January 16, 2001, the Company entered
into a Restricted Stock Purchase agreement with Dr. Loria
for the purchase of 1,056,301 common shares at $2.50 per
share. The shares vest daily over a four-year period and
unvested shares are subject to a repurchase option in favor of
the Company. A promissory note with an interest rate of 5.61%
was issued for the purchase price of the shares. In September
2003, Dr. Loria surrendered an aggregate of
963,740 shares of our common stock at the fair market value
of $3.17 per share, in exchange for the prepayment of the
outstanding principal and interest under the promissory note, a
total of $3,055,000. At the time of the transaction, the Company
included $231,000 associated with the remaining 92,561 unvested
shares in accrued liabilities as the Company has a repurchase
option on the unvested shares at the original exercise price. As
the remaining 92,561 unvested shares vest between
September 29, 2003 and January 15, 2005, the liability
will be reclassed into equity in equal installments. At
December 31, 2003, 74,247 shares were unvested and
subject to the repurchase option.

In connection with the prepayment of the note,
the Company recorded a non-cash, stock-based compensation charge
of approximately $645,000 in the third quarter of 2003 based on
the difference between the fair market price on
September 29, 2003 and the exercise price of the shares
surrendered by Dr. Loria. The Company also accrued an
additional $62,000 in non-cash, stock-based compensation charges
associated with the 92,561 remaining unvested shares, which it
will amortize to expense as the unvested shares vest between
September 29, 2003 and January 15, 2005. The Company
had approximately $50,000 of accrued deferred compensation at
December 31, 2003.

Prior to the prepayment of the promissory note,
the Company recorded monthly compensation expense related to the
shares sold to Dr. Loria based on the provisions of EITF
95-16, Accounting for Stock Compensation Arrangements
with Employer Loan features under APB 25. For the
years ended December 31, 2003, 2002 and 2001, the Company
recorded a charge of $66,000, a benefit of $127,000 and a charge
of $127,000 of compensation expense respectively.

The Company also recorded compensation expense
related to the below market interest rate the promissory note
bears. For the years ended December 31, 2003 and 2002, the
Company recorded $66,000 and $99,000 of compensation expense
related to the note respectively. In addition, the Company had
$50,000 and $203,000 of accrued, deferred compensation expense
for the years ended December 31, 2003 and 2002 respectively.



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

The following shares of common stock are reserved
for future issuance at December 31, 2003:

|                                                   |  |  |           | 
|-------------------------------------------------- |  |  | --------- | 
|Options granted and outstanding                    |  |  | 1,997,452 | 
|Options authorized for future grants               |  |  | 106,523   | 
|Employee stock purchase plan for future purchases  |  |  | 158,755   | 
|Stock warrants                                     |  |  | 797,198   | 
|Stock acquisition rights under existing agreements |  |  | 1,000,000 | 
|Conversion of preferred stock                      |  |  | 1,703,298 | 
|                                                   |  |  |           | 
|                                                   |  |  | 5,763,226 | 
|                                                   |  |  |           | 

F-17



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                  
|-- | ---------------------------------
|5. | Equipment Loans and Notes Payable

In August 1998, Epimmune entered into a
$1,150,000 loan and security agreement, as amended for capital
equipment purchases and certain tenant improvements. These funds
were used primarily for enhancement and upgrades of our
scientific information management systems databases. Total
cumulative advances drawn under the credit line totaled
$1,032,000 at December 31, 2003 and 2002. The capital
equipment financed collateralizes all borrowings. The line of
credit was paid in-full in March 2003.

Equipment loans and notes payable consist of the
following:

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



|   |            
|-- | -----------
|6. | Commitments

The Company leases its office and research
facility under an operating lease that expires in March 2009.
Under this operating lease, the Company pays taxes, insurance
and maintenance expenses related to the premises.
Epimmunes facility lease requires a letter of credit of
$472,000 to secure the performance of the Companys lease
obligation and is reflected as restricted cash. Rent expense was
$582,000 for each the years ended December 31, 2003, 2002
and 2001.

Future minimum lease payments under operating
leases at December 31, 2003 are as follows:

|                             |  |           |           | 
|---------------------------- |  | --------- | --------- | 
|                             |  | Operating
|Year                         |  | Leases   
|                             |  |          
|2004                         |  | $         | 585,000   | 
|2005                         |  |           | 602,000   | 
|2006                         |  |           | 620,000   | 
|2007                         |  |           | 639,000   | 
|2008                         |  |           | 658,000   | 
|Thereafter                   |  |           | 166,000   | 
|                             |  |           |           | 
|Total minimum lease payments |  | $         | 3,270,000 | 
|                             |  |           |           | 



|   |                                                                     
|-- | --------------------------------------------------------------------
|7. | Revenues Under Collaborative Research and
    Development Agreements



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

In July 2001, the Company entered into a
collaboration with Genencor International, Inc. for
vaccines to treat or prevent hepatitis B virus,
hepatitis C virus and human papilloma virus. Pursuant to
the agreement, Epimmune exclusively licensed to Genencor its
PADRE and epitope technologies for vaccines to treat or prevent
hepatitis B, hepatitis C and human papilloma virus. In
connection with this collaboration, the Company received an
upfront license fee, which is being amortized over the
collaboration term. In addition, Genencor made an initial ten
percent equity investment in Epimmune common stock at a premium
to the market price. Under the agreement with Genencor, the
Company may receive a total of approximately $60 million in
payments, including the initial equity investment but excluding
royalties. In January 2002, Epimmune received a payment from
Genencor for achievement of the first milestone, identification
of a product candidate to treat chronic hepatitis B
infection. In February 2004, the Company announced it had earned
a milestone payment from Genencor as a result of Genencor filing
an IND for a vaccine to Hepatitis B.

F-18



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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


The milestone payments were recognized as revenue
when received. The collaboration revenues are being recognized
as incurred. In addition, Genencor fully funds Epimmunes
research in these specific indications and is obligated to pay
the Company royalties on sales of any products that may be
developed under the collaboration. The initial collaboration had
a term through September 2003, and in October 2002, was extended
to September 2004. In March 2004, Genencor assigned its rights
under the collaboration to Innogenetics NV. In connection with
the assignment by Genencor, the Company extended the
collaboration term with Innogenetics through September 2005. In
addition, Genencor agreed not to sell or otherwise dispose of
any of the Companys common stock it held, without the
Companys prior approval, for a minimum of twelve months.
Innogenetics has the right to terminate the collaboration early,
upon three months written notice, if Epimmune breaches its
obligations under the collaboration agreement or upon certain
force majeure events. All revenues from Genencor are included in
related party revenue.



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

In November 2001, the Company entered into a
collaboration agreement with Bavarian Nordic A/ S to combine its
technology and expertise in the fields of T cell epitope
identification and vaccine design with Bavarian Nordics
vaccine delivery technology and manufacturing expertise to
develop vaccines for the treatment or prevention of HIV
infection. The Company did not record revenue on Bavarian Nordic
for the years ended December 31, 2003 and 2002.



| |                      
| | ---------------------
| | Beckman Coulter, Inc.

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



| |                      
| | ---------------------
| | Merck &
    Co., Inc.

In April 2003, the Company entered into an
agreement with Merck & Co., Inc. under which Merck
will evaluate select Epimmune epitopes in connection with
technology controlled by Merck for the development of certain
vaccines. Under the terms of the agreement, the Company will
provide Merck a limited number of its proprietary analog, or
modified, epitopes, which will then be evaluated in connection
with delivery technologies owned or controlled by Merck to
determine the activity of the Epimmune epitopes. The Company
received an evaluation license fee in connection with the
agreement, which is being amortized into revenue over the term
of the agreement. Merck has an option to enter into licensing
discussions with the Company for the development of the Epimmune
epitopes for use in vaccines for the treatment of certain
diseases.



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

In June 2001, the Company entered into a license
agreement with Pharmexa A/ S granting Pharmexa a non-exclusive
license to the Companys PADRE technology for use in
connection with Pharmexas AutoVacTM technology
for controlling autoimmune diseases. In connection with the
agreement, the Company received an upfront license fee and is
also entitled to receive milestones and royalties on product
sales, if any

F-19



---



##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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


products are ever developed. The upfront license
fee was recognized as revenue during 2001 as the Company had no
on-going obligations.



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

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



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

In August 2001, the Company entered into a
license agreement with Anosys Inc., formerly AP Cells, granting
Anosys a non-exclusive license to certain cancer antigens and
associated technology for use in ex vivocell therapy. In
connection with the agreement, the Company received an upfront
license fee, which was recognized as revenue during 2001, as the
Company had no on-going obligations. The Company is also
entitled to receive milestones and royalties on product sales,
if any products are ever developed. In September 2003, the
Company announced it had received a milestone payment under the
agreement as a result of Anosys filing an IND for a product
incorporating technology licensed to them. In addition, the
Company announced that it had received payment of additional
license fees under the terms of the original agreement as a
result of Epimmune regaining all rights to the technology
covered by the agreement in Japan. Both the milestone payment
and the additional license fees were recognized as revenue in
the third quarter ended September 30, 2003. In the event
Anosys elects to exercise its rights to include Japan in the
territory covered by the agreement, Epimmune will be entitled to
an additional license fee payment.



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

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



| |           
| | ----------
| | Amgen Inc.

In September 2003, the Company entered into an
agreement with Amgen Inc. under which Amgen acquired a
non-exclusive license to Epimmunes PADRE technology for
research use. Under the terms of the agreement, Epimmune
received a license fee that will be amortized into revenue over
the term of the agreement.

F-20



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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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




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

In July 2002, the Company entered into an
evaluation and license option agreement with Aventis Pasteur
Limited, which gives Aventis, for twelve months, the right to
exercise its option to license from Epimmune certain epitopes
from two cancer associated antigens. Aventis will evaluate the
epitopes for possible integration into its pox virus therapeutic
cancer vaccine program. The Company received an evaluation
license fee, which was amortized into revenue over the
evaluation period. In June 2003, the end of the evaluation
period, Aventis Pastuer chose not to exercise its rights under
the agreement.



| |                              
| | -----------------------------
| | National Institutes of Health

In September 2003, the Company received a
five-year, $16.7 million contract from the National
Institute of Allergy and Infectious Diseases (NIAID) at the
National Institutes of Health (NIH) for the design and
development of prophylactic HIV vaccines for clinical
evaluation. The Company will recognize revenue under the
contract as reimbursable expenses under the contract are
incurred.

In July 2003, the Company received a grant from
the National Cancer Institute, or NCI, an institute of the NIH,
to support continued epitope analog identification and
preclinical development of multi-epitope, analog based cancer
vaccines. The grant has a total potential value of approximately
$0.6 million over two years. The activities funded by this
grant complement current studies and Phase I/ II clinical
trials the Company is conducting by providing analog epitopes
that extend vaccine coverage to larger segments of the
population. The grant was made under the NCIs Flexible
System to Advance Innovative Research for Cancer Drug Discovery
by Small Business, or FLAIR program.

In October 2002, the Company was awarded a
contract from NIAID to conduct research and development aimed at
developing a malaria vaccine. The award is part of the
NIAIDs Millennium Vaccine Initiative that solicits vaccine
technology from the private sector to accelerate the development
of effective vaccines for malaria and tuberculosis. The program
is composed of a Phase A feasibility study and an option
for a Phase B development program for a total potential value of
$3.5 million over five years. The Company is working with
investigators at the Naval Medical Research Center on the
program.

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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |             
|-- | ------------
|8. | Income Taxes

Significant components of the Companys
deferred tax assets as of December 31, 2003 and 2002 are
shown below. A valuation allowance of $65,668,000 at
December 31, 2003 and $64,187,000 at December 31, 2002
has been recognized to offset the deferred tax assets as
realization of such assets is uncertain.

|                                            |                                  |      |             |            |   |   |             |            |  
|------------------------------------------- | -------------------------------- | ---- | ----------- | ---------- | - | - | ----------- | ---------- | -
|                                            |                                  | 2003 |             | 2002      
|                                            |                                  |      |             |           
|Deferred tax liabilities:                   |                                  |      |             |            |   |   |             |           
|                                            | Patents expensed for tax         |      | $           | (1,162,000 | ) |   | $           | (1,098,000 | )
|                                            |                                  |      |             |            |   |   |             |           
|Total deferred tax liabilities              |                                  |      | (1,162,000  | )          |   |   | (1,098,000  | )         
|Deferred tax assets:                        |                                  |      |             |            |   |   |             |           
|                                            | Capitalized research expenses    |      |             | 1,476,000  |   |   |             | 605,000    |  
|                                            | Net operating loss carryforwards |      |             | 55,167,000 |   |   |             | 54,732,000 |  
|                                            | Research and development credits |      |             | 9,698,000  |   |   |             | 9,410,000  |  
|                                            | Other, net                       |      |             | 489,000    |   |   |             | 538,000    |  
|                                            |                                  |      |             |            |   |   |             |           
|Total deferred tax assets                   |                                  |      | 66,830,000  |            |   |   | 65,285,000  |           
|Valuation allowance for deferred tax assets |                                  |      | (65,668,000 | )          |   |   | (64,187,000 | )         
|                                            |                                  |      |             |            |   |   |             |           
|Net deferred tax assets                     |                                  | $    |            |            |   | $ |            |           
|                                            |                                  |      |             |            |   |   |             |           

At December 31, 2003, the Company has
federal and California net operating loss carryforwards of
approximately $144,712,000 and $103,813,000, 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 2004,
unless previously utilized. The California tax loss
carryforwards will continue to expire in 2004. The Company also
has federal and California research and development tax credit
carryforwards of $7,444,000 and $3,468,000, respectively. The
federal research and development tax credit carryforwards will
begin expiring in 2004 unless previously utilized. The
California research and development tax credit carryforwards do
not expire and will carry forward indefinitely until utilized.

Pursuant to Internal Revenue Code
Sections 382 and 383, the annual use of the Companys
net operating loss and credit carryforwards will be limited
because of greater than 50% cumulative changes in ownership,
which occurred during 1989 and 1994. However, the Company
believes that these limitations will not have a material impact
on the financial statements.

9.     401(k)
Plan

The Company has a defined contribution plan, the
Epimmune Inc. 401(k) Plan, which covers all full-time employees
of the Company. This plan allows each eligible employee to
voluntarily make pre-tax deferred salary contributions. The
Company may make contributions in amounts as determined by the
Board of Directors. The Company did not make any matching
contributions for the years ended December 31, 2003, 2002
and 2001.



|    |                                              
|--- | ---------------------------------------------
|10. | Unaudited Quarterly Financial
    Information

The following tables present unaudited quarterly
financial information, for the eight quarters ended
December 31, 2002. We believe this information reflects all
adjustments (consisting only of normal recurring adjustments)
that we consider necessary for a fair presentation of such
information in accordance with

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##### Table of Contents



EPIMMUNE INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



10.     Unaudited
Quarterly Financial
Information  (Continued)


accounting principles generally accepted in the
United States. The results for any quarter are not necessarily
indicative of results for any future period (in millions, except
per share data):

|                             |                                      |             |   |             |   |             |   |             |   |  |   |       |   |  |   |       |  
|---------------------------- | ------------------------------------ | ----------- | - | ----------- | - | ----------- | - | ----------- | - |  | - | ----- | - |  | - | ----- | -
|                             |                                      | 1st Quarter |   | 2nd Quarter |   | 3rd Quarter |   | 4th Quarter
|                             |                                      |             |   |             |   |             |   |            
|Year Ended December 31, 2003 |                                      |             |   |             |   |             |   |             |   |  |   |       |   |  |   |      
|                             | Revenues                             |             | $ | 1.4         |   |             | $ | 1.8         |   |  | $ | 2.0   |   |  | $ | 1.9   |  
|                             | Loss from operations                 |             |   | (1.9        | ) |             |   | (2.1        | ) |  |   | (2.1  | ) |  |   | (1.2  | )
|                             | Net loss                             |             |   | (1.8        | ) |             |   | (2.0        | ) |  |   | (2.0  | ) |  |   | (1.2  | )
|                             | Basic and diluted net loss per share |             |   | (0.15       | ) |             |   | (0.17       | ) |  |   | (0.17 | ) |  |   | (0.09 | )

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



|    |                  
|--- | -----------------
|11. | Subsequent Events

In March 2004, Genencor assigned its rights under
the collaboration to Innogenetics NV. In connection with the
assignment by Genencor, the Company extended the collaboration
term with Innogenetics through September 2005. In addition,
Genencor agreed not to sell or otherwise dispose of any of the
Companys common stock it held, without the Companys
prior approval, for a minimum of twelve months. Innogenetics has
the right to terminate the collaboration early, upon three
months written notice, if Epimmune breaches its obligations
under the collaboration agreement or upon certain force majeure
events.

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