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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

|      |  |                                                                                                                                          
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|[ X ] |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
quarterly period ended March 31, 2003, or

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

Commission file number 0-19591

EPIMMUNE INC.

(Exact name of registrant as specified in its charter)


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

5820 Nancy Ridge Drive
San Diego, California 92121

(Address of principal executive offices)


(858) 860-2500

(Registrants telephone number)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
[X] No [  ]

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

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

Common Stock: $.01 par value 12,182,919 shares outstanding as of May 9, 2003.

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TABLE OF CONTENTS



|                              |                                                                                               |                                         |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM I. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED STATEMENT OF OPERATIONS      
|                              |                                                                                               | CONDENSED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                              | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION   
|                              | ITEM 1 LEGAL PROCEEDINGS                                                                     
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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EPIMMUNE INC.
QUARTERLY REPORT
FORM 10-Q

|                              |                                                                                               |                                                                                                   |   |    |    |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | - | -- | -- |  |  | 
|TABLE OF CONTENTSCOVER PAGE   |                                                                                               |                                                                                                   | 1 |   
|TABLE OF CONTENTS             |                                                                                               |                                                                                                   | 2 |   
|PART I. FINANCIAL INFORMATION |                                                                                               |                                                                                                   |   |   
|                              | ITEM 1. Financial Statements                                                                  |                                                                                                   |   |    |   
|                              |                                                                                               | Condensed Balance Sheets as of
March 31, 2003 (unaudited) and December 31, 2002                   |   |    | 3  | 
|                              |                                                                                               | Condensed Statements of Operations (unaudited)
For the Three Months Ended March 31, 2003 and 2002 |   |    | 4  | 
|                              |                                                                                               | Condensed Statements of Cash Flows (unaudited)
For the Three Months Ended March 31, 2003 and 2002 |   |    | 5  | 
|                              |                                                                                               | Notes to Condensed Financial
Statements (unaudited)                                               |   |    | 6  | 
|                              | ITEM 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations |                                                                                                   |   | 9  |   
|                              | ITEM 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                   |   | 14 |   
|                              |                                                                                               | Risk Factors                                                                                      |   |    | 15 | 
|                              | ITEM 4. Controls and Procedures                                                               |                                                                                                   |   | 28 |   
|PART II. OTHER INFORMATION    |                                                                                               |                                                                                                   |   |   
|                              | ITEM 1. Legal Proceedings                                                                     |                                                                                                   |   | 29 |   
|                              | 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                                   |                                                                                                   |   | *  |   
|                              | ITEM 5. Other Information                                                                     |                                                                                                   |   | *  |   
|                              | ITEM 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                   |   | 29 |   
|                              | SIGNATURE                                                                                     |                                                                                                   |   | 30 |   



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

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PART I. FINANCIAL INFORMATION




ITEM I. FINANCIAL STATEMENTS


EPIMMUNE INC.




CONDENSED BALANCE SHEETS
(in thousands, except share data)


|                                           |                                                                                                                                                                                                                                                                               |   |             |          |              |   |        |          |  
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | -------- | ------------ | - | ------ | -------- | -
|                                           |                                                                                                                                                                                                                                                                               |   | March 31,   |          | December 31,
|                                           |                                                                                                                                                                                                                                                                               |   | 2003        |          | 2002        
|                                           |                                                                                                                                                                                                                                                                               |   |             |          |             
|                                           |                                                                                                                                                                                                                                                                               |   | (unaudited) |          |              |   |       
|ASSETS                                     |                                                                                                                                                                                                                                                                               |   |             |          |              |   |        |         
|Current assets:                            |                                                                                                                                                                                                                                                                               |   |             |          |              |   |        |         
|                                           | Cash and cash equivalents                                                                                                                                                                                                                                                     |   | $           | 7,553    |              |   | $      | 9,745    |  
|                                           | Prepaids and other current assets                                                                                                                                                                                                                                             |   |             | 1,116    |              |   |        | 708      |  
|                                           |                                                                                                                                                                                                                                                                               |   |             |          |              |   |        |          |  
|Total current assets                       |                                                                                                                                                                                                                                                                               |   | 8,669       |          |              |   | 10,453 |         
|Restricted long-term investment            |                                                                                                                                                                                                                                                                               |   | 472         |          |              |   | 472    |         
|Property and equipment, net                |                                                                                                                                                                                                                                                                               |   | 1,322       |          |              |   | 1,363  |         
|Patents and other assets                   |                                                                                                                                                                                                                                                                               |   | 3,298       |          |              |   | 3,240  |         
|                                           |                                                                                                                                                                                                                                                                               |   |             |          |              |   |        |          |  
|TOTAL ASSETS                               |                                                                                                                                                                                                                                                                               | $ | 13,761      |          |              | $ | 15,528 |         
|                                           |                                                                                                                                                                                                                                                                               |   |             |          |              |   |        |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                                                                                                                                                                               |   |             |          |              |   |        |         
|Current liabilities:                       |                                                                                                                                                                                                                                                                               |   |             |          |              |   |        |         
|                                           | Accounts payable and accrued liabilities                                                                                                                                                                                                                                      |   | $           | 991      |              |   | $      | 1,336    |  
|                                           | Deferred contract revenues                                                                                                                                                                                                                                                    |   |             | 1,501    |              |   |        | 1,114    |  
|                                           | Accrued payroll and related expenses                                                                                                                                                                                                                                          |   |             | 265      |              |   |        | 252      |  
|                                           | Current portion of notes payable                                                                                                                                                                                                                                              |   |             |         |              |   |        | 43       |  
|                                           |                                                                                                                                                                                                                                                                               |   |             |          |              |   |        |          |  
|Total current liabilities                  |                                                                                                                                                                                                                                                                               |   | 2,757       |          |              |   | 2,745  |         
|Deferred rent                              |                                                                                                                                                                                                                                                                               |   | 204         |          |              |   | 197    |         
|Stockholders equity:                      |                                                                                                                                                                                                                                                                               |   |             |          |              |   |        |         
|                                           | Preferred stock, $.01 par value, 10,000,000 shares authorized,
1,409,288 shares issued and outstanding of Series S and S-1 convertible
preferred stock at March 31, 2003 and December 31, 2002. Liquidation
preference of $10,000,000 at March 31, 2003 and December 31, 2002 |   |             | 14       |              |   |        | 14       |  
|                                           | Common stock, $.01 par value, 25,000,000 shares authorized,
12,182,919 shares and 12,153,462 shares issued and outstanding
at March 31, 2003 and December 31, 2002, respectively                                                                                              |   |             | 122      |              |   |        | 122      |  
|                                           | Additional paid-in capital                                                                                                                                                                                                                                                    |   |             | 166,483  |              |   |        | 166,454  |  
|                                           | Note receivable from stockholder                                                                                                                                                                                                                                              |   |             | (2,973   | )            |   |        | (2,932   | )
|                                           | Deferred compensation                                                                                                                                                                                                                                                         |   |             | (177     | )            |   |        | (203     | )
|                                           | Accumulated deficit                                                                                                                                                                                                                                                           |   |             | (152,669 | )            |   |        | (150,869 | )
|                                           |                                                                                                                                                                                                                                                                               |   |             |          |              |   |        |          |  
|Total stockholders equity                 |                                                                                                                                                                                                                                                                               |   | 10,800      |          |              |   | 12,586 |         
|                                           |                                                                                                                                                                                                                                                                               |   |             |          |              |   |        |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                                                                                                                               | $ | 13,761      |          |              | $ | 15,528 |         
|                                           |                                                                                                                                                                                                                                                                               |   |             |          |              |   |        |          |  

See accompanying notes.

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EPIMMUNE INC.




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


|                                                                |                                      |   |                              |       |      |   |        |       | 
|--------------------------------------------------------------- | ------------------------------------ | - | ---------------------------- | ----- | ---- | - | ------ | ----- | 
|                                                                |                                      |   | Three months ended March 31,
|                                                                |                                      |   | 2003                         |       | 2002
|                                                                |                                      |   |                              |       |     
|Revenues                                                        |                                      |   |                              |       |      |   |        |      
|                                                                | License fees and milestones          |   | $                            | 202   |      |   | $      |      | 
|                                                                | Research grants and contract revenue |   |                              | 255   |      |   |        | 536   | 
|                                                                | Related party revenue                |   |                              | 973   |      |   |        | 1,420 | 
|                                                                |                                      |   |                              |       |      |   |        |       | 
|Total revenues                                                  |                                      |   | 1,430                        |       |      |   | 1,956  |      
|Costs and expenses:                                             |                                      |   |                              |       |      |   |        |      
|                                                                | Research and development             |   |                              | 2,610 |      |   |        | 2,687 | 
|                                                                | General and administrative           |   |                              | 683   |      |   |        | 578   | 
|                                                                |                                      |   |                              |       |      |   |        |       | 
|Total costs and expenses                                        |                                      |   | 3,293                        |       |      |   | 3,265  |      
|Loss from operations                                            |                                      |   | (1,863                       | )     |      |   | (1,309 | )    
|Interest income, net                                            |                                      |   | 65                           |       |      |   | 259    |      
|Other expense, net                                              |                                      |   | (2                           | )     |      |   | (1     | )    
|                                                                |                                      |   |                              |       |      |   |        |       | 
|Net loss                                                        |                                      | $ | (1,800                       | )     |      | $ | (1,051 | )    
|                                                                |                                      |   |                              |       |      |   |        |       | 
|Net loss per share - basic and diluted                          |                                      | $ | (0.15                        | )     |      | $ | (0.09  | )    
|                                                                |                                      |   |                              |       |      |   |        |       | 
|Shares used in computing net loss per share - basic and diluted |                                      |   | 11,676                       |       |      |   | 11,324 |      
|                                                                |                                      |   |                              |       |      |   |        |       | 

See accompanying notes.

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EPIMMUNE INC.




CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)


|                                                                            |                                             |                                          |        |                              |      |      |        |      |      |  
|--------------------------------------------------------------------------- | ------------------------------------------- | ---------------------------------------- | ------ | ---------------------------- | ---- | ---- | ------ | ---- | ---- | -
|                                                                            |                                             |                                          |        | Three months ended March 31,
|                                                                            |                                             |                                          |        | 2003                         |      | 2002
|                                                                            |                                             |                                          |        |                              |      |     
|OPERATING ACTIVITIES                                                        |                                             |                                          |        |                              |      |      |        |     
|Net loss                                                                    |                                             | $                                        | (1,800 | )                            |      | $    | (1,051 | )   
|Adjustments to reconcile net loss to net cash used in operating
activities: |                                             |                                          |        |                              |      |      |        |     
|                                                                            | Interest on note held by stockholder        |                                          |        | (41                          | )    |      |        | (174 | )   
|                                                                            | Depreciation and amortization               |                                          |        | 205                          |      |      |        | 172  |     
|                                                                            | Stock-based compensation                    |                                          |        | 31                           |      |      |        | (63  | )   
|                                                                            | Deferred rent                               |                                          |        | 7                            |      |      |        | 11   |     
|                                                                            | Deferred contract revenue                   |                                          |        | 387                          |      |      |        | (346 | )   
|                                                                            | Loss on disposal of assets                  |                                          |        | 1                            |      |      |        |     |     
|                                                                            | Change in operating assets and liabilities: |                                          |        |                              |      |      |        |      |     
|                                                                            |                                             | Prepaids and other current assets        |        |                              | (408 | )    |        |      | (425 | )
|                                                                            |                                             | Accounts payable and accrued liabilities |        |                              | (345 | )    |        |      | 505  |  
|                                                                            |                                             | Accrued payroll and related expenses     |        |                              | 13   |      |        |      | 81   |  
|                                                                            |                                             |                                          |        |                              |      |      |        |     
|Net cash used in operating activities                                       |                                             |                                          | (1,950 | )                            |      |      | (1,290 | )   
|INVESTING ACTIVITIES                                                        |                                             |                                          |        |                              |      |      |        |     
|Purchases of available-for-sale securities                                  |                                             |                                          |       |                              |      |      | (812   | )   
|Purchase of property and equipment                                          |                                             |                                          | (43    | )                            |      |      | (438   | )   
|Patents and other assets                                                    |                                             |                                          | (179   | )                            |      |      | (154   | )   
|                                                                            |                                             |                                          |        |                              |      |      |        |     
|Net cash used in investing activities                                       |                                             |                                          | (222   | )                            |      |      | (1,404 | )   
|FINANCING ACTIVITIES                                                        |                                             |                                          |        |                              |      |      |        |     
|Principal payments under equipment notes payable and note
payable to bank   |                                             |                                          | (43    | )                            |      |      | (107   | )   
|Net proceeds from issuance of common stock                                  |                                             |                                          | 23     |                              |      |      | (14    | )   
|                                                                            |                                             |                                          |        |                              |      |      |        |     
|Net cash used in financing activities                                       |                                             |                                          | (20    | )                            |      |      | (121   | )   
|Decrease in cash and cash equivalents                                       |                                             |                                          | (2,192 | )                            |      |      | (2,815 | )   
|Cash and cash equivalents at beginning of year                              |                                             |                                          | 9,745  |                              |      |      | 8,038  |     
|                                                                            |                                             |                                          |        |                              |      |      |        |     
|Cash and cash equivalents at end of period                                  |                                             | $                                        | 7,553  |                              |      | $    | 5,223  |     
|                                                                            |                                             |                                          |        |                              |      |      |        |     
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION                            |                                             |                                          |        |                              |      |      |        |     
|Interest paid                                                               |                                             | $                                        | 2      |                              |      | $    | 9      |     
|                                                                            |                                             |                                          |        |                              |      |      |        |     
|SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCIAL ACTIVITIES     |                                             |                                          |        |                              |      |      |        |     
|Unrealized losses on available-for-sale securities                          |                                             | $                                        |       |                              |      | $    | (27    | )   
|                                                                            |                                             |                                          |        |                              |      |      |        |     

See accompanying notes.

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EPIMMUNE INC.




NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
March 31, 2003


1. Basis of Presentation

The interim unaudited condensed financial statements contained herein have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information. Accordingly, they do not
include all of the information and 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, 2002.

The Company has an accumulated deficit of $152.7 million as of March 31, 2003.
The Companys ability to attain profitable operations is dependent upon
obtaining sufficient working capital to complete the successful development of
its products, FDA approval of its products, achieving market acceptance of such
products and achievement of sufficient levels of revenue to support the
Companys cost structure. Management believes that the Companys existing
capital resources will enable the Company to fund operations through December
2003. Without additional financing, the Company will be required to delay,
reduce the scope of or eliminate one or more of its research and development
projects and significantly reduce its expenditures on infrastructure.

Earnings per share (EPS) is computed in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share, FAS 128. FAS 128
requires dual presentation of basic and diluted earnings per share. Basic EPS
includes no dilution and is computed by dividing net income by the weighted
average number of common shares outstanding for the period, excluding owned but
unvested shares. There were 474,286 and 738,181 owned but unvested shares as
of March 31, 2003 and March 31, 2002, respectively. Diluted EPS reflects the
potential dilution of securities that could share in our earnings, such as
common stock equivalents that may be issuable upon exercise of outstanding
common stock options or warrants as well as all shares of preferred stock,
which may be converted into common stock. Prior to the application of the
treasury stock method for options and warrants, common stock equivalents of
3,515,829 and 3,449,880 for the three months ended March 31, 2003 and 2002 have
been excluded from EPS as the effect is antidilutive. On a fully diluted
basis, assuming full vesting and conversion of all common stock equivalents
upon exercise of outstanding common stock options and warrants as well as
conversion of all shares of preferred stock, there were 15,698,748 and
15,544,637 shares outstanding as of March 31, 2003 and March 31, 2002,
respectively.

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

As required under SFAS No. 123, Accounting for Stock-Based Compensation, and
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, the pro forma effects of stock-based compensation on net income and
net earnings per common share have been estimated at the date of grant using
the Black-Scholes option pricing model based on the following weighted-average
assumptions: risk-free interest rates of 6%; dividend yield of 0; and a
weighted average expected life for

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all options of six years. The volatility factor assumptions of the expected
market price of the Companys common stock were 114% and 87% for March 31, 2003
and 2002, respectively.

For purposes of adjusted pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The effect of
applying SFAS No. 123 for purposes of providing pro forma disclosures is not
likely to be representative of the effects on the Companys operating results
for future years because changes in the subjective input assumptions can
materially affect future value estimates. Pro forma information for the three
months ended March 31, 2003 and 2002 is as follows:

|                                                        |  |                              |            |      |  |   |            |  
|------------------------------------------------------- |  | ---------------------------- | ---------- | ---- |  | - | ---------- | -
|                                                        |  | Three months ended March 31,
|                                                        |  |                             
|                                                        |  | 2003                         |            | 2002
|                                                        |  |                              |            |     
|Adjusted pro forma basic and diluted net loss           |  | $                            | (1,966,000 | )    |  | $ | (1,235,000 | )
|Adjusted pro forma basic and diluted net loss per share |  | $                            | (0.17      | )    |  | $ | (0.11      | )

2. New Accounting Standards

In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation- Transition and Disclosure- an amendment of FASB Statement No.
123. This statement amends SFAS No. 123 Accounting for Stock Based
Compensationto provide alternative methods of voluntarily transitioning to
the fair value based method of accounting for stock-based employee
compensation. SFAS 148 also amends the disclosure requirements of SFAS 123 to
require disclosure of the method used to account for stock-based employee
compensation and the effect of the method on reported results in both annual
and interim financial statements. The disclosure provisions are effective for
the Company beginning with its year ended December 31, 2002. The Company has
not yet completed the final evaluation of the options presented by SFAS 148.
However, within fiscal year 2003, Management expects to reach a determination
of whether and, if so, when to change the Companys existing accounting for
stock-based compensation to the fair value method in accordance with the
transition alternatives of SFAS 148.

3. Potential Merger with Anosys, Inc.

In February 2003, the Company preliminarily agreed with Anosys, Inc. to merge
its operations to create a combined company focused on the field of
immunotherapeutics and products for the treatment of cancer and infectious
diseases. The all-stock transaction is subject to the parties entering into a
definitive merger agreement, approval by the shareholders of both companies,
obtaining commitments for capital resources to fund the combined companys
operations and various other conditions that must be satisfied prior to the
closing of the merger.

4. Note Receivable from Stockholder

In January 2001, the Company sold Dr. Loria 1,056,301 shares of its common
stock at the closing price of such common stock as reported by the Nasdaq
National Market on the date of purchase, which was $2.50 per share. These
shares vest in equal daily installments over the four-year period following the
purchase date and the Company has a right to purchase any unvested shares at
the purchase price paid by Dr. Loria in the event of termination of Dr. Lorias
service to the Company. Dr. Loria purchased the shares with a promissory note
in the principal amount of $2,641,000, which is secured by a pledge of the
shares. The note bears interest at the rate of 5.61% per year, compounded
annually. The principal and interest is due on January 16, 2005. For the three
months ended March 31, 2003 and 2002, there was principal and interest
outstanding under the note of $2,973,000 and $2,815,000, respectively.

The Company is recording monthly compensation expense related to the shares
sold to Dr. Loria based on the provisions of EITF 95-16, Accounting for Stock
Compensation Arrangements with Employer Loan features under APB 25. For the
three months ended March 31, 2003 and 2002, the Company had

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$0 and $81,000 of deferred compensation expense related to unvested shares on its
balance sheet, respectively. The Company will continue to record compensation
expense based on the difference between the exercise price and the current fair
market value of the vested shares until the note is paid off.

The Company is also recording compensation expense related to the below market
interest rate the promissory note bears. The Company recorded $24,000 in
compensation expense related to the below market interest rate on the note for
the three months ended March 31, 2003 and 2002. In addition, the Company had
$177,000 and $278,000 of accrued deferred compensation expense for the three
months ended March 31, 2003 and 2002, respectively, which it will recognize
monthly until the note matures in January 2005.

5. Beckman Coulter

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

6. Immuno-Designed Molecules, S.A.

In October 2002, the Company entered into an evaluation and license option
agreement with Immuno-Designed Molecules, S.A. for certain cancer antigens for
use in IDMs ex vivo cancer therapy program. Under the terms of the agreement,
IDM had 120 days from the date of the option agreement to evaluate the epitopes
and exercise its option to license certain patented and non-patented rights to
Epimmunes universal cancer epitope packages for use in ex vivo cancer therapy.
In February 2003, IDM exercised its option and the Company is negotiating a
license agreement with IDM pursuant to which IDM will be granted a
non-exclusive license to use the epitopes in connection with its
Dendritophage(TM) ex vivo technology. The Company received an evaluation
license fee when it entered into the evaluation and license option agreement,
which was amortized into revenue over the evaluation period. The Company also
received a license fee in February 2003 when IDM exercised its option. The
Company is amortizing the license fee over the estimated four-year life of the
license. In the event the parties enter into a license agreement, the Company
may be entitled to receive commercialization milestone payments and royalties
on product sales if IDM develops products using Epimmunes technology.

7. Merck and Co., Inc.

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

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PART I. FINANCIAL INFORMATION




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

Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include,
without limitation, those discussed below and in the section entitled Risk
Factors.

Epimmune, EIS and PADRE® are our trademarks and ImmunoStealth is our service
mark.

Since 1997, we have devoted substantially all of our resources to the discovery
and development of potential therapeutic and prophylactic products. To date, we
have not received any revenues from the sale of products. We began a Phase I/II
clinical trial targeting HIV in September 2002 and a Phase I/II clinical trial
targeting lung and colorectal cancer in February 2003. We have funded our
research and development primarily from equity-derived working capital and
through strategic alliances and collaborations with other companies. We have
not been profitable since our inception and expect to incur substantial
operating losses for at least the next several years. As of March 31, 2003, our
accumulated deficit was approximately $152.7 million.

In July 2001, we entered into a collaboration agreement with Genencor. The
revenue that we recognize from Genencor includes milestone payments,
recognition of upfront license fees over the term of the contract and contract
research and development funding to support our research over the term of the
collaboration. As of March 31, 2003, Genencor owned 11.0% of our common stock
and is therefore considered a related party for financial reporting purposes.
Therefore, all payments that we receive under this agreement are itemized under
the category, Related Party Revenue.

In February 2003, we preliminarily agreed with Anosys, Inc. to merge our
operations to create a combined company focused on the field of
immunotherapeutics and products for the treatment of cancer and infectious
diseases. The all-stock transaction is subject to the parties entering into a
definitive merger agreement, approval by the shareholders of both companies,
obtaining commitments for capital resources to fund the combined companys
operations and various other conditions that must be satisfied prior to the
closing of the merger. All of the projections, trends and forward-looking
statements included herein are based on Epimmune operating as a stand-alone
entity. In the event that this proposed merger and related financing is
completed, these projections, trends and forward-looking statements will likely
change, and the changes may be significant.

Critical Accounting Policies

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

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Revenue Recognition

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

Patents

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

Investment Policy

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

Results of Operations

Three months ended March 31, 2003, as compared with three months ended March
31, 2002.

In the three months ended March 31, 2003, we had total revenues of $1.4
million, as compared to $2.0 million in revenue in the three months ended March
31, 2002. The decrease in the three months ended March 31, 2003 relates
primarily to a $0.5 million reduction in related party revenue and a $0.3
million reduction in grant and contract revenue, partially offset by a $0.2
million increase in licensing and milestone revenue. Related party revenue
includes milestone payments, amortization of license fees and contract research
and development funding, as a result of our collaboration with Genencor. The
reduction in related party revenue was a result of an increase in the time
period during which the license fees previously paid by Genencor are being
amortized due to the extension of the agreement and recognition of a
non-recurring milestone payment as revenue during the first quarter of 2002.
The change in the estimated life of the license occurred due to the extension
of the agreement term. The decrease in grant revenue during the three months
ended March 31, 2003, compared to the three months

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ended March 31, 2002, was a result of completion of work on certain grants and the timing of
costs to be included for reimbursement on others. The increase in licensing
and milestone revenue during the first quarter of 2003 was a result of
amortization of evaluation fees and license fees received from Aventis,
Immuno-Designed Molecules and Beckman Coulter during 2003 whereas we did not
recognize any license fees or milestone payments as revenue during the first
quarter of 2002.

Research and development expenses decreased to $2.6 million in the three months
ended March 31, 2003 from $2.7 million in the comparable period of 2002. The
decrease in the three months ended March 31, 2003 relates primarily to lower
patent and intellectual property related expenses, lower outside costs related
to preclinical activities such as formulation and toxicology studies for our
HIV, and lung and colorectal cancer programs which are now in clinical trials,
partially offset by higher labor costs as a result of an increase in our
personnel responsible for research and development activities. We expect our
research and development expenses to increase between 6% and 20% in 2003
compared with 2002, as we continue our research and development programs as
well as our clinical trials in HIV and lung and colon cancer.

General and administrative costs were approximately $0.7 million in the three
months ended March 31, 2003 and $0.6 million in the three months ended March
31, 2002. The increase in the three months ended March 31, 2003 relates
primarily to expensing legal, accounting and printing fees and other outside
costs related to our previously proposed follow-on public offering. We had
originally capitalized those costs in anticipation of completing that offering.
We expect our general and administrative expenses to continue to increase in
2003 over corresponding 2002 levels as a result of the activities related to
our proposed merger with Anosys and the related financing.

Net interest income was $0.1 million in the three months ended March 31, 2003
and $0.3 million in the three months ended March 31, 2002. We recorded
interest income of $40,000 and $0.2 million, respectively, during the three
months ended March 31, 2003 and March 31, 2002, for interest accrued on the
note issued for the purchase of shares by Dr. Loria, our president and chief
executive officer, in January 2001. The $0.2 million in interest on the note
recorded in the three months ended March 31, 2002 includes a full years
interest from 2001 in addition to the amount recorded for the first quarter of
2002. We also had lower average cash balances and rates of return in the three
months ended March 31, 2003, compared to the three months ended March 31, 2002.

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

Liquidity and Capital Resources

We have financed operations since inception primarily through private
placements of equity securities, two public common stock offerings, revenues
under collaborative research and development agreements, grant revenues,
certain asset divestitures and interest income. Through March 31, 2003, we had
raised approximately $166.6 million from the sale of equity securities. As of
March 31, 2003, we had 13,791,367 shares outstanding on an as-converted to
common stock basis, assuming conversion of preferred shares.

As of March 31, 2003, our cash and cash equivalents were $7.6 million compared
to $9.7 million at December 31, 2002. The decrease was due to cash used for
operations. We expect to continue to use our cash and cash equivalents to fund
our ongoing clinical trials and drug research and development programs.

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Capital expenditures were negligible in the first quarter of 2003 and were $0.4
million in the first quarter of 2002. The expenditures for the first quarter
of 2002 were primarily for laboratory equipment to increase and improve
immunological screening throughput and to build out additional laboratory space
to accommodate additional employees. In the past, we have financed our
laboratory equipment and research and office facilities primarily through
operating lease arrangements and a note payable. During the first quarter of
2003 we made payments under the notes payable of approximately $40,000 compared
to $0.1 million in the first quarter of 2002. We have now fully paid off our
note payable as of the end of the first quarter of 2003. During 2003, we
anticipate that payments related to leasehold improvements and capital
expenditures will decrease compared to 2002 levels to a range of approximately
$0.4 million to $0.5 million. We will also pay approximately $0.6 million in
rent on our lease commitments during 2003.

Payments related to capitalized patent expenses were $0.1 million in the first
quarter of 2003 compared to $0.2 million in the first quarter of 2002. We
expect payments related to patents to be relatively flat in 2003 compared to
2002 as we continue to pursue filings and claims in our intellectual property
portfolio.

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

We also anticipate that operating expenses for the full year 2003 will rise
over 2002 levels. The anticipated rise in expenses relates to beginning our
Phase I/II clinical trial targeting HIV in September 2002 and our Phase I/II
clinical trial targeting lung and colorectal cancer in February 2003. We also
anticipate using some of our cash and investment in 2003 to fund our
collaboration with Bavarian Nordic. We will share equally with Bavarian Nordic
in all research related expenses and have included these anticipated
expenditures in our operating expense forecast for 2003. We will also become
liable in 2003 for payment of license fees of up to $0.1 million.

We anticipate that our existing cash and investments and interest earned
thereon, along with the cash receipts related to existing contracts will enable
us to maintain our current and planned operations through December 2003. We
will continue to spend substantial amounts on research and development,
including amounts spent for manufacturing clinical supplies, conducting
clinical trials for our HIV and lung and colorectal product candidates and
expanding our drug development programs. Therefore, we will need to raise
additional funding, however we do not have committed external sources of
funding and may not be able to obtain any additional funding, especially if
weak market conditions persist for biotechnology companies. If we are unable to
obtain additional funding, we may be forced to curtail certain operations to
focus on our primary research and development activities. Our future
operational and capital requirements will depend on many factors, including:



| |  |  | whether the proposed merger with Anosys and related financing occurs                                                             
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the costs associated with our clinical trials for our vaccine
targeting HIV, which began in the third quarter of 2002;           
|
| |  |  | the costs associated with our clinical trials for our vaccine
targeting lung and colorectal cancer, which began in February 2003;

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| |  |  | progress with other preclinical testing and clinical trials in the
future;                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to establish and maintain collaboration and license
agreements and any government grants;             
|
| |  |  | the actual revenue we receive under our collaboration and license agreements;                                     
|
| |  |  | the actual costs we incur under our research collaboration with Bavarian Nordic;                                  
|
| |  |  | the actual payment of license fees which may become payable at the option of the licensor;                        
|
| |  |  | the time and costs involved in obtaining regulatory approvals;                                                    
|
| |  |  | the costs involved in filing, prosecuting, enforcing and
defending patent claims and any other proprietary rights;
|
| |  |  | competing technological and market developments;                                                                  
|
| |  |  | changes in our existing research relationships;                                                                   
|
| |  |  | continued scientific progress in our drug discovery programs; and                                                 
|
| |  |  | the magnitude of our drug discovery and development programs.                                                     

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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RISK FACTORS

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

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

We will continue to spend substantial amounts on research and development,
including amounts spent for manufacturing clinical supplies, conducting
clinical trials for our product candidates and expanding our drug development
programs. Therefore, we will need to raise additional funding and we do not
have committed external sources of funding and may not be able to obtain any
additional funding, especially if weak market conditions persist for
biotechnology companies. Our future operational and capital requirements will
depend on many factors, including:



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

We intend to seek additional funding through collaboration and license
agreements, government research grants or equity or debt financings. In the
event we are able to obtain financing, it may not be on favorable terms. In
addition, we may not be able to enter into additional collaborations to reduce
our

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funding requirements. If we acquire funds by issuing securities, further
dilution to existing stockholders will result. If we raise funds through
additional collaborations and license agreements, we will likely have to
relinquish some or all of the rights to product candidates or technologies that
we may have otherwise developed ourselves. If we are unable to obtain funding,
we may be required to cease development of some product candidates, reduce the
scope of our operations, sell the Company or certain of its assets or
technologies or cease operations.

We may not be successful in completing our proposed merger with Anosys, Inc.

Although we have preliminarily agreed with Anosys to merge our operations, we
may never enter into a definitive agreement with Anosys and even in the event
that we do enter into a definitive merger agreement, the merger may not close
because we are unable to obtain financing for the combined company or our
stockholders may fail to approve the issuance of the shares of our common stock
in the proposed merger or in the proposed financing. If the proposed merger
and related financing is not completed or is delayed, our business may suffer
for a number of reasons including, but not limited to, other opportunities
foregone while the transaction was pending, additional costs incurred in
support of the proposed merger, loss of employees due to uncertainty
surrounding the acquisition and a further reduction in our cash balances. Even
if the proposed merger is completed, we may fail to realize the anticipated
benefits of the merger. In addition, if the proposed merger and financing is
completed, your ownership in our stock will be significantly diluted.

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

In order to continue trading on The NASDAQ National Market, we must comply with
The NASDAQ National Markets continued listing requirements, which require that
we maintain a minimum stockholders equity of $10.0 million and a minimum
closing bid price of $1.00 per share.

We currently are in compliance with The NASDAQ National Markets continued
listing requirements. However, if in the future we fail to satisfy The NASDAQ
National Markets continued listing requirements, our common stock may be
delisted from The NASDAQ National Market. The delisting of our common stock
may result in the trading of the stock on the NASDAQ SmallCap Market or the OTC
Bulletin Board. Consequently, a delisting of our common stock from The NASDAQ
National Market may reduce the liquidity of our common stock and adversely
affect our ability to raise additional necessary capital.

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

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



| |  |  | the results of preclinical studies may be inconclusive, or they may
not be indicative of results that will be obtained in human clinical
trials;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

We have experienced significant operating losses since our inception in 1987.
As of March 31, 2003, we had an accumulated deficit of $152.7 million. We
expect to continue to incur substantial operating expenses and net operating
losses for the foreseeable future, which may hurt our ability to continue
operations. We have not generated revenues from the commercialization of any
product. All of our revenues to date have consisted of contract research and
development revenues, license and milestone payments, research grants, certain
asset divestitures and interest income. We expect that substantially all of our
revenues for the foreseeable future will result from similar sources. To
achieve profitable operations, we, alone or with collaborators, must
successfully identify, develop, register and market proprietary products. We do
not expect to generate revenues from the commercialization of any product for
at least six years (and this would assume approval of either our HIV or lung
and colorectal product candidate, which may not occur). We may not be able to
generate sufficient product revenue to become profitable. Even if we do achieve
profitability, we may not be able to sustain or increase our profitability on a
quarterly or yearly basis.

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

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

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

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



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

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

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

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

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



| |  |  | pharmaceutical companies;           
| | - |  | ------------------------------------
|
| |  |  | chemical companies;                 
|
| |  |  | specialized biotechnology companies;

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| |  |  | academic institutions; and
| | - |  | --------------------------
|
| |  |  | research organizations.   

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

Our vaccines under development address a range of cancer and infectious disease
markets. The competition in these markets is extremely formidable. There are 16
drugs currently approved in the United States for HIV, and according
to a PhRMA
2001 report on pharmaceutical drug development, there were 98 new product
candidates in clinical development for HIV and related conditions, including 14
HIV vaccines. In addition, according to a PhRMA 2001 report on pharmaceutical
drug development, there were 402 new product candidates in clinical development
for the treatment of cancer, and at least 33 companies were developing more
than 50 vaccines against various cancers. An important factor in competition
may be the timing of market introduction of our vaccines and competitive
products. Accordingly, the relative speed with which we can develop vaccines,
complete the clinical trials and approval processes and supply commercial
quantities of the vaccines to the market are expected to be important
competitive factors. We expect that competition among products approved for
sale will be based, among other things, on product effectiveness, safety,
reliability, availability, price and patent position.

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our collaborations and license arrangements generally pose the following risks:



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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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



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

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

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

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

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

We are highly dependent on the principal members of our scientific and
management staff. We do not maintain key person life insurance on the life of
any employee and, although we have an employment contract with Dr. Emile Loria,
he may terminate his employment at any time. Our ability to identify epitopes,
develop vaccines and achieve our other business objectives also will depend in
part on the continued service of our key scientific and management personnel
and our ability to identify, hire and retain additional qualified personnel.
There is intense competition for qualified personnel in biochemistry, molecular
biology, immunology and other areas of our activities, and we may not be able
to continue to attract and retain such personnel necessary for the development
of our business. Because of the intense competition for qualified personnel
among technology-based businesses, particularly in the San Diego area, we may
not be successful in adding technical personnel as needed to meet the staffing
requirements of additional collaborative relationships. Our failure to attract
and retain key personnel could delay or be significantly detrimental to our
product development programs and could cause our stock price to decline.

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

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

If we do not develop a sufficient sales and marketing force, we may not be able
to successfully commercialize our products, which would limit our ability to
earn product revenues.

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 or obtain
the assistance of one or more pharmaceutical companies with a large
distribution system and a large direct sales force. If we cannot develop sales
and distribution capabilities, or enter into effective arrangements with third
parties in a timely manner on acceptable terms, we may not be able to
successfully commercialize any products we may develop and may not earn product
revenues. Other than our agreement with Genencor, we do not have any existing
distribution arrangements with any pharmaceutical company for our vaccines
under development. We cannot be sure that we can establish sales and
distribution capabilities or successfully gain market acceptance for our
products.

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

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

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

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

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

Our business exposes us to potential product liability risks that are inherent
in the testing, manufacturing and marketing of human therapeutic products.
While we currently have product liability insurance for an early stage clinical
trial, we cannot be sure that we can maintain such insurance on acceptable
terms or

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obtain acceptable insurance as we progress through product development and
commercialization, or that our insurance will provide adequate coverage against
potential liabilities, either in human clinical trials or following
commercialization of any vaccines we may develop.

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

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

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

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



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

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

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

Our common stock is expressly subordinate to our series S and series S-1
preferred stock in the event of our liquidation, dissolution or winding up.
With respect to our series S preferred, any merger or sale of substantially all
of our assets shall be considered a deemed liquidation. In connection with the
proposed merger with Anosys and related financing, these shares of Series S and
Series S-1 preferred stock would be converted into 1,608,448 shares of our
common stock. If we were to cease operations and liquidate our assets, we
would first be required to pay $10 million to our holders of preferred stock
and there may not be any remaining value available for distribution to the
holders of common stock after providing for

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the series S and series S-1 preferred stock liquidation preference. In
addition, due to adjustments to the conversion price of our series S preferred
stock, in the event our series S preferred stock is converted to common stock,
it will further dilute our holders of common stock.

The effect of anti-takeover provisions may deprive our stockholders from
receiving a premium over the market price of our common stock.

Provisions of our certificate of incorporation may have the effect of deterring
unsolicited take-over offers and thereby deprive our stockholders from
receiving a premium over the market price of our common stock. Our certificate
of incorporation includes a provision that requires the approval of holders of
at least 66 2/3% of our voting stock as a condition to a merger or certain
other business transactions with, or proposed by, a holder of 15% or more of
our voting stock. This approval is not required in cases where certain of our
directors approve the transaction or where certain minimum price criteria and
other procedural requirements are met. Our certificate of incorporation also
requires the approval of holders of at least 66 2/3% of our voting stock to
amend or change the provisions mentioned relating to the transaction approval.
Finally, our certificate of incorporation provides that any action required or
permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting rather than by any consent in writing. Our
stockholder rights plan, commonly referred to as a poison pill expired on March
19, 2003.

The promissory note that is outstanding to our chief executive officer is only
a 50%-recourse note.

We loaned our chief executive officer $2,641,000 in January 2001 in connection
with his purchase of shares of our common stock. The note bears interest at
the rate of 5.61% per year, compounded annually. The principal and interest is
due on January 16, 2005. The note is only 50% recourse and is secured by a
pledge of the 1,056,301 shares of our common stock, which as of May 8, 2003,
was valued at $1,595,014. In the event the note is not paid when due, our only
recourse is for 50% of the value of the note and we may never receive payment
for the other 50% of the value of the note.

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

As of March 31, 2003, our officers, directors and those stockholders owning at
least five percent of our outstanding stock together control approximately
64.9% of our outstanding common stock as converted and Pharmacia holds 100% of
our preferred stock. If some or all of these officers, directors and principal
stockholders act together, they will be able to exert a significant degree of
influence over our management and affairs and over matters requiring
stockholder approval, including the election of directors and approval of the
proposed merger with Anosys and related financing 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 also could
depress our stock price.

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ITEM 4. CONTROLS AND PROCEDURES



|(a) |  | Evaluation of Disclosure Controls and Procedures
|--- |  | ------------------------------------------------

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



|(b) |  | Changes in Internal Controls
|--- |  | ----------------------------

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

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PART II. OTHER INFORMATION






|ITEM 1 |  | LEGAL PROCEEDINGS                                                                                                                            
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|      
|       |  | From time to time we are involved in certain litigation arising out
of our operations. We are not currently engaged in any legal
proceedings.






|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K
|------- |  | --------------------------------



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

|             |  |                                                                       
|------------ |  | ----------------------------------------------------------------------
|Exhibit 99.1 |  | Certification pursuant to Section 906 of the Public Company Accounting

| |  |  | Reform and Investor Protection Act of 2002 (18
U.S.C. § 1350, as adopted)
| |  |  | -------------------------------------------------------------------------

|             |  |                                                                       
|------------ |  | ----------------------------------------------------------------------
|Exhibit 99.2 |  | Certification pursuant to Section 302 of the Public Company Accounting

| |     |  | Reform and Investor Protection Act of 2002 (18
U.S.C. § 1350, as adopted)
| | --- |  | -------------------------------------------------------------------------
|
| | (b) |  | Reports on Form 8-K during the first quarter ended March 31,
2003        
|
| |     |  | None.                                                                    

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EPIMMUNE INC.




SIGNATURES

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



|                  |  |               |  |                                                                                                                                                      
|----------------- |  | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|                  |  | EPIMMUNE INC.
|                 
|Date: May 9, 2003 |  | By:           |  | /s/  Emile Loria                                                                                                                                     
|                  |  |               |  |                                                                                                                                                      
|                  |  |               |  | Emile Loria, M.D.
President, Chief Executive Officer and Director                                                                                    
|                  |  |               |  |                                                                                                                                                      
|Date: May 9, 2003 |  | By:           |  | /s/  Robert De Vaere                                                                                                                                 
|                  |  |               |  |                                                                                                                                                      
|                  |  |               |  | Robert De Vaere
Vice President, Finance and Administration,
Chief Financial Officer, Assistant Secretary
(Principal Financial and Accounting Officer)

30