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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2002, or 
|       
|[     ] |  | Transition Period Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period From ______ to ______.

Commission file number 0-19591

EPIMMUNE INC.

(Exact name of Registrant as specified in its charter)




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



5820 Nancy Ridge Drive
San Diego, California 92121

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(Address of principal executive offices)




(858) 860-2500

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(Registrants telephone number)




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

Yes  [X]       No  [   ]

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

Common Stock: $.01 par value 12,134,420 shares outstanding as of August 10,
2002.

1



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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS      
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION   
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | ITEM 6. EXHIBITS                                                                             
|SIGNATURES                   
|EXHIBIT 99.1                 



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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 Consolidated Balance Sheets as of
June 30, 2002 (unaudited) and December 31, 2001                           |    |  | 3  | 
|                 
|                  |  |                       |   | Condensed Consolidated Statements of Operations (unaudited)
For the Three and Six Months Ended June 30, 2002 and 2001 |    |  | 4  | 
|                 
|                  |  |                       |   | Condensed Consolidated Statements of Cash Flows (unaudited)
For the Six Months Ended June 30, 2002 and 2001           |    |  | 5  | 
|                 
|                  |  |                       |   | Notes to Condensed Consolidated Financial
Statements (unaudited)                                                      |    |  | 6  | 
|                 
|                  |  | ITEM 2.               |   | Managements Discussion and Analysis of Financial
Condition and Results of Operations                                 |    |  | 8  | 
|                 
|                  |  | ITEM 3.               |   | Quantitative and Qualitative Disclosures about Market Risk                                                            |    |  | 13 | 
|                 
|PART II.          |  | OTHER INFORMATION     |   |                                                                                                                       |    | 
|                 
|                  |  | ITEM 1.               |   | Legal Proceedings                                                                                                     |    |  | 23 | 
|                 
|                  |  | 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                                                                   |    |  | 23 | 
|                 
|                  |  | ITEM 5.               |   | Other Information                                                                                                     |    |  | *  | 
|                 
|                  |  | ITEM 6.               |   | Exhibits and Reports on Form 8-K                                                                                      |    |  | 24 | 
|                 
|                  |  | SIGNATURES            |   |                                                                                                                       | 25 | 



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

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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS





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

|                                           |                                                                                                                                                                                                                             |   |             |          |              |   |        |          |  
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | -------- | ------------ | - | ------ | -------- | -
|                                           |                                                                                                                                                                                                                             |   | June 30,    |          | December 31,
|                                           |                                                                                                                                                                                                                             |   | 2002        |          | 2001        
|                                           |                                                                                                                                                                                                                             |   |             |          |             
|                                           |                                                                                                                                                                                                                             |   | (unaudited) |          |              |   |       
|ASSETS                                     |                                                                                                                                                                                                                             |   |             |          |              |   |        |         
|Current assets:                            |                                                                                                                                                                                                                             |   |             |          |              |   |        |         
|                                           | Cash and cash equivalents                                                                                                                                                                                                   |   | $           | 2,506    |              |   | $      | 8,038    |  
|                                           | Short-term investments                                                                                                                                                                                                      |   |             | 11,681   |              |   |        | 10,998   |  
|                                           | Prepaids and other current assets                                                                                                                                                                                           |   |             | 860      |              |   |        | 707      |  
|                                           |                                                                                                                                                                                                                             |   |             |          |              |   |        |         
|Total current assets                       |                                                                                                                                                                                                                             |   | 15,047      |          |              |   | 19,743 |         
|Restricted long-term investment            |                                                                                                                                                                                                                             |   | 472         |          |              |   | 472    |         
|Property and equipment, net                |                                                                                                                                                                                                                             |   | 1,466       |          |              |   | 984    |         
|Patents and other assets                   |                                                                                                                                                                                                                             |   | 2,947       |          |              |   | 2,711  |         
|                                           |                                                                                                                                                                                                                             |   |             |          |              |   |        |         
|TOTAL ASSETS                               |                                                                                                                                                                                                                             | $ | 19,932      |          |              | $ | 23,910 |         
|                                           |                                                                                                                                                                                                                             |   |             |          |              |   |        |         
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                                                                                                                             |   |             |          |              |   |        |         
|Current liabilities:                       |                                                                                                                                                                                                                             |   |             |          |              |   |        |         
|                                           | Accounts payable and accrued liabilities                                                                                                                                                                                    |   | $           | 1,836    |              |   | $      | 1,475    |  
|                                           | Deferred contract revenues                                                                                                                                                                                                  |   |             | 1,615    |              |   |        | 2,308    |  
|                                           | Accrued payroll and related expenses                                                                                                                                                                                        |   |             | 270      |              |   |        | 222      |  
|                                           | Current portion of notes payable                                                                                                                                                                                            |   |             | 173      |              |   |        | 345      |  
|                                           |                                                                                                                                                                                                                             |   |             |          |              |   |        |         
|Total current liabilities                  |                                                                                                                                                                                                                             |   | 3,894       |          |              |   | 4,350  |         
|Deferred rent                              |                                                                                                                                                                                                                             |   | 184         |          |              |   | 166    |         
|Notes payable, less current portion        |                                                                                                                                                                                                                             |   |            |          |              |   | 43     |         
|Stockholders equity:                      |                                                                                                                                                                                                                             |   |             |          |              |   |        |         
|                                           | Preferred stock, $.01 par value, 10,000,000 shares authorized,
1,409,288 shares issued and outstanding at June 30, 2002 and December 31, 2001. Liquidation preference of $10,000,000
at June 30, 2002 and December 31, 2001 |   |             | 14       |              |   |        | 14       |  
|                                           | Common stock, $.01 par value, 25,000,000 shares authorized,
12,134,420 shares and 12,094,757 shares issued and outstanding
at June 30, 2002 and December 31, 2001, respectively                                             |   |             | 121      |              |   |        | 121      |  
|                                           | Additional paid-in capital                                                                                                                                                                                                  |   |             | 166,428  |              |   |        | 166,772  |  
|                                           | Note receivable held by stockholder                                                                                                                                                                                         |   |             | (2,854   | )            |   |        | (2,641   | )
|                                           | Deferred compensation                                                                                                                                                                                                       |   |             | (253     | )            |   |        | (569     | )
|                                           | Accumulated deficit                                                                                                                                                                                                         |   |             | (147,615 | )            |   |        | (144,369 | )
|                                           | Accumulated other comprehensive income                                                                                                                                                                                      |   |             | 13       |              |   |        | 23       |  
|                                           |                                                                                                                                                                                                                             |   |             |          |              |   |        |         
|Total stockholders equity                 |                                                                                                                                                                                                                             |   | 15,854      |          |              |   | 19,351 |         
|                                           |                                                                                                                                                                                                                             |   |             |          |              |   |        |         
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                                                                             | $ | 19,932      |          |              | $ | 23,910 |         
|                                           |                                                                                                                                                                                                                             |   |             |          |              |   |        |         

See accompanying notes.

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

|                                                                |                                      |   |                             |       |                           |   |       |       |      |   |        |       |  |   |        |       | 
|--------------------------------------------------------------- | ------------------------------------ | - | --------------------------- | ----- | ------------------------- | - | ----- | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                                                |                                      |   | Three
months ended June 30, |       | Six
months ended June 30,
|                                                                |                                      |   | 2002                        |       | 2001                      |   | 2002  |       | 2001
|                                                                |                                      |   |                             |       |                           |   |       |       |     
|Revenues                                                        |                                      |   |                             |       |                           |   |       |       |      |   |        |       |  |   |        |      
|                                                                | License fees and milestones          |   | $                           | 125   |                           |   | $     | 650   |      |   | $      | 125   |  |   | $      | 950   | 
|                                                                | Research grants and contract revenue |   |                             | 580   |                           |   |       | 371   |      |   |        | 1,115 |  |   |        | 789   | 
|                                                                | Related party revenue-Genencor       |   |                             | 1,087 |                           |   |       | 450   |      |   |        | 2,507 |  |   |        | 501   | 
|                                                                |                                      |   |                             |       |                           |   |       |       |      |   |        |       |  |   |        |      
|Total revenues                                                  |                                      |   | 1,792                       |       |                           |   | 1,471 |       |      |   | 3,747  |       |  |   | 2,240  |      
|Costs and expenses:                                             |                                      |   |                             |       |                           |   |       |       |      |   |        |       |  |   |        |      
|                                                                | Research and development             |   |                             | 3,302 |                           |   |       | 1,549 |      |   |        | 5,988 |  |   |        | 3,217 | 
|                                                                | General and administrative           |   |                             | 810   |                           |   |       | 819   |      |   |        | 1,388 |  |   |        | 1,469 | 
|                                                                |                                      |   |                             |       |                           |   |       |       |      |   |        |       |  |   |        |      
|Total costs and expenses                                        |                                      |   | 4,112                       |       |                           |   | 2,368 |       |      |   | 7,376  |       |  |   | 4,686  |      
|Loss from operations                                            |                                      |   | (2,320                      | )     |                           |   | (897  | )     |      |   | (3,629 | )     |  |   | (2,446 | )    
|Interest income, net                                            |                                      |   | 129                         |       |                           |   | 78    |       |      |   | 388    |       |  |   | 187    |      
|Other income, net                                               |                                      |   | (5                          | )     |                           |   | (1    | )     |      |   | (6     | )     |  |   | (1     | )    
|                                                                |                                      |   |                             |       |                           |   |       |       |      |   |        |       |  |   |        |      
|Net loss                                                        |                                      | $ | (2,196                      | )     |                           | $ | (820  | )     |      | $ | (3,247 | )     |  | $ | (2,260 | )    
|Net loss per share-basic and diluted                            |                                      | $ | (0.19                       | )     |                           | $ | (0.10 | )     |      | $ | (0.29  | )     |  | $ | (0.29  | )    
|                                                                |                                      |   |                             |       |                           |   |       |       |      |   |        |       |  |   |        |      
|Shares
used in computing net loss per share  basic and diluted |                                      |   | 11,391                      |       |                           |   | 7,848 |       |      |   | 11,358 |       |  |   | 7,792  |      
|                                                                |                                      |   |                             |       |                           |   |       |       |      |   |        |       |  |   |        |      

See accompanying notes.

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

|                                                                            |                                             |   |                           |      |      |   |        |      |  
|--------------------------------------------------------------------------- | ------------------------------------------- | - | ------------------------- | ---- | ---- | - | ------ | ---- | -
|                                                                            |                                             |   | Six
months ended June 30,
|                                                                            |                                             |   | 2002                      |      | 2001
|                                                                            |                                             |   |                           |      |     
|OPERATING ACTIVITIES                                                        |                                             |   |                           |      |      |   |        |     
|Net loss                                                                    |                                             | $ | (3,247                    | )    |      | $ | (2,260 | )   
|Adjustments to reconcile net loss to net cash used in
operating activities: |                                             |   |                           |      |      |   |        |     
|                                                                            | Interest on note held by stockholder        |   |                           | (213 | )    |   |        |     |  
|                                                                            | Depreciation and amortization               |   |                           | 362  |      |   |        | 334  |  
|                                                                            | Stock-based compensation                    |   |                           | (70  | )    |   |        | 127  |  
|                                                                            | Deferred rent                               |   |                           | 18   |      |   |        | 26   |  
|                                                                            | Deferred revenue                            |   |                           | (693 | )    |   |        | (127 | )
|                                                                            | Change in operating assets and liabilities: |   |                           |      |      |   |        |      |  
|                                                                            | Prepaids and other current assets           |   |                           | (153 | )    |   |        | (196 | )
|                                                                            | Accounts payable and accrued liabilities    |   |                           | 361  |      |   |        | (114 | )
|                                                                            | Accrued payroll and related expenses        |   |                           | 48   |      |   |        | (7   | )
|                                                                            |                                             |   |                           |      |      |   |        |     
|Net cash used in operating activities                                       |                                             |   | (3,587                    | )    |      |   | (2,217 | )   
|INVESTING ACTIVITIES                                                        |                                             |   |                           |      |      |   |        |     
|Purchases of available-for-sale securities                                  |                                             |   | (1,614                    | )    |      |   | (1,143 | )   
|Maturities of available-for-sale securities                                 |                                             |   | 921                       |      |      |   | 855    |     
|Purchase of property and equipment                                          |                                             |   | (650                      | )    |      |   | (73    | )   
|Patents                                                                     |                                             |   | (430                      | )    |      |   | (381   | )   
|                                                                            |                                             |   |                           |      |      |   |        |     
|Net cash used in investing activities                                       |                                             |   | (1,773                    | )    |      |   | (742   | )   
|FINANCING ACTIVITIES                                                        |                                             |   |                           |      |      |   |        |     
|Principal payments under equipment notes payable and
note payable to bank   |                                             |   | (215                      | )    |      |   | (208   | )   
|Net proceeds from issuance of common stock                                  |                                             |   | 43                        |      |      |   | 10     |     
|Buyback of company stock relating to early exercise                         |                                             |   |                          |      |      |   | (3     | )   
|                                                                            |                                             |   |                           |      |      |   |        |     
|Net cash used in financing activities                                       |                                             |   | (172                      | )    |      |   | (201   | )   
|Decrease in cash and cash equivalents                                       |                                             |   | (5,532                    | )    |      |   | (3,160 | )   
|Cash and cash equivalents at beginning of year                              |                                             |   | 8,038                     |      |      |   | 4,181  |     
|                                                                            |                                             |   |                           |      |      |   |        |     
|Cash and cash equivalents at end of period                                  |                                             | $ | 2,506                     |      |      | $ | 1,021  |     
|                                                                            |                                             |   |                           |      |      |   |        |     
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION                            |                                             |   |                           |      |      |   |        |     
|Interest paid                                                               |                                             | $ | 16                        |      |      | $ | 35     |     
|                                                                            |                                             |   |                           |      |      |   |        |     
|SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCIAL ACTIVITIES     |                                             |   |                           |      |      |   |        |     
|Unrealized gains/(losses) on available-for-sale
securities                  |                                             | $ | 13                        |      |      | $ | 8      |     
|                                                                            |                                             |   |                           |      |      |   |        |     
|Purchase of common stock for stockholder note
receivable                    |                                             | $ |                          |      |      | $ | 2,641  |     
|                                                                            |                                             |   |                           |      |      |   |        |     

See accompanying notes.

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EPIMMUNE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 2002

1. Basis of Presentation

The interim unaudited condensed consolidated financial statements contained
herein have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In managements opinion, the unaudited information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position, results of operations and cash
flows for the periods presented. Interim results are not necessarily
indicative of results to be expected for the full year. The financial
statements should be read in conjunction with the audited consolidated
financial statements and footnotes thereto included in the Companys Form 10-K
for the year ended December 31, 2001.

Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period, excluding 672,388 and
936,283 shares that were owned but unvested as of June 30, 2002 and June 30,
2001, respectively. All shares of common stock that may be issued in the
future pursuant to options and warrants as well as all shares of preferred
stock which may be converted into common stock have been excluded from the
diluted net loss per share calculations, as they are antidilutive.

2. New Accounting Standards

The FASB has issued SFAS No. 142, Goodwill and Other Intangible Assets, which
establishes a new basis for accounting for intangible assets deemed to have
indefinite useful lives. Such assets are no longer amortized but are reviewed
annually for impairment, or more frequently, if indicators of impairment arise.
Intangible assets with definite useful lives will continue to be amortized
over their respective estimated useful lives. This Statement is required to be
adopted by companies for fiscal years beginning after December 15, 2001. The
Company adopted the new Statement effective January 1, 2002. There was no
impact on the consolidated financial statements as a result of the adoption of
this standard.

The FASB has issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which supersedes, with exceptions, SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. SFAS No. 144 retains the basic indicators of impairment
recognition and undiscounted cash-flow measurement model of SFAS No. 121;
however, it removes goodwill from the scope of the analysis, as the accounting
for goodwill is now subject to the provisions of SFAS Nos. 141 and 142. SFAS
No. 144 also provides additional guidance on differentiating between assets
held and used, held for sale, and held for disposal other than by sale. This
Statement is required to be adopted by companies for fiscal years beginning
after December 15, 2001. The Company adopted the new Statement effective
January 1, 2002. There was no impact on the consolidated financial statements
as a result of the adoption of this standard.

3. Rhein Biotech

In January 2002, the Company entered into a research agreement with Rhein
Biotech to combine its PADRE® technology with Rhein
Biotechs vaccine
technologies to improve existing vaccines and develop new vaccines.

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4. Genencor Program Milestone

In January 2002, the Company announced the achievement of a preclinical
milestone in its collaboration with Genencor International, Inc. Epimmune,
along with Genencor, identified an EpiGene clinical product candidate for the
lead program in the collaboration, a therapeutic hepatitis B vaccine. In
connection with the achievement of the milestone, the Company received a
payment from Genencor, which was recognized as revenue in the first quarter of
2002.

5. HIV Phase I/II Clinical Trials

In June 2002, the Company announced that it had submitted an Investigational
New Drug Application (IND) and had received clearance from the Food and Drug
Administration, or the FDA, to initiate a Phase I/II clinical trial of a
therapeutic HIV vaccine in HIV-1 infected patients. The trial, which is being
conducted at the University of Colorado Health Sciences Center, is expected to
be completed in the second half of 2003 with final data analysis by the end of
2003.

6. Aventis Pasteur

In July 2002, the Company announced that it had entered into an evaluation and
license option agreement with Aventis Pasteur. Pursuant to the agreement, for
a limited period of time, Aventis has 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, half of which it recognized as
revenue in the second quarter. The other half will be recognized as revenue in
the third quarter of 2002. The Company is further entitled to receive a
license fee if Aventis Pasteur exercises its option.

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

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

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

Since our inception in July 1987, we have devoted substantially all of our
resources to the discovery and development of potential therapeutic and
prophylactic products. To date, we have not received any revenues from the
sale of products. We have funded our research and development primarily from
equity-derived working capital and through strategic alliances and
collaborations with other companies. We have not been profitable since our
inception and expect to incur substantial operating losses for the next several
years. As of June 30, 2002, our accumulated deficit was approximately $147.6
million.

Results of Operations

Three months ended June 30, 2002 as compared with three months ended June 30,
2001.

In the three months ended June 30, 2002, we had total revenues of $1.8 million,
as compared to $1.5 million in revenue in the three months ended June 30, 2001.
The increase in the three months ended June 30, 2002 relates primarily to $1.1
million in revenue received from Genencor in the three months ended June 30,
2002 compared to $0.5 million of revenue received from Genencor in the three
months ended June 30, 2001. Genencor revenue includes milestone payments,
amortization of license fees and contract revenue in connection with our
collaboration agreement signed in July 2001. Genencor owns 11.1% of our common
stock and is therefore considered a related party. For the three months
ended June 30, 2002, we received $0.6 million in research grants and contract
revenue, approximately a 50% increase over the $0.4 million received in the
three months ended June 30, 2001. The increase was due to an increase in
expenditures and reimbursement for those expenditures under an NIH contract
supporting our HIV program preclinical activities. We received license fees of
$0.1 million in the three months ended June 30, 2002, as compared to $0.6
million in license fees and milestones in the three months ended June 30, 2001,
as a result of out licensing certain technology outside our core area of focus.
This decrease of $500,000 partially offset our total revenue for the three
months ended June 30, 2002.

Research and development expenses increased to $3.3 million in the three months
ended June 30, 2002 from $1.5 million in the three months ended June 30, 2001.
The increase in the three months ended June 30, 2002 relates primarily to
higher labor and related costs, including recruitment and relocation as a
result of an increase in our personnel responsible for research and development
activities, increased outside costs related to preclinical activities such as
formulation and toxicology studies for our HIV, and lung and colon cancer
programs, increased expenditures on scientific supplies due to increased
research and development efforts and our collaboration with Genencor. We
expect our research and development expenses to continue to be significantly
increased in 2002, compared with those of 2001, as we attempt to advance our
product candidates in both HIV, and lung and colon cancer to the clinic. We
expect to continue to incur costs in 2002 for, among other things, toxicology
studies, product formulation, manufacturing of product for use in clinical
trials and medical and clinical consultant costs.

General and administrative costs were approximately $0.8 million in the three
months ended June 30, 2002 and in the three months ended June 30, 2001.
Increases in recruiting and relocation, consulting and

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travel costs in the three months ended June 30, 2002 were offset by lower
general legal fees and compensation than in the three months ended June 30,
2001.

Net interest income was approximately $0.1 million in the three months ended
June 30, 2002 and in the three months ended June 30, 2001. Higher average cash
balances in the three months ended June 30, 2002 were offset by lower average
returns than in the three months ended June 30, 2001.

Six months ended June 30, 2002 as compared with six months ended June 30, 2001.

In the six months ended June 30, 2002, we had total revenues of $3.7 million,
as compared to $2.2 million in revenue in the six months ended June 30, 2001.
The increase in the six months ended June 30, 2002 relates primarily to $2.5
million in revenue received in the six months ended June 30, 2002 compared to
$0.5 million of revenue received in the six months ended June 30, 2001
including milestone payments, amortization of license fees and contract revenue
received in connection with our collaboration with Genencor. For the six
months ended June 30, 2002, we received $1.1 million in research grants and
contract revenue, approximately a 40% increase over the $0.8 million received
in the six months ended June 30, 2001. The increase was due to an increase in
expenditures and reimbursement for those expenditures under an NIH contract
supporting our HIV program preclinical activities. We received license fees of
$0.1 million in the six months ended June 30, 2002, as compared to $0.9 million
in license fees in the six months ended June 30, 2001, as a result of out
licensing certain technology outside our core area of focus.

Research and development expenses increased to $6.0 million in the six months
ended June 30, 2002 from $3.2 million in the six months ended June 30, 2001.
The increase in the six months ended June 30, 2002 relates primarily to higher
labor and related costs, including recruitment and relocation as a result of an
increase in our personnel responsible for research and development activities,
increased outside costs related to preclinical activities such as formulation
and toxicology studies for our HIV, and lung and colon cancer programs,
increased expenditures on scientific supplies due to increased research and
development efforts and our collaboration with Genencor.

General and administrative costs were approximately $1.4 million in the six
months ended June 30, 2002 and $1.5 million in the six months ended June 30,
2001. Increases in recruiting and relocation, consulting and travel costs in
the six months ended June 30, 2002 were offset by lower legal fees and
compensation than in the six months ended June 30, 2001.

Net interest income was approximately $0.4 million in the six months ended June
30, 2002 and $0.2 million in the six months ended June 30, 2001. Interest
income during the six months ended June 30, 2002 includes $0.2 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. Higher average
cash balances in the six months ended June 30, 2002 were offset by lower
average returns than in the six months ended June 30, 2001.

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

Liquidity and Capital Resources

We have financed operations since inception primarily through private
placements of our equity securities, two public common stock offerings, license
fees, revenues under collaborative research and

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development agreements, grant revenues, capital and operating lease
transactions, certain asset divestitures and interest income. Through June
2002, we have raised approximately $163.8 million from the sale of equity
securities. As of June 30, 2002, we had 13,742,868 shares outstanding on an
as-converted to common stock basis, assuming conversion of preferred shares.

As of June 30, 2002, our cash, cash equivalents and short-term investments were
$14.2 million compared to $19.0 million at December 31, 2001. The decrease was
due to cash used for operations. We expect to continue to use our cash, cash
equivalents and short-term investments to fund our ongoing drug research and
development programs. We had net working capital of $11.1 million as of June
30, 2002 compared to $15.4 million as of December 31, 2001.

Capital expenditures were $0.7 million in the first six months of 2002 and were
$0.1 million in the first six months of 2001. The expenditures for the first
six months of 2002 were primarily for laboratory equipment to increase and
improve immunological screening throughput, to build out additional laboratory
space to accommodate additional employees and for information technology
equipment and upgrades to accommodate new employees. In the past, we have
financed our laboratory equipment and research and office facilities primarily
through operating lease arrangements and a note payable. During the first six
months of both 2002 and 2001, we made payments under the notes payable of $0.2
million. During 2002, we anticipate that payments related to leasehold
improvements and capital expenditures will increase significantly over 2001
levels to a range of approximately $0.8 million to $1.0 million. As of June
30, 2002, we have already paid $0.7 million related to leasehold improvements
and capital expenditures. We will also pay approximately $0.6 million in rent
on our lease commitments during 2002. As of June 30, 2002, we have already
paid $0.3 million in rent.

Payments related to capitalized patent expenses were approximately $0.4 million
during the first six months of both 2002 and 2001.

We expect to incur substantial additional research and development expenditures
in 2002 versus 2001 levels in connection with our ongoing drug research and
development programs, including costs related to preclinical testing, clinical
trials and manufacturing. We intend to seek collaborative research and
development relationships with suitable corporate partners. We have in the
past and may in the future also license to third parties some of our technology
in markets that we are not pursuing ourselves or through our collaborations.
Any agreements that may result from these discussions may not successfully
reduce our funding requirements or, if entered into, may be terminated. We
will require additional equity or debt financing in order to pursue our
research and development programs, and we cannot assure you that these funds
will be available and even if available, may not be available on favorable
terms. If adequate funds are not available we may be required to delay, scale
back or eliminate one or more of our drug discovery or development programs or
obtain funds through arrangements with collaborative partners or others that
may require us to relinquish rights to certain of our technologies, product
candidates or products that we would not otherwise relinquish.

We continue to anticipate that total revenue for 2002 will be in the range of
at least $6.0 million to $6.5 million, which includes anticipated grant and
contract revenue and certain license fees. Our estimate assumes that we
recognize revenue from milestone or licensing payments under existing
agreements with third parties related to the licensing of our technology. We
also anticipate that operating expenses will rise from $11.2 million in 2001 to
between approximately $15.5 million and $16.8 million, representing a 40% to
50% increase over 2001. The anticipated rise in expenses relates to the filing
of our IND for our vaccine targeting HIV in the second quarter of 2002 and
assumes that we file an IND for our lung and colon cancer candidate in late
2002 or early 2003. We also anticipate using some of our cash and investments
beginning in 2002 to fund our recently announced HIV research collaboration
with Bavarian Nordic. We will share equally with Bavarian Nordic in all
research related expenses and have included

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these anticipated expenditures in our operating expense forecast for 2002. We
may also become liable in 2002 for payment of license fees of up to $0.5
million, at the option of the licensor. We have not included payment of these
potential license fees in our operating expense forecast for 2002 as payment of
those expenses is not assured.

We anticipate that our existing cash and investments and interest earned
thereon, along with the cash receipts related to our anticipated revenue in
2002, will enable us to maintain our current and planned operations through
mid-2003 based on our anticipated expenditures. The estimate for the period
for which we anticipate our existing resources to enable us to maintain our
current and planned operations, as well as our estimates for 2002 revenues and
expenses, are forward-looking statements that involve risks and uncertainties.

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



| |  | the costs associated with filing an IND for our vaccine targeting HIV and an IND for our lung and colon cancer vaccine
candidate;         
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the costs associated with our clinical trials for our vaccine targeting HIV which are now scheduled to begin in the third
quarter of 2002;
| 
| |  | the costs associated with safety studies and other preclinical activities for our vaccine targeting lung and colon cancer;                
| 
| |  | our ability to establish and maintain collaborative arrangements and license agreements;                                                  
| 
| |  | the actual revenue we receive under our collaborative research and development 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;                                                
| 
| |  | progress with preclinical testing and clinical trials;                                                                                    
| 
| |  | the time and costs involved in obtaining regulatory approvals;                                                                            
| 
| |  | the costs involved in filing, prosecuting and enforcing patent claims and any other proprietary rights;                                   
| 
| |  | competing technological and market developments;                                                                                          
| 
| |  | changes in our existing research relationships;                                                                                           
| 
| |  | continued scientific progress in our drug discovery programs;                                                                             
| 
| |  | the magnitude of our drug discovery programs;                                                                                             
| 
| |  | the cost of manufacturing scale-up; and                                                                                                   
| 
| |  | effective commercialization activities and arrangements.                                                                                  

As is typical in the biotechnology industry, our commercial success will depend
in part on 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, and the lengthy regulatory approval process and with potential
competition from other products. Even if our products appear promising at an
early stage of development, they may not reach the market for a number of
reasons. Such reasons include, but are not limited to, our inability to fund
clinical development of such products, or the possibilities that the potential
products will be found ineffective during clinical trials, fail to receive
necessary regulatory approvals, be difficult to manufacture on a large scale or
be uneconomical to market.

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Significant Accounting Policies

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including
those related to revenue recognition, patent costs and income taxes. We base
our estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. We
believe the following critical accounting policies affect the significant
judgments and estimates used in the preparation of our consolidated financial
statements (see Note 1 to our financial statements on page F-8 of the Form
10-K/A filed for the year ended December 31, 2001).

Revenue Recognition

We recognize revenues pursuant to Staff Accounting Bulletin No. 101, Revenue
Recognition. Collaboration revenues are earned and recognized as research
costs are incurred in accordance with the provisions of each agreement. Fees
paid to initiate research projects are deferred and recognized over the project
period. Milestone payments are recognized as revenue upon the completion of the
milestone when the milestone event was substantive, 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. 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.

Patent Costs

We capitalize the costs incurred to file patent applications when we believe
there is a high likelihood that the patent will be issued 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. At June 30, 2002,
capitalized patent costs total approximately $2.9 million (net of accumulated
amortization). In addition, we expense all costs related to abandoned patent
applications. If we elect to abandon any of our currently issued or unissued
patents, the related expense could be material to our results of operations for
the period of the abandonment. During the first six months of 2002, our gross
capitalized patent costs increased by approximately $0.4 million, which was a
significant factor in our cash used during the period.

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 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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At June 30, 2002, our investment portfolio included fixed-income securities of
$11.6 million. These securities are subject to interest rate risk. A
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would decrease the fair value of our interest
sensitive financial instruments at June 30, 2002 by $0.04 million. 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.

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

We are a research and development focused company. There are many factors
outside of our control that may affect the timing of commencement and
completion of clinical trials of any of our drug candidates, and we cannot
assure you that clinical trials will commence or be completed within any
anticipated timeframe. For example, although we originally expected to file an
IND for a therapeutic vaccine candidate targeting HIV with the FDA in the first
quarter of 2002, 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 actually filed our IND for this application during the second quarter of
2002. In addition, although we filed our IND for a therapeutic vaccine
candidate targeting HIV with the FDA in the second quarter of 2002 and expect
to file an IND with the FDA for our therapeutic lung and colon cancer vaccine
candidate by late 2002 or early 2003, we may experience unexpected delays in
our research and development efforts that would require us to delay these
filings or commencement of clinical trials of our vaccine candidates. In the
event we file our INDs in the proposed timeframes, the related clinical trials
may not begin one month later, due to review by the FDA. Although we previously
indicated that Pharmacia Corporation was expected to initiate Phase I/II human
clinical trials of a drug candidate in our cancer program by late 2000 or early
2001, Pharmacia terminated our collaboration in the cancer field in November
2000. As a result, the clinical trials for our cancer program did not begin
within the previously indicated timeframe. We have now implemented an orderly
conclusion to the collaboration and transfer of applicable materials and
documentation to us, and we are internally proceeding with the cancer program.

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

Unacceptable toxicities or side effects may occur at any time in the course of
human clinical trials or during commercial use. Delays in planned patient
enrollment in our clinical trials may result in increased costs, program delays
or both. The appearance of any unacceptable toxicities or side effects could
interrupt, limit, delay or cause us to terminate the development of any of our
product candidates or, if previously approved, require us to withdraw them from
the market.

We may never obtain approvals from the FDA or other necessary regulatory
approvals to successfully commercialize any of our products under development.
This may be because the clinical trials are not successful, but it may also be
because we either are unclear on the information the FDA will require or
because we do not design our clinical trials in such a way to provide the FDA
with the information it requires. Further, we may not be able to manufacture
any products in commercial quantities in compliance with regulatory
requirements at an acceptable cost. Even if we successfully develop and obtain
approval for our products, we may fail to achieve the necessary market
acceptance of these

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products. Our failure to address problems and delays relating to research and
development, regulatory approval, manufacturing and marketing would harm our
business.

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

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

Pharmacias decision to end our collaboration has delayed and may limit our
ability to develop our cancer epitope products.

Pharmacia terminated our research and development collaboration in November
2000 with respect to the production, use and sale of pharmaceutical products
derived from our cancer epitopes and the use of these epitopes in therapeutic
vaccines. We will not receive further revenues from Pharmacia under our prior
collaboration.

In light of the termination of our collaboration with Pharmacia, our
preclinical or clinical development of drug candidates in our cancer program is
delayed. We have not spent any time or money on the development of any of
these candidates (other than our therapeutic lung and colon cancer vaccine
candidate) and we may never develop any of those cancer epitope products, which
could prevent us from ever commercializing a product.

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

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

We do not directly control the amount or timing of resources that our
collaborators and licensees will devote to our collaborations and out-license
agreements, including the decision whether to proceed with clinical trials. Our
collaborators and licensees may not commit sufficient resources to research and
development programs or the commercialization of products. If our collaborators
fail to conduct their activities in a timely manner, or at all, our preclinical
or clinical development related to our partnership

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with them could be delayed or terminated. If our licensees fail to conduct
their activities in a timely manner, or at all, we may not realize the expected
benefits under the applicable license agreement. The suspension or termination
of our collaborations or licenses, the failure of such collaborations or
licenses to be successful or the delay in the development or commercialization
of pharmaceutical products pursuant to such collaborations or licenses could
harm our business.

In addition, due to financial constraints, we may be required to enter into
licenses or other collaborations with third parties in order to access
technologies that are necessary to successfully develop certain of our
products. We may not successfully negotiate acceptable licenses or other
collaborative arrangements that will allow us to access such technologies. In
addition, any technologies accessed through such licenses or other
collaborations may not help us achieve our goals.

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

As of June 30, 2002, we had $14.2 million in cash, cash equivalents and
short-term investments. Our future capital requirements will depend on many
factors, including: the costs associated with filing an IND for our vaccine
targeting HIV and an IND for our lung and colon cancer vaccine candidate; the
costs associated with our clinical trials for our vaccine targeting HIV which
are now scheduled to begin in the third quarter of 2002; the costs associated
with safety studies and other preclinical activities for our vaccine targeting
lung and colon cancer; our ability to establish and maintain collaborative
arrangements and license agreements; the actual revenue we receive under our
collaborative research and development 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; progress
with preclinical testing and clinical trials; the time and costs involved in
obtaining regulatory approvals; the costs involved in filing, prosecuting and
enforcing patent claims and any other proprietary rights; competing
technological and market developments; changes in our existing research
relationships; continued scientific progress in our drug discovery programs;
the magnitude of our drug discovery programs; the cost of manufacturing
scale-up; and effective commercialization activities and arrangements.

We intend to seek additional funding through collaborative arrangements and
license agreements, research grants or equity or debt financings, such as the
private financing that we completed in December 2001. However, we may not be
able to obtain any additional funding. In the event we do 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 may
result, as was the case when we issued an additional 2,000,000 shares of common
stock in December 2001. If we acquire funds through additional collaborations
and license agreements, we will likely have to relinquish some or all of the
rights to products or technologies that we may have otherwise developed
ourselves. If we are unable to obtain funding, we may be required to sell the
Company or certain of its assets or technologies or to cease operations.

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

We have experienced significant operating losses since our inception in 1987.
As of June 30, 2002, we had an accumulated deficit of $147.6 million. We have
not generated revenues from the commercialization of any product. All of our
revenues to date have consisted of contract research and development revenues,
license and milestone payments, research grants, certain asset divestitures and
interest income. We expect that substantially all of our revenues for the
foreseeable future will result from contract revenues and research grants and,
if we are able to establish and maintain collaborations, payments under those
collaborations, including royalties on product sales and interest income. We
expect

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to continue to incur substantial net operating losses that may imperil our
ability to continue operations. To achieve profitable operations, we, alone or
with partners, must successfully identify, develop, register and market
proprietary products. We may not be able to generate sufficient product revenue
to become profitable on a sustained basis or at all. Based on estimated
revenue, including contracts signed to date, we only have enough cash to
continue operations through mid-2003.

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

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

The regulatory process for new therapeutic drug products, including the
required preclinical studies and clinical testing, is lengthy and expensive. We
and our partners may not receive necessary FDA or foreign clearances for any of
our potential products in a timely manner, or at all. The length of the
clinical trial process and the number of patients the FDA will require to be
enrolled in the clinical trials in order to establish the safety and efficacy
of our products is uncertain. In addition, we may not provide the FDA with what
they want 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 drug compared to patients in the control group. We and our partners
may encounter significant delays or excessive costs in our efforts to secure
necessary approvals. Regulatory requirements are evolving and uncertain. Future
United States or foreign legislative or administrative acts could also prevent
or delay regulatory approval of our products. We and our partners may not
receive the necessary approvals for clinical trials, manufacturing or marketing
of any of our products under development. Even if we obtain commercial
regulatory approvals, the approvals may significantly limit the indicated uses
for which we may market our products. In addition, the FDA may continually
review a product after its initial approval and commercialization. Later
discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market, as well as possible
civil or criminal sanctions.

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

Among the other requirements for regulatory approval is the requirement that
prospective manufacturers conform to the FDAs Good Manufacturing Practices, or
GMP, requirements specifically for biological drugs, as well as for other
drugs. In complying with the FDAs GMP requirements, manufacturers must
continue to expend time, money and effort in production, record keeping and
quality control to assure that the product meets applicable specifications and
other requirements. Failure to comply with the

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FDAs GMP requirements subjects the manufacturer to possible FDA regulatory
action. If we or our contract manufacturers or partners, if any, fail to
maintain compliance with the FDAs GMP requirements on a continuing basis, it
could materially adversely affect our operations, commercialization efforts and
profitability.

Technological change and competition may render our potential products
obsolete.

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

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

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

Our success will depend in part on our ability to obtain and enforce patent
protection for our products and processes, both in the United States and other
countries. Although we have filed various patent applications, the patent
position of biotechnology and pharmaceutical companies is highly uncertain and
involves complex legal and factual questions. There is no consistent policy
regarding the breadth of claims allowed in biotechnology patents. We intend to
file applications and pursue patent prosecution as appropriate for patents
covering both our products and processes. We cannot be sure that patents will
issue from any of the patent applications that we own or license or that, if
patents do issue, that claims allowed will be sufficiently broad to protect our
products and processes. For example, even though we have issued patents and
have filed patent applications to cover the methods employed by our Epitope
Identification System, or EIS, as well as the epitopes we identify using EIS,
we cannot assure you regarding the breadth of claims that will be allowed in
these patents. In addition, we cannot be certain that third parties will not
challenge, invalidate or circumvent any patents issued to us, or that the
rights granted under the patents will provide proprietary protection to us.
Furthermore, because we collaborate with third parties on some of our
technology, there is also the risk that disputes may arise as to the rights to
technology or drugs developed in collaboration with other parties.

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

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

As is typical in the biotechnology industry, our commercial success will depend
in part on our ability to avoid infringing patents issued to competitors or
breaching the technology licenses upon which we might base our products. If we
fail to obtain a license to any technology that we require to commercialize our
products, or to develop an alternative compound and obtain FDA approval within
an acceptable period of time if required to do so, our business would be
harmed. Litigation, which could result in substantial costs to us, may also be
necessary to enforce any patents issued to us or to determine the scope and
validity of others proprietary rights. In addition, we may have to participate
in interference proceedings declared by the United States Patent and Trademark
Office, which could result in substantial costs to determine the priority of
inventions.

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

We are highly dependent on the principal members of our scientific and
management staff. We do not maintain key person life insurance on the life of
any employee and although we have an employment contract with Dr. Emile Loria,
he may terminate his employment at any time. Our future success also will
depend in part on the continued service of our key scientific and management
personnel and our ability to identify, hire and retain additional qualified
personnel. There is intense competition for qualified personnel in the areas of
our activities, and we may not be able to continue to attract and retain such
personnel necessary for the development of our business. Because of the intense
competition, 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 be significantly
detrimental to our product development programs and could harm our business.

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

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

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

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

We fund certain of our research and development 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.

Our ability to successfully commercialize our products may depend in part on
the extent to which reimbursement for the cost of such products and related
treatment will be available from government health administration authorities,
private health insurers and other organizations. Third-party payors are
increasingly challenging the price of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products, and 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. If we cannot obtain adequate
third-party coverage for our products, we may be precluded from commercializing
these products.

Product liability risks may expose us to significant liability.

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, we cannot be sure that we
can maintain such insurance on acceptable terms or that our insurance will
provide adequate coverage against potential liabilities.

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

Our research and development processes involve the controlled storage, use and
disposal of hazardous materials, chemicals and radioactive compounds. We are
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of these materials and some waste
products. Although we believe that our safety procedures for handling and
disposing of these materials comply with the standards prescribed by these laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of an accident, we
could be held liable for any damages that result, and any liability could
exceed our resources.

Although we believe that we are in compliance in all material respects with
applicable environmental laws and regulations and currently do not expect to
make material capital expenditures for environmental control facilities in the
near term, we cannot be sure that compliance with environmental laws and

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regulations in the future will not entail significant costs, or that our
business will not be harmed by current or future environmental laws or
regulations.

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

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



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

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

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

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

Our certificate of incorporation includes a provision that requires the
approval of holders of at least 66 2/3% of our voting stock as a condition to a
merger or certain other business transactions with, or proposed by, a holder of
15% or more of our voting stock. This approval is not required in cases where
certain of our directors approve the transaction or where certain minimum price
criteria and other procedural requirements are met. Our certificate of
incorporation also requires the approval of holders of at least 66 2/3% of our
voting stock to amend or change the provisions mentioned relating to the
transaction approval. Finally, our certificate of incorporation provides that
any action required or permitted to be taken by our stockholders must be
effected at a duly called annual or special meeting rather than by any consent
in writing.

Further, pursuant to the terms of our stockholder rights plan, we have
distributed a dividend of one right for each outstanding share of common stock.
If any person or group acquires 15% or more of our common stock, these rights
will be triggered. These rights will cause substantial dilution to the
ownership of a person or group that attempts to acquire us on terms not
approved by our Board of Directors and may have the effect of delaying or
deterring hostile takeover attempts.

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

Our officers, directors and stockholders with at least 10% of our stock
together control approximately 41% of our outstanding common stock and
preferred stock, on a combined, as-converted to common stock basis. If these
officers, directors and principal stockholders act together, they will be able
to exert a significant degree of influence over our management and affairs and
over matters requiring stockholder approval, including the election of
directors and approval of mergers or other business combination transactions.
The interests of this concentration of ownership may not always coincide with
our interests or the interests of other stockholders. For instance, officers,
directors and principal stockholders, acting together, could cause us to enter
into transactions or agreements that we would not otherwise consider.
Similarly, this concentration of ownership may have the effect of delaying or
preventing a change in control of our company otherwise favored by our other
stockholders. This concentration of ownership could depress our stock price.

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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 2002 Annual Meeting of Stockholders, or the Annual Meeting, was
held on June 18, 2002. 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 700,000 to 1,200,000 shares.
|
| | 3. |  | To ratify the selection of Ernst & Young LLP, as independent
auditors for the Company, for the year ending December 31, 2002.                                                                      

At the Annual Meeting, 11,034,794 shares of Common Stock out of a total of
12,094,757 shares of Common Stock outstanding at the record date were
represented in person or by proxy, 1,058,826 shares of Series S Preferred Stock
out of a total of 1,058,826 shares of Series S Preferred Stock outstanding at a
record date were represented in person or by proxy and 549,622 shares of Series
S-1 Preferred Stock out of a total of 549,622 shares of Series S-1 Preferred
Stock outstanding at the record date were represented in person or by proxy.
The holder of preferred stock votes its shares on all matters to be voted upon
at the Annual Meeting on an as-converted to common stock basis.

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.   |  |     | 12,563,829 |          |  |  | 79,413 | 
|William T. Comer, Ph.D. |  |     | 12,563,829 |          |  |  | 79,413 | 
|Michael G. Grey         |  |     | 12,563,829 |          |  |  | 79,413 | 
|Georges Hibon           |  |     | 12,563,829 |          |  |  | 79,413 | 
|Emile Loria, M.D.       |  |     | 12,563,829 |          |  |  | 79,413 | 
|John P. McKearn, Ph.D.  |  |     | 12,563,829 |          |  |  | 79,413 | 
|Michael J. Ross, Ph.D.  |  |     | 12,563,829 |          |  |  | 79,413 | 



|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 700,000 to 1,200,000 shares.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|        |  |       |            | 
|------- |  | ----- | ---------- | 
|        |  | Votes
|        |  |      
|For     |  |       | 12,110,759 | 
|Against |  |       | 252,696    | 
|Abstain |  |       | 279,787    | 

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|3. |  | Ratify the selection of Ernst &Young LLP, as independent auditors for the
year ending December 31, 2002.
|-- |  | --------------------------------------------------------------------------------------------------------

|        |  |       |            | 
|------- |  | ----- | ---------- | 
|        |  | Votes
|        |  |      
|For     |  |       | 12,610,461 | 
|Against |  |       | 23,902     | 
|Abstain |  |       | 8,879      | 




ITEM 6.  EXHIBITS AND REPORTS
ON FORM 8-K

| |     |                                               |                                                                                                                                                 
| | --- | --------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Exhibits                                     
|
| |     | Exhibit 99.1                                  | Certification pursuant to Section 906 of the Public
Company Accounting Reform and Investor Protection Act of 2002
(18 U.S.C. § 1350, as adopted)
|
| | (b) | Reports on Form
8-K During the Second Quarter
|
| |     | None                                         

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EPIMMUNE INC.




SIGNATURES

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





| | EPIMMUNE INC.
| | -------------





|                      |  |     |  |                                                                                                                                                      
|--------------------- |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Date: August 13, 2002 |  | By: |  | /s/ Emile Loria                                                                                                                                      
|                      |  |     | 
|                      |  |     |  | Emile Loria, M.D.
President, Chief Executive Officer and Director                                                                                    
|                     
|                     
|Date: August 13, 2002 |  | By: |  | /s/ Robert De Vaere                                                                                                                                  
|                      |  |     | 
|                      |  |     |  | Robert De Vaere
Vice President, Finance and Administration,
Chief Financial Officer, Assistant Secretary
(Principal Financial and Accounting Officer)

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