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

FORM 10-Q

(Mark One)



|[X] | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for thequarterly period ended March 31, 2002,
or
|--- | ----------------------------------------------------------------------------------------------------------------------------------------



|[   ] | Transition Period Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for theTransition Period From  to .
|----- | ----------------------------------------------------------------------------------------------------------------------------

Commission file number 0-19591

EPIMMUNE INC.

(Exact name of Registrant as specified in its charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 33-0245076                          
|(State of Incorporation) |  | (I.R.S. Employer
Identification No.)

5820 Nancy Ridge Drive
San Diego, California 92121
(Address of principal executive offices)

(858) 860-2500
(Registrants telephone number)

Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X]  No [   ]

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.

Common Stock: $.01 par value 12,094,757 shares outstanding as of May 8, 2002.

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|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM I. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION   
|                              | ITEM 1 LEGAL PROCEEDINGS                                                                     
|                              | ITEM 6. EXHIBITS                                                                             
|SIGNATURES                   
|EXHIBIT 10.98                
|EXHIBIT 10.99                



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EPIMMUNE INC.
QUARTERLY REPORT
FORM 10-Q

TABLE OF CONTENTS

|                              |  |           |   |                                                                                                                |  |    |    | 
|----------------------------- |  | --------- | - | -------------------------------------------------------------------------------------------------------------- |  | -- | -- | 
|COVER PAGE                    |  |           | 1 |                                                                                                               
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|TABLE OF CONTENTS             |  |           | 2 |                                                                                                               
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|PART I. FINANCIAL INFORMATION |  |           |   |                                                                                                               
|                             
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|                             
|                              |  | ITEM 1.   |   | Financial Statements                                                                                           |  |    |    | 
|                             
|                             
|                             
|                             
|                              |  |           |   | Condensed Consolidated Balance Sheets as of
March 31, 2002 (unaudited) and December 31, 2001                   |  |    | 3  | 
|                             
|                             
|                             
|                             
|                              |  |           |   | Condensed Consolidated Statements of Operations (unaudited)
For the Three Months Ended March 31, 2002 and 2001 |  |    | 4  | 
|                             
|                             
|                             
|                             
|                              |  |           |   | Condensed Consolidated Statements of Cash Flows (unaudited)
For the Three Months Ended March 31, 2002 and 2001 |  |    | 5  | 
|                             
|                             
|                             
|                             
|                              |  |           |   | Notes to Condensed Consolidated Financial
Statements (unaudited)                                               |  |    | 6  | 
|                             
|                             
|                             
|                             
|                              |  | ITEM 2.   |   | Managements Discussion and Analysis of Financial
Condition and Results of Operations                          |  |    | 8  | 
|                             
|                             
|                             
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|                              |  | ITEM 3.   |   | Quantitative and Qualitative Disclosures about Market Risk                                                     |  |    | 13 | 
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|                             
|                              |  |           |   | Risk Factors                                                                                                   |  |    | 14 | 
|                             
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|PART II. OTHER INFORMATION    |  |           |   |                                                                                                               
|                             
|                             
|                             
|                             
|                              |  | ITEM 1.   |   | Legal Proceedings                                                                                              |  |    | 22 | 
|                             
|                             
|                             
|                             
|                              |  | ITEM 2.   |   | Changes in Securities and Use of Proceeds                                                                      |  |    | *  | 
|                             
|                             
|                             
|                             
|                              |  | ITEM 3.   |   | Defaults upon Senior Securities                                                                                |  |    | *  | 
|                             
|                             
|                             
|                             
|                              |  | ITEM 4.   |   | Submission of Matters to a Vote of Security Holders                                                            |  |    | *  | 
|                             
|                             
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|                             
|                              |  | ITEM 5.   |   | Other Information                                                                                              |  |    | *  | 
|                             
|                             
|                             
|                             
|                              |  | ITEM 6.   |   | Exhibits and Reports on Form 8-K                                                                               |  |    | 22 | 
|                             
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|                             
|                              |  | SIGNATURE |   |                                                                                                                |  | 23 |   

*     No information provided due to inapplicability of item.

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PART I. FINANCIAL INFORMATION




ITEM I. FINANCIAL STATEMENTS





EPIMMUNE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

|                                           |                                                                                                                                                                                                                                |   |             |          |              |   |        |          |  
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ----------- | -------- | ------------ | - | ------ | -------- | -
|                                           |                                                                                                                                                                                                                                |   | March 31,   |          | December 31,
|                                           |                                                                                                                                                                                                                                |   | 2002        |          | 2001        
|                                           |                                                                                                                                                                                                                                |   |             |          |             
|                                           |                                                                                                                                                                                                                                |   | (unaudited) |          |              |   |       
|                                          
|                                          
|                                          
|                                          
|ASSETS                                     |                                                                                                                                                                                                                                |   |             |          |              |   |        |         
|                                          
|                                          
|                                          
|                                          
|Current assets:                            |                                                                                                                                                                                                                                |   |             |          |              |   |        |         
|                                           | Cash and cash equivalents                                                                                                                                                                                                      |   | $           | 5,223    |              |   | $      | 8,038    |  
|                                           | Short-term investments                                                                                                                                                                                                         |   |             | 11,783   |              |   |        | 10,998   |  
|                                           | Prepaids and other current assets                                                                                                                                                                                              |   |             | 1,132    |              |   |        | 707      |  
|                                           |                                                                                                                                                                                                                                |   |             |          |              |   |        |         
|Total current assets                       |                                                                                                                                                                                                                                |   | 18,138      |          |              |   | 19,743 |         
|Restricted long-term investment            |                                                                                                                                                                                                                                |   | 472         |          |              |   | 472    |         
|Property and equipment, net                |                                                                                                                                                                                                                                |   | 1,343       |          |              |   | 984    |         
|Patents and other assets                   |                                                                                                                                                                                                                                |   | 2,772       |          |              |   | 2,711  |         
|                                           |                                                                                                                                                                                                                                |   |             |          |              |   |        |         
|TOTAL ASSETS                               |                                                                                                                                                                                                                                | $ | 22,725      |          |              | $ | 23,910 |         
|                                           |                                                                                                                                                                                                                                |   |             |          |              |   |        |         
|                                          
|                                          
|                                          
|                                          
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                                                                                                                                |   |             |          |              |   |        |         
|                                          
|                                          
|                                          
|                                          
|Current liabilities:                       |                                                                                                                                                                                                                                |   |             |          |              |   |        |         
|                                           | Accounts payable and accrued liabilities                                                                                                                                                                                       |   | $           | 1,980    |              |   | $      | 1,475    |  
|                                           | Deferred contract revenues                                                                                                                                                                                                     |   |             | 1,962    |              |   |        | 2,308    |  
|                                           | Accrued payroll and related expenses                                                                                                                                                                                           |   |             | 302      |              |   |        | 222      |  
|                                           | Current portion of notes payable                                                                                                                                                                                               |   |             | 282      |              |   |        | 345      |  
|                                           |                                                                                                                                                                                                                                |   |             |          |              |   |        |         
|Total current liabilities                  |                                                                                                                                                                                                                                |   | 4,526       |          |              |   | 4,350  |         
|Deferred rent                              |                                                                                                                                                                                                                                |   | 177         |          |              |   | 166    |         
|Notes payable, less current portion        |                                                                                                                                                                                                                                |   |            |          |              |   | 43     |         
|Stockholders equity:                      |                                                                                                                                                                                                                                |   |             |          |              |   |        |         
|                                           | Preferred stock, $.01 par value, 10,000,000 shares authorized,
1,409,288 shares issued and outstanding at March 31, 2002 and
December 31, 2001. Liquidation preference of $10,000,000
at March 31, 2002 and December 31, 2001. |   |             | 14       |              |   |        | 14       |  
|                                           | Common stock, $.01 par value, 25,000,000 shares authorized,
12,094,757 shares issued and outstanding at March 31, 2002
and December 31, 2001.                                                                                  |   |             | 121      |              |   |        | 121      |  
|                                           | Additional paid-in capital                                                                                                                                                                                                     |   |             | 166,484  |              |   |        | 166,772  |  
|                                           | Note receivable held by stockholder                                                                                                                                                                                            |   |             | (2,815   | )            |   |        | (2,641   | )
|                                           | Deferred compensation                                                                                                                                                                                                          |   |             | (359     | )            |   |        | (569     | )
|                                           | Accumulated deficit                                                                                                                                                                                                            |   |             | (145,420 | )            |   |        | (144,369 | )
|                                           | Unrealized gain (loss) on available-for-sale securities                                                                                                                                                                        |   |             | (3       | )            |   |        | 23       |  
|                                           |                                                                                                                                                                                                                                |   |             |          |              |   |        |         
|Total stockholders equity                 |                                                                                                                                                                                                                                |   | 18,022      |          |              |   | 19,351 |         
|                                           |                                                                                                                                                                                                                                |   |             |          |              |   |        |         
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                                                                                | $ | 22,725      |          |              | $ | 23,910 |         
|                                           |                                                                                                                                                                                                                                |   |             |          |              |   |        |         

See accompanying notes.

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EPIMMUNE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)

|                                                                |                                      |   |                              |       |      |   |        |       | 
|--------------------------------------------------------------- | ------------------------------------ | - | ---------------------------- | ----- | ---- | - | ------ | ----- | 
|                                                                |                                      |   | Three months ended March 31,
|                                                                |                                      |   |                             
|                                                                |                                      |   | 2002                         |       | 2001
|                                                                |                                      |   |                              |       |     
|Revenues                                                        |                                      |   |                              |       |      |   |        |      
|                                                                | License fees and milestones          |   | $                            |      |      |   | $      | 300   | 
|                                                                | Research grants and contract revenue |   |                              | 536   |      |   |        | 418   | 
|                                                                | Related party revenue                |   |                              | 1,420 |      |   |        | 51    | 
|                                                                |                                      |   |                              |       |      |   |        |      
|Total revenues                                                  |                                      |   | 1,956                        |       |      |   | 769    |      
|                                                               
|                                                               
|                                                               
|                                                               
|Cost and Expenses                                               |                                      |   |                              |       |      |   |        |      
|                                                                | Research and development             |   |                              | 2,687 |      |   |        | 1,668 | 
|                                                                | General and administrative           |   |                              | 578   |      |   |        | 650   | 
|                                                                |                                      |   |                              |       |      |   |        |       | 
|Total costs and expenses                                        |                                      |   | 3,265                        |       |      |   | 2,318  |      
|                                                                |                                      |   |                              |       |      |   |        |      
|Loss from operations                                            |                                      |   | (1,309                       | )     |      |   | (1,549 | )    
|Interest income, net                                            |                                      |   | 259                          |       |      |   | 109    |      
|Other income, net                                               |                                      |   | (1                           | )     |      |   |       |      
|                                                                |                                      |   |                              |       |      |   |        |      
|Net loss                                                        |                                      | $ | (1,051                       | )     |      | $ | (1,440 | )    
|                                                                |                                      |   |                              |       |      |   |        |      
|Net loss per share  basic and diluted                          |                                      | $ | (0.09                        | )     |      | $ | (0.19  | )    
|                                                                |                                      |   |                              |       |      |   |        |      
|Shares used in computing net loss per share  basic and diluted |                                      |   | 11,324                       |       |      |   | 7,776  |      
|                                                                |                                      |   |                              |       |      |   |        |      

See accompanying notes.

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EPIMMUNE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

|                                                                            |                                              |                                          |        |                              |      |      |        |     |      |  
|--------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------- | ------ | ---------------------------- | ---- | ---- | ------ | --- | ---- | -
|                                                                            |                                              |                                          |        | Three months ended March 31,
|                                                                            |                                              |                                          |        |                             
|                                                                            |                                              |                                          |        | 2002                         |      | 2001
|                                                                            |                                              |                                          |        |                              |      |     
|OPERATING ACTIVITIES                                                        |                                              |                                          |        |                              |      |      |        |    
|Net loss                                                                    |                                              | $                                        | (1,051 | )                            |      | $    | (1,440 | )  
|Adjustments to reconcile net loss to net cash used in operating
activities: |                                              |                                          |        |                              |      |      |        |    
|                                                                            | Interest on stockholder note receivable      |                                          |        | (174                         | )    |      |        |    |     
|                                                                            | Depreciation and amortization                |                                          |        | 172                          |      |      |        | 166 |     
|                                                                            | Amortization of deferred compensation        |                                          |        | (63                          | )    |      |        | 69  |     
|                                                                            | Deferred rent                                |                                          |        | 11                           |      |      |        | 14  |     
|                                                                            | Deferred contract revenue                    |                                          |        | (346                         | )    |      |        | (51 | )   
|                                                                            | Changes in operating assets and liabilities: |                                          |        |                              |      |      |        |     |     
|                                                                            |                                              | Other current assets                     |        |                              | (425 | )    |        |     | 26   |  
|                                                                            |                                              | Accounts payable and accrued liabilities |        |                              | 505  |      |        |     | (214 | )
|                                                                            |                                              | Accrued payroll and related expenses     |        |                              | 81   |      |        |     | (18  | )
|                                                                            |                                              |                                          |        |                              |      |      |        |    
|Net cash used in operating activities                                       |                                              |                                          | (1,290 | )                            |      |      | (1,448 | )  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|INVESTING ACTIVITIES                                                        |                                              |                                          |        |                              |      |      |        |    
|Purchases of available-for-sale securities                                  |                                              |                                          | (812   | )                            |      |      | (506   | )  
|Maturities of available-for-sale securities                                 |                                              |                                          |       |                              |      |      | 670    |    
|Purchase of property and equipment                                          |                                              |                                          | (438   | )                            |      |      | (3     | )  
|Patents and other assets                                                    |                                              |                                          | (154   | )                            |      |      | (233   | )  
|                                                                            |                                              |                                          |        |                              |      |      |        |    
|Net cash used in investing activities                                       |                                              |                                          | (1,404 | )                            |      |      | (72    | )  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|FINANCING ACTIVITIES                                                        |                                              |                                          |        |                              |      |      |        |    
|Principal payments under equipment notes payable and note
payable to bank   |                                              |                                          | (107   | )                            |      |      | (109   | )  
|Net repurchases of common stock                                             |                                              |                                          | (14    | )                            |      |      | (2     | )  
|                                                                            |                                              |                                          |        |                              |      |      |        |    
|Net cash used in financing activities                                       |                                              |                                          | (121   | )                            |      |      | (111   | )  
|Decrease in cash and cash equivalents                                       |                                              |                                          | (2,815 | )                            |      |      | (1,631 | )  
|Cash and cash equivalents at beginning of period                            |                                              |                                          | 8,038  |                              |      |      | 4,181  |    
|                                                                            |                                              |                                          |        |                              |      |      |        |    
|Cash and cash equivalents at end of period                                  |                                              | $                                        | 5,223  |                              |      | $    | 2,550  |    
|                                                                            |                                              |                                          |        |                              |      |      |        |    
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                            |                                              |                                          |        |                              |      |      |        |    
|Interest paid                                                               |                                              | $                                        | 9      |                              |      | $    | 18     |    
|                                                                            |                                              |                                          |        |                              |      |      |        |    
|SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES     |                                              |                                          |        |                              |      |      |        |    
|Unrealized (gain)/loss on available-for-sale securities                     |                                              | $                                        | (27    | )                            |      | $    | 11     |    
|                                                                            |                                              |                                          |        |                              |      |      |        |    
|Issuance of common stock for stockholder note receivable                    |                                              | $                                        |       |                              |      | $    | 2,641  |    
|                                                                            |                                              |                                          |        |                              |      |      |        |    

See accompanying notes.

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EPIMMUNE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
March 31, 2002

1. Basis of Presentation

The interim unaudited condensed consolidated financial statements contained
herein have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In managements opinion, the unaudited information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position, results of operations and cash
flows for the periods presented. Interim results are not necessarily
indicative of results to be expected for the full year. The financial
statements should be read in conjunction with the audited consolidated
financial statements and footnotes thereto included in the Companys Form 10-K
for the year ended December 31, 2001.

Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period, excluding 738,181 shares
that are owned but unvested as of the date of the calculation. All shares of
common stock that may be issued in the future pursuant to options and warrants
as well as all shares of preferred stock which may be converted into common
stock have been excluded from the diluted net loss per share calculations, as
they are antidilutive.

2. New Accounting Standards

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

The FASB has issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which supersedes, with exceptions, SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. SFAS No. 144 retains the basic indicators of impairment
recognition and undiscounted cash-flow measurement model of SFAS No. 121;
however, it removes goodwill from the scope of the analysis, as the accounting
for goodwill is now subject to the provisions of SFAS Nos. 141 and 142. SFAS
No. 144 also provides additional guidance on differentiating between assets
held and used, held for sale, and held for disposal other than by sale. This
Statement is required to be adopted by companies for fiscal years beginning
after December 15, 2001. The Company adopted the new Statement effective
January 1, 2002. The impact on the consolidated financial statements was not
material.

3. Rhein Biotech

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

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4. Genencor Program Milestone

In January 2002, the Company announced the achievement of a preclinical
milestone in its collaboration with Genencor International, Inc. Epimmune,
along with Genencor, identified an EpiGene clinical product candidate for the
lead program in our collaboration, a therapeutic hepatitis B vaccine. In
connection with the achievement of the milestone, the Company received a
payment from Genencor.

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|PART
I. | FINANCIAL INFORMATION
|------- | ---------------------




|ITEM 2. | 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, as well as those discussed in the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2001.

Epimmune, EIS, EpiGene and PADRE® are our trademarks and ImmunoSense and
ImmunoStealth are our service marks.

Since our inception in July 1987, we have devoted substantially all of our
resources to the discovery and development of potential therapeutic and
prophylactic products. To date, we have not received any revenues from the
sale of products. We have funded our research and development primarily from
equity-derived working capital and through strategic alliances and
collaborations with other companies. We have not been profitable since our
inception and expect to incur substantial operating losses for the next several
years. As of March 31, 2002, our accumulated deficit was approximately $145.4
million.

Results of Operations

Three months ended March 31, 2002, as compared with three months ended March
31, 2001.

In the three months ended March 31, 2002, we had total revenues of $2.0
million, as compared to $0.8 million in revenue in the three months ended March
31, 2001. The increase in the three months ended March 31, 2002 relates
primarily to $1.4 million in related party revenue received in the three months
ended March 31, 2002 compared to $51,000 of related party revenue received in
the three months ended March 31, 2001. Related party revenue includes
milestone payments, amortization of license fees and contract revenue, as a
result of our collaboration with Genencor. We did not receive any other
license fees or milestones in the three months ended March 31, 2002. For the
three months ended March 31, 2002, we received $0.5 million in research grants
and contract revenue, approximately a 25% increase over the $0.4 million
received in the three months ended March 31, 2001. The increase was due to an
increase in expenditures and reimbursement for those expenditures under an NIH
contract supporting our HIV program preclinical activities.

Research and development expenses increased to $2.7 million in the three months
ended March 31, 2002 from $1.7 million in the comparable period of 2001. The
increase in the three months ended March 31, 2002 relates primarily to higher
labor and related costs including recruiting and relocation as a result of an
increase in our personnel responsible for research and development activities,
increased outside costs related to preclinical activities such as formulation
and toxicology studies for our HIV, and lung and colon cancer programs and
increased expenditures on scientific supplies due to increased research and
development efforts and our collaboration with Genencor. We expect our
research and development expenses to continue to significantly increase in
2002, compared with those of 2001, as we attempt to advance our product
candidates in both lung and colon cancer, and HIV to the clinic. We expect to
continue to incur costs in 2002 for, among other things, toxicology studies,
product formulation, manufacturing of product for use in clinical trials and
medical and clinical consultant costs.

General and administrative costs were approximately $0.6 million in the three
months ended March 31, 2002 and $0.7 million in the three months ended March
31, 2001. Increases in recruiting, relocation and
consulting costs in the three months ended March 31, 2002 were offset by lower
legal fees and stock-based compensation than in the three months ended March
31, 2001.

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Net interest income was $0.3 million in the three months ended March 31, 2002
and $0.1 million in the three months ended March 31, 2001. Interest income
during the three months ended March 31, 2002 includes $0.2 million of interest
accrued on the note issued for the purchase of shares by Dr. Loria, our
president and chief executive officer, in January 2001. Higher average cash
balances in the three months ended March 31, 2002 were offset by lower average
returns than in the three months ended March 31, 2001.

We expect to incur significant operating losses over the next several years due
to continuing expenses associated with our research and development programs,
including preclinical testing and clinical trials. Operating losses may
fluctuate from quarter to quarter as a result of differences in the timing 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 equity securities, two public common stock offerings, revenues
under collaborative research and development agreements, grant revenues,
certain asset divestitures and interest income. Through March 2002, we had
raised approximately $163.8 million from the sale of equity securities. As of
March 31, 2002, we had 13,703,205 shares outstanding on an as-converted to
common stock basis, assuming conversion of preferred shares.

As of March 31, 2002, our cash, cash equivalents, restricted cash and
short-term investments were $17.5 million compared to $19.5 million at December
31, 2001. The decrease was due to cash used for operations. We expect to
continue to use our cash, cash equivalents and short-term investments to fund
our ongoing drug research and development programs. We had net working capital
of $13.6 million as of March 31, 2002 compared to $15.4 million as of December
31, 2001.

Capital expenditures were $0.4 million in the first quarter of 2002 and were
negligible in the first quarter of 2001. The expenditures for the first
quarter of 2002 were primarily for laboratory equipment to increase and improve
immunological screening throughput and to build out additional laboratory space
to accommodate additional employees. In the past, we have financed our
laboratory equipment and research and office facilities primarily through
operating lease arrangements and a note payable. During both the first quarter
of 2002 and 2001 we made payments under the notes payable of $0.1 million.
During 2002, we anticipate that payments related to leasehold improvements and
capital expenditures will increase significantly over 2001 levels to a range of
approximately $0.8 million to $1.0 million. We will also pay approximately
$0.6 million in rent on our lease commitments during 2002.

Payments related to capitalized patent expenses were $0.2 million in the first
quarter of 2002 and 2001.

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

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We continue to anticipate that revenue for 2002 will be in the range of at
least $6.0 million to $6.5 million, which includes anticipated grant and
contract revenue and certain license fees. Our estimate assumes that we
recognize revenue from milestone or licensing payments under existing
agreements with third parties related to the licensing of our technology. We
also anticipate that operating expenses will rise from $11.2 million in 2001 to
between approximately $15.5 million to $16.8 million, representing a 40% to 50%
increase over 2001. The anticipated rise in expenses assumes that we file an
IND for our vaccine targeting HIV in the second quarter of 2002 and file an IND
for our lung and colon cancer candidate in late 2002 or early 2003. We also
anticipate using some of our cash and investments beginning in 2002 to fund our
recently announced HIV research collaboration with Bavarian Nordic. We will
share equally with Bavarian Nordic in all research related expenses and have
included these anticipated expenditures in our operating expense forecast for
2002. We may also become liable in 2002 for payment of license fees of up to
$0.5 million, at the option of the licensor. We have not included payment of
these potential license fees in our operating expense forecast for 2002 as
payment of those expenses is not assured.

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

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



| |  | the costs associated with filing an IND for our vaccine targeting HIV and an IND for our lung and colon cancer vaccine
candidate;      
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the costs associated with our clinical trials for our vaccine targeting HIV which are scheduled to begin in the second quarter
of 2002;
| 
| |  | the costs associated with safety studies and other preclinical activities for our vaccine targeting lung and colon cancer;             
| 
| |  | our ability to establish and maintain collaborative arrangements and license agreements;                                               
| 
| |  | the actual revenue we receive under our collaborative research and development agreements;                                             
| 
| |  | the actual costs we incur under our research collaboration with Bavarian Nordic;                                                       
| 
| |  | the actual payment of license fees which may become payable at the option of the licensor;                                             
| 
| |  | progress with preclinical testing and clinical trials;                                                                                 
| 
| |  | the time and costs involved in obtaining regulatory approvals;                                                                         
| 
| |  | the costs involved in filing, prosecuting and enforcing patent claims;                                                                 
| 
| |  | competing technological and market developments;                                                                                       
| 
| |  | changes in our existing research relationships;                                                                                        
| 
| |  | continued scientific progress in our drug discovery programs;                                                                          
| 
| |  | the magnitude of our drug discovery programs;                                                                                          
| 
| |  | the cost of manufacturing scale-up; and                                                                                                
| 
| |  | effective commercialization activities and arrangements.                                                                               

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As is typical in the biotechnology industry, our commercial success will depend
in part on neither infringing patents issued to competitors nor breaching the
technology licenses upon which our products might be based. Our business is
also subject to other significant risks, including the uncertainties associated
with our ability to enter into and maintain new collaborations, and the lengthy
regulatory approval process and with potential competition from other products.
Even if our products appear promising at an early stage of development, they
may not reach the market for a number of reasons. Such reasons include, but
are not limited to, our inability to fund clinical development of such
products, or the possibilities that the potential products will be found
ineffective during clinical trials, fail to receive necessary regulatory
approvals, be difficult to manufacture on a large scale or be uneconomical to
market.

Significant Accounting Policies

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including
those related to revenue recognition, patent costs and income taxes. We base
our estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. We
believe the following critical accounting policies affect the significant
judgments and estimates used in the preparation of our consolidated financial
statements (see Note 1 to our financial statements on page F-8 of the Form
10-K/A filed for the year ended December 31, 2001).

Revenue Recognition

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

Patent Costs

We capitalize the costs incurred to file patent applications when we believe
there is a high likelihood that the patent will be issued and there will be
future economic benefit associated with the patent. These costs are amortized
over a ten-year life from the date of patent filing. At March 31, 2002,
capitalized patent costs total approximately $2.8 million (net of accumulated
amortization). In addition, we expense all costs related to abandoned patent
applications. If we elect to abandon any of our currently issued or unissued
patents, the related expense could be material to our results of operations for
the period of the abandonment.

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Investment Policy

The primary objective of our investment activities is to preserve principal
while at the same time achieving competitive yields, without significantly
increasing risk. To achieve this objective, we primarily invest in A1 or P1 or
higher rated debt securities with maturities of less than two years, with the
weighted average maturity not to exceed eighteen months. We also attempt to
minimize our portfolio risk by placing constraints on how much of our portfolio
may be held in a specific type of investment such as asset-backed securities or
collateralized mortgage obligations as well as limiting our holdings in any one
issuer.

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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

At March 31, 2002, our investment portfolio included fixed-income securities of
$11.8 million. These securities are subject to interest rate risk. A
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would decrease the fair value of our interest
sensitive financial instruments at March 31, 2002 by $0.05 million. Any
decline in interest rates over time will reduce our interest income, while
increases in interest rates over time will increase our interest income.

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Risk Factors

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

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

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

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

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

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

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

We have not completed the development of any product and, accordingly, have not
begun to market or generate revenues from the commercialization of any product.
We do not expect to market any of our therapeutic or prophylactic products for
a number of years. If we do not successfully develop and commercialize
products, we may never generate revenues that would allow us to become
profitable. Our potential vaccines under development will require time
consuming and costly research and development efforts, preclinical studies,
clinical testing, regulatory approvals and additional investment prior to their
commercialization, which may never occur.

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

Pharmacia terminated our research and development collaboration in November
2000 with respect to the production, use and sale of pharmaceutical products
derived from our cancer epitopes and the use of these epitopes in therapeutic
vaccines. We will not receive further revenues from Pharmacia under our prior
collaboration.

In light of the termination of our collaboration with Pharmacia, our
preclinical or clinical development of drug candidates in our cancer program is
delayed. We have not spent any time or money on the development of one or more
of those candidates (other than our therapeutic lung and colon cancer vaccine
candidate) and we may never develop any of those cancer epitope products, which
could harm our business.

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

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

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

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to be successful or the delay in the development or commercialization of
pharmaceutical products pursuant to such collaborations or licenses could harm
our business.

In addition, due to financial constraints, we may be required to enter into
licenses or other collaborations with third parties in order to access
technologies that are necessary to successfully develop certain of our
products. We may not successfully negotiate acceptable licenses or other
collaborative arrangements that will allow us to access such technologies. In
addition, any technologies accessed through such licenses or other
collaborations may not help us achieve our goals.

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

As of March 31, 2002, we had $17.5 million in cash, cash equivalents,
restricted cash and short-term investments. Our future capital requirements
will depend on many factors, including: continued scientific progress in our
drug discovery programs; the magnitude of our drug discovery programs; our
ability to establish and maintain collaborative arrangements and license
agreements; progress with preclinical testing and clinical trials and the cost
of such trials; the time and costs involved in obtaining regulatory approvals;
the costs involved in filing, prosecuting and enforcing patent claims;
competing technological and market developments; the cost of manufacturing
scale-up; and effective commercialization activities and arrangements.

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

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

We have experienced significant operating losses since our inception in 1987.
As of March 31, 2002, we had an accumulated deficit of $145.4 million. We have
not generated revenues from the commercialization of any product. All of our
revenues to date have consisted of contract research and development revenues,
license and milestone payments, research grants, certain asset divestitures and
interest income. We expect that substantially all of our revenues for the
foreseeable future will result from contract revenues and research grants and,
if we are able to establish and maintain collaborations, payments under those
collaborations, including royalties on product sales and interest income. We
expect to continue to incur substantial net operating losses that may imperil
our ability to continue operations. To achieve profitable operations, we, alone
or with partners, must successfully identify, develop, register and market
proprietary products. We may not be able to generate sufficient product revenue
to become profitable on a sustained basis or at all.

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

We and our partners cannot commercialize our products if we do not receive FDA
or foreign approval to market our products. Clinical testing, manufacture,
promotion and the sale of our products are subject to extensive regulation by
numerous governmental authorities in the United States, principally the FDA,
and corresponding state and foreign regulatory agencies. These regulations may
delay or prevent us from

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commercializing products. Noncompliance with
applicable requirements can result in, among other things, fines, injunctions,
seizure of products, total or partial suspension of product marketing, failure
of the government to grant pre-market approval, withdrawal of marketing
approvals and criminal prosecution.

The regulatory process for new therapeutic drug products, including the
required preclinical studies and clinical testing, is lengthy and expensive. We
and our partners may not receive necessary FDA or foreign clearances for any of
our potential products in a timely manner, or at all. The length of the
clinical trial process and the number of patients the FDA will require to be
enrolled in the clinical trials in order to establish the safety and efficacy
of our products is uncertain. In addition, we may not provide the FDA with what
they want even though we or our collaborators believe we are doing the right
studies based on the protocol. The FDA or we and our collaborators may decide
to discontinue or suspend clinical trials at any time if the subjects or
patients who are participating in such trials are being exposed to unacceptable
health risks or if the results show no or limited benefit in patients treated
with the drug compared to patients in the control group. We and our partners
may encounter significant delays or excessive costs in our efforts to secure
necessary approvals. Regulatory requirements are evolving and uncertain. Future
United States or foreign legislative or administrative acts could also prevent
or delay regulatory approval of our products. We and our partners may not
receive the necessary approvals for clinical trials, manufacturing or marketing
of any of our products under development. Even if we obtain commercial
regulatory approvals, the approvals may significantly limit the indicated uses
for which we may market our products. In addition, the FDA may continually
review a product after its initial approval and commercialization. Later
discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market, as well as possible
civil or criminal sanctions.

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

Among the other requirements for regulatory approval is the requirement that
prospective manufacturers conform to the FDAs Good Manufacturing Practices, or
GMP, requirements specifically for biological drugs, as well as for other
drugs. In complying with the FDAs GMP requirements, manufacturers must
continue to expend time, money and effort in production, record keeping and
quality control to assure that the product meets applicable specifications and
other requirements. Failure to comply with the FDAs GMP requirements subjects
the manufacturer to possible FDA regulatory action. If we or our contract
manufacturers or partners, if any, fail to maintain compliance with the FDAs
GMP requirements on a continuing basis, it could materially adversely affect
our operations, commercialization efforts and profitability.

Technological change and competition may render our potential products
obsolete.

The biotechnology industry continues to undergo rapid change and competition is
intense and is expected to increase. Our competitors may succeed in developing
technologies and products that treat the indications that we are pursuing
sooner than us, that are more effective or affordable than any of the products
we are developing or which would render our technology and products obsolete
and noncompetitive. We compete with many public and private companies,
including pharmaceutical companies, chemical companies, specialized
biotechnology companies and academic institutions. Many of our competitors have
substantially greater experience, financial and technical resources and

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

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

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

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

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

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

As is typical in the biotechnology industry, our commercial success will depend
in part on our ability to avoid infringing patents issued to competitors or
breaching the technology licenses upon which we might base our products. If we
fail to obtain a license to any technology that we require to commercialize our
products, or to develop an alternative compound and obtain FDA approval within
an acceptable period of time if required to do so, our business would be
harmed. Litigation, which could result in substantial costs to us, may also be
necessary to enforce any patents issued to us or to determine the scope and
validity of others proprietary rights. In addition, we may have to participate
in interference proceedings

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declared by the United States Patent and Trademark
Office which could result in substantial costs to determine the priority of
inventions.

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

We are highly dependent on the principal members of our scientific and
management staff. We do not maintain key person life insurance on the life of
any employee and although we have an employment contract with Dr. Emile Loria,
he may terminate his employment at any time. Our future success also will
depend in part on the continued service of our key scientific and management
personnel and our ability to identify, hire and retain additional qualified
personnel. There is intense competition for qualified personnel in the areas of
our activities, and we cannot be sure that we will be able to continue to
attract and retain such personnel necessary for the development of our
business. Because of the intense competition, we may not be successful in
adding technical personnel as needed to meet the staffing requirements of
additional collaborative relationships. Our failure to attract and retain key
personnel could be significantly detrimental to our product development
programs and could harm our business.

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

To be successful, products that use our technology must be manufactured in
commercial quantities in compliance with regulatory requirements and at an
acceptable cost. We have not commercialized any products, nor have we or our
partners demonstrated that we can manufacture commercial quantities of product
candidates that use our technology in accordance with regulatory requirements.
We intend to rely on third-party contract manufacturers to produce materials
needed for clinical trials and product commercialization. Third-party
manufacturers may not be able to meet our needs with respect to timing,
quantity or quality. If we are unable to contract for a sufficient supply of
needed materials on acceptable terms, or if we should encounter delays or
difficulties in our relationships with manufacturers, it may delay clinical
trials, regulatory approvals and marketing efforts for our products. Such
delays could adversely affect our competitive position and our chances of
achieving profitability. We cannot be sure that we can manufacture, either on
our own our through contracts with third parties, such products at a cost or in
quantities that are commercially viable.

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

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

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

Our ability to successfully commercialize our products may depend in part on
the extent to which reimbursement for the cost of such products and related
treatment will be available from government health administration authorities,
private health insurers and other organizations. Third-party payors are
increasingly challenging the price of medical products and services.
Significant uncertainty exists as to

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the reimbursement status of newly approved
health care products, and adequate third-party coverage may not be available to
enable us to maintain price levels sufficient to realize an appropriate return
on our investment in product development. If we cannot obtain adequate
third-party coverage for our products, we may be precluded from commercializing
these products.

Product liability risks may expose us to significant liability.

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

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

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

Although we believe that we are in compliance in all material respects with
applicable environmental laws and regulations and currently do not expect to
make material capital expenditures for environmental control facilities in the
near term, we cannot be sure that compliance with environmental laws and
regulations in the future will not entail significant costs, or that our
business will not be harmed by current or future environmental laws or
regulations.

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

The market prices for securities of biotechnology companies, including our
common stock, have historically been highly volatile, and the market from time
to time has experienced significant price and volume fluctuations that are
unrelated to the operating performance of such companies. Our stock price has
been and will continue to be influenced by general market conditions. In
addition, the following factors may have a significant effect on the market
price of our common stock:



| |  | announcements of technological innovations or new commercial therapeutic products by us or others;
|- |  | --------------------------------------------------------------------------------------------------
| 
| |  | governmental regulation that affects the biotechnology and pharmaceutical industries;             
| 
| |  | developments in patent or other proprietary rights;                                               
| 
| |  | developments in, or termination of, our relationships with our collaborative partners;            
| 
| |  | public concern as to the clinical results and/or, the safety of drugs developed by us or others;  
| 
| |  | announcements related to the sale of our stock; and                                               
| 
| |  | general market conditions.                                                                        

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

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

Our common stock is expressly subordinate to our Series S and Series S-1
Preferred Stock in the event of our liquidation, dissolution or winding up. If
we were to cease operations and liquidate our assets, we would first be
required to pay $10 million to our holders of preferred stock and there may not
be any remaining value available for distribution to the holders of common
stock after providing for the Series S and Series S-1 Preferred Stock
liquidation preference. In addition, due to adjustments to the conversion price
of our Series S Preferred Stock, in the event our Series S Preferred Stock is
converted to common stock, it will further dilute our holders of common stock.

The effect of anti-takeover provisions could adversely affect our common
stockholders.

Our certificate of incorporation includes a provision that requires the
approval of holders of at least 66 2/3% of our voting stock as a condition to a
merger or certain other business transactions with, or proposed by, a holder of
15% or more of our voting stock. This approval is not required in cases where
certain of our directors approve the transaction or where certain minimum price
criteria and other procedural requirements are met. Our certificate of
incorporation also requires the approval of holders of at least 66 2/3% of our
voting stock to amend or change the provisions mentioned relating to the
transaction approval. Finally, our certificate of incorporation provides that
any action required or permitted to be taken by our stockholders must be
effected at a duly called annual or special meeting rather than by any consent
in writing.

Further, pursuant to the terms of our stockholder rights plan, we have
distributed a dividend of one right for each outstanding share of common stock.
If any person or group acquires 15% or more of our common stock, these rights
will be triggered. These rights will cause substantial dilution to the
ownership of a person or group that attempts to acquire us on terms not
approved by our Board of Directors and may have the effect of delaying or
deterring hostile takeover attempts.

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

Our officers, directors and stockholders with at least 10% of our stock
together control approximately 41% of our outstanding common stock and
preferred stock, on a combined, as-converted to common stock basis. If these
officers, directors and principal stockholders act together, they will be able
to exert a significant degree of influence over our management and affairs and
over matters requiring stockholder approval, including the election of
directors and approval of mergers or other business combination transactions.
The interests of this concentration of ownership may not always coincide with
our interests or the interests of other stockholders. For instance, officers,
directors and principal stockholders, acting together, could cause us to enter
into transactions or agreements that we would not otherwise consider.
Similarly, this concentration of ownership may have the effect of delaying or
preventing a change in control of our company otherwise favored by our other
stockholders. This concentration of ownership could depress our stock price.

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|PART II. | OTHER INFORMATION
|-------- | -----------------




|ITEM 1 | LEGAL PROCEEDINGS
|------ | -----------------



| | From time to time we are involved in certain litigation arising out
of our operations. We are not currently engaged in any legal
proceedings.
| | ---------------------------------------------------------------------------------------------------------------------------------------------






|ITEM 6. | EXHIBITS
|------- | --------

|              |  |                                                                            
|------------- |  | ---------------------------------------------------------------------------
|Exhibit 10.98 |  | Letter Agreement between Epimmune and Michael McClurg
dated March 29, 2002.
|             
|             
|             
|             
|Exhibit 10.99 |  | Letter Agreement between Epimmune and Dr. John Fikes
dated March 29, 2002. 

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EPIMMUNE INC.




SIGNATURES

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

|                   |                                                                   |                
|------------------ | ----------------------------------------------------------------- | ---------------
|                   | EPIMMUNE INC                                                     
|                  
|Date: May 13, 2002 | By:                                                               | /s/ Emile Loria
|                   |                                                                  
|                   | Emile Loria, M.D.
President, Chief Executive Officer and Director
|                  

|                   |                                                                                                                                                       |                    
|------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------
|Date: May 13, 2002 | By:                                                                                                                                                   | /s/ Robert De Vaere
|                   |                                                                                                                                                      
|                   | Robert De Vaere
Vice President, Finance and Administration,
Chief Financial Officer, Assistant Secretary
(Principal Financial and Accounting Officer)

23