##### 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
June 30, 2001, 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 10,064,453 shares outstanding as of August 8,
2001.

1



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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM I. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION   
|                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | ITEM 6. EXHIBITS                                                                             
|SIGNATURES                   
|EXHIBIT 10.88                



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##### Table of Contents



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 Consolidated Balance Sheets as of
June 30, 2001 and December 31, 2000                           |   |  | 3  | 
|                 
|                  |  |                       |    | Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2001 and 2000 |   |  | 4  | 
|                 
|                  |  |                       |    | Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2001 and 2000           |   |  | 5  | 
|                 
|                  |  |                       |    | Notes to Condensed Consolidated Financial Statements                                                      |   |  | 6  | 
|                 
|                  |  | ITEM 2.               |    | Managements Discussion and Analysis of Financial
Condition and Results of Operations                     |   |  | 8  | 
|                 
|                  |  | ITEM 3.               |    | Quantitative and Qualitative Disclosures about Market Risk                                                |   |  | 11 | 
|                 
|PART II           |  | OTHER INFORMATION     |    |                                                                                                           |   | 
|                 
|                  |  | ITEM 1.               |    | Legal Proceedings                                                                                         |   |  | *  | 
|                 
|                  |  | ITEM 2.               |    | Changes in Securities and Use of Proceeds                                                                 |   |  | *  | 
|                 
|                  |  | ITEM 3.               |    | Defaults upon Senior Securities                                                                           |   |  | *  | 
|                 
|                  |  | ITEM 4.               |    | Submission of Matters to a Vote of Security Holders                                                       |   |  | 20 | 
|                 
|                  |  | ITEM 5.               |    | Other Information                                                                                         |   |  | *  | 
|                 
|                  |  | ITEM 6.               |    | Exhibits and Reports on Form 8-K                                                                          |   |  | 21 | 
|                 
|                  |  | SIGNATURES            | 22 |                                                                                                          

* No information provided due to inapplicability of item.

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM I. FINANCIAL STATEMENTS




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

|                                     |                                                                                                                                                                               |                            |        |             |        |              |        |          |        | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ----------- | ------ | ------------ | ------ | -------- | ------ | 
|                                     |                                                                                                                                                                               |                            |        | June 30,    |        | December 31,
|                                     |                                                                                                                                                                               |                            |        | 2001        |        | 2000        
|                                     |                                                                                                                                                                               |                            |        |             |        |             
|                                     |                                                                                                                                                                               |                            |        | (unaudited) |        |              |        |         
|Assets                               |                                                                                                                                                                               |                            |        |             |        |              |        |         
|                                    
|                                    
|                                    
|                                    
|Current assets:                      |                                                                                                                                                                               |                            |        |             |        |              |        |         
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents                                                                                                                                                     |                            | $      | 1,020       |        |              | $      | 4,181    |       
|                                    
|                                    
|                                    
|                                    
|                                     | Short-term investments                                                                                                                                                        |                            |        | 5,704       |        |              |        | 5,412    |       
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaids and other current assets                                                                                                                                             |                            |        | 703         |        |              |        | 507      |       
|                                     |                                                                                                                                                                               |                            |        |             |        |              |        |         
|                                     |                                                                                                                                                                               | Total current assets       |        |             | 7,427  |              |        |          | 10,100 | 
|                                    
|                                    
|                                    
|                                    
|Restricted cash                      |                                                                                                                                                                               |                            | 472    |             |        |              | 472    |         
|                                    
|                                    
|                                    
|                                    
|Property and equipment, net          |                                                                                                                                                                               |                            | 896    |             |        |              | 966    |         
|                                    
|                                    
|                                    
|                                    
|Patents and other assets             |                                                                                                                                                                               |                            | 3,138  |             |        |              | 2,948  |         
|                                     |                                                                                                                                                                               |                            |        |             |        |              |        |         
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                               | Total assets               |        | $           | 11,933 |              |        | $        | 14,486 | 
|                                     |                                                                                                                                                                               |                            |        |             |        |              |        |         
|Liabilities and stockholders equity |                                                                                                                                                                               |                            |        |             |        |              |        |         
|                                    
|                                    
|                                    
|                                    
|Current liabilities:                 |                                                                                                                                                                               |                            |        |             |        |              |        |         
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable and accrued liabilities                                                                                                                                      |                            | $      | 890         |        |              | $      | 1,004    |       
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred contract revenues                                                                                                                                                    |                            |        | 102         |        |              |        | 229      |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued payroll and related expenses                                                                                                                                          |                            |        | 234         |        |              |        | 241      |       
|                                    
|                                    
|                                    
|                                    
|                                     | Current portion of equipment loans and notes payable                                                                                                                          |                            |        | 421         |        |              |        | 413      |       
|                                     |                                                                                                                                                                               |                            |        |             |        |              |        |         
|                                     |                                                                                                                                                                               | Total current liabilities  |        |             | 1,647  |              |        |          | 1,887  | 
|                                    
|                                    
|                                    
|                                    
|Notes payable, less current portion  |                                                                                                                                                                               |                            | 173    |             |        |              | 389    |         
|                                    
|                                    
|                                    
|                                    
|Deferred rent commitments            |                                                                                                                                                                               |                            | 144    |             |        |              | 119    |         
|                                    
|                                    
|                                    
|                                    
|Stockholders equity:                |                                                                                                                                                                               |                            |        |             |        |              |        |         
|                                    
|                                    
|                                    
|                                    
|                                     | Preferred stock, $.01 par value, 10,000,000 shares
authorized, 1,409,288 shares issued and outstanding
at June 30, 2001 and December 31, 2000                                 |                            |        | 14          |        |              |        | 14       |       
|                                    
|                                    
|                                    
|                                    
|                                     | Common stock, $.01 par value, 25,000,000 shares
authorized, 8,908,278 shares and 7,847,343 shares
issued and outstanding at June 30, 2001 and
December 31, 2000, respectively |                            |        | 89          |        |              |        | 78       |       
|                                    
|                                    
|                                    
|                                    
|                                     | Additional paid-in capital                                                                                                                                                    |                            |        | 156,483     |        |              |        | 153,720  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Note receivable held by stockholder                                                                                                                                           |                            |        | (2,641      | )      |              |        |         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated deficit                                                                                                                                                           |                            |        | (143,984    | )      |              |        | (141,725 | )     
|                                     | Unrealized gain on available-for-sale securities                                                                                                                              |                            |        | 8           |        |              |        | 4        |       
|                                     |                                                                                                                                                                               |                            |        |             |        |              |        |         
|                                     |                                                                                                                                                                               | Total stockholders equity |        |             | 9,969  |              |        |          | 12,091 | 
|                                     |                                                                                                                                                                               |                            |        |             |        |              |        |         
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                               | $                          | 11,933 |             |        | $            | 14,486 |         
|                                     |                                                                                                                                                                               |                            |        |             |        |              |        |         

See accompanying notes.

3



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##### Table of Contents






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

|                                                                |                          |   |                             |       |                           |   |           |        |      |   |           |        |   |   |           |        |  
|--------------------------------------------------------------- | ------------------------ | - | --------------------------- | ----- | ------------------------- | - | --------- | ------ | ---- | - | --------- | ------ | - | - | --------- | ------ | -
|                                                                |                          |   | Three months ended June 30, |       | Six months ended June 30,
|                                                                |                          |   |                             |       |                          
|                                                                |                          |   | 2001                        |       | 2000                      |   | 2001      |        | 2000
|                                                                |                          |   |                             |       |                           |   |           |        |     
|Revenues                                                       
|                                                               
|                                                               
|                                                               
|                                                               
|Research and development                                        |                          | $ | 650                         |       |                           | $ |          |        |      | $ | 950       |        |   | $ |          |       
|                                                               
|                                                               
|                                                               
|                                                               
|Research grants and
contract revenue                            |                          |   | 821                         |       |                           |   | 364       |        |      |   | 1,290     |        |   |   | 691       |       
|                                                                |                          |   |                             |       |                           |   |           |        |      |   |           |        |   |   |           |       
|                                                               
|                                                               
|                                                               
|                                                               
|Total revenues                                                  |                          |   | 1,471                       |       |                           |   | 364       |        |      |   | 2,240     |        |   |   | 691       |       
|                                                               
|                                                               
|                                                               
|                                                               
|Costs and expenses                                             
|                                                               
|                                                               
|                                                               
|                                                               
|Research and development                                        |                          |   | 1,549                       |       |                           |   | 1,395     |        |      |   | 3,217     |        |   |   | 2,873     |       
|                                                               
|                                                               
|                                                               
|                                                               
|General and administrative                                      |                          |   | 819                         |       |                           |   | 557       |        |      |   | 1,469     |        |   |   | 1,218     |       
|                                                                |                          |   |                             |       |                           |   |           |        |      |   |           |        |   |   |           |       
|                                                                | Total costs and expenses |   |                             | 2,368 |                           |   |           | 1,952  |      |   |           | 4,686  |   |   |           | 4,091  |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Loss from operations     |   |                             | (897  | )                         |   |           | (1,588 | )    |   |           | (2,446 | ) |   |           | (3,400 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Interest income, net                                            |                          |   | 78                          |       |                           |   | 135       |        |      |   | 187       |        |   |   | 271       |       
|                                                               
|                                                               
|                                                               
|                                                               
|Other income (expense), net                                     |                          |   | (1                          | )     |                           |   |          |        |      |   | (1        | )      |   |   | 961       |       
|                                                                |                          |   |                             |       |                           |   |           |        |      |   |           |        |   |   |           |       
|Net loss                                                        |                          | $ | (820                        | )     |                           | $ | (1,453    | )      |      | $ | (2,260    | )      |   | $ | (2,168    | )     
|                                                                |                          |   |                             |       |                           |   |           |        |      |   |           |        |   |   |           |       
|Net loss per share 
basic and diluted                          |                          | $ | (0.10                       | )     |                           | $ | (0.21     | )      |      | $ | (0.29     | )      |   | $ | (0.33     | )     
|                                                                |                          |   |                             |       |                           |   |           |        |      |   |           |        |   |   |           |       
|                                                               
|                                                               
|                                                               
|                                                               
|Shares used in computing
net loss per share  basic
and diluted |                          |   | 7,847,663                   |       |                           |   | 6,996,064 |        |      |   | 7,791,890 |        |   |   | 6,636,996 |       
|                                                                |                          |   |                             |       |                           |   |           |        |      |   |           |        |   |   |           |       

See accompanying notes.

4



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##### Table of Contents






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

|                                                                            |                                                                      |                                          |        |                           |      |      |        |      |      |  
|--------------------------------------------------------------------------- | -------------------------------------------------------------------- | ---------------------------------------- | ------ | ------------------------- | ---- | ---- | ------ | ---- | ---- | -
|                                                                            |                                                                      |                                          |        | Six months ended June 30,
|                                                                            |                                                                      |                                          |        |                          
|                                                                            |                                                                      |                                          |        | 2001                      |      | 2000
|                                                                            |                                                                      |                                          |        |                           |      |     
|OPERATING ACTIVITIES                                                        |                                                                      |                                          |        |                           |      |      |        |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net loss                                                                    |                                                                      | $                                        | (2,260 | )                         |      | $    | (2,168 | )   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Adjustments to reconcile net loss to net cash used in operating
activities: |                                                                      |                                          |        |                           |      |      |        |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Depreciation and amortization                                        |                                          |        | 334                       |      |      |        | 255  |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Amortization of deferred compensation                                |                                          |        | 127                       |      |      |        |     |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Deferred rent                                                        |                                          |        | 25                        |      |      |        | 34   |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Deferred revenue                                                     |                                          |        | (127                      | )    |      |        | (38  | )   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Stock warrants relating to severance agreement                       |                                          |        |                          |      |      |        | 29   |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Loss on disposal of assets                                           |                                          |        |                          |      |      |        | (5   | )   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Restructuring operating expenses                                     |                                          |        |                          |      |      |        | (208 | )   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Net change in operating assets and liabilities, net of divestitures: |                                          |        |                           |      |      |        |      |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                      | Other current assets                     |        |                           | (196 | )    |        |      | (192 | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                      | Accounts payable and accrued liabilities |        |                           | (114 | )    |        |      | 97   |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                      | Accrued payroll and related expenses     |        |                           | (7   | )    |        |      | 22   |  
|                                                                            |                                                                      |                                          |        |                           |      |      |        |     
|Net cash used in operating activities                                       |                                                                      |                                          | (2,218 | )                         |      |      | (2,174 | )   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|INVESTING ACTIVITIES                                                        |                                                                      |                                          |        |                           |      |      |        |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Purchases of available-for-sale securities                                  |                                                                      |                                          | (1,144 | )                         |      |      | (3,237 | )   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Maturities of available-for-sale securities                                 |                                                                      |                                          | 856    |                           |      |      | 1,290  |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Proceeds from the sale of property and equipment                            |                                                                      |                                          |       |                           |      |      | 5      |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Purchase of property and equipment                                          |                                                                      |                                          | (73    | )                         |      |      | (185   | )   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Patents                                                                     |                                                                      |                                          | (381   | )                         |      |      | (300   | )   
|                                                                            |                                                                      |                                          |        |                           |      |      |        |     
|Net cash used in investing activities                                       |                                                                      |                                          | (742   | )                         |      |      | (2,427 | )   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|FINANCING ACTIVITIES                                                        |                                                                      |                                          |        |                           |      |      |        |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Principal payments under equipment notes payable
and note payable to bank   |                                                                      |                                          | (208   | )                         |      |      | (112   | )   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Loan draw proceeds-equipment loan                                           |                                                                      |                                          |       |                           |      |      | 150    |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net proceeds from issuance of common stock                                  |                                                                      |                                          | 7      |                           |      |      | 4,310  |     
|                                                                            |                                                                      |                                          |        |                           |      |      |        |     
|Net cash (used in) provided by financing activities                         |                                                                      |                                          | (201   | )                         |      |      | 4,348  |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Decrease in cash and cash equivalents                                       |                                                                      |                                          | (3,161 | )                         |      |      | (253   | )   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Cash and cash equivalents at beginning of period                            |                                                                      |                                          | 4,181  |                           |      |      | 1,843  |     
|                                                                            |                                                                      |                                          |        |                           |      |      |        |     
|Cash and cash equivalents at end of period                                  |                                                                      | $                                        | 1,020  |                           |      | $    | 1,590  |     
|                                                                            |                                                                      |                                          |        |                           |      |      |        |     
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                            |                                                                      |                                          |        |                           |      |      |        |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Interest paid                                                               |                                                                      | $                                        | 35     |                           |      | $    | 33     |     
|                                                                            |                                                                      |                                          |        |                           |      |      |        |     
|DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES                  |                                                                      |                                          |        |                           |      |      |        |     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Unrealized losses on available-for-sale securities                          |                                                                      | $                                        | 4      |                           |      | $    | 17     |     
|                                                                            |                                                                      |                                          |        |                           |      |      |        |     
|Purchase of common stock for stockholder note receivable                    |                                                                      | $                                        | 2,641  |                           |      | $    |       |     
|                                                                            |                                                                      |                                          |        |                           |      |      |        |     

See accompanying notes.

5



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##### Table of Contents






EPIMMUNE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 2001

1. Basis of Presentation

The interim unaudited condensed consolidated financial statements contained
herein have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In managements opinion, the unaudited information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position, results of operations and cash
flows for the periods presented. Interim results are not necessarily
indicative of results to be expected for the full year. The financial
statements should be read in conjunction with the audited consolidated
financial statements and footnotes thereto included in the Companys Form 10-K
for the year ended December 31, 2000.

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

2. New Accounting Standard

In June 1998, the Financial Standards Accounting Board, or FASB, issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments and
hedging activities. The Statement will require the recognition of all
derivatives on our balance sheet at fair value. The FASB subsequently delayed
implementation of the standard for the financial years beginning after June 15,
2000. We have adopted the new Statement effective January 1, 2001. The impact
on our financial statements was not material.

3. CEO Recruitment

On January 16, 2001, we entered into an employment agreement with Dr. Emile
Loria for the position of President and Chief Executive Officer. Dr. Loria was
elected to the Companys Board of Directors.

Also on January 16, 2001, we entered into a Restricted Stock Purchase agreement
with Dr. Loria for the purchase of 1,056,301 common shares at $2.50 per share.
The shares vest daily over a four-year period and unvested shares are subject
to a repurchase option in favor of the Company. A promissory note was issued
for the purchase price of the shares, which note is secured by the shares
issued to Dr. Loria. Principal and interest under the promissory note will be
due and payable four years from the date of the note.

4. Nexell

On March 28, 2001, we entered into a license agreement with Nexell Therapeutics
Inc. granting Nexell a non-exclusive license to certain cancer antigens and
associated technology for use in ex-vivocell therapy. In connection with the
agreement, we received an upfront license fee, half of which was paid on
signing and half of which will be paid four months from signing. We are also
entitled to receive milestones and royalties on product sales.

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5. Elan

On April 5, 2001, we entered into a license and option agreement with Elan
which gives Elan an exclusive license to use and evaluate our PADRE technology
in animal studies and Phase I clinical trials for prevention and treatment of
neurodegenerative conditions including Alzheimers Disease. Elan also has the
right to negotiate an exclusive license for continued development and
commercialization of products using the technology in that field. In
connection with the agreement, we received an upfront license fee.

6. Pharmexa

On June 25, 2001, we entered into a license agreement with Pharmexa A/S
granting Pharmexa a non-exclusive license to our PADRE technology for use in
connection with their AutoVac technology for controlling autoimmune diseases.
In connection with the agreement, we received an upfront license fee and are
also entitled to receive milestones and royalties on product sales.

7. Subsequent Event  Genencor

On July 9, 2001, we entered into license, development and securities purchase
agreements with Genencor International, Inc. Pursuant to those agreements, we
exclusively licensed to Genencor our PADRE and epitope technologies for
vaccines to treat or prevent hepatitis B, hepatitis C and human papilloma
virus. Genencor will also fund research and development activities on those
programs at Epimmune for 30 months and made an initial ten percent equity
purchase in Epimmune. In connection with the license agreement, Genencor paid
us an upfront license fee and will also pay us pre-commercialization milestones
and royalties on product sales.

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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 Risks
and Uncertainties, as well as those discussed in the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2000.

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

Since Cytels inception in July 1987, we have devoted substantially all of our
resources to the discovery and development of potential therapeutic and
prophylactic products. To date, we have not received any revenues from the
sale of products. We have funded our research and development primarily from
equity-derived working capital and through strategic alliances with other
companies. We have been unprofitable since our inception and expect to incur
substantial operating losses for the next several years. As of June 30, 2001,
our accumulated deficit was approximately $144.0 million.

Results of Operations

Three months ended June 30, 2001 (2001), as compared with three months ended
June 30, 2000 (2000).

In 2001, we had total revenues of $1.5 million from research grants, research
and development contracts and license fees, as compared to $0.4 million of
revenue related to research grants in 2000.

Research and development expenses increased to $1.5 million in 2001 from $1.4
million in 2000. The increase relates primarily to higher labor, facility and
equipment related costs during 2001 as compared to 2000.

General and administrative expenses increased to $0.8 million in 2001 from $0.6
million in 2000. This increase relates primarily to increased labor and
related costs and increased legal expenses resulting from licensing and
collaborative efforts during the 2001 period.

Net interest income was approximately $0.1 million in 2001 and 2000, based on
comparable average cash balances.

Six months ended June 30, 2001 (2001), as compared with six months ended June
30, 2000 (2000).

In 2001, we had total revenues of $2.2 million related to research grants,
research and development contracts and license fees, as compared to revenues of
$0.7 million in 2000 related to research grants.

Research and development expenses in 2001 increased to $3.2 million from $2.9
million in 2000. The increase relates to higher labor, facility and equipment
related costs in 2001 compared to 2000 as well as increased costs for sponsored
research as part of our HIV grant program during the 2001 period.

General and administrative expenses were $1.5 million in 2001 compared to $1.2
million in 2000. This increase relates primarily to increased labor and
related costs and increased legal expenses during the 2001 period.

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Net interest income was $0.2 million in 2001 compared to $0.3 million in 2000,
based on higher average cash balances.

There was no other income in 2001 compared to $1.0 million of other income in
2000. The 2000 amount represents a payment from Elan of $0.5 million related
to the assignment of a license and the release of $0.5 million from escrow
under the Neose agreement.

We expect to incur 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 our equity securities, two public common stock offerings, license
fees, revenues under collaborative research and development agreements, grant
revenues, capital and operating lease transactions, certain asset divestitures
and interest income. Through June 2001, we have raised approximately $151.4
million from the sale of equity securities. As of June 30, 2001, we had
10,393,240 shares outstanding on an as-converted basis, assuming conversion of
preferred shares held by Pharmacia Corporation (formerly known as G. D. Searle
& Co., a wholly-owned subsidiary of Monsanto Company). Subsequent to June 30,
2001, we entered into a series of agreements with Genencor International, Inc.
including license, collaboration and securities purchase agreements pursuant to
which we sold 1,154,747 common shares to Genencor.

As of June 30, 2001, our cash, cash equivalents, restricted cash and short-term
investments were $7.2 million compared to $10.1 million at December 31, 2000.
The decrease was due to cash used for operations, partially offset by proceeds
from license fees paid to us during the first six months of 2001. Subsequent
to June 30, 2001, we entered into a series of agreements with Genencor
International, Inc., including license, collaboration and securities purchase
agreements. After giving effect to these transactions we had cash, cash
equivalents, restricted cash and short-term investments of $15.0 million on a
pro forma basis. We expect to continue to use our cash, cash equivalents and
short-term investments to fund our ongoing vaccine research programs. We had
net working capital of $5.8 million as of June 30, 2001 compared to $8.2
million as of December 31, 2000. After giving effect to the transactions we
completed with Genencor International subsequent to June 30, 2001, we had net
working capital of $13.6 million on a pro forma basis.

Capital expenditures totaled $0.1 million in the first six months of 2001,
compared to $0.2 million in the first six months of 2000. Expenditures, during
both periods, were primarily for laboratory equipment. We have financed our
laboratory equipment and research and office facilities primarily through
operating lease arrangements and a note payable.

Payments related to capitalized patent expenses were $0.4 million in the first
six months of 2001, compared to $0.3 million in the corresponding period of
2000.

We expect 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 our
intention to seek additional collaborative research and development
relationships and licensing arrangements with suitable partners. There can be
no assurance that any agreements that may result from these discussions will
successfully reduce our 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 we may be required to delay, scale back or eliminate one or more

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of our drug discovery or development programs or obtain funds through
arrangements with collaborative partners or others that may require us to
relinquish rights to certain of our technologies, product candidates or
products that we would not otherwise relinquish.

We anticipate that our existing resources, including those received in
connection with the Genencor International agreements subsequent to June 30,
2001, will enable us to maintain our current and planned operations through at
least mid-2002. The estimate for the period for which we anticipate our
existing resources to enable us to maintain our current and planned operations
is a forward-looking statement that involves risks and uncertainties as set
forth herein.

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



| |  | our ability 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 our existing research relationships;                       
| 
| |  | continued scientific progress in our drug discovery programs;         
| 
| |  | the magnitude of our drug discovery programs;                         
| 
| |  | the cost of manufacturing scale-up; and                               
| 
| |  | effective commercialization activities and arrangements.              

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At June 30, 2001, our investment portfolio included fixed-income securities of
$6.7 million. These securities are subject to interest rate risk and will
decline in value if interest rates increase. Due to the short duration of our
investment portfolio, an immediate 10 percent increase in interest rates would
have no material impact on our financial condition or results of operations.

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RISK FACTORS

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

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

We are a research and development focused company. There are many factors
outside of our control that may affect the timing of commencement and
completion of clinical trials of any of our drug candidates, and we cannot
assure you that clinical trials will commence or be completed within any
anticipated timeframe. For example, although we previously indicated that
Pharmacia Corporation was expected to initiate Phase I/II human clinical trials
of a drug candidate in our cancer program by late 2000 or early 2001, Pharmacia
recently terminated our collaboration in the cancer field. We are working with
Pharmacia to implement an orderly conclusion to the collaboration and transfer
of applicable materials and documentation to us so that we may proceed with the
cancer program, either alone or with another partner. As a result, the
clinical trials for our cancer program will not begin within the previously
indicated timeframe. Although we expect to initiate clinical trials for a
therapeutic vaccine targeting HIV by late 2001 or early 2002, we may experience
unexpected delays in our research and development efforts that would require us
to delay these trials.

We cannot guarantee that our research and development programs will be
successful or that we can show that our products are safe and effective in
humans. Unacceptable toxicities or side effects may occur at any time in the
course of human clinical trials or during commercial use. Delays in planned
patient enrollment in our clinical trials may result in increased costs,
program delays or both. The appearance of any unacceptable toxicities or side
effects could interrupt, limit, delay or abort the development of any of our
products or, if previously approved, necessitate their withdrawal from the
market.

We may never obtain approvals from the U.S. Food and Drug Administration, or
FDA, or other necessary regulatory approvals to successfully commercialize any
of our products under development. Further, we may not be able to manufacture
any products in commercial quantities in compliance with regulatory
requirements at an acceptable cost. Even if we successfully develop and obtain
approval for our products, we may fail to achieve the necessary market
acceptance of these products. Our failure to address problems and delays
relating to research and development, regulatory approval, manufacturing and
marketing would harm our business.

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

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

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

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

In light of the termination of our collaboration with Pharmacia, our
preclinical or clinical development of drug candidates in our cancer program is
delayed and could be terminated, which could harm our business.

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

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

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

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

As of June 30, 2001, we had $7.2 million in cash, cash equivalents, restricted
cash and short-term investments. Subsequent to June 30, 2001, we entered into
a series of agreements with Genencor International, Inc., including license,
collaboration and securities purchase agreements. After giving effect to these
transactions we had cash, cash equivalents, restricted cash and
short-investments of $15.0 million on a pro forma basis. Our future capital
requirements will depend on many factors, including:

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continued scientific progress in our drug discovery programs; the magnitude of
our drug discovery programs; our ability 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; the cost of manufacturing scale-up; and
effective commercialization activities and arrangements.

We intend to seek additional funding through collaborative arrangements,
research grants or equity or debt financings. If additional financing is not
available, we anticipate that our existing resources will enable us to maintain
our current and planned operations through at least mid-2002. We may not be
able to obtain financing on favorable terms, if at all, or enter into
additional collaborations to reduce our funding requirements. If we acquire
funds by issuing securities, further dilution to existing stockholders may
result. If we acquire funds through additional collaborations, we will likely
have to relinquish some or all of the rights to products or technologies that
we may have otherwise developed ourselves. If we are unable to obtain funding,
we may be required to sell the Company or certain of its assets or technologies
or to cease operations.

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

We have experienced significant operating losses since our inception in 1987.
As of June 30, 2001, we had an accumulated deficit of $144.0 million. We have
not generated revenues from the commercialization of any product. All of our
revenues to date have consisted of contract research and development revenues,
license and milestone payments, research grants, certain asset divestitures and
interest income. We expect that substantially all of our revenues for the
foreseeable future will result from research grants and contract revenues and,
if we are able to establish new collaborations, payments under those future
collaborations, including royalties on product sales and interest income. We
expect to continue to incur substantial net operating losses which may imperil
our ability to continue operations. To achieve profitable operations, we,
alone or with partners, must successfully identify, develop, register and
market proprietary products. We may not be able to generate sufficient product
revenue to become profitable on a sustained basis or at all.

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

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

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

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

The regulatory process for new therapeutic drug products, including the
required preclinical studies and clinical testing, is lengthy and expensive.
We and our partners may not receive necessary FDA or foreign clearances for any
of our potential products in a timely manner, or at all. The length of the
clinical trial process and the number of patients the FDA will require to be
enrolled in the clinical trials in order to establish the safety and efficacy
of our products is uncertain. The FDA or we and our collaborators may decide
to discontinue or suspend clinical trials at any time if the subjects or
patients who are participating in such trials are being exposed to unacceptable
health risks or if the results show no or limited benefit in patients treated
with the drug compared to patients in the control group.

We and our partners may encounter significant delays or excessive costs in our
efforts to secure necessary approvals. Regulatory requirements are evolving
and uncertain. Future United States or foreign legislative or administrative
acts could also prevent or delay regulatory approval of our products. We and
our partners may not receive the necessary approvals for clinical trials,
manufacturing or marketing of any of our products under development. Even if we
obtain commercial regulatory approvals, the approvals may significantly limit
the indicated uses for which we may market our products. In addition, the FDA
may continually review a product after its initial approval and
commercialization. Later discovery of previously unknown problems or failure
to comply with the applicable regulatory requirements may result in
restrictions on the marketing of a product or withdrawal of the product from
the market, as well as possible civil or criminal sanctions.

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

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

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Technological change and competition may render our potential products
obsolete.

The biotechnology industry continues to undergo rapid change and competition is
intense and is expected to increase. Our competitors may succeed in developing
technologies and products that are more effective or affordable than any of the
products we are developing or which would render our technology and products
obsolete and noncompetitive. We compete with many public and private
companies, including pharmaceutical companies, chemical companies, specialized
biotechnology companies and academic institutions. Many of our competitors
have substantially greater experience, financial and technical resources and
production, marketing and development capabilities than us. In addition, many
of our competitors have significantly greater experience conducting preclinical
studies and clinical trials of new products, and in obtaining regulatory
approvals for such products. Accordingly, some of our competitors may succeed
in obtaining developing and commercializing products more rapidly or
effectively than us, or in developing technology and products that would render
our technology and products obsolete or noncompetitive. We are aware of
companies that are pursuing the development of novel pharmaceuticals which
target the same diseases that we are targeting. These and other efforts by
potential competitors may be successful, and other technologies may be
developed to compete with our technologies. If we cannot successfully respond
to technological change in a timely manner, our commercialization efforts may
be harmed.

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

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

Our success will depend in part on our ability to obtain patent protection for
our products and processes, both in the United States and other countries. The
patent position of biotechnology and pharmaceutical companies is highly
uncertain and involves complex legal and factual questions. There is no
consistent policy regarding the breadth of claims allowed in biotechnology
patents. We intend to file applications and pursue patent prosecution as
appropriate for patents covering both our products and processes. We cannot be
sure that patents will issue from any of the patent applications that we own or
license or that, if patents do issue, that claims allowed will be sufficiently
broad to protect our products and processes. In addition, we cannot be certain
that third parties will not challenge, invalidate or circumvent any patents
issued to us, or that the rights granted under the patents will provide
proprietary protection to us.

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

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

As is typical in the biotechnology industry, our commercial success will depend
in part on our ability to avoid infringing patents issued to competitors or
breaching the technology licenses upon which we might

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

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

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

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

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

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

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

Product liability risks may expose us to significant liability.

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

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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. Although we believe that our safety procedures for handling and
disposing of these materials comply with the standards prescribed by these laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of an accident, we
could be held liable for any damages that result, and any liability could
exceed our resources.

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

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

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



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

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

The subordination of our common stock to our preferred stock could hurt common
stockholders.

Our common stock is expressly subordinate to our Series S and Series S-1
Preferred Stock in the event of our liquidation, dissolution or winding up. If
we were to cease operations and liquidate our assets, 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.

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

Our certificate of incorporation includes a provision that requires the
approval of holders of at least 66 2/3% of our voting stock as a condition to a
merger or certain other business transactions with, or proposed by, a holder of
15% or more of our voting stock. This approval is not required in cases where

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certain of our directors approve the transaction or where certain minimum price
criteria and other procedural requirements are met. Our certificate of
incorporation also requires the approvals of holders of at least 66 2/3% of our
voting stock to amend or change the provisions mentioned relating to the
transaction approval. Finally, our certificate of incorporation provides that
any action required or permitted to be taken by our stockholders must be
effected at a duly called annual or special meeting rather than by any consent
in writing.

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

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

Our officers, directors and stockholders with at least 10% of our stock
together control approximately 49% of our outstanding common stock and
preferred stock, on a combined, as-converted basis. If these officers,
directors and principal stockholders act together, they will be able to exert a
significant degree of influence over our management and affairs and over
matters requiring stockholder approval, including the election of directors and
approval of mergers or other business combination transactions. The interests
of this concentration of ownership may not always coincide with our interests
or the interests of other stockholders. For instance, officers, directors and
principal stockholders, acting together, could cause us to enter into
transactions or agreements that we would not otherwise consider. Similarly,
this concentration of ownership may have the effect of delaying or preventing a
change in control of our company otherwise favored by our other stockholders.
This concentration of ownership could depress our stock price.

We have never paid dividends.

We have never paid any cash dividends and do not anticipate paying cash
dividends in the foreseeable future.

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PART II. OTHER INFORMATION




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

The Companys 2001 Annual Meeting of Stockholders (Annual Meeting) was held
June 18, 2001. The matters voted on at the Annual Meeting were:



| | 1. |  | To elect the Board of Directors.                                                                                            
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | To approve the Companys 2001 Employee Stock Purchase Plan.                                                                 
|
| | 3. |  | To ratify the selection of Ernst & Young LLP, as independent
auditors for the Company for the year ending December 31, 2001.

At the Annual Meeting, 7,901,588 shares of Common Stock out of a total of
8,905,778 shares of Common Stock outstanding at the record date were
represented in person or by proxy, 935,274 shares of Series S Preferred Stock
out of a total of 935,274 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.
The holder of preferred stock votes its shares on all matters to be voted upon
at the Annual Meeting on an as-converted to common stock basis, provided that
it is not entitled to vote such shares to the extent that the total number of
shares of voting capital stock held by it and its affiliates exceed 19.9% of
the total shares of voting capital stock.

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

1.     Election of the Board of Directors.

|                        |  |     |           |          |  |  |           | 
|----------------------- |  | --- | --------- | -------- |  |  | --------- | 
|Nominees                |  | For |           | Withheld
|                        |  |     |           |         
|Howard E. Greene, Jr.   |  |     | 9,312,255 |          |  |  | 74,229    | 
|                       
|                       
|                       
|                       
|William T. Comer, Ph.D. |  |     | 9,312,312 |          |  |  | 74,172    | 
|                       
|                       
|                       
|                       
|Michael G. Grey         |  |     | 9,312,312 |          |  |  | 74,172    | 
|                       
|                       
|                       
|                       
|John P. McKearn, Ph.D.  |  |     | 8,029,385 |          |  |  | 1,357,099 | 
|                       
|                       
|                       
|                       
|Emile Loria, M.D.       |  |     | 9,312,312 |          |  |  | 74,172    | 

2.     Approve the Companys 2001 Employee Stock Purchase Plan.

|        |  |       |           | 
|------- |  | ----- | --------- | 
|        |  | Votes
|        |  |      
|For     |  |       | 8,968,247 | 
|       
|       
|       
|       
|Against |  |       | 107,179   | 
|       
|       
|       
|       
|Abstain |  |       | 311,058   | 

3.     Ratify the selection of Ernst &Young LLP, as independent auditors for the
year ending December 31, 2001.

|        |  |       |           | 
|------- |  | ----- | --------- | 
|        |  | Votes
|        |  |      
|For     |  |       | 9,363,993 | 
|       
|       
|       
|       
|Against |  |       | 10,650    | 
|       
|       
|       
|       
|Abstain |  |       | 11,841    | 

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ITEM 6. EXHIBITS

|                                                                                                                                                                                         |                                                                                                                                        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 10.88                                                                                                                                                                            | Non-exclusive License Agreement between Epimmune and
Pharmexa A/S dated June 25, 2001 (with certain confidential
portions deleted). (1)
|                                                                                                                                                                                        
|(1) Confidential Treatment has been requested with respect to
certain portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.

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EPIMMUNE INC.




SIGNATURES

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: August 13, 2001 | By:                                                         | /s/ Emile Loria
|                      |                                                            
|                      | Emile Loria
President, Chief Executive Officer and Director

|                      |                                                                                                                  |                    
|--------------------- | ---------------------------------------------------------------------------------------------------------------- | -------------------
|                      |                                                                                                                 
|                     
|Date: August 13, 2001 | By:                                                                                                              | /s/ Robert De Vaere
|                      |                                                                                                                 
|                      | Robert De Vaere
Vice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)

22