<PAGE>   1
                                  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, 1999,

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

                                 Yes [X] No [ ]

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

Common Stock: $.01 par value 6,035,136 shares outstanding as of October 31,
1999.
<PAGE>   2
                                  EPIMMUNE INC.
                                QUARTERLY REPORT
                                    FORM 10-Q

                                TABLE OF CONTENTS

<TABLE>
<S>                                                                                    <C>
COVER PAGE ............................................................................   1

TABLE OF CONTENTS .....................................................................   2

PART I. FINANCIAL INFORMATION

           ITEM 1. Financial Statements

                   Condensed Consolidated Balance Sheets as of
                   September 30, 1999 and December 31, 1998 ...........................   3

                   Condensed Consolidated Statements of Operations
                   for the Three and Nine Months Ended September 30, 1999
                   and 1998 ...........................................................   4

                   Condensed Consolidated Statements of Cash Flows
                   for the Nine Months Ended September 30, 1999 and 1998 ..............   5

                   Notes to Condensed Consolidated Financial Statements ...............   6

           ITEM 2. Management's Discussion and Analysis of Financial
                   Condition and Results of Operations ................................   9

           ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..........   *

PART II. OTHER INFORMATION

           ITEM 1. Legal Proceedings ..................................................   *

           ITEM 2. Changes in Securities and Use of Proceeds ..........................  20

           ITEM 3. Defaults upon Senior Securities ....................................   *

           ITEM 4. Submission of Matters to a Vote of Security Holders ................  20

           ITEM 5. Other Information ..................................................   *

           ITEM 6. Exhibits and Reports on Form 8-K ...................................  21

           SIGNATURE ..................................................................  22
</TABLE>

*  NO INFORMATION PROVIDED DUE TO INAPPLICABILITY OF ITEM.


                                       2
<PAGE>   3
PART I.  FINANCIAL INFORMATION
ITEM I.  FINANCIAL STATEMENTS

                                  EPIMMUNE INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                         SEPTEMBER 30,     DECEMBER 31,
                                                                             1999              1998
                                                                         -------------     ------------
                                                                          (unaudited)
<S>                                                                      <C>               <C>
ASSETS
Current assets:
   Cash and cash equivalents                                               $   3,065         $   2,594
   Short-term investments                                                      6,731             9,217
   Prepaids and other current assets                                             571             1,657
                                                                           ---------         ---------
     Total current assets                                                     10,367            13,468

Restricted short-term investment                                                 472               472
Property and equipment, net                                                      826             2,879
Patents and other assets                                                       2,044             4,211
                                                                           ---------         ---------
     Total assets                                                          $  13,709         $  21,030
                                                                           =========         =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued liabilities                                $     958         $   2,289
   Deferred contract revenues                                                     --               515
   Accrued restructuring cost                                                  1,522                --
   Accrued payroll and related expenses                                          202               416
   Current portion of obligations under equipment
    loans and notes payable                                                      250               493
                                                                           ---------         ---------
     Total current liabilities                                                 2,932             3,713

Equipment loans and notes payable                                                479             1,606
Deferred rent                                                                     37                --

Commitments

Minority interest in consolidated subsidiary                                      --             1,735

Stockholders' equity:
   Preferred stock, $.01 par value, 10,000,000 shares authorized,
     1,409,288 shares and 659,898 issued and outstanding at
     September 30, 1999 and December 31, 1998, respectively                       14                 7
   Common stock, $.01 par value, 25,000,000 and 75,000,000
     shares authorized at September 30, 1999 and December 31, 1998,
     respectively; 6,035,136 shares and 4,987,453 shares issued and
     outstanding at September 30, 1999 and December 31, 1998,
     respectively                                                                 60                50
   Warrants outstanding                                                          258                --
   Additional paid-in capital                                                147,131           142,642
   Accumulated deficit                                                      (137,153)         (128,723)
   Unrealized (loss) on available-for-sale securities                            (49)               --
                                                                           ---------         ---------
Total stockholders' equity                                                    10,261            13,976
                                                                           ---------         ---------
                                                                           $  13,709         $  21,030
                                                                           =========         =========
</TABLE>

See accompanying notes.


                                       3
<PAGE>   4
                                  EPIMMUNE INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED SEPT. 30,         NINE MONTHS ENDED SEPT. 30,
                                      -----------------------------       -----------------------------
                                         1999              1998              1999              1998
                                      -----------       -----------       -----------       -----------
<S>                                   <C>               <C>               <C>               <C>
REVENUES
Milestone                             $     2,000       $        --            $2,000       $        --
Research and development                      462             1,774             1,865             2,751
                                      -----------       -----------       -----------       -----------
    Total revenues                          2,462             1,774             3,865             2,751

COSTS AND EXPENSES:
Research and development                    1,597             5,690             7,911            14,092
General and administrative                    519               885             2,108             3,497
Restructuring costs                            --                --             3,700                --
Write-off of in-process
   technology                               3,154                --             3,154                --
                                      -----------       -----------       -----------       -----------
   Total costs and expenses                 5,270             6,575            16,873            17,589

Loss from operations                       (2,808)           (4,801)          (13,008)          (14,838)

Minority interest in net loss of
   consolidated subsidiary                     --               136               523               281
Interest income, net                           93               213               287               752
Other income                                   --                --               550                --
Gain (loss) on disposal of
   assets                                     (93)               --             3,218                --
                                      -----------       -----------       -----------       -----------
Net loss                              $    (2,808)      $    (4,452)      $    (8,430)      $   (13,805)
                                      ===========       ===========       ===========       ===========
Net loss per share -
   basic and diluted                  $     (0.47)      $     (0.91)      $     (1.58)      $     (2.91)
                                      ===========       ===========       ===========       ===========
Shares used in computing
  net loss per share - basic and
  diluted                               6,026,747         4,868,482         5,342,401         4,740,123
                                      ===========       ===========       ===========       ===========
</TABLE>

See accompanying notes.


                                       4
<PAGE>   5
                                  EPIMMUNE INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (UNAUDITED) (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                    NINE MONTHS ENDED
                                                                                      SEPTEMBER 30,
                                                                                 -----------------------
                                                                                   1999           1998
                                                                                 --------       --------
<S>                                                                              <C>            <C>
OPERATING ACTIVITIES
Net loss                                                                         $ (8,430)      $(13,805)
Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization                                                    446            597
     Deferred rent                                                                     37           (225)
     Deferred revenue                                                                (515)           (78)
     Gain on disposal of assets                                                    (3,233)           (30)
     Minority interest in consolidated subsidiary                                    (523)          (281)
     Restructuring operating expenses                                              (1,524)            --
     Write-off of in-process technology                                             3,154             --
     Accrued restructuring costs                                                    3,700             --
     Net change in operating assets and liabilities; net of divestitures:
       Other current assets                                                           469           (213)
       Accounts payable and accrued liabilities                                    (1,463)         1,337
       Accrued payroll and related expenses                                          (214)           (33)
                                                                                 --------       --------
Net cash used in operating activities                                              (8,096)       (12,731)

INVESTING ACTIVITIES
Purchases of available-for-sale securities                                         (2,087)       (14,981)
Sales of available-for-sale securities                                              4,524         18,515
Proceeds from the sale of property and equipment                                    3,681            204
Proceeds from the sale of patents (net of fees)                                     3,035             --
Expenditures related to early lease termination                                        --           (226)
Purchase of property and equipment                                                   (704)        (1,862)
Patents                                                                              (126)          (812)
Deposits and other assets                                                              10            160
Repayment of note                                                                     519             --
                                                                                 --------       --------
Net cash provided by investing activities                                           8,852            998

FINANCING ACTIVITIES
Principal payments under equipment notes payable and note
   payable to bank                                                                   (939)        (1,099)
Restricted cash released as note payable collateral                                    --          1,031
Proceeds from the issuance of equipment notes payable                                 510          1,197
Net proceeds from issuance of preferred stock                                          --          9,700
Net proceeds from issuance of common stock, net of fees                               144          2,694
                                                                                 --------       --------
Net cash (used in) provided by financing activities                                  (285)        13,523

Increase in cash and cash equivalents                                                 471          1,790
Cash and cash equivalents at beginning of year                                      2,594          6,187
                                                                                 --------       --------
Cash and cash equivalents at end of period                                       $  3,065       $  7,977
                                                                                 ========       ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid                                                                    $     97       $     96
                                                                                 ========       ========

DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Unrealized gains (losses) on available-for-sale securities                       $     49       $     32
                                                                                 ========       ========
Issued common stock for non-exclusive license agreement for
   patent rights                                                                 $     --       $    900
                                                                                 ========       ========
Early lease termination - net debt extinguishment and asset
   abandonment                                                                   $     --       $    152
                                                                                 ========       ========
Asset write down in accrued restructuring charge                                 $    587       $     --
                                                                                 ========       ========
Assumption of debt                                                               $    838       $     --
                                                                                 ========       ========
Exchange of common and preferred stock                                           $  3,096       $     --
                                                                                 ========       ========
</TABLE>

See accompanying notes


                                       5
<PAGE>   6
                                  EPIMMUNE INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               SEPTEMBER 30, 1999

1.    BASIS OF PRESENTATION

      The interim unaudited condensed consolidated financial statements
contained herein have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In management's
opinion, the unaudited information includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented.
Interim results are not necessarily indicative of results to be expected for the
full year. The financial statements should be read in conjunction with the
audited consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the year ended December 31, 1998.

      Unless otherwise indicated, all references to "Cytel" are to Cytel
Corporation, all references to "Epimmune" are to Epimmune Inc., Cytel's
majority-owned subsidiary, until July 1, 1999, at which time Cytel and Epimmune
merged, and all references to the "Company" are to the combined entity of Cytel
and Epimmune.

      On July 1, 1999, the Company completed a series of transactions (the
"Exchange Transactions") in which it (i) transferred all of the outstanding
shares of Epimmune's Series B-1 Preferred Stock then held by Cytel to G.D.
Searle & Co. ("Searle") in exchange for all of the outstanding shares of Cytel's
Series B Preferred Stock, (ii) issued 859,666 shares of Cytel's Series S
Preferred Stock and 549,622 shares of Cytel's Series S-1 Preferred Stock to
Searle in exchange for all outstanding shares of Epimmune's Series B Preferred
Stock and Series B-1 Preferred Stock and (iii) issued a total of 1,027,782
shares of Cytel's Common Stock to the holders of Common Stock of Epimmune in
exchange for all outstanding shares of Epimmune's Common Stock. The acquisition
of the minority interest in Epimmune, through the exchange transaction, was
accounted for as a purchase. The Company recorded the minority interest at its
fair market value, and determined that the excess of the purchase price over the
identifiable net assets of $3.2 million was in-process technology. The Company
prepared a discounted cash flow analysis to determine the fair value of the
in-process technology and, based on this analysis, recorded a charge to
operations of approximately $3.2 million for this excess value of the shares
issued over identifiable net assets. Following the Exchange Transactions, Searle
held approximately 23% of all of the outstanding capital stock of the Cytel.
Following the Exchange Transactions, Cytel held all of the outstanding shares of
Common Stock and Preferred Stock of, and merged with, Epimmune, with Cytel
remaining as the surviving entity (the "Merger"). In connection with Merger,
Cytel assumed the outstanding options to purchase approximately 423,000 shares
of the Common Stock of Epimmune and Cytel changed its name from Cytel
Corporation to Epimmune Inc.

      In July 1999, the Company issued warrants to purchase an aggregate of
241,004 shares of Common Stock with an exercise price of $1.875 to Virgil
Thompson, former President and Chief Executive Officer of Cytel, and Robert L.
Roe, former Chief Operating Officer of Cytel. The warrants were issued in
connection with severance agreements with such former officers. The Company
recorded the fair value of the warrants issued as compensation expense within
the previously recorded restructuring charge.


                                       6
<PAGE>   7
      Prior year condensed consolidated financial statements include the
accounts of Cytel and its majority-owned subsidiary Epimmune. Current year
condensed consolidated financial statements include Cytel accounts prior to the
Merger with revenues of $.5 million, costs and expenses of $7.6 million, and
other non-operating income of $3.8, resulting in a net loss of $3.3 million. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The minority interest calculation was based on the average
quarterly third parties' ownership in Epimmune.

      A one-for-seven reverse split of Cytel's common stock was effected on
November 13, 1998. The reverse split was approved by Cytel's Board of Directors
on November 2, 1998 pursuant to authority granted to the Board of Directors by
Cytel's stockholders at a special meeting held on October 30, 1998. All common
share balances and net loss per share amounts presented in these financial
statements have been retroactively adjusted to reflect the reverse stock split.

      Basic and diluted net loss per share is computed using the weighted
average number of common shares outstanding during the period. All potential
common shares have been excluded from the diluted net loss per share
calculations as they are antidilutive.

2.    RESULTS OF CYLEXIN CLINICAL TRIAL

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

      Based on the determination to terminate Cytel's businesses and focus
future operations on Epimmune, Cytel recorded a restructuring charge of $3.7
million in the first quarter 1999. The accrued restructuring charge includes the
following (in thousands):

<TABLE>
<CAPTION>
                                                               September 30,      March 31,
                                                                    1999            1999
                                                               -------------      ---------
<S>                                                            <C>                <C>
Minimum commitments for lease facilities                           $  921          $1,200
Employee severance                                                     71             827
Exit costs of operations                                               --             628
Write-down to fair value for certain assets held for sale              --             575
Other loss contingencies                                              530             470
                                                                   ------          ------
Accrued restructuring costs                                        $1,522          $3,700
                                                                   ======          ======
</TABLE>

3.    SALE OF THE GLYTEC CARBOHYDRATE SYNTHESIS AND MANUFACTURING BUSINESS

      In the first quarter of 1999, Cytel completed the sales of its Glytec
carbohydrate synthesis and manufacturing business, including the sale of fixed
assets and intellectual property, and assignment of certain liabilities and
transfer of certain personnel relating to the business. The sales of the fixed
and intangible assets of this business raised approximately $6.2 million, net of
fees. Cytel recorded a gain of approximately $3.3 million in connection with the
two transactions, as discussed further below.


                                       7
<PAGE>   8
      On February 28, 1999, Cytel licensed its proprietary carbohydrate
synthesis and manufacturing intellectual property assets to Baxter Healthcare
Corporation's Nextran unit ("Nextran") for exclusive use in xenotransplantation.
Cytel received total consideration of $4.0 million, of which $3.2 million was
cash and $0.8 million assignment of certain liabilities to Nextran.
Additionally, Nextran assumed the facility lease and certain personnel and fixed
assets related to this manufacturing operation.

      On March 26, 1999, Cytel sold the remainder of its Glytec carbohydrate
synthesis and manufacturing intellectual property assets to Neose Technologies,
Inc. ("Neose"). Neose paid Cytel $3.5 million cash and paid an additional $1.5
million into escrow, the release of which is conditioned on the Company's
satisfaction of certain matters relating to the patents and licenses acquired by
Neose. Neose may pay the Company up to an additional $1.6 million contingent on
potential payments and revenues realized by Neose in connection with certain
future corporate collaborations. The Company has recorded the gain relating to
the initial cash consideration and will record subsequent gains as they are
realized, if at all.

4.    G.D. SEARLE & CO. COLLABORATION

      In February 1998, Epimmune entered into a collaborative agreement with
Searle to develop immune-stimulating products for the treatment of cancer. Under
the terms of the agreement Searle will make milestone payments to Epimmune upon
the achievement of certain preclinical and clinical milestones. In August 1999,
the Company received a $2.0 million milestone payment as a result of Searle's
acceptance of a lead product candidate for breast, lung and colon cancers.

               THIS PORTION OF THE PAGE LEFT INTENTIONALLY BLANK.


                                       8
<PAGE>   9
PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

       Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, without limitation, those discussed below under "Risks and
Uncertainties" and those discussed in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998. The Company undertakes no
obligation to release publicly the results of any revisions to these forward
looking statements to reflect events or circumstances arising after the date
hereof.

      Unless otherwise indicated, all references to "Cytel" are to Cytel
Corporation, all references to "Epimmune" are to Epimmune Inc., a majority-owned
subsidiary of Cytel until July 1, 1999, at which time Cytel and Epimmune merged,
and all references to the "Company" are to the combined entity of Cytel and
Epimmune.

      On July 1, 1999, the Company completed a series of transactions (the
"Exchange Transactions") in which it (i) transferred all of the outstanding
shares of Epimmune's Series B-1 Preferred Stock then held by Cytel to G.D.
Searle & Co. ("Searle") in exchange for all of the outstanding shares of Cytel's
Series B Preferred Stock, (ii) issued 859,666 shares of Cytel's Series S
Preferred Stock and 549,622 shares of Cytel's Series S-1 Preferred Stock to
Searle in exchange for all outstanding shares of Epimmune's Series B Preferred
Stock and Series B-1 Preferred Stock and (iii) issued a total of 1,027,782
shares of Cytel's Common Stock to the holders of Common Stock of Epimmune in
exchange for all outstanding shares of Epimmune's Common Stock. The acquisition
of the minority interest in Epimmune, through the exchange transaction, was
accounted for as a purchase. The Company recorded the minority interest at its
fair market value, and determined that the excess of the purchase price over the
identifiable net assets of $3.2 million was in-process technology. The Company
prepared a discounted cash flow analysis to determine the fair value of the
in-process technology and, based on this analysis, recorded a charge to
operations of approximately $3.2 million for this excess value of the shares
issued over identifiable net assets.

Following the Exchange Transactions, Searle held approximately 23% of all
of the outstanding capital stock of the Cytel. Following the Exchange
Transactions, Cytel held all of the outstanding shares of Common Stock and
Preferred Stock of Epimmune and merged with its subsidiary, Epimmune Inc., with
Cytel remaining as the surviving entity (the "Merger"). In connection with
Merger, Cytel assumed the outstanding options to purchase approximately 423,000
shares of the Common Stock of Epimmune and Cytel changed its name from Cytel
Corporation to Epimmune Inc.

      Since its inception in July 1987, the Company has devoted substantially
all of its resources to the discovery and development of its potential
therapeutic products. To date, the Company has not received any revenues from
the sale of products. The Company has funded its research and development
primarily from equity-derived working capital and through strategic alliances
with other companies. The Company has been unprofitable since its inception and
expects to incur substantial operating losses for the next several years. As of
September 30, 1999, the Company's accumulated deficit was approximately $137.2
million.

      In the first quarter of 1999, Cytel completed the sales of its Glytec
carbohydrate synthesis and manufacturing business resulting in net proceeds of
approximately $6.2 million (see Note 3 in the Condensed Consolidated Financial
Statements). In addition, Cytel announced the results from the Cylexin Phase
II/III clinical trial which indicated that Cylexin, Cytel's lead therapeutic
compound, showed no benefit over the placebo. Accordingly, Cytel terminated its
therapeutic anti-inflammatory business and, as


                                       9
<PAGE>   10
a result, Cytel recorded a restructuring charge of $3.7 million in the first
quarter 1999 (see Note 2 in the Condensed Consolidated Financial Statements).
The Company is now focused exclusively on the development of therapeutic and
prophylactic vaccines for cancer and infectious diseases.

LIQUIDITY AND CAPITAL RESOURCES

      The following discussion reflects financial information for Cytel and
Epimmune on a consolidated basis.

      The Company has financed operations since inception primarily through
private placements of its equity securities, two public common stock offerings,
revenues under collaborative research and development agreements, grant
revenues, certain asset divestitures and interest income. Through September
1999, the Company has raised approximately $145.1 million from the sale of
equity securities. The Company has financed its laboratory equipment and its
research and office facility primarily through operating lease arrangements and
a note payable.

      As of September 30, 1999, the Company had cash, cash equivalents,
restricted cash and short-term investments of $10.3 million as compared to $12.3
million at December 31, 1998. The decrease was primarily due to cash used for
Epimmune operations and payment of liabilities associated with the wind-down of
Cytel operations, partially offset by net proceeds of $6.2 million from the sale
of Glytec discussed above, the sale of certain other Cytel assets totaling $0.5
million, and the receipt of a $2.0 million milestone payment from Searle. The
Company's cash, its cash equivalents and short-term investments are expected to
decline primarily due to Epimmune's ongoing vaccine research programs. The
Company had net working capital of $7.4 million as of September 30, 1999
compared to $9.8 million as of December 31, 1998.

      For the nine months ended September 30, 1999, the capital expenditures of
the Company totaled $0.7 million as compared to $1.9 million for the first nine
months of 1998. Capital expenditures during the nine months ended September 30,
1999 were primarily for furniture and leasehold improvements for the new
laboratory and office facility which was completed in April 1999. Capital
expenditures during the same period ended September 30, 1998 were primarily for
manufacturing and laboratory equipment additions for Cytel's Glytec carbohydrate
manufacturing facility. The Company has since sold its Glytec carbohydrate
synthesis and manufacturing business, terminated its anti-inflammatory
therapeutic business, and sold all remaining Cytel fixed assets in June 1999.
Future capital expenditures will be in support of the Company's vaccine
business.

      During the nine months ended September 1999, the Company raised
approximately $6.7 million, net of fees, through the sale of Cytel's Glytec
carbohydrate synthesis and manufacturing business and the disposal of certain
fixed assets and intellectual property.

      In August 1998, Epimmune entered into a $0.7 million term credit facility
with Silicon Valley Bank to provide secured financing for future laboratory,
office and tenant improvement additions. This line of credit was fully utilized
as of September 1999 and has a three (3) year repayment term. In November 1998,
Epimmune entered into a 10-year lease related to the construction of a new
laboratory and office facility, which was completed and occupied in April 1999.
The minimum rental commitment for this facility ranges from approximately
$520,000 to $658,000 per year.


                                       10
<PAGE>   11
      The Company believes that its available cash, cash equivalents, marketable
securities and existing sources of funding will be adequate to satisfy its
anticipated capital requirements through December 31, 2000. The estimate for the
period for which the Company expects its available cash balances and existing
sources of funding to be sufficient to meet its capital requirements is a
forward-looking statement that involves risks and uncertainties as set forth
herein and in the Company's Form 10-K for the year ended December 31, 1998.

RESULTS OF OPERATIONS

      Three months ended September 30, 1999 ("1999"), as compared with three
months ended September 30, 1998 ("1998").

      The Company had total revenues of $2.5 million for 1999, as compared to
$1.8 million in 1998. Revenues generated in the third quarter of 1999 were from
the collaborative agreement with Searle and grant revenues. Total revenues in
the corresponding period of 1998 were generated primarily by Cytel's sublicense
and option agreement with Elan International Services, Ltd. ("Elan") and grant
revenues.

      In 1999, research and development expenses decreased to $1.6 million from
$5.7 million in 1998. The decrease was due to the wind-down of Cytel operations
partially offset by increased research expenditures at Epimmune. General and
administrative expenses decreased to $0.5 million in 1999 from $0.9 million in
1998. The decrease was due to the wind-down of Cytel operations partially offset
by increased general and administrative personnel at Epimmune.

      In 1999, the Company charged to operations $3.2 million for the write-off
of in-process technology related to the acquisition of the minority interest.
The charge was based upon a discounted cash flow analysis prepared to determine
the fair value of the excess of purchase price over the identifiable assets
recorded as a result of the Merger.

      Net interest income was $0.1 million in 1999 compared to $0.2 million in
1998. The decrease was due to a lower average cash balance.

      Loss on disposal of assets of $0.1 million in 1999 was due to the
write-off of leasehold improvements from the early termination of a facility
lease.

      Nine months ended September 30, 1999 ("1999"), as compared with nine
months ended September 30, 1998 ("1998").

      The Company had total revenues of $3.9 million for 1999, compared to $2.8
million in 1998. Total revenues for 1999 were from collaborative agreements with
Searle and Baxter Healthcare Corporation's Nextran unit and grant revenues.
Total revenues for 1998 were from the sublicense and option agreement with Elan
and grant revenues.

      In 1999, research and development expenses decreased to $7.9 million from
$14.1 million in 1998. The decrease was due to the wind-down of Cytel operations
partially offset by increased research expenditures at Epimmune. General and
administrative expenses decreased to $2.1 million in 1999 from $3.5 million in
1998, due to termination of Cytel operations partially offset by increases in
general and administrative personnel at Epimmune.

      The restructuring charge of $3.7 million recorded in 1999 relates to the
termination of the Company's non-Epimmune operations. The Company also recorded
a gain of $3.3 million on disposal of assets related to the sale of Cytel's
Glytec carbohydrate synthesis and manufacturing business, offset by the write
off of leasehold improvements of $0.1 million.


                                       11
<PAGE>   12
      In 1999, the Company charged to operations $3.2 million for the write-off
of in-process technology related to the acquisition of the minority interest.
The charge was based upon a discounted cash flow analysis prepared to determine
the fair value of the excess of purchase price over the identifiable assets
recorded as a result of the Merger.

      Net interest income was $0.3 million in 1999 compared to $0.8 million in
1998. The decrease was due to a lower average cash balance.

      Other income in 1999 includes $0.5 million from Elan in consideration of
the buyout of certain future milestone obligations by Elan, and $.05 million
from the sale of certain patents and related technology rights to Abaron
Biosciences, Inc.

Future Capital Needs

      The Company expects to incur operating losses over the next several years
due to continuing expenses associated with its 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.

      The Company expects to incur substantial additional research and
development expenditures, including costs related to preclinical testing,
clinical trials and manufacturing, as well as marketing and distribution
expenses. It is the Company's intention to seek additional collaborative
research and development relationships with suitable corporate partners. There
can be no assurance that any agreements that may result from these discussions
will successfully reduce the Company's funding requirements. Additional equity
or debt financing will be required, and there can be no assurance that these
funds will be available on favorable terms, if at all. If adequate funds are not
available, the Company may be required to delay, scale back or eliminate one or
more of its drug discovery or development programs or obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, product candidates or
products that the Company would not otherwise relinquish.

      The Company's future capital requirements depend on many factors,
including continued scientific progress in its drug discovery programs, the
magnitude of these programs, progress with preclinical testing and clinical
trials, the time and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, changes in the existing collaborative
research relationships, the ability of the Company to establish and maintain
development arrangements, the cost of manufacturing scale-up and effective
commercialization activities and arrangements.

      As is typical in the biotechnology industry, the commercial success of the
Company will depend in part on the Company neither infringing patents issued to
competitors nor breaching the technology licenses upon which the Company's
products might be based. The Company's business is also subject to other
significant risks, including the uncertainties associated with the lengthy
regulatory approval process and with potential competition from other products.
Even if the Company's 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 the Company's inability to fund clinical
development of such products, or the possibilities that the potential products
will be found ineffective during clinical trials, fail to receive necessary
regulatory approvals, be difficult to manufacture on a large scale, or be
uneconomical to market.


                                       12
<PAGE>   13
YEAR 2000

      Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with year 2000
requirements. The impact of the year 2000 issue may affect other systems that
utilize imbedded computer chip technology, including building controls, security
systems or laboratory equipment. It may also impact the ability to obtain
products or services if the provider encounters and fails to resolve year 2000
related problems.

      In 1999, the Company established an active program to identify and resolve
year 2000 related issues. This program includes the review and assessment of the
Company's information technology and non-information technology systems, as well
as third parties with whom the Company has material relationships. This program
consists of four phases: inventory, risk assessment, problem validation and
problem resolution. The inventory phase identified potential risks we face. They
include among others computer software, computer hardware, telecommunications
systems, laboratory equipment, facilities systems (security, environment
control, alarm), service providers, and other third parties. The risk assessment
phase categorizes and prioritizes each risk by its potential impact. The problem
validation phase tests each potential risk, according to priority, to determine
if an action risk exists. In the case of critical third parties, this step will
include a review of their year 2000 plans and activities. The problem resolution
phases will, for each validated risk, determine the method/strategy for
alleviating the risk. It may include anything from replacement of hardware or
software to process modification to selection of alternative vendors. This step
also includes the development of contingency plans.

      The inventory and risk assessment phases were completed in second calendar
quarter 1999. The problem validation phase, except for evaluating specific
pieces of research equipment, was completed in the third calendar quarter of
1999. The Company expects to complete the last portion of the problem validation
and resolution phase in the fourth calendar quarter of 1999. Contingency plans
are being developed. The Company expects to have those plans completed in the
fourth quarter 1999.

      The Company is actively correcting problems as they are identified. These
corrections include the replacement of hardware and software systems, the
identification of alternative service providers and the creation of contingency
plans. The Company currently estimates that the cost of identified problems will
be approximately $130,000 for hardware and software upgrades or modifications.
In addition, the Company will incur approximately $10,000 of internal personnel
costs to complete the remaining phases of the project. The Company does not
believe that the costs of these actions will have a material adverse effect on
its business. The Company expects to be able to resolve any problems identified
of the project as part of normal operating expenses.

      Any failure to be year 2000 compliant within the Company's internal
computer systems or of third party equipment or software it uses, or of systems
maintained by its suppliers, may adversely affect the Company's business.


                                       13
<PAGE>   14
RISKS AND UNCERTAINTIES

      The Company wishes to caution readers that the following important
factors, among others, in some cases have affected the Company's results and in
the future could cause actual results and needs of the Company to vary
materially from forward-looking statements made from time to time by the Company
on the basis of management's then-current expectations. The business in which
the Company is 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.

      Future Capital Needs; Uncertainty of Additional Funding. As of September
30, 1999, the Company had $10.3 million in cash, cash equivalents, restricted
cash and short-term investments. The Company's future capital requirements will
depend on many factors, including: the ability of the Company to establish and
maintain collaborative arrangements; progress with preclinical testing and
clinical trials; the time and costs involved in obtaining regulatory approvals;
the costs involved in filing, prosecuting and enforcing patent claims; competing
technological and market developments; changes in its existing research
relationships; continued scientific progress in its drug discovery programs; the
magnitude of these programs; the cost of manufacturing scale-up; and effective
commercialization activities and arrangements. The Company intends to seek
additional funding through collaborative arrangements or equity or debt
financings. If additional financing is not available, the Company anticipates
its existing available cash, cash equivalents, restricted cash and short-term
investments will be adequate to fund its operations through December 31, 2000.
The estimate for the period for which the Company expects its available cash
balances, investment income and estimated cash flow from collaborative
agreements and research grants to be sufficient to meet its capital requirements
is a forward-looking statement that involves risks and uncertainties as set
forth herein and in Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Report on Form 10-Q.
There can be no assurance that any financing or transaction through which the
Company seeks to obtain additional funding will be available on favorable terms,
if at all, or that any collaboration agreements to which the Company is or may
become a party will successfully reduce the Company's funding requirements. The
suspension or termination of the Company's collaboration with its existing
corporate partner or the inability to enter into new collaborations, the failure
of any such collaborations to be successful or the delay in their development or
commercialization of products could have a material adverse effect on the
Company's business, financial condition and results of operations. If additional
funds are raised by issuing securities, further dilution to existing
stockholders may result. If adequate funds are not available, the Company will
be required to delay, scale back or eliminate one or more of its drug discovery
or development programs; obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to or sell
certain of its technologies, product candidates or products that the Company
would not otherwise relinquish or sell; sell itself or certain of its
technologies or other assets to a third party; cease operations; or declare
bankruptcy.

      Early Stage of Development; Absence of Products. The Company is a research
and development focused company. In collaboration with its corporate partner,
Searle, the Company expects that Searle will initiate Phase I/II human clinical
trials by mid 2000. It has not completed the development of any product and,
accordingly, has not begun to market or generate revenues from the
commercialization of products. The Company does not expect to market any
therapeutic or prophylactic products for a number of years. The Company's
products under development will require significant time-consuming and costly
research, development, preclinical studies, clinical testing, regulatory
approval and significant additional investment prior to their commercialization,
which may never occur. There can be no assurance that the Company's research and
development programs will be successful. In particular, Cytel completed its
Phase II/III clinical trial of Cylexin, its lead cell adhesion inhibitor
compound, in March 1999. Based on disappointing


                                       14
<PAGE>   15
results from this Phase II/III clinical trial, Cytel announced that it halted
clinical trials of Cylexin and discontinued its therapeutic anti-inflammatory
business. Further, there can be no assurance that the Company will be able to
manufacture any products in commercial quantities in compliance with regulatory
requirements at an acceptable cost, that any of its products under development
will be successfully commercialized or will prove to be safe and efficacious in
clinical trials or that the Company or its collaborators will be successful in
obtaining market acceptance of any of its products. The Company or its
collaborators may encounter problems and delays relating to research and
development, regulatory approval, manufacturing and marketing. The failure by
the Company to address such problems and delays successfully would have a
material adverse effect on the Company's business, financial condition and
results of operations.

      Reliance on Collaborative Partners. The Company expects to rely on
collaborative arrangements both to develop and commercialize pharmaceutical
products. The Company has relied on certain established pharmaceutical companies
interested in its technology to fund a portion of its research and development
expenses for pharmaceutical product candidates. There can be no assurance that
the Company will be able to enter into collaborative arrangements in the future,
that any such collaborative arrangements or its existing collaborative
arrangements will continue or be successful or that the Company will receive
royalty revenues, license fees or milestone payments from any of such
collaborative arrangements. In addition, collaborative partners may pursue
alternative technologies or develop alternative compounds either on their own or
in collaboration with others, including the Company's competitors, as a means of
developing treatments for the disease targeted by any collaborative program of
the Company.

      The Company has a research and development collaboration with Searle with
respect to the production, use and sale of pharmaceutical products derived from
the Company's cancer epitopes and the use thereof in therapeutic vaccines. Such
collaboration is currently the Company's only significant collaboration, and the
Company is substantially dependent upon it. The success of the collaboration
will depend, in significant part, on Searle's development, competitive marketing
and strategic considerations, including the relative advantages of alternative
products being developed or marketed by competitors. The Company expects that
substantially all of its revenues for the foreseeable future will result from
payments under its existing, and any future, collaborations, including royalties
on product sales and interest income. There can be no assurance that Searle will
perform its obligations as expected or that any future milestone payments or
other amounts will be received by the Company. The suspension or termination of
the Company's collaboration with Searle, the failure of such collaboration to be
successful or the delay in the development or commercialization of
pharmaceutical products pursuant to such collaboration could have a material
adverse effect on the Company's business, financial condition and results of
operations.

      In addition, the Company may be required to enter into licenses or other
collaborative agreements with third parties in order to access technologies that
may be necessary to successfully develop certain of its products. There can be
no assurance that the Company will be able to successfully negotiate acceptable
licenses or other collaborative arrangements that allow it to access such
technology. In addition, there can be no assurance that any technology accessed
through such licenses or other collaborations will successfully meet the
Company's requirements.

      Continuing Operating Losses; Accumulated Deficit. The Company has
experienced significant operating losses since its inception in 1987. As of
September 30, 1999, the Company had an accumulated deficit of approximately
$137.2 million. The Company expects to incur substantial additional operating
losses as the Company's research and development and clinical trial efforts
continue. All of the Company's revenues to date have consisted of contract
research and development revenues, license and milestone payments, research
grants, certain asset divestitures and interest income. To achieve profitable
operations, the Company, alone or with others, must identify, develop, register,
manufacture and market


                                       15
<PAGE>   16
proprietary products. There can be no assurance that the Company will be
successful in its efforts to achieve profitable operations.

      Manufacturing Limitations. To be successful, the Company's products and
products of its partners must be manufactured in commercial quantities in
compliance with regulatory requirements and at an acceptable cost. The Company
has not commercialized any products, nor has it demonstrated its ability to
manufacture commercial quantities of its or its partners' product candidates in
accordance with regulatory requirements. If the Company is unable to develop
itself or contract with a third-party manufacturing capabilities to produce
suitable quantities of its or its partners' products in accordance with
regulatory standards, the ability of the Company or its partners to conduct
clinical trials, obtain regulatory approvals and market such products may be
adversely affected, which could adversely affect the Company's competitive
position and its chances of achieving profitability. There can be no assurance
that such products can be manufactured by the Company or any other party at a
cost or in quantities which are commercially viable.

      Government Regulation; Uncertainty Associated with Clinical Trials. The
production and marketing of the Company's products and its ongoing research and
development activities are subject to regulation by numerous governmental
authorities in the United States and other countries. Before any drug developed
by the Company can be marketed, it will undergo rigorous preclinical and
clinical testing and an extensive regulatory approval process mandated by the
Food and Drug Administration ("FDA") and equivalent foreign authorities. These
processes can take a number of years and require the expenditure of substantial
resources. The time required for completing such testing and obtaining such
approvals is uncertain and approval itself may not be obtained. The FDA or the
Company and its collaborators may decide to discontinue or suspend clinical
trials at any time if the subjects or patients who are participating in such
trials are being exposed to unacceptable health risks or if the results show no
or limited benefit in patients treated with the drug compared to patients in the
control group. In particular, Cytel completed its Phase II/III clinical trial of
Cylexin, its lead cell adhesion inhibitor compound, in March 1999. Cytel
announced that it halted clinical trials of Cylexin based on disappointing
results that indicated that Cylexin showed no benefit over placebo for the
treatment of reperfusion injury in infants undergoing cardiopulmonary bypass
("CPB") to facilitate the surgical repair of heart defects.

      Testing of the Company's other product candidates in research and
development may reveal undesirable and unintended side effects or other
characteristics that may prevent or limit their commercial use. There can be no
assurance that the Company will not encounter problems in clinical trials of
other product candidates that will cause the FDA, or the Company to delay or
suspend clinical trials. Furthermore, there can be no assurance that any of the
Company's products will be approved by the FDA or foreign regulatory agency for
any indication. Products, if any, resulting from the Company's research and
development programs are not expected to be commercially available for a number
of years. Even if regulatory approval of a drug is granted, such approval may
entail limitations on the indicated uses for which the drug may be marketed. In
addition, a marketed drug, its manufacturer and the facilities in which the drug
is manufactured are subject to continual review and periodic inspections. Later
discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or manufacturer, including
withdrawal of the product from the market.

      Technological Change and Competition. The Company is engaged in a highly
competitive industry. The Company competes with many public and private
companies, including pharmaceutical companies, chemical companies, specialized
biotechnology companies and academic institutions. Many of the Company's
competitors have substantially greater financial, scientific and technical
resources, and manufacturing and marketing experience and capabilities than the
Company. In addition, many of the Company's competitors have significantly
greater experience conducting preclinical studies and clinical trials of new
pharmaceutical products, and in obtaining regulatory approvals for
pharmaceutical products.


                                       16
<PAGE>   17
Competitors of the Company and its collaborators may develop and commercialize
such products more rapidly than the Company and its collaborators. There can be
no assurance that the Company's competitors will not succeed in developing
technologies and products that are more effective than any being developed by
the Company, or that would render the Company's technology and products obsolete
or noncompetitive. The Company is aware of companies that are pursuing the
development of novel pharmaceuticals which target the same diseases that the
Company is targeting. There can be no assurance that these and other efforts by
potential competitors will not be successful, or that other technologies will
not be developed to compete with the Company's technologies.

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

      Patents and Proprietary Rights. The Company's success will depend in part
on its ability to obtain patent protection for its products and processes, both
in the United States and other countries. The patent position of biotechnology
and pharmaceutical companies is highly uncertain and involves complex legal and
factual questions. There is no consistent policy regarding the breadth of claims
allowed in biotechnology patents. The Company intends to file applications and
pursue patent prosecution as appropriate for patents covering both its products
and processes. There can be no assurance that patents will issue from any of the
patent applications owned or licensed by the Company or that, if patents do
issue, that claims allowed will be sufficiently broad to protect the Company's
products and processes. In addition, there can be no assurance that any patents
issued to the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide proprietary protection to the
Company.

      As is typical in the biotechnology industry, the commercial success of the
Company will depend in part on the Company neither infringing patents issued to
competitors nor breaching the technology licenses upon which the Company's
products might be based. Failure by the Company to obtain a license to any
technology that it requires to commercialize its products, or to develop an
alternative compound and obtain FDA approval within an acceptable period of time
if required to do so, would have a material adverse effect on the Company.
Litigation, which could result in substantial costs to the Company, may also be
necessary to enforce any patents issued to the Company or to determine the scope
and validity of others' proprietary rights. In addition, the Company may have to
participate in interference proceedings declared by the United States Patent and
Trademark Office which could result in substantial costs to the Company to
determine the priority of inventions.

      The Company also protects its proprietary technology and processes in part
by confidentiality agreements with its collaborative partners, employees and
consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors.


                                       17
<PAGE>   18
      Absence of Sales and Marketing Experience. The Company has no experience
in sales, marketing or distribution. Before it can market any of its products
directly, the Company must develop a substantial marketing and sales force with
technical expertise and supporting distribution capability. Alternatively, the
Company may obtain the assistance of a pharmaceutical company with a large
distribution system and a large direct sales force. Other than its agreements
with Searle and Takara, the Company does not have any existing distribution
arrangements with any pharmaceutical company for its products under development.
There can be no assurance that the Company will be able to establish sales and
distribution capabilities or be successful in gaining market acceptance for its
products.

      Dependence on Reimbursement. The Company's ability to commercialize its
products successfully 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 there can be no
assurance that adequate third-party coverage will be available to enable the
Company to maintain price levels sufficient to realize an appropriate return on
its investment in product development.

      Dependence on Key Personnel. The Company is highly dependent on the
principal members of its scientific and management staff. The Company does not
maintain key person life insurance on the life of any employee. The Company's
future success also will depend in part on the continued service of its key
scientific personnel and its ability to identify, hire and retain additional
qualified personnel.

      There is intense competition for qualified personnel in the areas of the
Company's activities, and there can be no assurance that the Company will be
able to continue to attract and retain such personnel necessary for the
development of the Company's business. Because of the intense competition, there
can be no assurance that the Company will be successful in adding technical
personnel as needed to meet the staffing requirements of additional
collaborative relationships. Failure to attract and retain key personnel could
have a material adverse effect on the Company.

      Product Liability and Insurance. The Company's business exposes it to
potential product liability risks which are inherent in the testing,
manufacturing and marketing of human therapeutic products. While the Company
currently has product liability insurance, there can be no assurance that it
will be able to maintain such insurance on acceptable terms or that insurance
will provide adequate coverage against potential liabilities.

      Use of Hazardous Materials. The Company's research and development
involves the controlled use of hazardous materials, chemicals and radioactive
compounds. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by state
and federal regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damage that results, which
liability could exceed the resources of the Company. The Company may incur
substantial cost to comply with environmental regulations if the Company
develops commercial manufacturing capacity.

      Although the Company believes that it is in compliance in all material
respects with applicable environmental laws and regulations and currently does
not expect to make material capital expenditures for environmental control
facilities in the near term, there can be no assurance that it will not be
required to incur significant costs to comply with environmental laws and
regulations in the future, or that the


                                       18
<PAGE>   19
operations, business or assets of the Company will not be materially, adversely
affected by current or future environmental laws or regulations.

      Volatility of Common Stock Price.The market price for securities of
biotechnology companies, including the Company, have historically been highly
volatile, and the market from time to time has experienced significant price and
volume fluctuations that are unrelated to the operating performance of such
companies. Factors such as announcements of technological innovations or new
commercial therapeutic products by the Company or others, governmental
regulation, developments in patent or other proprietary rights, developments in
the Company's relationships with its collaborative partners, public concern as
to the clinical results and/or, the safety of drugs developed by the Company or
others and general market conditions may have a significant effect on the market
price of the Company's common stock. Fluctuations in financial performance from
period to period also may have a significant impact on the market price of the
common stock.

      Absence of Dividends. The Company has never paid any cash dividends and
does not anticipate paying cash dividends in the foreseeable future.


                                       19
<PAGE>   20
PART II. OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

During the period covered by this Form 10-Q, the Company sold and issued the
following securities which were not registered under the Securities Act of 1933,
as amended (the "Securities Act"):

1.    In July 1999, the Company completed a series of transactions in which it
      issued (i) 859,666 shares of Series S Preferred Stock and 549,622 shares
      of Series S-1 Preferred Stock to Searle in exchange for all outstanding
      shares of Epimmune's Series B Preferred Stock and Series B-1 Preferred
      Stock, and (ii) issued a total of 1,027,082 shares of Common Stock to
      holders of Common Stock of Epimmune in exchange for all outstanding shares
      of Epimmune's Common Stock.

2.    In July 1999, the Company issued warrants to purchase an aggregate of
      241,004 shares of Common Stock with an exercise price of $1.875 to Virgil
      Thompson, former President and Chief Executive Officer of Cytel, and
      Robert L. Roe, former Chief Operating Officer of Cytel. The warrants were
      issued in connection with severance agreements with such former officers.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's 1999 Annual Meeting of Stockholders ("Annual Meeting") was held
September 8, 1999. The matters voted on at the Annual Meeting were:

1.    To elect the Board of Directors.

2.    To approve an amendment to the Company's Amended and Restated Certificate
      of Incorporation.

3.    To ratify the selection of Ernst & Young LLP, as independent auditors for
      the year ending December 31, 1999.

At the Annual Meeting, 5,031,805 shares of Common Stock out of a total of
6,026,455 shares of Common Stock outstanding at the record date were represented
in person or by proxy, 859,666 shares of Series S Preferred Stock out of a total
of 859,666 shares of Series S Preferred Stock outstanding at a record date were
represented in person or by proxy and 549,622 shares of Series S-1 Preferred
Stock out of a total of 549,622 shares of Series S-1 Preferred Stock outstanding
at the record date were represented in person or by proxy.


                                       20
<PAGE>   21

The results of the stockholders' vote on each matter set forth below:

1.       Election of the Board of Directors.

<TABLE>
<CAPTION>
         Nominees                                       For            Withheld
         --------                                       ---            --------
<S>                                                  <C>              <C>
         Howard E. Greene, Jr.                       6,426,158          14,935
         William T. Comer, Ph.D.                     6,066,300          14,793
         Nicole Vitullo                              6,066,286          14,807
         Nancy D. Rasmussen                          6,066,286          14,807
         Deborah A. Schueren                         6,066,300          14,793
         Michael G. Grey                             6,066,300          14,793
</TABLE>

2. Approve an amendment to the Company's Amended and Restated Certificate of
Incorporation.

<TABLE>
<CAPTION>
                                                          Votes
                                                        ---------
<S>                                                     <C>
                     For                                6,031,106
                     Against                               41,486
                     Abstain                                8,501
</TABLE>

3. Ratify the selection of Ernst & Young LLP, as independent auditors for the
year ending December 31, 1999.

<TABLE>
<CAPTION>
                                                          Votes
                                                        ---------
<S>                                                     <C>
                     For                                6,062,387
                     Against                               15,454
                     Abstain                                3,252
</TABLE>

ITEM 6.A Exhibits

      Exhibit 3.9   Certificate of Amendment of Amended and Restated Certificate
      of Incorporation

      Exhibit 3.10  Certificate of Decrease of Series A Junior Participating
      Preferred Stock

      Exhibit 27.1  Financial Data Schedule

ITEM 6.B REPORTS ON FORM 8-K

The Company filed a Report on Form 8-K on July 16, 1999 relating to the merger
of Epimmune Inc. into Cytel Corporation and the stock exchange transactions
which were completed immediately prior thereto.


                                       21
<PAGE>   22
                                  EPIMMUNE INC.

                                    SIGNATURE

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

                                       EPIMMUNE INC.

Date: November 15, 1999            By: /s/ Deborah A. Schueren
                                       -----------------------------------------
                                       Deborah A. Schueren
                                       President, Chief Executive Officer and
                                       Chief Financial Officer


                                       22