##### Table of Contents



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 the quarterly period ended
September 30, 2003, or                                   
|           |  |                                                                                         
|[  ]       |  | Transition Period Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
|           |  | for the Transition 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
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]
No [  ]

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

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
13,475,624 shares outstanding as of November 10, 2003.

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TABLE OF CONTENTS



|                              |                                                                                               |                                         |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM I. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED STATEMENT OF OPERATIONS      
|                              |                                                                                               | CONDENSED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED 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                           
|                              |                                                                                               | RISK FACTORS                           
|                              | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION   
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                              | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|EXHIBIT 10.51                
|EXHIBIT 31                   
|EXHIBIT 32                   



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EPIMMUNE INC.
QUARTERLY REPORT
FORM 10-Q

|                              |           |                                                                                                                |   |    |    | 
|----------------------------- | --------- | -------------------------------------------------------------------------------------------------------------- | - | -- | -- | 
|TABLE OF CONTENTS COVER PAGE  |           |                                                                                                                | 1 |   
|TABLE OF CONTENTS             |           |                                                                                                                | 2 |   
|PART I. FINANCIAL INFORMATION |           |                                                                                                                |   |   
|                              | ITEM 1.   | Financial Statements                                                                                           |   |    |    | 
|                              |           | Condensed Balance Sheets as of September 30, 2003 (unaudited) and
December 31, 2002                            |   |    | 3  | 
|                              |           | Condensed Statements of Operations (unaudited) for the Three and
Nine Months Ended September 30, 2003 and 2002 |   |    | 4  | 
|                              |           | Condensed Statements of Cash Flows (unaudited) for Nine Months
Ended September 30, 2003 and 2002               |   |    | 5  | 
|                              |           | Notes to Condensed Financial Statements (unaudited)                                                            |   |    | 6  | 
|                              | ITEM 2.   | Managements Discussion and Analysis of Financial
Condition and Results of Operations                          |   |    | 11 | 
|                              | ITEM 3.   | Quantitative and Qualitative Disclosures about Market Risk                                                     |   |    | 17 | 
|                              |           | Risk Factors                                                                                                   |   |    | 18 | 
|                              | ITEM 4.   | Controls and Procedures                                                                                        |   |    | 30 | 
|PART II. OTHER INFORMATION    |           |                                                                                                                |   |   
|                              | ITEM 1.   | Legal Proceedings                                                                                              |   |    | 31 | 
|                              | ITEM 2.   | Changes in Securities and Use of Proceeds                                                                      |   |    | 31 | 
|                              | ITEM 3.   | Defaults upon Senior Securities                                                                                |   |    | *  | 
|                              | ITEM 4.   | Submission of Matters to a Vote of Security Holders                                                            |   |    | *  | 
|                              | ITEM 5.   | Other Information                                                                                              |   |    | *  | 
|                              | ITEM 6.   | Exhibits and Reports on Form 8-K                                                                               |   |    | 31 | 
|                              | SIGNATURE |                                                                                                                |   | 32 |   



|* |  | No information provided due to inapplicability of item.
|- |  | -------------------------------------------------------

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PART I. FINANCIAL INFORMATION




ITEM I. FINANCIAL
STATEMENTS





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

|                                           |                                                                                                                                                                                                                                                                                        |   |               |          |              |   |        |          |  
|------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------- | -------- | ------------ | - | ------ | -------- | -
|                                           |                                                                                                                                                                                                                                                                                        |   | September 30, |          | December 31,
|                                           |                                                                                                                                                                                                                                                                                        |   | 2003          |          | 2002        
|                                           |                                                                                                                                                                                                                                                                                        |   |               |          |             
|                                           |                                                                                                                                                                                                                                                                                        |   | (unaudited)   |          |              |   |       
|ASSETS                                     |                                                                                                                                                                                                                                                                                        |   |               |          |              |   |        |         
|Current
assets:                            |                                                                                                                                                                                                                                                                                        |   |               |          |              |   |        |         
|                                           | Cash and cash
equivalents                                                                                                                                                                                                                                                              |   | $             | 8,139    |              |   | $      | 9,745    |  
|                                           | Prepaids and other current
assets                                                                                                                                                                                                                                                      |   |               | 1,170    |              |   |        | 708      |  
|                                           |                                                                                                                                                                                                                                                                                        |   |               |          |              |   |        |          |  
|Total current
assets                       |                                                                                                                                                                                                                                                                                        |   | 9,309         |          |              |   | 10,453 |         
|Restricted long-term
investment            |                                                                                                                                                                                                                                                                                        |   | 472           |          |              |   | 472    |         
|Property and equipment,
net                |                                                                                                                                                                                                                                                                                        |   | 1,197         |          |              |   | 1,363  |         
|Patents and other
assets                   |                                                                                                                                                                                                                                                                                        |   | 3,508         |          |              |   | 3,240  |         
|                                           |                                                                                                                                                                                                                                                                                        |   |               |          |              |   |        |          |  
|TOTAL
ASSETS                               |                                                                                                                                                                                                                                                                                        | $ | 14,486        |          |              | $ | 15,528 |         
|                                           |                                                                                                                                                                                                                                                                                        |   |               |          |              |   |        |          |  
|LIABILITIES AND
STOCKHOLDERS EQUITY       |                                                                                                                                                                                                                                                                                        |   |               |          |              |   |        |         
|Current
liabilities:                       |                                                                                                                                                                                                                                                                                        |   |               |          |              |   |        |         
|                                           | Accounts payable and accrued
liabilities                                                                                                                                                                                                                                               |   | $             | 1,712    |              |   | $      | 1,336    |  
|                                           | Deferred contract
revenues                                                                                                                                                                                                                                                             |   |               | 1,529    |              |   |        | 1,114    |  
|                                           | Accrued payroll and related
expenses                                                                                                                                                                                                                                                   |   |               | 234      |              |   |        | 252      |  
|                                           | Current portion of notes
payable                                                                                                                                                                                                                                                       |   |               |         |              |   |        | 43       |  
|                                           |                                                                                                                                                                                                                                                                                        |   |               |          |              |   |        |          |  
|Total current
liabilities                  |                                                                                                                                                                                                                                                                                        |   | 3,475         |          |              |   | 2,745  |         
|Deferred
rent                              |                                                                                                                                                                                                                                                                                        |   | 209           |          |              |   | 197    |         
|Stockholders
equity:                      |                                                                                                                                                                                                                                                                                        |   |               |          |              |   |        |         
|                                           | Preferred stock, $.01 par value,
10,000,000 shares authorized,
1,409,288 shares issued and outstanding of Series S and S-1 convertible
preferred stock at September 30, 2003 and December 31, 2002. Liquidation
preference of $10,000,000 at September 30, 2003 and
December 31, 2002. |   |               | 14       |              |   |        | 14       |  
|                                           | Common stock, $.01 par value,
25,000,000 shares authorized,
13,454,474 shares and 12,153,462 shares issued and outstanding
at September 30, 2003 and December 31, 2002, respectively.                                                                                                  |   |               | 134      |              |   |        | 122      |  
|                                           | Additional paid-in
capital                                                                                                                                                                                                                                                             |   |               | 167,439  |              |   |        | 166,454  |  
|                                           | Note receivable held by
stockholder                                                                                                                                                                                                                                                    |   |               |         |              |   |        | (2,932   | )
|                                           | Deferred
compensation                                                                                                                                                                                                                                                                  |   |               | (62      | )            |   |        | (203     | )
|                                           | Accumulated
deficit                                                                                                                                                                                                                                                                    |   |               | (156,723 | )            |   |        | (150,869 | )
|                                           |                                                                                                                                                                                                                                                                                        |   |               |          |              |   |        |          |  
|Total stockholders
equity                 |                                                                                                                                                                                                                                                                                        |   | 10,802        |          |              |   | 12,586 |         
|                                           |                                                                                                                                                                                                                                                                                        |   |               |          |              |   |        |          |  
|TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY |                                                                                                                                                                                                                                                                                        | $ | 14,486        |          |              | $ | 15,528 |         
|                                           |                                                                                                                                                                                                                                                                                        |   |               |          |              |   |        |          |  

See accompanying notes.

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

|                                            |                                      |   |                              |       |                             |   |        |       |      |   |        |       |  |   |        |       | 
|------------------------------------------- | ------------------------------------ | - | ---------------------------- | ----- | --------------------------- | - | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                            |                                      |   | Three
months ended Sept. 30, |       | Nine
months ended Sept. 30,
|                                            |                                      |   |                              |       |                            
|                                            |                                      |   | 2003                         |       | 2002                        |   | 2003   |       | 2002
|                                            |                                      |   |                              |       |                             |   |        |       |     
|Revenues                                    |                                      |   |                              |       |                             |   |        |       |      |   |        |       |  |   |        |      
|                                            | License fees and
milestones          |   | $                            | 553   |                             |   | $      | 125   |      |   | $      | 1,001 |  |   | $      | 250   | 
|                                            | Research grants and contract
revenue |   |                              | 664   |                             |   |        | 435   |      |   |        | 1,438 |  |   |        | 1,550 | 
|                                            | Related party
revenue                |   |                              | 794   |                             |   |        | 1,186 |      |   |        | 2,791 |  |   |        | 3,693 | 
|                                            |                                      |   |                              |       |                             |   |        |       |      |   |        |       |  |   |        |       | 
|Total
revenues                              |                                      |   | 2,011                        |       |                             |   | 1,746  |       |      |   | 5,230  |       |  |   | 5,493  |      
|Costs
and expenses:                         |                                      |   |                              |       |                             |   |        |       |      |   |        |       |  |   |        |      
|                                            | Research and
development             |   |                              | 2,280 |                             |   |        | 2,721 |      |   |        | 7,726 |  |   |        | 8,709 | 
|                                            | General and
administrative           |   |                              | 1,457 |                             |   |        | 637   |      |   |        | 3,182 |  |   |        | 2,025 | 
|                                            | Restructuring
costs                  |   |                              | 344   |                             |   |        |      |      |   |        | 344   |  |   |        |      | 
|                                            |                                      |   |                              |       |                             |   |        |       |      |   |        |       |  |   |        |       | 
|Total costs and
expenses                    |                                      |   | 4,081                        |       |                             |   | 3,358  |       |      |   | 11,252 |       |  |   | 10,734 |      
|                                            |                                      |   |                              |       |                             |   |        |       |      |   |        |       |  |   |        |       | 
|Loss
from operations                        |                                      |   | (2,070                       | )     |                             |   | (1,612 | )     |      |   | (6,022 | )     |  |   | (5,241 | )    
|Interest income,
net                        |                                      |   | 52                           |       |                             |   | 113    |       |      |   | 175    |       |  |   | 501    |      
|Other expense,
net                          |                                      |   | (3                           | )     |                             |   | (8     | )     |      |   | (7     | )     |  |   | (14    | )    
|                                            |                                      |   |                              |       |                             |   |        |       |      |   |        |       |  |   |        |       | 
|Net
loss                                    |                                      | $ | (2,021                       | )     |                             | $ | (1,507 | )     |      | $ | (5,854 | )     |  | $ | (4,754 | )    
|                                            |                                      |   |                              |       |                             |   |        |       |      |   |        |       |  |   |        |       | 
|Net loss per share
- basic and diluted      |                                      | $ | (0.17                        | )     |                             | $ | (0.13  | )     |      | $ | (0.49  | )     |  | $ | (0.42  | )    
|                                            |                                      |   |                              |       |                             |   |        |       |      |   |        |       |  |   |        |       | 
|Shares used in computing
net loss per share |                                      |   | 12,132                       |       |                             |   | 11,496 |       |      |   | 11,851 |       |  |   | 11,404 |      
|                                            |                                      |   |                              |       |                             |   |        |       |      |   |        |       |  |   |        |       | 

See accompanying notes.

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

|                                                                            |                                             |                                          |        |                                 |      |      |        |      |      |  
|--------------------------------------------------------------------------- | ------------------------------------------- | ---------------------------------------- | ------ | ------------------------------- | ---- | ---- | ------ | ---- | ---- | -
|                                                                            |                                             |                                          |        | Nine months ended September 30,
|                                                                            |                                             |                                          |        |                                
|                                                                            |                                             |                                          |        | 2003                            |      | 2002
|                                                                            |                                             |                                          |        |                                 |      |     
|OPERATING
ACTIVITIES                                                        |                                             |                                          |        |                                 |      |      |        |     
|Net
loss                                                                    |                                             | $                                        | (5,854 | )                               |      | $    | (4,754 | )   
|Adjustments to reconcile
net loss to net cash used in operating
activities: |                                             |                                          |        |                                 |      |      |        |     
|                                                                            | Interest on note held by
stockholder        |                                          |        | (123                            | )    |      |        | (252 | )   
|                                                                            | Depreciation and
amortization               |                                          |        | 653                             |      |      |        | 565  |     
|                                                                            | Stock-based
compensation                    |                                          |        | 746                             |      |      |        | (32  | )   
|                                                                            | Deferred
rent                               |                                          |        | 12                              |      |      |        | 25   |     
|                                                                            | Deferred
revenue                            |                                          |        | 415                             |      |      |        | (789 | )   
|                                                                            | Loss on disposal of
assets                  |                                          |        | 2                               |      |      |        | 3    |     
|                                                                            | Write-off of abandoned
patents              |                                          |        |                                |      |      |        | 233  |     
|                                                                            | Change in operating
assets and liabilities: |                                          |        |                                 |      |      |        |      |     
|                                                                            |                                             | Prepaids and other current
assets        |        |                                 | (462 | )    |        |      | (196 | )
|                                                                            |                                             | Accounts payable and accrued
liabilities |        |                                 | 146  |      |        |      | (364 | )
|                                                                            |                                             | Accrued payroll and related
expenses     |        |                                 | (18  | )    |        |      | 54   |  
|                                                                            |                                             |                                          |        |                                 |      |      |        |     
|Net cash used in
operating activities                                       |                                             |                                          | 4,483  |                                 |      |      | (5,507 | )   
|INVESTING
ACTIVITIES                                                        |                                             |                                          |        |                                 |      |      |        |     
|Purchases of
available-for-sale securities                                  |                                             |                                          |       |                                 |      |      | (1,614 | )   
|Maturities of
available-for-sale securities                                 |                                             |                                          |       |                                 |      |      | 12,589 |     
|Purchase of property and
equipment                                          |                                             |                                          | (106   | )                               |      |      | (669   | )   
|Patents                                                                     |                                             |                                          | (649   | )                               |      |      | (705   | )   
|                                                                            |                                             |                                          |        |                                 |      |      |        |     
|Net cash (used in)
provided by investing activities                         |                                             |                                          | (755   | )                               |      |      | 9,601  |     
|FINANCING
ACTIVITIES                                                        |                                             |                                          |        |                                 |      |      |        |     
|Principal payments on
notes payable to bank                                 |                                             |                                          | (43    | )                               |      |      | (303   | )   
|Net proceeds from
issuance of common stock                                  |                                             |                                          | 3,675  |                                 |      |      | 43     |     
|                                                                            |                                             |                                          |        |                                 |      |      |        |     
|Net cash provided by
(used in) financing activities                         |                                             |                                          | 3,632  |                                 |      |      | (260   | )   
|Decrease in cash and
cash equivalents                                       |                                             |                                          | (1,606 | )                               |      |      | 3,834  |     
|Cash and cash
equivalents at beginning of year                              |                                             |                                          | 9,745  |                                 |      |      | 8,038  |     
|                                                                            |                                             |                                          |        |                                 |      |      |        |     
|Cash and cash
equivalents at end of period                                  |                                             | $                                        | 8,139  |                                 |      | $    | 11,872 |     
|                                                                            |                                             |                                          |        |                                 |      |      |        |     
|SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION                            |                                             |                                          |        |                                 |      |      |        |     
|Interest
paid                                                               |                                             | $                                        | 4      |                                 |      | $    | 19     |     
|                                                                            |                                             |                                          |        |                                 |      |      |        |     
|SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING
AND FINANCIAL ACTIVITIES     |                                             |                                          |        |                                 |      |      |        |     
|Unrealized
gains/(losses) on available-for-sale securities                  |                                             | $                                        |       |                                 |      | $    | (23    | )   
|                                                                            |                                             |                                          |        |                                 |      |      |        |     
|Reversal of deferred
compensation on equity instruments                     |                                             | $                                        |       |                                 |      | $    | 134    |     
|                                                                            |                                             |                                          |        |                                 |      |      |        |     
|Unvested
common stock included in accrued liabilities                       |                                             | $                                        | 230    |                                 |      | $    |       |     
|                                                                            |                                             |                                          |        |                                 |      |      |        |     

See accompanying notes.

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EPIMMUNE INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
September 30, 2003

1. Basis of Presentation

The interim unaudited condensed 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 disclosures 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 disclosures thereto included in the Companys Form
10-K for the year ended December 31, 2002.

The Company has an accumulated deficit of $156.7 million as of September 30,
2003. The Companys ability to attain profitable operations is dependent upon
obtaining sufficient working capital to complete the successful development of
its products, the Food and Drug Administration (FDA) approval of its
products, achieving market acceptance of such products and achievement of
sufficient levels of revenue to support the Companys cost structure.
Management believes that the Companys existing capital resources will enable
the Company to fund its operations through 2004 and into the second quarter of
2005. If the Company is unable to obtain additional funding, it will be
required to delay, reduce the scope of or eliminate one or more of its research
and development projects, sell the Company or certain of its assets or
technologies, or dissolve and liquidate all of its assets.

Earnings per share (EPS) is computed in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share(SFAS No. 128).
SFAS No. 128 requires dual presentation of basic and diluted earnings per
share. Basic EPS includes no dilution and is computed by dividing net income by
the weighted average number of common shares outstanding for the period,
excluding owned but unvested shares. There were 92,172 and 605,872 owned but
unvested shares as of September 30, 2003 and September 30, 2002, respectively.
Diluted EPS reflects the potential dilution of securities that could share in
our earnings, such as common stock equivalents that may be issuable upon
exercise of outstanding common stock options or warrants as well as all shares
of preferred stock, which may be converted into common stock. Prior to the
application of the treasury stock method for options and warrants, common stock
equivalents of 4,640,801 and 3,564,253 for the nine months ended September 30,
2003 and 2002, respectively, have been excluded from EPS as the effect is
antidilutive. On a fully diluted basis, assuming full vesting and conversion
of all common stock equivalents upon exercise of outstanding common stock
options and warrants as well as conversion of all shares of preferred stock,
there were 18,095,275 and 15,698,673 shares outstanding as of September 30,
2003 and September 30, 2002, respectively.

As permitted by SFAS No. 123, Accounting for Stock-Based Compensation(SFAS
No. 123), the Company elected to follow the Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees(APB Opinion No.
25), and related interpretations in accounting for its employee stock options.
Under APB Opinion No. 25, among other things, when the exercise price of its
employee stock options is not less than the market price of the underlying
stock on the date of grant, no compensation expense is recognized.

As required under SFAS No. 123 and SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure- an amendment of FASB Statement No. 123
(SFAS No. 148), the pro forma effects of stock-based compensation on net
income and net earnings per common share have been

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estimated at the date of
grant using the Black-Scholes option pricing model based on the following
weighted-average assumptions: risk-free interest rates of 6%; dividend yield of
0; and a weighted average expected life for all options of six years. The
volatility factor assumptions of the expected market price of the Companys
common stock were 128% and 94% for September 30, 2003 and 2002, respectively.

For purposes of adjusted pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The effect of
applying SFAS No. 123 for purposes of providing pro forma disclosures is not
likely to be representative of the effects on the Companys operating results
for future years because changes in the subjective input assumptions can
materially affect future value estimates. Pro forma information for the three
and nine months ended September 30, 2003 and 2002 is as follows:

|                                                        |  |                              |           |                             |  |      |           |      |  |    |           |   |  |    |           |  
|------------------------------------------------------- |  | ---------------------------- | --------- | --------------------------- |  | ---- | --------- | ---- |  | -- | --------- | - |  | -- | --------- | -
|                                                        |  | Three months ended Sept. 30, |           | Nine months ended Sept. 30,
|                                                        |  | 2003                         |           | 2002                        |  | 2003 |           | 2002
|                                                        |  |                              |           |                             |  |      |           |     
|Net loss as  reported                                   |  | ($                           | 2,021,000 | )                           |  | ($   | 1,507,000 | )    |  | ($ | 5,854,000 | ) |  | ($ | 4,754,000 | )
|FAS 123 compensation  expense                           |  |                              | (190,000  | )                           |  |      | (191,000  | )    |  |    | (522,000  | ) |  |    | (566,000  | )
|                                                        |  |                              |           |                             |  |      |           |      |  |    |           |   |  |    |           |  
|Adjusted pro forma basic and  diluted net loss          |  | ($                           | 2,211,000 | )                           |  | ($   | 1,698,000 | )    |  | ($ | 6,376,000 | ) |  | ($ | 5,320,000 | )
|Adjusted pro forma basic and diluted
net loss per share |  | ($                           | 0.18      | )                           |  | ($   | 0.15      | )    |  | ($ | 0.54      | ) |  | ($ | 0.46      | )

2. New Accounting Standards

In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148. This statement amends SFAS No. 123 to provide alternative methods of
voluntarily transitioning to the fair value based method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require disclosure of the method used to
account for stock-based employee compensation and the effect of the method on
reported results in both annual and interim financial statements. The annual
disclosure provisions are effective for the Company beginning with its year
ended December 31, 2002. The interim disclosure requirements are currently
effective. The adoption of SFAS No. 148 did not have a material effect on our
results of operations or financial condition.

3. Termination of Merger Agreement with Anosys, Inc.

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

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4. Note Receivable from Stockholder

In January 2001, the Company sold Dr. Emile Loria, President and CEO, 1,056,301
shares of its common stock at the closing price of such common stock as
reported by the Nasdaq National Market on the date of purchase, which was $2.50
per share. These shares vested in equal daily installments over the four-year
period following the purchase date and the Company had a right to purchase any
unvested shares at the purchase price paid by Dr. Loria in the event of
termination of Dr. Lorias service to the Company. Dr. Loria purchased the
shares with a promissory note in the principal amount of $2,641,000, which was
secured by a pledge of the shares. The note bore interest at the rate of 5.61%
per year, compounded annually.

On September 29, 2003, Dr. Loria surrendered an aggregate of 963,740 shares of
the Companys common stock, including 250,139 unvested shares, at the fair
market value of $3.17 per share, in exchange for the prepayment of the
outstanding principal and interest under the promissory note, an aggregate
amount of $3,055,000. The remaining 92,561 unvested shares will vest in equal
daily installments between September 29, 2003 and January 15, 2005. The
Company continues to have the right to purchase any unvested shares at the
purchase price paid by Dr. Loria in the event of termination of Dr. Lorias
service to the Company.

In connection with this transaction, the Company recorded a non-cash,
stock-based compensation charge of approximately $646,000 in the third quarter
ended September 30, 2003 based on the difference between the fair market price
on September 29, 2003 and the exercise price of the shares surrendered by Dr.
Loria. The Company will also recognize an additional $62,000 in non-cash,
stock-based compensation charges ratably over the period from September 29,
2003 to January 15, 2005 as the remaining 92,561 unvested shares vest.

The Company has included $230,000 associated with the remaining
unvested shares in accrued liabilities because the Company has a repurchase option on
the 92,561 unvested shares at the original exercise price. As the
remaining 92,561 unvested shares vest between September 29, 2003 and January
15, 2005, the liability will be reclassified into equity in equal installments.

The Company has also been recording non-cash compensation expense related to
the below market interest rate the promissory note bore. The Company recorded
$25,000 in such compensation expense for the three months ended September 30,
2003 and 2002. Due to the prepayment of the note, the Company reversed the
unamortized portion of $137,000 of deferred compensation related to the below
market interest rate on the note during the quarter ended September 30, 2003.

5. CEO Performance Bonus

In June 2003, in consideration for continued employment at Epimmune, the
Company entered into an agreement with Dr. Loria, whereby Dr. Loria was
eligible to earn a performance bonus equal to 2% of any proceeds received by
the Company from any private or public equity financing completed through
December 31, 2004. Payment of such bonus was to be automatic up to $1.0
million and thereafter was at the discretion of the Companys Board of
Directors.

In September 2003, in consideration for an option grant to purchase 500,000
shares of Common Stock of Epimmune at the then fair market value, Dr. Loria
agreed to terminate the June 2003 letter agreement and his right to receive a
performance bonus from any private or public equity financing.

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6. Work Force Reduction

On September 3, 2003, the Company announced a reduction of its work force aimed
at focusing the
Companys efforts on its most advanced clinical programs and its sponsored and
partnered programs. The Company reduced its research and administrative staff
by 11 individuals or 23%, which resulted in a one-time restructuring charge of
approximately $344,000 in the third quarter ended September 30, 2003. The
Company paid $329,000 during the three months ended September 30, 2003
remaining liability of $15,000 included in Accrued Liabilities as of September
30, 2003. The Company expects the remaining liability to be paid in
the fourth quarter of 2003.

7. Private Placement

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

8. Beckman Coulter

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

9. Immuno-Designed Molecules, S.A.

In October 2002, the Company entered into an evaluation and license option
agreement with Immuno-Designed Molecules, S.A., or IDM, for certain cancer
antigens for use in IDMs ex vivocancer therapy program. Under the terms of
the agreement, IDM had 120 days from the date of the option agreement to
evaluate the epitopes and exercise its option to license certain patented and
non-patented rights to Epimmunes universal cancer epitope packages for use in
ex vivocancer therapy. In February 2003, IDM exercised its option and in July
2003, the Company entered into a license agreement with IDM pursuant to which
IDM was granted a non-exclusive license to use the epitopes in connection with
its DendritophageTMex vivotechnology. The Company received an evaluation
license fee when it entered into the evaluation and license option agreement,
which was amortized into revenue over the evaluation period. The Company
received a license fee in February 2003 when IDM exercised its option. The
Company is amortizing the license fee over the estimated four-year life of the
license. The Company also received a non-recurring milestone payment in June
2003, which it will recognize as revenue over the
remaining estimated life of the license.

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10. Merck & Co., Inc.

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

epitopes for use in vaccines for the treatment of certain diseases.

11. Aventis Pasteur

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

12. Amgen

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

13. Milestone Payment under Anosys License Agreement

In September 2003, the Company earned and received a milestone payment from
Anosys Inc. as a result of Anosys filing of an Investigational New Drug
application for a product incorporating Epimmune technology under a license
granted to Anosys in August 2001. In addition, the Company announced that it
had received payment of an additional license fee under the terms of the
original agreement as a result of Epimmune regaining all rights to the
technology covered by the agreement in Japan. Both the milestone payment and
the additional license fee were recognized as revenue in the third quarter
ended September 30, 2003. In the event Anosys elects to exercise its rights to
include Japan in the territory covered by the agreement, Epimmune will be
entitled to an additional license fee payment.

14. National Institutes of Health Contract for HIV Vaccine

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

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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.

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

Since 1997, we have devoted substantially all of our resources to the discovery
and development of potential therapeutic and prophylactic products. To date, we
have not received any revenues from the sale of products. We began a Phase I/II
clinical trial targeting HIV in September 2002 and two Phase I/II clinical
trials targeting lung and colorectal cancer in February 2003. We have funded
our research and development primarily from equity-derived working capital,
through licensing transactions and collaborations with other companies and
through government grants and contracts. We have not been profitable since our
inception and expect to incur substantial operating losses for at least the
next several years. As of September 30, 2003, our accumulated deficit was
approximately $156.7 million.

In July 2001, we entered into a collaboration agreement with Genencor. The
revenue that we recognize from Genencor includes milestone payments,
recognition of upfront license fees over the term of the contract and contract
research and development funding to support our research over the term of the
collaboration. As of September 30, 2003, Genencor owned 8.9% of our common
stock and is therefore considered a related party for financial reporting
purposes. Therefore, all payments that we receive under this agreement are
included in the category, Related Party Revenue.

On August 12, 2003, we announced that the merger agreement between us and
Anosys, Inc., entered into on May 9, 2003, was terminated.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to revenue
recognition, patents and income taxes. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies affect the significant judgments and estimates
used in the preparation of our financial statements (see Note 1 to our
financial statements on page F-7 of the Form 10-K filed for the year ended
December 31, 2002).

Revenue Recognition

We recognize revenues pursuant to Staff Accounting Bulletin No. 101, Revenue
Recognition. License fees are earned and recognized in accordance with the
provisions of each agreement. Upfront license fees for perpetual licenses
where we have no performance obligations are recognized when received. License
fees under agreements in which we have ongoing involvement or performance
obligations are recognized over the term of the agreement. For example, in
connection with our Genencor collaboration, because we received an upfront
license fee, it is being amortized into revenue over the collaboration

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term.
Milestone payments are recognized as revenue upon the completion of the
milestone as long as the milestone event
was substantive, and its achievability was not reasonably assured at inception
and the Companys performance obligations after milestone achievement will
continue to be funded at a comparable level before the milestone achievement.
Contract research and development funding is recognized as revenue in the same
period as reimbursable expenses under a contract are incurred and in an amount
or at a rate billable under each contracts terms. Revenues from grants are
recognized on a percentage-of-completion basis as related costs are incurred.
We defer revenue recognition until performance obligations have been completed
and collectibility is reasonably assured.

Patents

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

Investment Policy

The primary objective of our investment activities is to preserve principal
while at the same time achieving competitive yields, without significantly
increasing risk. To achieve this objective, we primarily invest in cash and
money market accounts as well as A1 or P1 or higher rated debt securities with
maturities of less than two years, with the weighted average maturity not to
exceed eighteen months. We also attempt to minimize our portfolio risk by
placing constraints on how much of our portfolio may be held in a specific type
of investment such as asset-backed securities or collateralized mortgage
obligations as well as limiting our holdings in any one issuer. At September
30, 2003, our investment portfolio included only cash and money market accounts
and had no fixed-income securities.

Results of Operations

Three months ended September 30, 2003, as compared with three months ended
September 30, 2002.

We had total revenues of $2.0 million in the three months ended September 30,
2003, as compared to $1.7 million in the three months ended September 30, 2002.
In the three months ended September 30, 2003, a $0.4 million increase in
license fees and milestone revenue and a $0.2 million increase in grant and
contract revenue was offset by a $0.4 million decrease in related party
revenue. The increase in license fees and milestone revenue was primarily the
result of the receipt of one-time payments for license fees and milestones
during the three months ended September 30, 2003 under the terms of our
agreement with Anosys, compared to the three months ended September 30, 2002.
The increase in grant and contract revenue in the third quarter of 2003, as
compared to the third quarter of 2002, was the result of an increase in the
number of active grants and contracts from the NIH and the timing of costs
included for reimbursement on those grants and contracts, partially offset by
the completion of work on certain grants. Related party revenue includes
milestone payments, amortization of license fees and contract research and
development funding, as a result of our collaboration with Genencor. The
reduction in related party revenue during the three months ended September 30,
2003, compared to the three months ended September 30, 2002, was primarily due
to the shift in focus from scientific research activities, the part of the
collaboration in which we are most involved, to preclinical development on the
lead program in support of a late 2003 or early 2004 IND filing, as announced
by Genencor, and an increase in the time period during which the license fees
previously paid by Genencor are being amortized due to the extension of the
agreement. The change in the estimated life of the license occurred due to the
extension of the agreement term from September 1, 2003 to September 1, 2004.
The agreement term was extended in October of 2002.

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Research and development expenses decreased to $2.3 million in the three months
ended September 30, 2003 from $2.7 million in the three months ended September
30, 2002. The decrease in the three months ended September 30, 2003 relates
primarily to reduced labor and related costs due to the work force reduction,
lower outside costs related to preclinical activities such as formulation and
toxicology studies for our HIV and lung and colorectal cancer programs which
are now in clinical trials, lower scientific supplies costs related to
completion of preclinical activities, and lower patent and intellectual
property related expenses, partially offset by higher costs associated with
outside research support from the La Jolla Institute for Allergy and Immunology
with whom we contracted on our High Throughput Screening, or HTS, contract with
the NIH.

General and administrative costs were approximately $1.5 million in the three
months ended September 30, 2003 and $0.6 million in the three months ended
September 30, 2002. The increase in the third quarter of 2003 was primarily
due to the recognition of non-cash, stock-based compensation charges in
connection with the prepayment of a promissory note by our CEO in September
2003, other non-cash, stock-based compensation expenses as a result of recent
increases in our stock price, and legal, investment banking, accounting and
other expenses related to our previously proposed merger with Anosys, which has
now been terminated, partially offset by lower consulting and travel expenses.

On September 3, 2003, we announced a reduction of our work force aimed at
reducing our cash burn and focusing our efforts on our most advanced clinical
programs and our sponsored and partnered programs. We reduced our research and
administrative staff by 11 individuals or 23%, which resulted in a one-time
restructuring charge of approximately $344,000 in the three months ended
September 30, 2003. We had no restructuring charges in the corresponding
period ended September 30, 2002.

Net interest income was approximately $0.1 million in the three months ended
September 30, 2003 and in the three months ended September 30, 2002.

Nine months ended September 30, 2003 as compared with nine months ended
September 30, 2002.

In the nine months ended September 30, 2003, we had total revenues of $5.2
million, as compared to $5.5 million in revenue in the nine months ended
September 30, 2002. The decrease in the nine months ended September 30, 2003
relates primarily to a $0.9 million decrease in related party revenue and a
$0.1 million decrease in research grants and contract revenue, offset by a $0.8
million increase in licensing and milestone revenue. The decrease in related
party revenue in the nine months ended September 30, 2003, compared to the nine
months ended September 30, 2002, was primarily due to the shift in focus from
scientific research activities, the part of the collaboration in which we are
most involved, to preclinical development on the lead program in support of a
late 2003 or early 2004 IND filing, as announced by Genencor, lower
non-recurring milestone payments received in 2003 and an increase in the time
period during which the license fees previously paid by Genencor are being
amortized due to the extension of the agreement. The change in the estimated
life of the license occurred due to the extension of the agreement term from
September 1, 2003 to September 1, 2004. The agreement term was extended in
October of 2002. The decrease in grant and contract revenue in the nine months
ended September 30, 2003, as compared to the nine months ended September 30,
2002, was a result of completion of work on certain grants and the timing of
costs to be included for reimbursement on others. The increase in licensing
and milestone revenue in the nine months ended September 30, 2003 was due to
the receipt of one-time payments for license fees and milestones during the
third quarter of 2003 under the terms of our agreement with Anosys, and an
increase in licensing revenue as a result of amortization of evaluation fees
and license fees received from Aventis, IDM, Beckman Coulter, Merck and Amgen
in the current period, compared to the same period in 2002.

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Research and development expenses decreased to $7.7 million in the nine months
ended September 30, 2003, from $8.7 million in the nine months ended September
30, 2002. The decrease in the nine months ended September 30, 2003 relates
primarily to lower outside costs related to preclinical activities such as
formulation and toxicology studies for our HIV and lung and colorectal cancer
programs, which are now
in clinical trials, lower scientific supplies costs related to completion of
preclinical activities, lower patent and intellectual property related
expenses, and reduced labor costs related to the work force reduction,
partially offset by higher costs associated with outside research support
related to our HTS contract with the NIH.

General and administrative costs were approximately $3.2 million in the nine
months ended September 30, 2003 and $2.0 million in the nine months ended
September 30, 2002. The increase in the nine months ended September 30, 2003
was primarily due to the recognition of non-cash, stock-based compensation
charges in connection with the prepayment of a promissory note by our CEO in
September 2003, other non-cash, stock-based compensation expenses as a result
of recent increases in our stock price, and the write off of legal, investment
banking, accounting and other expenses related to our previously proposed
merger with Anosys, which has now been terminated. The increases were
partially offset by a reduction in legal, consulting and other outside costs,
decreases in recruiting and relocation expenses, the timing of accounting fees,
and the reclassification of internal, intellectual property related salaries to
research and development expense.

On September 3, 2003, we announced a reduction of our work force aimed at
reducing our cash burn and focusing our efforts on our most advanced clinical
programs and our sponsored and partnered programs. We reduced our research and
administrative staff by 11 individuals or 23%, which resulted in a one-time
restructuring charge of approximately $344,000 in the nine months ended
September 30, 2003. We had no restructuring charges in the nine months ended
September 30, 2002.

Net interest income was approximately $0.2 million in the nine months ended
September 30, 2003 and $0.5 million in the nine months ended September 30,
2002. Interest income during the nine months ended September 30, 2003 includes
$0.1 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,
compared to $0.3 million of interest on the note for the nine months ended
September 30, 2002. We also had lower average cash balances and rates of
return in the nine months ended September 30, 2003, compared to the nine months
ended September 30, 2002.

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 September 30, 2003, we
had raised approximately $168.0 million in cash from the sale of equity
securities. As of September 30, 2003, we had 15,157,772 shares outstanding on
an as converted to common stock basis, assuming conversion of preferred shares.

As of September 30, 2003, our cash and cash equivalents were $8.1 million
compared to $9.7 million at December 31, 2002. The decrease was primarily due
to cash used for operations. Approximately $0.5 million was used for legal,
investment banking, accounting and other expenses related to our previously
proposed merger with Anosys, which has now been terminated. In addition, we
used approximately $0.4 million for costs related to our work force reduction,
which included payment of severance, accrued vacation and outplacement
services. We expect to continue to use our cash and cash equivalents to fund
our ongoing clinical trials and drug research and development programs.

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Capital expenditures were approximately $0.1 million for the nine months ended
September 30, 2003 compared to $0.7 million for the nine months ended September
30, 2002. The expenditures for the first
nine months 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. We fully paid off our
note payable in the first quarter of 2003, resulting in payments of
approximately $43,000 in the nine months ended September 30, 2003, as compared
to $0.3 million in the nine months ended September 30, 2002. During 2003,
payments related to leasehold improvements and capital expenditures will
decrease compared to 2002 levels to approximately $0.2 million. We will also
pay approximately $0.6 million in rent on our lease commitments during 2003.

Payments related to capitalized patent expenses were approximately $0.6 million
during the nine months ended September 30, 2003, as compared to $0.7 million
during the same period in 2002. The decrease in the nine months ended
September 30, 2003 is due to consolidation of our patent portfolio to limit
administrative redundancies. We expect payments related to patents to decrease
by approximately $0.2 million over the remainder of 2003 compared to 2002 for
similar reasons.

We now expect, as a result of the recent reduction in our work force, to incur
research and development expenditures in 2003 at comparative levels to 2002 in
connection with our ongoing drug research and development programs, including
costs related to preclinical testing, our three Phase I/II clinical trials and
manufacturing. We intend to seek collaborative research and development
relationships with suitable corporate partners and U.S. government agencies
(including seeking grants to fund our research). We continue to attempt to
license to third parties some of our technology in markets that we are not
pursuing ourselves or through our collaborations. In the event these agreements
relate to markets we are not pursuing, any agreements that may result from
these discussions may not successfully reduce our funding requirements or, if
entered into, may be terminated.

In September 2003, we completed a private placement of common stock and
warrants to selected institutional and accredited investors, including current
shareholders. We sold 2,168,961 shares of common stock and warrants to
purchase up to 542,238 shares of common stock, for gross proceeds of $4.05 million.

We also anticipate that costs and expenses for the full year 2003 will be
comparable to 2002 levels. We anticipate using some of our cash in 2003 and
beyond to fund our collaboration with Bavarian Nordic. We will share equally
with Bavarian Nordic in all research related expenses and have included these
anticipated expenditures in our operating expense forecast for 2003 and beyond.
A significant portion of our expenses as well as those of Bavarian Nordic will
be reimbursed under our recently awarded HIV contract from NIH. We will also
become liable in 2003 for payment of license fees of up to $0.1 million.

We anticipate that our existing cash and investments and interest earned
thereon, along with the cash receipts related to existing contracts will enable
us to maintain our current and planned operations through 2004 and into the
second quarter of 2005. We will continue to spend substantial amounts on
research and development, including amounts spent for manufacturing clinical
supplies, conducting clinical trials for our product candidates and advancing
development of certain sponsored and partnered programs. Therefore, we will
need to obtain additional funding. We do not have committed external sources
of funding and may not be able to obtain any additional funding, especially if
volatile market conditions persist for biotechnology companies. If we are
unable to obtain additional funding, we will be required to delay, further
reduce the scope of or eliminate one or more of our research and development
projects, sell the Company or certain of its assets or technologies, or
dissolve and liquidate all of its assets. As of September 30, 2003, we had
approximately $8.1 million in cash and cash equivalents.

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



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

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At September 30, 2003, our investment portfolio included only cash and money
market accounts and had no fixed-income securities. There would be no material
impact to our investment portfolio, in the short term, associated with any
change in interest rates and any decline in interest rates over time will
reduce our interest income, while increases in interest rates over time will
increase our interest income.

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RISK FACTORS

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

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

We will continue to spend substantial amounts on research and development,
including amounts spent for manufacturing clinical supplies, conducting
clinical trials for our product candidates and advancing development of certain
sponsored and partnered programs. Therefore, we will need to obtain additional
funding. We do not have committed external sources of funding and may not be
able to obtain any additional funding, especially if volatile market conditions
persist for biotechnology companies. If we are unable to obtain additional
funding, we will be required to delay, further reduce the scope of or eliminate
one or more of our research and development projects, sell the Company or
certain of its assets or technologies, or dissolve and liquidate all of its
assets. As of September 30, 2003, we had approximately $8.1 million in cash
and cash equivalents. Our future operational and capital requirements will
depend on many factors, including:



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

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

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

In order to continue trading on The NASDAQ National Market, we must comply with
The NASDAQ National Markets continued listing requirements, which require that
we maintain a minimum stockholders equity of $10.0 million and a minimum
closing bid price of $1.00 per share. If we fail to satisfy The NASDAQ
National Markets continued listing requirements, our common stock may be
delisted from The NASDAQ National Market. The delisting of our common stock
may result in the trading of the stock on The NASDAQ SmallCap Market or the OTC
Bulletin Board. Consequently, a delisting of our common stock from The NASDAQ
National Market may reduce the liquidity of our common stock and adversely
affect our ability to raise additional necessary capital.

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

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



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

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| |  |  | the effects our vaccine candidates have may not be the desired
effects or may include undesirable side effects or other
characteristics that preclude regulatory approval or limit their
commercial use if ever approved.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

We have experienced significant operating losses since our inception in 1987.
As of September 30, 2003, we had an accumulated deficit of $156.7 million. We
expect to continue to incur substantial operating expenses and net operating
losses for the foreseeable future, which may hurt our ability to continue
operations. We have not generated revenues from the commercialization of any
product. All of our revenues to date have consisted of contract research and
development revenues, license and milestone payments, research grants, certain
asset divestitures and interest income. We expect that substantially all of our
revenues for the foreseeable future will result from similar sources. To
achieve profitable operations, we, alone or with collaborators, must
successfully identify, develop, register and market proprietary products. We do
not expect to generate revenues from the commercialization of any product for
at least six years (and this would assume approval of either our HIV or lung
and colorectal product candidates, which may not occur). We may not be able to
generate sufficient product revenue to become profitable. Even if we do achieve
profitability, we may not be able to sustain or increase our profitability on a
quarterly or yearly basis.

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

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

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

We are an early stage research and development company, and only commenced our
first Phase I/II clinical trials for two of our vaccines within the past year.
There are many factors outside of our control that may affect the timing of
completion of our current clinical trials, and any future clinical trials may

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not commence when planned or be completed within any anticipated time frame. We
have already experienced unexpected delays in filing an IND for our therapeutic
vaccine candidate targeting HIV, due to additional time necessary to complete
all of the animal safety studies that were contemplated in our
pre-IND discussions with the FDA. We may experience unexpected delays in our
research and development efforts that would require us to postpone the
commencement or completion of clinical trials of other vaccine candidates. The
FDA may comment or raise concerns or questions with respect to any IND that we
file and, therefore, clinical trials may not begin when planned, if at all.

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

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



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

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

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

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

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



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

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

Our vaccines under development address a range of cancer and infectious disease
markets. The competition in these markets is extremely formidable. There are 74
drugs currently approved in the United States for HIV, and according to a PhRMA
2002 report on pharmaceutical drug development, there were 83 new product
candidates in clinical development for HIV and related conditions, including 14
HIV vaccines. In addition, according to a PhRMA 2003 report on pharmaceutical
drug development, there were 395 new product candidates in clinical development
for the treatment of cancer, and at least 33 companies were developing more
than 50 vaccines against various cancers. An important factor in competition
may be the timing of market introduction of our vaccines and competitive
products. Accordingly, the relative speed with which we can develop vaccines,
complete the clinical trials and approval processes and supply commercial
quantities of the vaccines to the market are expected to be important
competitive factors. We expect that competition among products approved for
sale will be based, among other things, on product effectiveness, safety,
reliability, availability, price and patent position.

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our collaborations and license arrangements generally pose the following risks:



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

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

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

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

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

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

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

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

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

We have not completed the development of any product and, accordingly, have not
begun to market or generate revenues from the commercialization of any product.
We do not expect to market any of our therapeutic or prophylactic vaccines or
any other products for at least six years (and this would assume approval of
either our HIV or lung and colorectal product candidate, which may not occur).
If we do not successfully develop and commercialize products, we will never
generate revenues that would allow us to become profitable.

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

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



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

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

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

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

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

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

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



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

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

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

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

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

We are highly dependent on the principal members of our scientific and
management staff. We do not maintain key person life insurance on the life of
any employee and, although we have an employment contract with Dr. Emile Loria,
he may terminate his employment at any time. Our ability to identify epitopes,
develop vaccines and achieve our other business objectives also will depend in
part on the continued service of our key scientific and management personnel
and our ability to identify, hire and

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retain additional qualified personnel.
There is intense competition for qualified personnel in biochemistry, molecular
biology, immunology and other areas of our activities, and we may not be able
to continue to attract and retain such personnel necessary for the development
of our business. Because of the intense competition for qualified personnel
among technology-based businesses, particularly in the San Diego area, we may
not be successful in adding technical personnel as needed to meet the staffing
requirements
of additional collaborative relationships. Our failure to attract and retain
key personnel could delay or be significantly detrimental to our product
development programs and could cause our stock price to decline.

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

We have licensed to third parties some of our technology in markets that we are
not pursuing ourselves or with our collaborators. If these licensees are not
successful in developing and commercializing products using our technology, our
revenues would be limited. Our licensees may pursue alternative technologies or
develop alternative products either on their own or in collaboration with
others in competition with products developed under licenses or collaborations
with us.

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

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

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

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

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

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

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

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

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

The market prices for securities of biotechnology companies, including our
common stock, have historically been highly volatile, and the market from time
to time has experienced significant price and volume fluctuations that are not
necessarily related to the operating performance of such companies. In the year
2003, our closing stock price has ranged from $0.760 to $3.166 and has been and
will continue to be influenced by general market and industry conditions. In
addition, the following factors may have a significant effect on the market
price of our common stock:



| |  |  | whether we are able to secure additional financing on favorable
terms, or at all;                                   
| | - |  | --------------------------------------------------------------------------------------------------------------------
|
| |  |  | announcements of technological innovations or new commercial
vaccines or other therapeutic products by us or others;
|
| |  |  | governmental regulation that affects the biotechnology and pharmaceutical industries;                               
|
| |  |  | developments in patent or other proprietary rights;                                                                 
|
| |  |  | receipt of funding under collaboration and license agreements and government grants;                                
|
| |  |  | developments in, or termination of, our relationships with our collaborators and licensees;                         
|
| |  |  | public concern as to the clinical results and/or the safety of
drugs developed by us or others; and                 
|
| |  |  | announcements related to the sale of our stock.                                                                     

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

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

As of September 30, 2003, our officers, directors and those stockholders owning
at least five percent of our outstanding stock together control approximately
57.2% of our outstanding common stock as converted and Pharmacia, now part of
Pfizer, holds 100% of our preferred stock. If some or all of these officers,
directors and principal stockholders act together, they will be able to exert a
significant degree of influence over our management and affairs and over
matters requiring stockholder approval, including the election of directors and
approval or disapproval of any proposed merger or financing or other business
combination transaction. The interests of this concentration of ownership may
not always coincide with our interests or the interests of other stockholders.
For instance, officers, directors and principal stockholders, acting together,
could cause us to enter into transactions or agreements that we would not
otherwise consider. Similarly, this concentration of ownership may have the
effect of delaying or preventing a change in control of our company otherwise
favored by our other stockholders. This concentration of ownership also could
depress our stock price.

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ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted
an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined under Rule
13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended, as
of September 30, 2003. Based on their evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures are effective as of the evaluation date.

(b) Changes in Internal Controls

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

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PART 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On September 18, 2003, pursuant to a Unit Purchase Agreement dated September
18, 2003, we completed a private placement of common stock and warrants to
selected institutional and accredited investors, including current
shareholders. We sold 2,168,961 shares of our common stock and warrants to
purchase 542,238 shares of our common stock at a combined unit price of
$1.86725 per unit. Each unit consisted of one share of common stock and a
warrant to purchase 25% of one share of our common stock. In addition, we
issued warrants to purchase an aggregate of 250,000 shares of our common stock
to a placement agent, Jefferies & Company, Inc., for services rendered in
connection with the private placement. The warrants issued in the private
placement, including the warrant issued to the placement agent, are exercisable
at any time in whole or in part until September 17, 2006 at an exercise price
of $2.33406 per share. The exercise price of the warrants and the number of
shares issuable upon exercise of the warrants are subject to adjustment upon
the subdivision, split or combination of shares of our common stock and the
issuance of dividends in the form of common stock. We issued the common stock
and the warrants to the purchasers in the private placement and the warrants to
the placement agent in reliance on the exemption from registration permitted
under Section 4(2) or Regulation D of the Securities Act of 1933, as amended,
based on investment representations made by each such purchaser and the
placement agent. We have filed a registration statement under the Securities
Act to permit registered resales of the common stock and the common stock
issuable upon exercise of the warrants issued to the purchasers and to the
placement agent, which became effective on October 21, 2003.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits
| | --- |  | --------

| |  |               |  |                                                                                                                                                 
| |  | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Exhibit 10.51 |  | Termination of Amendment to Letter Agreement between
Epimmune and Dr. Emile Loria dated September 8, 2003.                                      
| |  |               |  |                                                                                                                                                 
| |  | Exhibit 31    |  | Certification pursuant to Section 302 of the Public
Company Accounting Reform and Investor Protection Act of 2002
(18 U.S.C. § 1350, as adopted)
| |  |               |  |                                                                                                                                                 
| |  | Exhibit 32    |  | Certification pursuant to Section 906 of the Public
Company Accounting Reform and Investor Protection Act of 2002
(18 U.S.C. § 1350, as adopted)
| |  |               |  |                                                                                                                                                 



| | (b) |  | Reports on Form 8-K during the second quarter ended September 30, 2003
| | --- |  | ----------------------------------------------------------------------

| |  |  |    |   |  |                                                                                                                                                    
| |  |  | -- | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 1. | ) |  | The Company filed a Report on Form 8-K on August
13, 2003 announcing that the merger agreement between the
Company and Anosys, Inc. was terminated.
| |  |  |    |   |  |                                                                                                                                                    
| |  |  | 2. | ) |  | The Company filed a Report on Form 8-K on August
14, 2003 announcing its financial results for the second
quarter ended June 30, 2003.             
| |  |  |    |   |  |                                                                                                                                                    
| |  |  | 3. | ) |  | The Company filed a Report on Form 8-K on
September 3, 2003 providing an update on its clinical trials
and announcing a work force reduction.      
| |  |  |    |   |  |                                                                                                                                                    
| |  |  | 4. | ) |  | The Company filed a Report on Form 8-K on
September 19, 2003 announcing the completion of a private placement
of common stock and warrants.        

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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: November 10, 2003 |  | By:           |  | /s/ Emile Loria                                                                                                                                         
|                        |  |               |  |                                                                                                                                                         
|                        |  |               |  | Emile Loria, M.D.
President, Chief Executive Officer and Director                                                                                       
|                        |  |               |  |                                                                                                                                                         
|Date: November 10, 2003 |  | By:           |  | /s/ Robert J. De Vaere                                                                                                                                  
|                        |  |               |  |                                                                                                                                                         
|                        |  |               |  | Robert J. De Vaere
Vice President, Finance and Administration,
Chief Financial Officer, Assistant Secretary
(Principal Financial and Accounting Officer)

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