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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
June 30, 2003, or

|  |  |                                                                                                                             
|- |  | ----------------------------------------------------------------------------------------------------------------------------
|o |  | 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 12,207,768 shares outstanding as of August 12,
2003.

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EPIMMUNE INC.
QUARTERLY REPORT
FORM 10-Q

|                              |  |  |   |                                                                                                            |                                                                                                              |  |    |    | 
|----------------------------- |  |  | - | ---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ |  | -- | -- | 
|TABLE OF CONTENTS COVER PAGE  |  |  | 1 |                                                                                                           
|TABLE OF CONTENTS             |  |  | 2 |                                                                                                           
|PART I. FINANCIAL INFORMATION |  |  |   |                                                                                                           
|                              |  |  |   | ITEM 1. Financial Statements                                                                               |                                                                                                              |  |    |   
|                              |  |  |   |                                                                                                            | Condensed Balance Sheets as of June 30, 2003 (unaudited) and
December 31,
    2002                           |  |    | 3  | 
|                              |  |  |   |                                                                                                            | Condensed Statements of Operations (unaudited) for the Three and
Six Months
    Ended June 30, 2003 and 2002 |  |    | 4  | 
|                              |  |  |   |                                                                                                            | Condensed Statements of Cash Flows (unaudited) for Six Months
Ended June,
    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 |                                                                                                              |  | 10 |   
|                              |  |  |   | ITEM 3. Quantitative and Qualitative Disclosures about Market Risk                                         |                                                                                                              |  | 16 |   
|                              |  |  |   |                                                                                                            | Risk Factors                                                                                                 |  |    | 17 | 
|                              |  |  |   | ITEM 4. Controls and Procedures                                                                            |                                                                                                              |  | 29 |   
|PART II. OTHER INFORMATION    |  |  |   |                                                                                                           
|                              |  |  |   | ITEM 1. Legal Proceedings                                                                                  |                                                                                                              |  | 30 |   
|                              |  |  |   | 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                                                |                                                                                                              |  | 30 |   
|                              |  |  |   | ITEM 5. Other Information                                                                                  |                                                                                                              |  | *  |   
|                              |  |  |   | ITEM 6. Exhibits and Reports on Form 8-K                                                                   |                                                                                                              |  | 31 |   
|                              |  |  |   | SIGNATURE                                                                                                  |                                                                                                              |  | 32 |   



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

2



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|                              |                                                                                               |                                         |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED STATEMENT OF OPERATIONS      
|                              |                                                                                               | CONDENSED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED FINANCIAL STATEMENTS
|PART I. FINANCIAL INFORMATION
|                              | 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|EXHIBIT 10.49                
|EXHIBIT 10.50                
|EXHIBIT 31                   
|EXHIBIT 32                   



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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

|                                           |                                                                                                                                                                                                                                                                              |   |             |          |              |   |        |          |  
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | -------- | ------------ | - | ------ | -------- | -
|                                           |                                                                                                                                                                                                                                                                              |   | June 30,    |          | December 31,
|                                           |                                                                                                                                                                                                                                                                              |   | 2003        |          | 2002        
|                                           |                                                                                                                                                                                                                                                                              |   |             |          |             
|                                           |                                                                                                                                                                                                                                                                              |   | (unaudited) |          |              |   |       
|ASSETS                                     |                                                                                                                                                                                                                                                                              |   |             |          |              |   |        |         
|Current assets:                            |                                                                                                                                                                                                                                                                              |   |             |          |              |   |        |         
|                                           | Cash and cash equivalents                                                                                                                                                                                                                                                    |   | $           | 5,895    |              |   | $      | 9,745    |  
|                                           | Prepaids and other current assets                                                                                                                                                                                                                                            |   |             | 1,199    |              |   |        | 708      |  
|                                           |                                                                                                                                                                                                                                                                              |   |             |          |              |   |        |         
|Total current assets                       |                                                                                                                                                                                                                                                                              |   | 7,094       |          |              |   | 10,453 |         
|Restricted long-term investment            |                                                                                                                                                                                                                                                                              |   | 472         |          |              |   | 472    |         
|Property and equipment, net                |                                                                                                                                                                                                                                                                              |   | 1,243       |          |              |   | 1,363  |         
|Patents and other assets                   |                                                                                                                                                                                                                                                                              |   | 3,390       |          |              |   | 3,240  |         
|                                           |                                                                                                                                                                                                                                                                              |   |             |          |              |   |        |         
|TOTAL ASSETS                               |                                                                                                                                                                                                                                                                              | $ | 12,199      |          |              | $ | 15,528 |         
|                                           |                                                                                                                                                                                                                                                                              |   |             |          |              |   |        |         
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                                                                                                                                                                              |   |             |          |              |   |        |         
|Current liabilities:                       |                                                                                                                                                                                                                                                                              |   |             |          |              |   |        |         
|                                           | Accounts payable and accrued liabilities                                                                                                                                                                                                                                     |   | $           | 1,411    |              |   | $      | 1,336    |  
|                                           | Deferred contract revenues                                                                                                                                                                                                                                                   |   |             | 1,543    |              |   |        | 1,114    |  
|                                           | Accrued payroll and related expenses                                                                                                                                                                                                                                         |   |             | 258      |              |   |        | 252      |  
|                                           | Current portion of notes payable                                                                                                                                                                                                                                             |   |             |         |              |   |        | 43       |  
|                                           |                                                                                                                                                                                                                                                                              |   |             |          |              |   |        |         
|Total current liabilities                  |                                                                                                                                                                                                                                                                              |   | 3,212       |          |              |   | 2,745  |         
|Deferred rent                              |                                                                                                                                                                                                                                                                              |   | 207         |          |              |   | 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 June 30, 2003 and December 31, 2002. Liquidation
preference of $10,000,000 at June 30, 2003 and December 31,
2002. |   |             | 14       |              |   |        | 14       |  
|                                           | Common stock, $.01 par value, 25,000,000 shares authorized,
12,207,768 shares and 12,153,462 shares issued and outstanding
at June 30, 2003 and December 31, 2002, respectively.                                                                                             |   |             | 122      |              |   |        | 122      |  
|                                           | Additional paid-in capital                                                                                                                                                                                                                                                   |   |             | 166,514  |              |   |        | 166,454  |  
|                                           | Note receivable held by stockholder                                                                                                                                                                                                                                          |   |             | (3,014   | )            |   |        | (2,932   | )
|                                           | Deferred compensation                                                                                                                                                                                                                                                        |   |             | (154     | )            |   |        | (203     | )
|                                           | Accumulated deficit                                                                                                                                                                                                                                                          |   |             | (154,702 | )            |   |        | (150,869 | )
|                                           |                                                                                                                                                                                                                                                                              |   |             |          |              |   |        |         
|Total stockholders equity                 |                                                                                                                                                                                                                                                                              |   | 8,780       |          |              |   | 12,586 |         
|                                           |                                                                                                                                                                                                                                                                              |   |             |          |              |   |        |         
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                                                                                                                              | $ | 12,199      |          |              | $ | 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 June 30, |       | Six months ended June 30,
|                                                                |                                      |   |                             |       |                          
|                                                                |                                      |   | 2003                        |       | 2002                      |   | 2003   |       | 2002
|                                                                |                                      |   |                             |       |                           |   |        |       |     
|Revenues                                                        |                                      |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |      
|                                                                | License fees and milestones          |   | $                           | 246   |                           |   | $      | 125   |      |   | $      | 449   |  |   | $      | 125   | 
|                                                                | Research grants and contract revenue |   |                             | 519   |                           |   |        | 580   |      |   |        | 774   |  |   |        | 1,115 | 
|                                                                | Related party revenue-Genencor       |   |                             | 1,023 |                           |   |        | 1,087 |      |   |        | 1,996 |  |   |        | 2,507 | 
|                                                                |                                      |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |      
|Total revenues                                                  |                                      |   | 1,788                       |       |                           |   | 1,792  |       |      |   | 3,219  |       |  |   | 3,747  |      
|Costs and expenses:                                             |                                      |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |      
|                                                                | Research and development             |   |                             | 2,835 |                           |   |        | 3,302 |      |   |        | 5,446 |  |   |        | 5,988 | 
|                                                                | General and administrative           |   |                             | 1,042 |                           |   |        | 810   |      |   |        | 1,725 |  |   |        | 1,388 | 
|                                                                |                                      |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |      
|Total costs and expenses                                        |                                      |   | 3,877                       |       |                           |   | 4,112  |       |      |   | 7,171  |       |  |   | 7,376  |      
|Loss from operations                                            |                                      |   | (2,089                      | )     |                           |   | (2,320 | )     |      |   | (3,952 | )     |  |   | (3,629 | )    
|Interest income, net                                            |                                      |   | 58                          |       |                           |   | 129    |       |      |   | 123    |       |  |   | 388    |      
|Other income, net                                               |                                      |   | (1                          | )     |                           |   | (5     | )     |      |   | (4     | )     |  |   | (6     | )    
|                                                                |                                      |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |      
|Net loss                                                        |                                      | $ | (2,032                      | )     |                           | $ | (2,196 | )     |      | $ | (3,833 | )     |  | $ | (3,247 | )    
|Net loss per share-basic and diluted                            |                                      | $ | (0.17                       | )     |                           | $ | (0.19  | )     |      | $ | (0.33  | )     |  | $ | (0.29  | )    
|                                                                |                                      |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |      
|Shares used in computing net loss per share  basic and diluted |                                      |   | 11,742                      |       |                           |   | 11,391 |       |      |   | 11,709 |       |  |   | 11,358 |      
|                                                                |                                      |   |                             |       |                           |   |        |       |      |   |        |       |  |   |        |      

See accompanying notes.

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

|                                                                            |                                             |                                          |        |                           |      |      |        |      |      |  
|--------------------------------------------------------------------------- | ------------------------------------------- | ---------------------------------------- | ------ | ------------------------- | ---- | ---- | ------ | ---- | ---- | -
|                                                                            |                                             |                                          |        | Six months ended June 30,
|                                                                            |                                             |                                          |        |                          
|                                                                            |                                             |                                          |        | 2003                      |      | 2002
|                                                                            |                                             |                                          |        |                           |      |     
|OPERATING ACTIVITIES                                                        |                                             |                                          |        |                           |      |      |        |     
|Net loss                                                                    |                                             | $                                        | (3,833 | )                         |      | $    | (3,247 | )   
|Adjustments to reconcile net loss to net cash used in operating
activities: |                                             |                                          |        |                           |      |      |        |     
|                                                                            | Interest on note held by stockholder        |                                          |        | (82                       | )    |      |        | (213 | )   
|                                                                            | Depreciation and amortization               |                                          |        | 417                       |      |      |        | 362  |     
|                                                                            | Stock-based compensation                    |                                          |        | 65                        |      |      |        | (70  | )   
|                                                                            | Deferred rent                               |                                          |        | 10                        |      |      |        | 18   |     
|                                                                            | Deferred revenue                            |                                          |        | 429                       |      |      |        | (693 | )   
|                                                                            | Loss on disposal of assets                  |                                          |        | 2                         |      |      |        |     |     
|                                                                            | Change in operating assets and liabilities: |                                          |        |                           |      |      |        |      |     
|                                                                            |                                             | Prepaids and other current assets        |        |                           | (491 | )    |        |      | (153 | )
|                                                                            |                                             | Accounts payable and accrued liabilities |        |                           | 75   |      |        |      | 361  |  
|                                                                            |                                             | Accrued payroll and related expenses     |        |                           | 6    |      |        |      | 48   |  
|                                                                            |                                             |                                          |        |                           |      |      |        |     
|Net cash used in operating activities                                       |                                             |                                          | (3,402 | )                         |      |      | (3,587 | )   
|INVESTING ACTIVITIES                                                        |                                             |                                          |        |                           |      |      |        |     
|Purchases of available-for-sale securities                                  |                                             |                                          |       |                           |      |      | (1,614 | )   
|Maturities of available-for-sale securities                                 |                                             |                                          |       |                           |      |      | 921    |     
|Purchase of property and equipment                                          |                                             |                                          | (51    | )                         |      |      | (650   | )   
|Patents                                                                     |                                             |                                          | (398   | )                         |      |      | (430   | )   
|                                                                            |                                             |                                          |        |                           |      |      |        |     
|Net cash used in investing activities                                       |                                             |                                          | (449   | )                         |      |      | (1,773 | )   
|FINANCING ACTIVITIES                                                        |                                             |                                          |        |                           |      |      |        |     
|Principal payments on notes payable to bank                                 |                                             |                                          | (43    | )                         |      |      | (215   | )   
|Net proceeds from issuance of common stock                                  |                                             |                                          | 44     |                           |      |      | 43     |     
|                                                                            |                                             |                                          |        |                           |      |      |        |     
|Net cash provided by (used in) financing activities                         |                                             |                                          | 1      |                           |      |      | (172   | )   
|Decrease in cash and cash equivalents                                       |                                             |                                          | (3,850 | )                         |      |      | (5,532 | )   
|Cash and cash equivalents at beginning of year                              |                                             |                                          | 9,745  |                           |      |      | 8,038  |     
|                                                                            |                                             |                                          |        |                           |      |      |        |     
|Cash and cash equivalents at end of period                                  |                                             | $                                        | 5,895  |                           |      | $    | 2,506  |     
|                                                                            |                                             |                                          |        |                           |      |      |        |     
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                            |                                             |                                          |        |                           |      |      |        |     
|Interest paid                                                               |                                             | $                                        | 3      |                           |      | $    | 16     |     
|                                                                            |                                             |                                          |        |                           |      |      |        |     
|SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCIAL ACTIVITIES     |                                             |                                          |        |                           |      |      |        |     
|Unrealized gains/(losses) on available-for-sale securities                  |                                             | $                                        |       |                           |      | $    | 13     |     
|                                                                            |                                             |                                          |        |                           |      |      |        |     

See accompanying notes.

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

1.     Basis of Presentation

The interim unaudited condensed financial statements contained herein have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information. Accordingly, they do not
include all of the information and disclosures required by accounting
principles generally accepted in the United States for complete financial
statements. In managements opinion, the unaudited information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position, results of operations and cash
flows for the periods presented. Interim results are not necessarily
indicative of results to be expected for the full year. The financial
statements should be read in conjunction with the audited consolidated
financial statements and disclosures thereto included in the Companys Form
10-K for the year ended December 31, 2002.

The Company has an accumulated deficit of $154.7 million as of June 30, 2003.
The Companys ability to attain profitable operations is dependent upon
obtaining sufficient working capital to complete the successful development of
its products, the Food and Drug Administration (FDA) approval of its
products, achieving market acceptance of such products and achievement of
sufficient levels of revenue to support the Companys cost structure.
Management believes that the Companys existing capital resources will enable
the Company to fund its operations through December 31, 2003. If the Company
is unable to obtain additional funding, it will be required to delay, reduce
the scope of or eliminate one or more of its research and development projects,
sell the Company or certain of its assets or technologies, or dissolve and
liquidate all of its assets.

Earnings per share (EPS) is computed in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share(SFAS No. 128).
SFAS No. 128 requires dual presentation of basic and diluted earnings per
share. Basic EPS includes no dilution and is computed by dividing net income by
the weighted average number of common shares outstanding for the period,
excluding owned but unvested shares. There were 408,493 and 672,388 owned but
unvested shares as of June 30, 2003 and June 30, 2002, respectively. Diluted
EPS reflects the potential dilution of securities that could share in our
earnings, such as common stock equivalents that may be issuable upon exercise
of outstanding common stock options or warrants as well as all shares of
preferred stock, which may be converted into common stock. Prior to the
application of the treasury stock method for options and warrants, common stock
equivalents of 3,130,149 and 3,540,480 for the six months ended June 30, 2003
and 2002, respectively, have been excluded from EPS as the effect is
antidilutive. On a fully diluted basis, assuming full vesting and conversion
of all common stock equivalents upon exercise of outstanding common stock
options and warrants as well as conversion of all shares of preferred stock,
there were 15,337,917 and 15,674,900 shares outstanding as of June 30, 2003 and
June 30, 2002, respectively.

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

As required under SFAS No. 123 and SFAS No. 148, Accounting for Stock-Based
Compensation- Transition and Disclosure- an amendment of FASB Statement No. 123
(SFAS No. 148), the pro forma
effects of stock-based compensation on net income and net earnings per common
share have been estimated at the date of grant using the Black-Scholes option
pricing model based on the following

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weighted-average assumptions: risk-free
interest rates of 6%; dividend yield of 0; and a weighted average expected life
for all options of six years. The volatility factor assumptions of the
expected market price of the Companys common stock were 123% and 83% for June
30, 2003 and 2002, respectively.

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

|                                                        |  |                             |             |                           |  |      |             |      |  |  |             |   |  |  |             |  
|------------------------------------------------------- |  | --------------------------- | ----------- | ------------------------- |  | ---- | ----------- | ---- |  |  | ----------- | - |  |  | ----------- | -
|                                                        |  | Three months ended June 30, |             | Six months ended June 30,
|                                                        |  |                             |             |                          
|                                                        |  | 2003                        |             | 2002                      |  | 2003 |             | 2002
|                                                        |  |                             |             |                           |  |      |             |     
|Net loss as reported                                    |  |                             | ($2,032,000 | )                         |  |      | ($2,196,000 | )    |  |  | ($3,833,000 | ) |  |  | ($3,247,000 | )
|FAS 123 compensation expense                            |  |                             | (166,000    | )                         |  |      | (191,000    | )    |  |  | (332,000    | ) |  |  | (374,000    | )
|                                                        |  |                             |             |                           |  |      |             |      |  |  |             |   |  |  |             |  
|Adjusted pro forma basic and
diluted net loss           |  |                             | ($2,198,000 | )                         |  |      | ($2,387,000 | )    |  |  | ($4,165,000 | ) |  |  | ($3,621,000 | )
|Adjusted pro forma basic and
diluted net loss per share |  |                             | ($0.19      | )                         |  |      | ($0.21      | )    |  |  | ($0.36      | ) |  |  | ($0.32      | )

2.     New Accounting Standards

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

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity(SFAS No.
150), which establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires an issuer to classify certain instruments as
liabilities (or assets in some circumstances), which may have previously been
classified as equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
provisions of SFAS No. 150 are to be implemented by reporting the cumulative
effect of a change in accounting principle for financial instruments created
before the issuance date of the statement and still existing at the beginning
of the interim period of adoption. The Company does not believe the adoption of
the provisions of SFAS
No. 150 will have a material effect on the Companys consolidated financial
statements.

3.     Termination of Merger Agreement with Anosys, Inc.

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

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4.     Note Receivable from Stockholder

In January 2001, the Company sold Dr. Emile Loria, President and CEO, 1,056,301
shares of its common stock at the closing price of such common stock as
reported by the Nasdaq National Market on the date of purchase, which was $2.50
per share. These shares 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 six months ended June 30, 2003 and 2002, there was principal and
interest outstanding under the note of $3,014,000 and $2,854,000, respectively.

The Company is monitoring and, when applicable, 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 six months ended June 30, 2003 and 2002, the
Company had $0 of deferred compensation expense related to unvested shares on
its balance sheet. The Company will record compensation expense each month,
when applicable, 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 $25,000 in
compensation expense related to the below market interest rate on the note for
the three months ended June 30, 2003 and 2002. In addition, the Company had
$154,000 and $253,000 of accrued deferred compensation expense for the three
months ended June 30, 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., or IDM, for certain cancer
antigens for use in IDMs ex vivocancer therapy program. Under the terms of
the agreement, IDM had 120 days from the date of the option agreement to
evaluate the epitopes and exercise its option to license certain patented and
non-patented rights to Epimmunes universal cancer epitope packages for use in
ex vivocancer therapy. In February 2003, IDM exercised its option and in July
2003, the Company entered into a license agreement with IDM pursuant to which
IDM was granted a non-exclusive license to use the epitopes in connection with
its

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DendritophageTMex vivotechnology. The Company received an evaluation
license fee when it entered into the evaluation and license option agreement,
which was amortized into revenue over the evaluation period. The Company
received a license fee in February 2003 when IDM exercised its option. The
Company is amortizing the license fee over the estimated four-year life of the
license. The Company also received a non-recurring milestone payment in June
2003, which it will recognize as revenue over the remaining estimated life of
the license.

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 term of the agreement. Merck has an option to enter into
licensing discussions with Epimmune for the development of the Epimmune
epitopes for use in vaccines for the treatment of certain diseases.

8.     CEO Performance Bonus

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

In addition, there were other benefits provided to Dr. Loria in the event the
merger with Anosys was consummated, however, as discussed in Note 3, such
merger agreement was terminated.

9.     Aventis Pasteur

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

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

Since 1997, we have devoted substantially all of our resources to the discovery
and development of potential therapeutic and prophylactic products. To date, we
have not received any revenues from the sale of products. We began a Phase I/II
clinical trial targeting HIV in September 2002 and two Phase I/II clinical
trials targeting lung and colorectal cancer in February 2003. We have funded
our research and development primarily from equity-derived working capital and
through licensing transactions 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 June 30, 2003, our
accumulated deficit was approximately $154.7 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 June 30, 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.

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

Critical Accounting Policies

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

Revenue Recognition

We recognize revenues pursuant to Staff Accounting Bulletin No. 101, Revenue
Recognition. License fees are earned and recognized in accordance with the
provisions of each agreement. Upfront license fees for perpetual licenses where
we have no performance obligations are recognized when received. License fees
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,

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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 June 30,
2003, our investment portfolio included only cash and money market accounts and
had no fixed-income securities.

Results of Operations

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

We had total revenues of $1.8 million in the three months ended June 30, 2003
and in the three months ended June 30, 2002. In the three months ended June
30, 2003, a $0.1 million reduction in grant and contract revenue and related
party revenue was offset by a $0.1 million increase in licensing and milestone
revenue. The decrease in grant and contract revenue during the three months
ended June 30, 2003, compared to the three months ended June 30, 2002, was a
result of completion of work on certain grants and the timing of costs to be
included for reimbursement on others. Related party revenue includes milestone
payments, amortization of license fees and contract research and development
funding, as a result of our collaboration with Genencor. The reduction in
related party revenue during the three months ended June 30, 2003, compared to
the three months ended June 30, 2002, 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, partially offset by a
non-recurring milestone payment received in the three months ended June 30,
2003, whereas we recognized no milestone revenue in the three months ended June
30, 2002. The change in the estimated life of the license occurred due to the
extension of the agreement term from September 1, 2003 to September 1, 2004.
The increase in licensing and milestone revenue in the second quarter of 2003
was due to an increase in licensing revenue as a result of amortization of
evaluation fees and license fees received from Aventis, IDM and Beckman Coulter
in the current period, compared to the same period in 2002.

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Research and
development expenses decreased to $2.8 million in the three months ended June
30, 2003 from $3.3 million in the three months ended June 30, 2002. The
decrease in the three months ended June 30, 2003 relates primarily to lower
outside costs related to preclinical activities such as formulation and
toxicology studies for our HIV and lung and colorectal cancer programs which
are now in clinical trials, lower scientific supplies costs related to
completion of preclinical activities, and lower patent and intellectual
property related expenses, partially offset by higher costs associated with
outside research support from the La Jolla Institute for Allergy and Immunology
with whom we contracted on our High Throughput Screening, or HTS contract with
the National Institutes of Health (NIH).

General and administrative costs were approximately $1.0 million in the three
months ended June 30, 2003 and $0.8 million in the three months ended June 30,
2002. The increase in the second quarter of 2003 was primarily due to the
write-off of approximately $0.5 million of legal, investment banking,
accounting and other expenses related to our previously proposed merger with
Anosys, which has now been terminated, and increased deferred compensation
expense due to director options as a result of a greater increase in our stock
price from the beginning of the quarter to the end of the quarter during the
three months ended June 30, 2003 as compared to the three months ended June 30,
2002, partially offset by lower SEC annual report costs and decreases in legal,
consulting and other outside expenses.

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

Six months ended June 30, 2003 as compared with six months ended June 30, 2002.

In the six months ended June 30, 2003, we had total revenues of $3.2 million,
as compared to $3.7 million in revenue in the six months ended June 30, 2002.
The decrease in the six months ended June 30, 2003 relates primarily to a $0.5
million decrease in related party revenue, and a $0.3 million decrease in
research grants and contract revenue, offset by a $0.3 million increase in
licensing and milestone revenue. The decrease in related party revenue in the
six months ended June 30, 2003, compared to the six months ended June 30, 2002,
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 lower non-recurring milestone payments received in 2003. The
change in the estimated life of the license occurred due to the extension of
the agreement term from September 1, 2003 to September 1, 2004. The decrease
in grant and contract revenue in the six months ended June 30, 2003, compared
to the six months ended June 30, 2002, was a result of completion of work on
certain grants and the timing of costs to be included for reimbursement on
others. The increase in licensing and milestone revenue in the six months
ended June 30, 2003 was due to an increase in licensing revenue as a result of
amortization of evaluation fees and license fees received from Aventis, IDM and
Beckman Coulter in the current period, compared to the same period in 2002.

Research and development expenses decreased to $5.4 million in the six months
ended June 30, 2003, from $6.0 million in the six months ended June 30, 2002.
The decrease in the six months ended June 30, 2003 relates primarily to
decreased outside costs related to preclinical activities such as formulation
and toxicology studies for our HIV and lung and colorectal cancer programs,
lower patent and intellectual property related expenses, and lower scientific
supplies costs related to completion of preclinical activities, partially
offset by higher costs associated with outside research support related to our
HTS contract with the NIH. We now expect our research and development expenses
to increase up to 10% in 2003 compared with 2002, as we continue our research
and development programs, including our clinical trials in HIV and lung and
colorectal cancer.

General and administrative costs were approximately $1.7 million in the six
months ended June 30, 2003 and $1.4 million in the six months ended June 30,
2002. The increase in the six months ended June 30, 2003 was primarily due to
the write-off of approximately $0.5 million of legal, investment banking,
accounting and other expenses related to our previously proposed merger with
Anosys, which has now

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been terminated, and increased deferred compensation expense due a greater
increase in our stock price from the beginning of the period to the end of the
period during the six months ended June 30, 2003 as compared to the six months
ended June 30, 2002, partially offset by a reduction in legal, consulting and
other outside costs, decreases in recruiting and relocation expenses, the
timing of accounting fees, and the reclassification of internal, intellectual
property related salaries to research and development expense.

Net interest income was approximately $0.1 million in the six months ended June
30, 2003 and $0.4 million in the six months ended June 30, 2002. Interest
income during the six months ended June 30, 2003 includes $0.1 million of
interest accrued on the note issued for the purchase of shares by Dr. Loria,
our president and chief executive officer, in January 2001, compared to $0.2
million of interest on the note for the six months ended June 30, 2002. We
also had lower average cash balances and rates of return in the six months
ended June 30, 2003, compared to the six months ended June 30, 2002.

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

Liquidity and Capital Resources

We have financed operations since inception primarily through private
placements of equity securities, two public common stock offerings, revenues
under collaborative research and development agreements, grant revenues,
certain asset divestitures and interest income. Through June 30, 2003, we had
raised approximately $163.9 million in cash from the sale of equity securities.
As of June 30, 2003, we had 13,816,216 shares outstanding on an as converted
to common stock basis, assuming conversion of preferred shares.

As of June 30, 2003, our cash and cash equivalents were $5.9 million compared
to $9.7 million at December 31, 2002. The decrease was primarily due to cash
used for operations. Approximately $0.5 million was for legal, investment
banking, accounting and other expenses related to our previously proposed
merger with Anosys, which has now been terminated. We expect to continue to use
our cash and cash equivalents to fund our ongoing clinical trials and drug
research and development programs.

Capital expenditures were approximately $0.1 million for the six months ended
June 30, 2003 compared to $0.7 million for the six months ended June 30, 2002.
The expenditures for the first six months of 2002 were primarily for laboratory
equipment to increase and improve immunological screening throughput and to
build out additional laboratory space to accommodate additional employees. In
the past, we have financed our laboratory equipment and research and office
facilities primarily through operating lease arrangements and a note payable.
We fully paid off our note payable in the first quarter of 2003, resulting in
payments of approximately $40,000 in the six months ended June 30, 2003
compared to $0.2 million in the six months ended June 30, 2002. During 2003,
we anticipate that payments related to leasehold improvements and capital
expenditures will decrease compared to 2002 levels to a range of approximately
$0.2 million to $0.4 million. We will also pay approximately $0.6 million in
rent on our lease commitments during 2003.

Payments related to capitalized patent expenses were approximately $0.4 million
during the first six months of both 2003 and 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 three
Phase I/II clinical trials and manufacturing. We intend to seek collaborative
research and development relationships with suitable corporate partners and
U.S. government agencies

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(including seeking grants to fund our research). We continue to attempt to
license to third parties some of our technology in markets that we are not
pursuing ourselves or through our collaborations. In the event these agreements
relate to markets we are not pursuing, any agreements that may result from
these discussions may not successfully reduce our funding requirements or, if
entered into, may be terminated.

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 two Phase
I/II clinical trials 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 currently 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
volatile market conditions persist for biotechnology companies. If we are
unable to obtain additional funding, we will be required to delay, reduce the
scope of or eliminate one or more of our research and development projects,
sell the Company or certain of its assets or technologies, or dissolve and
liquidate all of its assets. As of June 30, 2003, we had only approximately
$5.9 million in cash and cash equivalents. Our future operational and capital
requirements will depend on many factors, including:



| |  |  | whether we are able to secure additional financing on favorable terms, or
at all;                                                
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the costs associated with our clinical trials for our vaccine
targeting HIV, which began in 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;
|
| |  |  | 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                                                                

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

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RISK FACTORS

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

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

We will continue to spend substantial amounts on research and development,
including amounts spent for manufacturing clinical supplies, conducting
clinical trials for our product candidates and expanding our drug development
programs. Therefore, we currently 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 volatile market conditions persist for
biotechnology companies. If we are unable to obtain additional funding, we will
be required to delay, reduce the scope of or eliminate one or more of our
research and development projects, sell the Company or certain of its assets or
technologies, or dissolve and liquidate all of its assets. As of June 30,
2003, we had only approximately $5.9 million in cash and cash equivalents. Our
future operational and capital requirements will depend on many factors,
including:



| |  |  | whether we are able to secure additional financing on favorable
terms, or at all;                                                
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the costs associated with our clinical trials for our vaccine
targeting HIV, which began in September of 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.                                                                    

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We intend to seek additional funding through collaboration and license
agreements, government research grants or equity or debt financings. In the
event we are able to obtain financing, it may not be on favorable terms. In
addition, we may not be able to enter into additional collaborations to reduce
our funding requirements. If we acquire funds by issuing securities, 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 currently do not meet all of The NASDAQ National Markets continued listing
requirements and we may be delisted, which could reduce the liquidity of our
common stock and adversely affect our ability to raise additional necessary
capital.

In order to continue trading on The NASDAQ National Market, we must comply with
The NASDAQ National Markets continued listing requirements, which require that
we maintain a minimum stockholders equity of $10.0 million and a minimum
closing bid price of $1.00 per share. As of June 30, 2003, our stockholders
equity was less than the $10.0 million minimum.

If we fail to satisfy The NASDAQ National Markets continued listing
requirements or are unable to regain compliance with those 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;                                                                            
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | after reviewing test results, we or our collaborators may abandon
projects that we might previously have believed to be promising;                                                                                          
|
| |  |  | we, our collaborators or regulators may suspend or terminate
clinical trials if the participating subjects or patients are being
exposed to unacceptable health risks;                                                      
|
| |  |  | we may have to delay clinical trials as a result of scheduling
conflicts with participating clinicians and clinical institutions, or
difficulties in identifying and enrolling patients who meet trial
eligibility criteria;
|
| |  |  | safety and efficacy results attained in early human clinical trials
may not be indicative of results that are obtained in later clinical
trials; and                                                                        

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

The data collected from clinical trials may not be sufficient to support
regulatory approval of any of our products, and the 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 June 30, 2003, we had an accumulated deficit of $154.7 million. We expect
to continue to incur substantial operating expenses and net operating losses
for the foreseeable future, which may hurt our ability to continue operations.
We have not generated revenues from the commercialization of any product. All
of our revenues to date have consisted of contract research and development
revenues, license and milestone payments, research grants, certain asset
divestitures and interest income. We expect that substantially all of our
revenues for the foreseeable future will result from similar sources. To
achieve profitable operations, we, alone or with collaborators, must
successfully identify, develop, register and market proprietary products. We do
not expect to generate revenues from the commercialization of any product for
at least six years (and this would assume approval of either our HIV or lung
and colorectal product candidates, which may not occur). We may not be able to
generate sufficient product revenue to become profitable. Even if we do achieve
profitability, we may not be able to sustain or increase our profitability on a
quarterly or yearly basis.

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

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

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

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

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

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

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

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 were found not to be safe or effective, we would never
commercialize a product candidate and would never make a profit.

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

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

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

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

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

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

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.

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

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

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

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

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

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

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.

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

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

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 August 12,
2003, was valued at $1,806,275. 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 June 30, 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 or
disapproval of any proposed merger or financing or other business combination
transaction. The interests of this concentration of ownership may not always
coincide with our interests or the interests of other stockholders. For
instance, officers, directors and principal stockholders, acting together,
could cause us to enter into transactions or agreements that we would not
otherwise consider. Similarly, this concentration of ownership may have the
effect of delaying or preventing a change in control of our company otherwise
favored by our other stockholders. This concentration of ownership also could
depress our stock price.

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ITEM 4. CONTROLS AND PROCEDURES



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

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



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

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

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PART II. OTHER INFORMATION




ITEM 1 LEGAL PROCEEDINGS

From time to time we are involved in certain litigation arising out of our
operations. We are not currently engaged in any legal proceedings.




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

The Companys 2003 Annual Meeting of Stockholders, or the Annual Meeting, was
held on July 15, 2003. The matters voted on at the Annual Meeting were:



| | 1. |  | To elect the members of the Board of Directors.                                                                                                                                                      
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | To approve an amendment to the Epimmune Inc. 2000 Stock Plan to
increase the number of shares of the Companys Common Stock available
for issuance under the plan from 1,200,000 to 1,600,000 shares.
|
| | 3. |  | To ratify the selection of Ernst & Young LLP, as independent
auditors for the Company, for the year ending December 31, 2003.                                                                        

At the Annual Meeting, 11,183,955 shares of Common Stock out of a total of
12,182,919 shares of Common Stock outstanding at the record date were
represented in person or by proxy, 859,666 shares of Series S Preferred Stock
(1,058,826 on an as converted to common stock basis) out of a total of 859,666
shares of Series S Preferred Stock (1,058,826 on an as converted to common
stock basis) outstanding at a record date were represented in person or by
proxy and 549,622 shares of Series S-1 Preferred Stock out of a total of
549,622 shares of Series S-1 Preferred Stock outstanding at the record date
were represented in person or by proxy. The holder of preferred stock votes
its shares on all matters to be voted upon at the Annual Meeting on an
as-converted to common stock basis.

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



| | 1. |  | Election of the Board of Directors.
| | -- |  | -----------------------------------

|                        |  |     |            |          |  |  |           | 
|----------------------- |  | --- | ---------- | -------- |  |  | --------- | 
|Nominees                |  | For |            | Withheld
|                        |  |     |            |         
|Howard E. Greene, Jr.   |  |     | 10,635,599 |          |  |  | 2,156,804 | 
|William T. Comer, Ph.D. |  |     | 12,445,499 |          |  |  | 346,904   | 
|Michael G. Grey         |  |     | 12,572,656 |          |  |  | 219,747   | 
|John P. McKearn, Ph.D.  |  |     | 12,445,499 |          |  |  | 346,904   | 
|Georges Hibon           |  |     | 12,572,599 |          |  |  | 219,804   | 
|Emile Loria, M.D.       |  |     | 12,572,656 |          |  |  | 219,747   | 
|Michael J. Ross, Ph.D.  |  |     | 12,572,656 |          |  |  | 219,747   | 



| | 2. |  | Approve an amendment to the Epimmune Inc. 2000 Stock Plan to
increase the number of shares of the Companys Common Stock available
for issuance under the plan from 1,200,000 to 1,600,000 shares.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|        |  |       |            | 
|------- |  | ----- | ---------- | 
|        |  | Votes
|        |  |      
|For     |  |       | 12,268,193 | 
|Against |  |       | 513,617    | 
|Abstain |  |       | 10,593     | 

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| | 3. |  | Ratify the selection of Ernst &Young LLP, as independent auditors
for the year ending December 31, 2003.
| | -- |  | --------------------------------------------------------------------------------------------------------

|        |  |       |            | 
|------- |  | ----- | ---------- | 
|        |  | Votes
|        |  |      
|For     |  |       | 12,765,580 | 
|Against |  |       | 17,542     | 
|Abstain |  |       | 9,281      | 




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



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

|              |  |                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 10.49 |  | Amendment to Letter Agreement between Epimmune and
Dr. Emile Loria dated June 20, 2003                                                          
|Exhibit 10.50 |  | Non-Exclusive License Agreement between Epimmune and
Immuno-Designed Molecules dated July 7, 2003 (with certain
confidential portions deleted)  
|Exhibit 31    |  | Certification pursuant to Section 302 of the Public
Company Accounting Reform and Investor Protection Act of 2002
(18 U.S.C. § 1350, as adopted)
|Exhibit 32    |  | Certification pursuant to Section 906 of the Public
Company Accounting Reform and Investor Protection Act of 2002
(18 U.S.C. § 1350, as adopted)



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

|
|
|
|
|
|
|

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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: August 14, 2003 |  | By:           |  | /s/ Emile Loria                                                                         
|                      |  |               |  |                                                                                         
|                      |  |               |  | Emile Loria, M.D.                                                                       
|                      |  |               |  | President, Chief Executive Officer and Director                                         
|                      |  |               |  |                                                                                         
|Date: August 14, 2003 |  | By:           |  | /s/ Robert J. De Vaere                                                                  
|                      |  |               |  |                                                                                         
|                      |  |               |  | Robert J. De Vaere                                                                      
|                      |  |               |  | Vice President, Finance and Administration,
Chief Financial Officer, Assistant Secretary
|                      |  |               |  | (Principal Financial and Accounting Officer)                                            

32