<PAGE>   1


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

[X]     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934 for the quarterly period ended June 30, 1999, or

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

                         Commission file number 0-19591

                                  EPIMMUNE INC.

             (Exact name of Registrant as specified in its charter)

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

                             5820 Nancy Ridge Drive

                           San Diego, California 92121
                           ---------------------------
                    (Address of principal executive offices)

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

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

                              Yes [X]       No [ ]

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

Common Stock: $.01 par value 6,026,655 shares outstanding as of July 1, 1999.



                                                                               1
<PAGE>   2

                                  EPIMMUNE INC.
                                QUARTERLY REPORT
                                    FORM 10-Q

                                TABLE OF CONTENTS

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

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

PART I.  FINANCIAL INFORMATION

           ITEM 1.   Financial Statements

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

                     Condensed Consolidated Statements of Operations
                     For the Three and Six Months Ended June 30, 1999 and 1998................. 4

                     Condensed Consolidated Statements of Cash Flows
                     For the Six Months Ended June 30, 1999 and 1998........................... 5

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

           ITEM 2.   Management's Discussion and Analysis of Financial
                     Condition and Results of Operations...................................... 11

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

PART II. OTHER INFORMATION

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

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

           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......................................... 22

           SIGNATURE ......................................................................... 23
</TABLE>


*       NO INFORMATION PROVIDED DUE TO INAPPLICABILITY OF ITEM.



                                                                               2
<PAGE>   3

PART I.  FINANCIAL INFORMATION

ITEM I.  FINANCIAL STATEMENTS

                                 EPIMMUNE INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS

                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                  JUNE 30,        DECEMBER 31,
                                                                    1999              1998
                                                                 ---------         ---------
ASSETS                                                          (unaudited)
<S>                                                              <C>               <C>
Current assets:
   Cash and cash equivalents                                     $   1,777         $   2,594
   Short-term investments                                            7,915             9,217
   Prepaids and other current assets                                 1,114             1,657
                                                                 ---------         ---------
     Total current assets                                           10,806            13,468

Restricted short-term investment                                       472               472
Property and equipment, net                                            944             2,879
Patents and other assets                                             2,101             4,211
                                                                 ---------         ---------
     Total assets                                                $  14,323         $  21,030
                                                                 =========         =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued liabilities                      $   1,508         $   2,289
   Deferred contract revenues                                           --               515
   Accrued restructuring cost                                        2,150                --
   Accrued payroll and related expenses                                289               416
   Current portion of obligations under equipment
    loans and notes payable                                            182               493
                                                                 ---------         ---------
     Total current liabilities                                       4,129             3,713

Equipment loans and notes payable                                      478             1,606

Commitments

Minority interest in consolidated subsidiary                         1,388             1,735

Stockholders' equity:
   Preferred stock, $.01 par value, 10,000,000 shares
     authorized, 659,898 shares issued and outstanding
     at June 30, 1999 and December 31, 1998, respectively                7                 7
   Common stock, $.01 par value, 75,000,000 shares
     authorized at 4,998,873 shares and 4,987,453 shares
     issued and outstanding at June 30, 1999 and
     December 31, 1998, respectively
                                                                        50                50
   Additional paid-in capital                                      142,664           142,642
   Accumulated deficit                                            (134,345)         (128,723)
   Unrealized (loss) on available-for-sale securities                  (48)               --
                                                                 ---------         ---------
Total stockholders' equity                                           8,328            13,976
                                                                 ---------         ---------
                                                                 $  14,323         $  21,030
                                                                 =========         =========
</TABLE>

See accompanying notes



                                                                               3
<PAGE>   4

                                  EPIMMUNE INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED JUNE 30,              SIX MONTHS ENDED JUNE 30,
                                              -------------------------------         -------------------------------
                                                  1999                1998                1999                1998
                                              -----------         -----------         -----------         -----------
<S>                                           <C>                 <C>                 <C>                 <C>
REVENUES

Research and development revenues             $       474         $       507         $     1,403         $       977
                                              -----------         -----------         -----------         -----------
                                                      474                 507               1,403                 977
COSTS AND EXPENSES:
Research and development                            2,035               4,616               6,314               8,402
General and administrative                            351               1,508               1,589               2,612
Restructuring costs                                    --                  --               3,700                  --
                                              -----------         -----------         -----------         -----------
   Total costs and expenses                         2,386               6,124              11,603              11,014

   Loss from operations                            (1,912)             (5,617)            (10,200)            (10,037)

Minority interest in net loss of
    consolidated subsidiary                           382                 120                 523                 145
Interest income, net                                   91                 263                 194                 539
Other income                                          550                  --                 550                  --
Gain on disposal of assets                             15                  --               3,311                  --
                                              -----------         -----------         -----------         -----------
Net loss                                      $      (874)        $    (5,234)        $    (5,622)        $    (9,353)
                                              ===========         ===========         ===========         ===========

Net loss per share - basic and diluted        $     (0.17)        $     (1.11)        $     (1.13)        $     (2.00)
                                              ===========         ===========         ===========         ===========

Shares used in computing net
loss per share - basic and diluted              4,997,422           4,695,486           4,994,493           4,675,943
                                              ===========         ===========         ===========         ===========
</TABLE>



See accompanying notes.



                                                                               4
<PAGE>   5

                                  EPIMMUNE INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                 SIX MONTHS ENDED JUNE 30,
                                                                                 -------------------------
                                                                                   1999             1998
                                                                                 --------         --------
<S>                                                                              <C>              <C>
OPERATING ACTIVITIES

Net loss                                                                         $ (5,622)        $ (9,353)
Adjustments to reconcile net loss to net cash used in operating
   activities:
     Depreciation and amortization                                                    338              361
     Deferred rent                                                                     --             (150)
     Deferred revenue                                                                (515)              33
     Gain on disposal of assets                                                    (3,311)              (9)
     Minority interest in consolidated subsidiary                                    (523)            (145)
     Restructuring operating expenses                                              (1,153)              --
     Receivable from fixed assets held for sale                                       459               --
     Accrued restructuring costs                                                    3,700               --
     Net change in operating assets and liabilities; net of divestitures:
       Other current assets                                                           (51)            (342)
       Accounts payable and accrued liabilities                                      (915)             782
       Accrued payroll and related expenses                                          (127)              18
                                                                                 --------         --------
Net cash used in operating activities                                              (7,720)          (8,805)

INVESTING ACTIVITIES
Purchases of available-for-sale securities                                         (1,566)         (12,903)
Sales of available-for-sale securities                                              2,820           15,938
Proceeds from the sale of property and equipment                                    3,210                9
Proceeds from the sale of patents (net of fees)                                     2,909               --
Purchase of property and equipment                                                   (280)          (1,400)
Deposits and other assets                                                              10             (267)
Repayment of note                                                                     519               --
                                                                                 --------         --------
Net cash provided by (used in) investing activities                                 7,622            1,377

FINANCING ACTIVITIES
Principal payments under equipment notes payable
   and note payable to bank                                                          (917)            (227)
Restricted cash released as note payable collateral                                    --              137
Net proceeds from issuance of preferred stock                                          --            9,700
Net proceeds from issuance of common stock                                            198               49
                                                                                 --------         --------
Net cash provided by financing activities                                            (719)           9,659

Increase in cash and cash equivalents                                                (817)           2,231
Cash and cash equivalents at beginning of year                                      2,594            6,187
                                                                                 --------         --------
Cash and cash equivalents at end of period                                       $  1,777         $  8,418
                                                                                 ========         ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid                                                                    $     82         $     40
                                                                                 ========         ========

DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Unrealized losses on available-for-sale securities                               $     48         $      7
                                                                                 ========         ========
Issued common stock for non-exclusive license
   agreement for  patent rights                                                  $     --         $    900
                                                                                 ========         ========
Asset write down in accrued restructuring charge                                 $    587         $     --
                                                                                 ========         ========
Assumption of debt                                                               $    868         $     --
                                                                                 ========         ========
Additions to obligations under capital leases                                    $    420         $     --
                                                                                 ========         ========
</TABLE>



                                                                               5
<PAGE>   6

                                  EPIMMUNE INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                  JUNE 30, 1999

1.      BASIS OF PRESENTATION

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

        Unless otherwise indicated, all references to "Cytel" are to Cytel
Corporation, all references to "Epimmune" are to Epimmune Inc., Cytel's
majority-owned subsidiary, and all references to the "Company" are to the
combined entity of Cytel and Epimmune.

        On July 1, 1999, in a series of related transactions, Cytel acquired
100% ownership of, and merged with, its subsidiary, Epimmune Inc., with Cytel
remaining as the surviving entity (the "Merger"). In connection with the Merger,
Cytel changed its name from Cytel Corporation to Epimmune Inc.

        The condensed consolidated financial statements include the accounts of
Cytel and its majority-owned subsidiary Epimmune. All significant intercompany
accounts and transactions have been eliminated. The minority interest
calculation is based on third parties' ownership percentage in Epimmune of 25.4%
during the second quarter of 1999. The calculation does not include the
potential additional ownership interest that would result from the conversion of
the Cytel preferred stock held by G.D. Searle & Co. ("Searle"), a wholly-owned
subsidiary of Monsanto Co., which is convertible into Epimmune common stock. As
of June 30, 1999, Cytel owned 74.6%, Epimmune employees owned 13.8%, and Searle
owned 11.6% of the outstanding capital stock of Epimmune.

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

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



                                                                               6
<PAGE>   7

2.      RESULTS OF CYLEXIN CLINICAL TRIAL

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

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

<TABLE>
<CAPTION>
                                                                June 30,      March 31,
                                                                  1999          1999
                                                                --------      ---------
<S>                                                              <C>           <C>
Minimum commitments for lease facilities                         $1,042        $1,200
Employee severance                                                  463           827
Exit costs of operations                                            178           628
Write-down to fair value for certain assets held for sale            --           575
Other loss contingencies                                            467           470
                                                                 ------        ------
  Accrued restructuring costs                                    $2,150        $3,700
                                                                 ======        ======
</TABLE>

3.      SALE OF THE GLYTEC CARBOHYDRATE SYNTHESIS AND MANUFACTURING BUSINESS

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

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

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



                                                                               7
<PAGE>   8

4.      MANAGEMENT'S PLAN FOR FUTURE OPERATIONS

        Following the termination in the first quarter of 1999 of Cytel's
anti-inflammatory therapeutic business and the sale of its Glytec business,
Cytel terminated its employees, sold its fixed assets and intellectual property,
and focused all subsequent development efforts on Epimmune's technology.

        On July 1, 1999, in a series of related transactions, Cytel acquired
100% ownership of, and merged with, its subsidiary, Epimmune, with Cytel
remaining as the surviving entity (the "Merger"). In connection with the Merger,
Cytel changed its name from Cytel Corporation to Epimmune Inc.

        The Company plans to use the proceeds from the disposition of the Glytec
carbohydrate synthesis and manufacturing business, together with proceeds of
certain asset sales and existing cash resources, to meet its financial
obligations, including restructuring and termination costs of its non-Epimmune
operations.

5.      ADDITIONAL INFORMATION

        As a result of the events described above, the Company is presenting
additional information related to the operation and financial position of
Epimmune and Cytel. Epimmune was formed in October 1997 as a wholly-owned
subsidiary with separate management and financing. As of June 30, 1999, Cytel
owned approximately 75% of the outstanding stock of Epimmune.

                                  EPIMMUNE INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                         SIX MONTHS ENDED JUNE 30, 1999
                                   (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                              Cytel           Epimmune      Consolidating
                                           Corporation          Inc.           Entries           Total
                                           -----------        --------      -------------       --------
<S>                                          <C>              <C>              <C>              <C>
REVENUES
    Research and development revenues        $    525         $    878         $     --         $  1,403
                                             --------         --------         --------         --------
                                                  525              878               --            1,403
COSTS AND EXPENSES:
    Research and development                    3,042            3,272               --            6,314
    General and administrative                    870              719               --            1,589
    Restructuring costs                         3,700               --               --            3,700
                                             --------         --------         --------         --------
Total costs and expenses                        7,612            3,991               --           11,603

Loss from operations                           (7,087)          (3,113)                          (10,200)

Minority interest in net loss of
    consolidated subsidiary                        --               --              523              523
Interest income, net                              (44)             238               --              194
Other income                                      550               --                               550
Gain on disposal of assets                      3,296               15               --            3,311
                                             --------         --------         --------         --------
Net loss                                     $ (3,285)        $ (2,860)        $    523         $ (5,622)
                                             ========         ========         ========         ========
</TABLE>



                                                                               8
<PAGE>   9

                                  EPIMMUNE INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET

                                   (UNAUDITED)
                                  JUNE 30, 1999

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                    Cytel         Epimmune     Consolidating
                                                                 Corporation        Inc.          Entries           Total
                                                                 -----------      --------     -------------       --------
<S>                                                               <C>             <C>                   <C>        <C>
Assets
     Cash, cash equivalents and short-
         term investments                                         $  1,517        $  8,175        $     --         $  9,692
     Other current assets                                              567             565             (18)           1,114
                                                                  --------        --------        --------         --------
   Total current assets                                              2,084           8,740                           10,806
     Restricted cash                                                    --             472              --              472
     Property and equipment, net                                        --             944              --              944
     Investment in consolidated
     subsidiary                                                     11,742              --         (11,742)              --
     Patents and other non-current assets                               --           2,101              --            2,101
                                                                  --------        --------        --------         --------
 Total assets                                                     $ 13,826        $ 12,257        $(11,760)        $ 14,323
                                                                  ========        ========        ========         ========

 Liabilities and stockholders' equity
   Current liabilities:
   Accounts payable and accrued liabilities                       $    562        $  1,253        $    (18)           1,797
   Accrued restructuring costs                                       2,150              --              --            2,150
   Current portion of obligations under
   equipment loans and notes payable                                    --             182              --              182
                                                                  --------        --------        --------         --------
 Total current liabilities                                           2,712           1,435             (18)           4,129

 Long-term obligations under
     equipment loans and notes payable                                  --             478              --              478
 Minority interest in consolidated subsidiary                           --              --           1,388            1,388
 Stockholders' equity                                               11,114          10,344         (13,130)           8,328
                                                                  --------        --------        --------         --------

 Total liabilities and stockholders' Equity                       $ 13,826        $ 12,257        $(11,760)        $ 14,323
                                                                  ========        ========        ========         ========
</TABLE>

6.      SUBSEQUENT EVENTS

        On July 1, 1999, the Company completed a series of transactions (the
"Exchange Transactions") in which it (i) transferred all of the outstanding
shares of Epimmune's Series B-1 Preferred Stock then held by Cytel to Searle in
exchange for all of the outstanding shares of Cytel's Series B Preferred Stock,
(ii) issued 859,622 shares of Cytel's Series S Preferred Stock and 549,622
shares of Cytel's Series S-1 Preferred Stock to Searle in exchange for all
outstanding shares of Epimmune's Series B Preferred Stock and Series B-1
Preferred Stock and (iii) issued a total of 1,027,782 shares of Cytel's Common
Stock to the holders of Common Stock of Epimmune in exchange for all outstanding
shares of Epimmune's Common Stock. Following the Exchange Transactions, Searle
held approximately 23% of all of the outstanding capital stock of the Cytel.
Following the Exchange Transactions, Cytel held all of the outstanding shares of
Common Stock and Preferred Stock of Epimmune and completed the Merger, in which
Epimmune merged into Cytel, with Cytel remaining as the surviving entity. In
connection with



                                                                               9
<PAGE>   10

the Merger, Cytel assumed the outstanding options to purchase approximately
423,000 shares of the Common Stock of Epimmune and Cytel changed its name from
Cytel Corporation to Epimmune Inc.





               THIS PORTION OF THE PAGE LEFT INTENTIONALLY BLANK.



                                                                              10
<PAGE>   11

                                  EPIMMUNE INC.


PART I. FINANCIAL INFORMATION

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

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

        Unless otherwise indicated, all references to "Cytel" are to Cytel
Corporation, all references to "Epimmune" are to Epimmune Inc., a majority-owned
subsidiary of Cytel, and all references to the "Company" are to the combined
entity of Cytel and Epimmune.

        On July 1, 1999, in a series of related transactions, Cytel acquired
100% ownership of, and merged with, its subsidiary, Epimmune, with Cytel
remaining as the surviving entity (the "Merger"). In connection with the Merger,
Cytel changed its name from Cytel Corporation to Epimmune Inc.

        Since its inception in July 1987, the Company has devoted substantially
all of its resources to the discovery and development of its potential
therapeutic products. To date, the Company has not received any revenues from
the sale of products. The Company has funded its research and development
primarily from equity-derived working capital and through strategic alliances
with other companies. The Company has been unprofitable since its inception and
expects to incur substantial operating losses for the next several years. As of
June 30, 1999, the Company's accumulated deficit was approximately $134.3
million.

        In the first quarter of 1999, Cytel completed the sales of its Glytec
carbohydrate synthesis and manufacturing business resulting in net proceeds of
approximately $6.2 million (see Note 3 in financial statements). Additionally,
Cytel announced the results from the Cylexin Phase II/III clinical trial. The
results of this trial indicated that Cylexin, Cytel's lead therapeutic compound,
showed no benefit over placebo. Accordingly, Cytel terminated its therapeutic
anti-inflammatory business and, as a result, Cytel recorded a restructuring
charge of $3.7 million in the first quarter 1999 (see Note 2 in financial
statements). During the second quarter of 1999, Cytel raised approximately $1.0
million from the disposal of certain fixed assets and intellectual property.

        The Company plans to use the proceeds from the disposition of the Glytec
carbohydrate synthesis and manufacturing business, together with the proceeds of
certain asset sales and existing cash resources, to meet its financial
obligations, including restructuring and termination costs of its non-Epimmune
operations.



                                                                              11
<PAGE>   12

LIQUIDITY AND CAPITAL RESOURCES

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

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

        The Company had net working capital of $6.7 million as of June 30, 1999
compared to $9.8 million as of December 31, 1998. The decrease was primarily due
to recording of the accrued restructuring liability, partially offset by a
decrease in cash to fund ongoing Epimmune operations and payment of liabilities
due to the wind-down of Cytel. As of June 30, 1999, the Company's cash, cash
equivalents, restricted cash and short-term investments decreased to $10.1
million from $12.3 million at December 31, 1998. The decrease was due to cash
used for Epimmune operations and cash used in the payment of liabilities
associated with wind-down of Cytel operations partially offset by proceeds from
the sale of assets discussed above. Excluding Epimmune, as of June 30, 1999,
Cytel had $1.5 million of cash available to fund its operations, which are
planned to be used to meet its financial obligations, including corporate
restructuring and termination costs of all its non-Epimmune operations. The sale
of Cytel's remaining fixed assets was completed in June 1999. The proceeds of
$0.5 million were received in July 1999.

        Capital expenditures totaled $0.7 million in 1999, primarily for
laboratory equipment, compared to $1.4 million in second quarter 1998, primarily
for manufacturing and laboratory equipment additions for Cytel's Glytec
carbohydrate manufacturing facility. The Company has sold its Glytec
carbohydrate synthesis and manufacturing business and has terminated its
anti-inflammatory therapeutic business and sold all remaining Cytel fixed assets
in June 1999. Future capital expenditures will be in support of Epimmune's
vaccine business.

        The Company's cash, cash equivalents and short-term investments are
expected to decline primarily due to Epimmune's ongoing vaccine research
programs and the payments associated with the termination of Cytel's therapeutic
anti-inflammatory business. Cytel raised approximately $6.2 million in the first
quarter of 1999 through the sale of its Glytec carbohydrate synthesis and
manufacturing business and raised approximately $1.0 million in the second
quarter of 1999 from the disposal of certain fixed assets and intellectual
property, the proceeds of which will be used to fund the restructuring efforts
of Cytel.

        In August 1998, Epimmune entered into a $0.7 million term credit
facility with Silicon Valley Bank to provide secured financing for future
laboratory, office and tenant improvement additions. As of June 30, 1999,
Epimmune had $.09 million available to finance future capital equipment and
tenant improvements by August 1999. In addition, Epimmune leases its laboratory
and office facilities under operating leases. In November 1998, Epimmune entered
into a 10-year lease related to the construction of a new laboratory and office
facility, which was completed and occupied in April 1999.



                                                                              12
<PAGE>   13

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

RESULTS OF OPERATIONS

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

        The Company had total revenues of $474,000 for 1999, compared to
$507,000 in 1998. Total revenues decreased slightly in 1999 from 1998.

        In 1999, research and development expenses decreased to $2.0 million
from $4.6 million in 1998. The decrease was due to the wind-down of Cytel
operations partially offset by increased research expenditures at Epimmune.
General and administrative expenses decreased to $0.4 million in 1999 from $1.5
million in 1998. The decrease is due to the wind-down of Cytel operations
partially offset by increased general and administrative personnel at Epimmune.

        Net interest income was $91,000 in 1999 compared to $263,000 in 1998.
The decrease is due to a lower average cash balance.

        Other income includes $500,000 from Elan International Services, Ltd.
("Elan") in consideration for the buyout of certain future milestone obligations
by Elan, and $50,000 for sale of certain patents and related technology rights
to Abaron Biosciences, Inc. ("Abaron").

        Six months ended June 30, 1999 ("1999"), as compared with six months
ended June 30, 1998 ("1998").

        The Company had total revenues of $1.4 million for 1999, compared to
$1.0 million in 1998. Total revenues increased $0.4 million in 1999 from 1998
primarily due to revenue recognized in connection with the sale of Cytel's
Glytec carbohydrate synthesis and manufacturing business.

        In 1999, research and development expenses decreased to $6.3 million
from $8.4 million in 1998. The decrease was due to the wind-down of Cytel
operations partially offset by increased research expenditures at Epimmune.
General and administrative expenses decreased to $1.6 million in 1999 from $2.6
million in 1998, due to termination of Cytel operations partially offset by
increases in general and administrative personnel at Epimmune.

        The restructuring charge of $3.7 million recorded in 1999 relates to the
termination of the Company's non-Epimmune operations. The Company also recorded
a gain of $3.3 million on disposal of assets related to the sale of Cytel's
Glytec carbohydrate synthesis and manufacturing business, as discussed above.

        Net interest income was $194,000 in 1999 compared to $539,000 in 1998.
The decrease is due to a lower average cash balance, and the termination of the
Cytel anti-inflammatory therapeutic business.



                                                                              13
<PAGE>   14

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

Future Capital Needs

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

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

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

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



                                                                              14
<PAGE>   15

YEAR 2000

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

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

        The inventory and risk assessment phases were completed in second
calendar quarter 1999. The problem validation phase will be completed in third
calendar quarter 1999 for all areas, except for evaluating specific pieces of
research equipment and the assessment of some protocol third parties. The
Company expects that it will complete the last portion of the problem validation
and resolution phase by the end of the third calendar quarter of 1999.
Contingency plans are being developed. The Company expects to have those plans
completed by the end of the third quarter 1999.

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

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



                                                                              15
<PAGE>   16

RISKS AND UNCERTAINTIES

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

        Disappointing results of the Phase II/III clinical trial of Cylexin,
Cytel's lead cell adhesion inhibitor compound, has led to the termination of the
therapeutic anti-inflammatory business. Accordingly, Cytel has terminated its
employees, sold its fixed assets and intellectual property, and focused all
subsequent development efforts on Epimmune's vaccine technology. During the
first quarter of 1999, Cytel sold its Glytec carbohydrate synthesis and
manufacturing business and plans to use the proceeds from such sale, together
with existing cash resources, to meet its financial obligations, including
corporate restructuring and termination costs of all of its non-Epimmune
operations.

        Future Capital Needs; Uncertainty of Additional Funding. As of June 30,
1999, the Company had $10.1 million in cash, cash equivalents, restricted cash
and short-term investments. The Company's future capital requirements will
depend on many factors, including: the ability of the Company to establish and
maintain collaborative arrangements; progress with preclinical testing and
clinical trials; the time and costs involved in obtaining regulatory approvals;
the costs involved in filing, prosecuting and enforcing patent claims; competing
technological and market developments; changes in its existing research
relationships; continued scientific progress in its drug discovery programs; the
magnitude of these programs; the cost of manufacturing scale-up; and effective
commercialization activities and arrangements. The Company intends to seek
additional funding through collaborative arrangements or equity or debt
financings. If additional financing is not available, the Company anticipates
its existing available cash, cash equivalents, restricted cash and short-term
investments will be adequate to fund its operations through December 31, 2000.
The estimate for the period for which the Company expects its available cash
balances, investment income and estimated cash flow from collaborative
agreements and research grants to be sufficient to meet its capital requirements
is a forward-looking statement that involves risks and uncertainties as set
forth herein and in Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Report on Form 10-Q.
There can be no assurance that any financing or transaction through which the
Company seeks to obtain additional funding will be available on favorable terms,
if at all, or that any collaboration agreements to which the Company is or may
become a party will successfully reduce the Company's funding requirements. The
suspension or termination of the Company's collaboration with its existing
corporate partner or the inability to enter into new collaborations, the failure
of any such collaborations to be successful or the delay in their development or
commercialization of products could have a material adverse effect on the
Company's business, financial condition and results of operations. If additional
funds are raised by issuing securities, further dilution to existing
stockholders may result. If adequate funds are not available, the Company will
be required to delay, scale back or eliminate one or more of its drug discovery
or development programs; obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to or sell
certain of its technologies, product candidates or products that the Company
would not otherwise relinquish or sell; sell itself or certain of its
technologies or other assets to a third party; cease operations; or declare
bankruptcy.



                                                                              16
<PAGE>   17

        Early Stage of Development; Absence of Products. The Company is a
research and development focused company. In collaboration with its corporate
partner, Searle, the Company expects that Searle will initiate Phase I/II human
clinical trials within the coming year. It has not completed the development of
any product and, accordingly, has not begun to market or generate revenues from
the commercialization of products. The Company does not expect to market any
therapeutic or prophylactic products for a number of years. The Company's
products under development will require significant time-consuming and costly
research, development, preclinical studies, clinical testing, regulatory
approval and significant additional investment prior to their commercialization,
which may never occur. There can be no assurance that the Company's research and
development programs will be successful. In particular, Cytel completed its
Phase II/III clinical trial of Cylexin, its lead cell adhesion inhibitor
compound, in March 1999. Based on disappointing results from this Phase II/III
clinical trial, Cytel announced that it halted clinical trials of Cylexin and
discontinued its therapeutic anti-inflammatory business. Further, there can be
no assurance that the Company will be able to manufacture any products in
commercial quantities in compliance with regulatory requirements at an
acceptable cost, that any of its products under development will be successfully
commercialized or will prove to be safe and efficacious in clinical trials or
that the Company or its collaborators will be successful in obtaining market
acceptance of any of its products. The Company or its collaborators may
encounter problems and delays relating to research and development, regulatory
approval, manufacturing and marketing. The failure by the Company to address
such problems and delays successfully would have a material adverse effect on
the Company's business, financial condition and results of operations.

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

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



                                                                              17
<PAGE>   18

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

        Continuing Operating Losses; Accumulated Deficit. The Company has
experienced significant operating losses since its inception in 1987. As of June
30, 1999, the Company had an accumulated deficit of approximately $134.3
million. The Company expects to incur substantial additional operating losses as
the Company's research and development and clinical trial efforts continue. All
of the Company's revenues to date have consisted of contract research and
development revenues, license and milestone payments, research grants, certain
asset divestitures and interest income. To achieve profitable operations, the
Company, alone or with others, must identify, develop, register, manufacture and
market proprietary products. There can be no assurance that the Company will be
successful in its efforts to achieve profitable operations.

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

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



                                                                              18
<PAGE>   19

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

        Technological Change and Competition. The Company is engaged in a highly
competitive industry. The Company competes with many public and private
companies, including pharmaceutical companies, chemical companies, specialized
biotechnology companies and academic institutions. Many of the Company's
competitors have substantially greater financial, scientific and technical
resources, and manufacturing and marketing experience and capabilities than the
Company. In addition, many of the Company's competitors have significantly
greater experience conducting preclinical studies and clinical trials of new
pharmaceutical products, and in obtaining regulatory approvals for
pharmaceutical products. Competitors of the Company and its collaborators may
develop and commercialize such products more rapidly than the Company and its
collaborators. There can be no assurance that the Company's competitors will not
succeed in developing technologies and products that are more effective than any
being developed by the Company, or that would render the Company's technology
and products obsolete or noncompetitive. The Company is aware of companies that
are pursuing the development of novel pharmaceuticals which target the same
diseases that the Company is targeting. There can be no assurance that these and
other efforts by potential competitors will not be successful, or that other
technologies will not be developed to compete with the Company's technologies.

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

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



                                                                              19
<PAGE>   20

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

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

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

        Dependence on Reimbursement. The Company's ability to commercialize its
products successfully may depend in part on the extent to which reimbursement
for the cost of such products and related treatment will be available from
government health administration authorities, private health insurers and other
organizations. Third-party payors are increasingly challenging the price of
medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, and there can be no
assurance that adequate third-party coverage will be available to enable the
Company to maintain price levels sufficient to realize an appropriate return on
its investment in product development.

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

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



                                                                              20
<PAGE>   21

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

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

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

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

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



                                                                              21
<PAGE>   22

PART II. OTHER INFORMATION

ITEM 6.A Exhibits

Exhibit 10.63  Letter agreement between Epimmune and Dr. Robert W. Chesnut
               regarding severance benefits dated February 5, 1998.

Exhibit 10.64  Letter agreement between Epimmune and Dr. Alessandro Sette
               regarding severance benefits dated February 5, 1998.

Exhibit 10.65  Amendment to Severance Benefits Agreement between the Company and
               Dr. Robert L. Roe dated June 2, 1999.

Exhibit 10.66  Amendment to Severance Benefits Agreement between the Company and
               Virgil Thompson dated June 2, 1999.

Exhibit 27.1   Financial Data Schedule


ITEM 6.B REPORTS ON FORM 8-K

         The Company filed a Report on Form 8-K on April 9, 1999 and a Report of
         Form 8-K/A on June 8, 1999 relating to the sale of the Company's
         carbohydrate manufacturing and synthesis intellectual property assets
         to Neose Technologies, Inc.



                                                                              22
<PAGE>   23

                                  EPIMMUNE INC.


                                    SIGNATURE

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


                                        EPIMMUNE INC.

Date:  August 16, 1999                  By: /s/ DEBORAH A. SCHUEREN
                                           -------------------------------------
                                           Deborah A. Schueren
                                           President, Chief Executive Officer
                                           and Chief Financial Officer



                                                                              23