APHTON CORP - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________

FORM 10-K
(MARK ONE)
( X ) Annual Report Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934 (Fee Required)
For the Fiscal Year Ended December 31, 2002

Or

( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________ to ____________

Commission File No. 000-19122
___________

APHTON CORPORATION
80 SW Eighth Street, Suite 2160
Miami, Florida 33130
(305) 374-7338
Incorporated in Securities Registered Pursuant to I.R.S. Employer
Delaware Section 12(b) of the Act Identification

None.
Title of Each Class

No. 95-3640931

Securities Registered pursuant to Section 12(g) of the Act:
Common Stock ($.001 par value)

______________________
Title of Each Class

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

Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K. ( )

Number of shares of Common Stock ($.001 par value)
Outstanding as of March 28, 2003: 24,701,639

Aggregate market value of Common Stock ($.001 par value)
held by non-affiliates of the registrant on June 30, 2002
based on the last sale price on June 30, 2002: $136,101,923

Documents Incorporated by Reference

Document Part of Form 10-K
Proxy Statement for the 2003 Annual Part III
Meeting of Stockholders

2

Item 1. Business

The Company

Our History and Product Development

Aphton Corporation ("Aphton" or the "Company") is a biopharmaceutical company.
We are engaged in research and development and conduct clinical trials for our
products, both independently and with our corporate strategic partners. We apply
our innovative active immunization technology-platform to develop products for
neutralizing, and removing from circulation, hormones and other molecules that
participate in gastrointestinal system and reproductive system cancer and
non-cancer diseases.We also are developing a product to neutralize hormones to
prevent pregnancy.

Since 1997 we have had a strategic alliance with Pasteur Merieux Connaught, now
Aventis Pasteur, for products that treat gastrointestinal cancers, in North
America and Europe. Since 1998, we have had a strategic alliance with SmithKline
Beecham, now GlaxoSmithKline, for products that treat reproductive system
cancers and non-cancer diseases, worldwide.

During our first five years, we developed the basis of our innovative active
immunization (vaccine) technology and our monoclonical antibody technology and
have continued developing them to date. In our second five years, Aphton
initiated the development of products based on those technology platforms, which
we have continued to date. Since our inception, we have developed a patent
estate to protect our technology platforms and our products after they are
commercialized. During this period and since, together with our collaborating
scientists, we have developed the scientific foundations and the scientific
literature relating to the central role of gastrin and gastrin receptors in the
onset, development, growth and spread of adenocarcinomas of the gastrointestinal
system from the esophagus to the stomach, pancreas and liver and through the
colon and rectum.

After conducting toxicology testings and pre-clinical trials in animals, we
initiated phase I safety and phase II dose-ranging/indications of efficacy
clinical trials, with G17DT and GnRH pharmaccine. These trials demonstrated for
the first time that a patient's immune system can be activated to target,
neutralize and inhibit hormonal growth factors that fuel cancers and drive them
to metastasize (spread). We recently reported successful results from a
randomized, double-blind, phase III trial with G17DT as monotherapy for advanced
pancreatic cancer and from a phase II gastric (stomach) cancer trial with G17DT
in combination with the chemotherapeutics cisplatin and 5-FU. These trials are
described more fully under "Results and Status" in this Section.

We achieved our developments, preclinical and clinical results with the
expenditure approximately $134 million in the twelve years since our initial
public offering in 1991. We believe we can reduce our spending during the next
twelve months by more than 60% to less than $16 million from the approximately
$40 million during the 12 months of fiscal year 2002. We will pursue our primary
objective of filing for approval to market G17DT for monotherapy for advanced
pancreatic cancer patients in the European Union, Canada and Australia by
September 2003. We currently have a strategic alliance with Aventis Pasteur,
whereby Aventis will exclusively promote, advertise, market, distribute and sell
our anti-gastrine vaccine (G17DT) in North America and Europe. We intend to
license G17DT to third parties to treat human cancers in other markets
worldwide, including Japan. We also intend to license worldwide our monoclonal
antibody products to target gastrointestinal system cancers. For non-cancer
therapies, we intend to license G17DT for the treatment of gastroesophageal
reflux disease (GERD).

Clinical Trials

We are currently completing the following clinical trials: a phase III trial
conducted outside of the United States for pancreatic cancer with its
anti-gastrin 17 immunogen (G17DT) as a monotherapy; a phase II clinical trial
conducted in the United States and foreign countries, with G17DT in combination
with the chemotherapeutics cisplatin and 5-FU for gastric cancer patients; and a
phase II trial in Europe with GnRH pharmaccine for prostate cancer patients. We
are conducting a second phase III trial that has also completed patient
recruitment, conducted in the United States and foreign countries for pancreatic
cancer with G17DT in combination with the chemotherapeutic gemcitabine. We have
initiated but are not currently recruiting patients pending funding for a phase
II trial in Europe with G17DT for gastroesophageal reflux disease (GERD), or

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"severe heart burn" patients. In addition, our Phase II clinical trial with
respect to immuno-contraception has been initiated but is "on hold," pending
further funding from the WHO.

We believe that the results of the randomized, double blind, phase III trial
conducted in foreign countries with G17DT as a monotherapy for advanced
pancreatic cancer patients, described in more detail under "Status and Results"
in this Section, are already sufficient for filing for marketing approval in the
European Union, Canada and Australia. Therefore, Aphton has begun the process of
gathering and compiling the data and the preparation of the extensive regulatory
documentation required for submission for marketing approval. This process can
be expected to take approximately five months, but that cannot be stated with
certainty. Aphton expects it will receive priority review of the filings. The
time for review and the granting of marketing approval in each jurisdiction
cannot, however, be predicted by Aphton with certainty.

In addition, we believe that the results of our phase II trial for gastric
cancer patients treated with G17DT in combination with cisplatin and 5-FU can be
described as "impressive." We plan to investigate the possibility of obtaining a
conditional marketing approval for this therapy in a foreign jurisdiction based
on these results, when the final data is compiled, analyzed and documented. In
parallel, we plan to seek corporate partners for G17DT for cancer therapy in
countries outside of Europe and North America, where we currently have no
licensees, and corporate partners for our monoclonal antibody platform for
cancer therapies and G17DT for GERD therapy, worldwide.

Financial Strategy

We finance our operations through the sale of our equity securities, convertible
debentures and licensing fees. These funds provide us with the resources to
operate our business, attract and retain key personnel and scientific staff,
fund our research and development program, pre-clinical testing and clinical
trials, obtain the necessary regulatory approvals and develop our technology and
products.

Aphton Corporation, a Delaware corporation, was incorporated in 1981. The common
stock of Aphton has been trading on Nasdaq's National Market System since June
2, 1994. Aphton had been traded in the Nasdaq Small-Cap Issues (formerly
over-the-counter) market since April 1, 1991, the date of Aphton's initial
public offering. The Company's common stock is traded under the symbol "APHT."

Basis of Approach

Aphton's primary approach for the treatment of major diseases such as cancer has
been to employ (anti) "hormone therapy." Aphton's hormone therapy involves
neutralizing, or blocking, targeted hormones which play a critical role in
diseases of the gastrointestinal and reproduction systems. Aphton has selected
the strategy of hormone therapy because hormone therapy has proved over decades
to be efficacious in the treatment of major diseases, both malignant and
non-malignant. Well-documented examples of the efficacy of hormone therapy in
humans are blocking gastrin (Proglumide) or blocking another hormone stimulated
by gastrin, namely histamine (Zantac, Tagamet), to reduce stomach acid. These
hormone therapies treat GERD, ulcerations of the esophagus and peptic ulcers.
Additional examples of hormone therapy include blocking estrogen (Tamoxifen),
for breast cancer therapy and blocking the production of testosterone (Lupron,
Zoladex) for prostate cancer therapy.

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Results and Status

The status of our products under research and development is summarized in the
following table.

Strategic
Product Indication(s) Product Description Status(1)(2) Alliances
------- ------------- ------------------- ------------ ---------

Anti-Gastrin 17 Advanced The vaccine, containing a portion Phase III clinical Aventis
(G17DT) for pancreatic cancers of the hormone gastrin 17 (G17), trial: G17DT Pasteur(3)
Gastrointestinal and diphtheria toxoid (DT), administered as a
Cancers chemically bound together to form monotherapy
G17DT, neutralizes both G17 and the
hormone Gly-G17 to treat advanced
pancreatic cancer.

Anti-Gastrin 17 Advanced The vaccine, containing a portion Phase III clinical Aventis
(G17DT) for pancreatic cancers of the hormone gastrin 17 (G17), trial: G17DT Pasteur(4)
Gastrointestinal and diphtheria toxoid (DT), administered with
Cancers chemically bound together to form Gemcitabine, a
G17DT, neutralizes both G17 and the chemotherapy
hormone Gly-G17 to treat advanced
pancreatic cancer.

Anti-Gastrin 17 Advanced stomach The vaccine, containing a portion Phase II clinical Aventis
(G17DT) for Gastric cancer and/or of the hormone gastrin 17 (G17), trial: G17DT Pasteur(5)
and esophagus cancers and diphtheria toxoid (DT), administered with
Gastro-Esophageal chemically bound together to form the
Cancers G17DT, neutralizes both G17 and the chemotherapeutics
hormone Gly-G17 to treat advanced Cisplatin and 5-FU
stomach cancer and/or esophagus
cancer.

GnRH Pharmaccine Reproductive A vaccine that neutralizes the GnRH Phase II clinical GlaxoSmith
system cancers hormone for hormone-failed or trial: GnRH Kline(6)
(including hormone-resistant patients with pharmaccine
prostate cancer) prostate cancer. administered with
Taxotere, a
chemotherapy

Anti-Gastrin 17 Gastro-intestinal An anti-gastrin vaccine, that Phase II clinical None
(G17DT) for ulcerations and neutralizes G17 to treat GERD and trial, initiated but
Gastro-Esophageal GERD gastro-intestinal ulcerations. not currently
Reflux Disease recruiting patients;
(GERD) pending funding

Immuno- Prevent pregnancy A prophylactic (contraceptive) Phase II clinical World Health
Contraception in women vaccine that neutralizes a female trial initiated but Organization
hormone known as hCG. awaiting further (WHO)
funding by WHO

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(1) The first, third and fourth of these trials are fully recruited and nearing
completion.

(2) Clinical trials of a new drug are typically conducted in three sequential
phases. Phase I studies typically test the product for safety tolerance. Phase
II studies involve limited trials to determine the optimal dose and frequency of
administration and an indication of efficacy for defined indications. When the
product has been found safe and shows promise of efficacy, further trials are
undertaken in Phase III to fully evaluate clinical efficacy and to further test
for safety typically using a large and geographically diverse number of
patients.
(3),(4),(5) For countries in North America and Europe.
(6) For countries worldwide.

Anti-Gastrin Immunogen (G17DT)

Our current anti-gastrin immunogen, or vaccine, clinical programs treat several
human gastrointestinal system adenocarcinomas, including those of the esophagus,
stomach and pancreas, metastases to the liver and may treat metastases of the
liver, colon and rectum.

Our anti-gastrin targeted therapy induces antibodies in patients that bind to
both gastrin 17 and gly-gastrin and remove them from circulation before they can
bind to the cancer cell and initiate cell growth. Gastrin 17 and gly-gastrin are
believed to be central growth factors, or the initiating signals, for cell
growth, cell proliferation and metastasis (spread) in gastric, i.e. stomach,
pancreatic, esophageal, colorectal, liver and other gastrointestinal (GI) system
cancers. This signaling program is accomplished by gastrin binding to the large
numbers of gastrin receptors which appear, de novo, in the great majority of
cases, on tumor cell surfaces throughout the gastrointestinal system.
Interrupting this process by immunizing the patient with Aphton's anti-gastrin
immunogen is a precisely "targeted" immunotherapy. This specificity of targeting
only cancer cells occurs because gastrin is not normally secreted and gastrin
receptors are not normally found on cells in the GI system, unless they are
malignant, or on the path to malignancy (except for those cells involved with
normal acid secretion).

Recent findings have shown that inhibiting gastrin not only inhibits cell
growth, proliferation and metastasis directly, but also "unblocks" a central
pathway leading to cell-suicide (apoptosis). This tilts the balance, from cell
growth, to cell suicide. This effect is amplified synergistically when Aphton's
drug is given together with a chemotherapeutic drug, as demonstrated in our
phase II trial for gastric cancer patients treated with G17DT in combination
with cisplatin and 5-FU, described hereunder. Gastrin also stimulates the
secretion and expression of other important growth factors and receptors within
and on the surfaces of the cancer cells involved in tumor growth. Hence,
inhibiting gastrin inhibits all of the foregoing factors contributing to tumor
growth and spread, while simultaneously opening a central pathway to cell
suicide. Aphton's anti-gastrin targeted therapy adds a biological dimension to
the treatment of gastrointestinal cancers.

We know of no other vaccine or drug that selectively blocks or neutralizes both
gastrin 17 and glycine-extended gastrin 17. Aphton believes that its
anti-gastrin vaccine can extend survival in patients suffering from
adenocarcinomas of the gastrointestinal system, without adding systemic
toxicity.

Phase III clinical trial for patients with advanced pancreatic cancer

In March 2003 Aphton announced that it had met with and presented results of its
randomized, double blind, controlled, monotherapy, Phase III clinical trial
conducted in Europe with G17DT on patients with advanced pancreatic cancer to a
foreign regulatory authority.

The presentation of the most recent analysis of the data resulting from the
Phase III clinical trial, which is not yet completed, as some patients are still
alive, demonstrated an overall median survival benefit of 83%, with a
statistically significant value of p. The corresponding hazard ratio (HR) was
0.65, which also had a statistically significant value of p. (an HR of 0.65
means that at any point in time, patients on G17DT had a 154% higher likelihood
of surviving longer than patients on the control.) Because there are still
surviving patients in the trial that are being treated, the results of the final
analysis could vary. If further details on the trial were to emerge prior to its
completion, there is a possibility that the result of the analysis of the
standard of care of the remaining patients could be influenced, thereby
jeopardizing both their inclusion in the final statistical analysis and the
ultimate breadth of the indication allowed in each jurisdiction.

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The latest Phase III clinical trial results update the results announced by
Aphton on October 28, 2002 which reported on clinical trials on patients with
advanced pancreatic cancer who had received no previous therapy and were treated
either with Aphton's anti-gastrin immunogen G17DT as a monotherapy, or with the
control. The primary efficacy measure was survival time from the date of
randomization. A summary of the results reported is as follows: a) patients with
stage IV pancreatic cancer treated with G17DT had a median survival time that
was 53% longer than the stage IV patients in the control arm; b) 25% of the
patients with stage IV pancreatic cancer who were treated with G17DT had a
survival time that was 106% longer than the control arm; and c) the overall HR
was 0.7; that is to say, at any point in time, patients on G17DT had a 143%
higher likelihood of surviving longer than patients on the control.

It is estimated that approximately 88,000 new cases of pancreatic cancer will be
diagnosed in the United States and Europe this year. The prognosis for most of
these patients is very poor. At the time of diagnosis, the great majority of
patients have the disease in its advanced stages, which is considered incurable,
and the patients have a very short survival time. Surgery, when possible, and
chemotherapy are the primary treatment options currently available, but have
shown only very limited benefit. Aphton believes that its anti-gastrin targeted
immunotherapy approach has the potential to extend patient survival time
significantly without adding systemic toxicity.

We believe that the results of the trial are already sufficient for filing for
marketing approval in the European Union, Canada and Australia. Therefore,
Aphton has begun the process of gathering and compiling the data and the
preparation of the extensive regulatory documentation required for submission
for marketing approval. This process can be expected to take approximately five
months, but cannot be stated with certainty. Aphton expects it will receive
priority review of the filings. The time for review and the granting of
marketing approval in each jurisdiction cannot, however, be predicted by Aphton
with certainty.

We believe that with these clinical trials and regulatory developments, we have
reached the decisive turning point in our corporate development and in the
pursuit of our corporate objectives.

Fast Track designation for G17DT (anti-gastrin) immunogen in combination with
cisplatin and 5-FU for use in stage IV gastric cancer

On February 21, 2003, Aphton announced that the U.S. Food and Drug
Administration (FDA) granted its request for Fast Track designation for its
G17DT (anti-gastrin) immunogen in combination with cisplatin and 5-FU for use in
stage IV gastric cancer to improve overall survival. "Fast Track" is a formal
mechanism of interacting with the FDA using approaches that are available to all
applicants for marketing claims. The benefits of a Fast Track designation
includes scheduled meetings with the FDA to seek FDA input into development
plans, the option of submitting a New Drug Application in sections rather than a
submission of all components simultaneously, and the option of requesting
evaluation of studies using surrogate endpoints. The Fast Track designation is
intended for the combination of a product and a claim that addresses an unmet
medical need, but is independent of the FDA's priority review and accelerated
approval mechanisms.

It is estimated that there are approximately 570,000 patients with gastric
cancer in the United States, Europe and Japan alone. The prognosis for the
overwhelming majority of these patients is very poor. Patients diagnosed with
metastatic disease have five-year survival rates of only about three percent.
Currently, surgery and chemotherapy are the primary treatment options, but these
regimens have shown only very limited benefit. Aphton believes that its
anti-gastrin targeted immunotherapy approach has the potential to extend patient
survival without adding systemic toxicity.

Phase II clinical trial with patients with metastatic stomach cancer who were
treated with Aphton's G17DT and chemotherapy consisting of cisplatin and 5FU

On February 6, 2003 Aphton reported an interim analysis of tumor response
results from its phase II clinical trial with patients with metastatic stomach
cancer who were treated with Aphton's G17DT and chemotherapy consisting of
cisplatin and 5FU. This report follows interim response results reported at the
American Society of Clinical Oncology (ASCO) in an interim report dated July 31,
2002, which reported an overall tumor response rate of 51.4%, an interim report
at the ASCO annual meeting dated June 12, 2002, which reported an overall tumor.

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response rate of 48.3% and an initial report dated May 17, 2002 at the ASCO
annual meeting, which reported an overall tumor response rate of 53%.

A total of 103 patients were enrolled, of which 73 were evaluable. Thirty-seven
patients had either a partial or a complete tumor response, for an overall tumor
response rate of 51%. Two patients had a complete response (CR - no detectable
residual tumor) and 35 had a partial response (PR). An additional 23 patients
had stable disease. Throughout the trial, there was no systemic toxicity
attributed to G17DT. One patient showed a previously unseen response pattern. He
first responded to treatment with the combination of G17DT and cisplatin/5FU
with a reduction of the tumor lesions by approximately 70% (a partial response).
Subsequently, the disease stabilized (i.e. the size of the lesions did not
increase for between 7 to 8 months, in spite of discontinuation of treatment
with cisplatin halfway through the study period because of neuropathy). An
additional treatment with G17DT in October 2002, the fifth overall treatment,
resulted in a reduction of the tumor lesions (PR) by a further 80%. Subsequent
to the sixth treatment in January 2003, there was a complete disappearance of
all lesions, the second complete response in the study. Sixteen months after his
first treatment, the patient was alive and doing well, with no residual tumor
detectable. Aphton's anti-gastrin targeted immunotherapy adds a biological,
non-toxic dimension to the treatment of gastrointestinal cancers.

There is only one large, randomized, phase III clinical trial that has been
reported in the medical literature with cisplatin plus 5FU for patients with
advanced gastric cancer. Of 399 total patients enrolled in the trial, 245 were
evaluable. For the patients treated with cisplatin plus 5FU, the tumor response
rate was 20%, as reported by the European Organization for Research and
Treatment of Cancer (EORTC) which conducted the trial. The results reported by
Aphton today compare favorably with those results. They represent a 155%
improvement relative to the 20% results reported in the EORTC clinical trial.

Aphton's July 31, 2002 interim results from its phase II clinical trial with
patients with metastatic stomach cancer who were treated with Aphton's G17DT and
chemotherapy consisting of cisplatin and 5FU updated results reported on June
12, 2002. Of 72 evaluable patients reported upon this time, 37 had either a
partial or a complete tumor response for an overall tumor response rate of
51.4%. One patient had a complete response (no detectable residual tumor) and 36
had a partial response (tumor shrinkage by 50% or more). Furthermore, an
additional 20 patients had stable disease.

Aphton's June 12, 2002 interim results from its phase II clinical trial with
patients with metastatic stomach cancer who were treated with Aphton's G17DT and
chemotherapy consisting of cisplatin and 5FU updated results reported at the
ASCO annual meeting on May 17, 2002. Of 58 evaluable patients reported upon this
time, 28 had either a partial or a complete tumor response for an overall tumor
response rate of 48.3%. One patient had a complete response (no detectable
residual tumor) and 27 had a partial response (tumor shrinkage by 50% or more).
Furthermore, an additional 21 patients, or 36.2% of the evaluated patients, had
stable disease. Thus, a total of 84.5% of the patients had either tumor
shrinkage or stable disease.

Aphton's May 17, 2002 report at the ASCO annual meeting presented highlights
from several clinical trials and studies with Aphton's anti-gastrin 17 immunogen
(G17DT). Audited results from a Phase II clinical trial in the United States and
Europe with previously untreated patients with advanced metastatic stomach
cancer treated with Aphton's anti-gastrin 17 immunogen (G17DT) were presented by
the principal investigator, Dr. Jaffer Ajani, MD. He noted that there was no
approved therapy currently available and that chemotherapy is considered only
palliative. Dr. Ajani presented additional audited interim results of the
clinical trial with patients with metastatic stomach cancer who were treated
with Aphton's G17DT and chemotherapy consisting of cisplatin and 5FU. Of the 36
reported and audited evaluable patients, 19 had a partial tumor response (tumor
shrinkage by 50% or more) for an overall response rate of 53%. One patient had a
complete response (no detectable residual tumor) and 18 had a partial response.
These results compared favorably with the reported response rates of
chemotherapy with cisplatin plus 5 FU/Leucovorin. Aphton's anti-gastrin targeted
therapy added a biological dimension to the treatment of gastrointestinal
cancers.

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On February 8, 2002, Dr. Ajani, announced interim results of the gastric cancer
Phase II clinical trial with Aphton's immunogen, G17DT, in a symposium titled
"G17DT: A New Approach to Growth Factor Neutralization" at the 12th
International Congress on Anti-Cancer Treatment held that week in Paris. The
symposium was chaired by Dr. Ajani. Dr. Ajani presented an interim analysis of
the first 30 patients on whom results were available. No side effects were
attributed to the immunogen. When administered with G17DT the patients completed
on average 5.5 cycles of chemotherapy, compared to a normal average of 2.5
cycles completion before side effects force discontinuation. Of the 30 patients,
15 had a partial tumor response (tumor shrinkage by 50% or more) for an overall
response rate of 50%. One patient had a complete response (no detectable
residual tumor) and 14 had a partial response. These results compare favorably
with reported response rates of chemotherapy with cisplatin plus 5 FU/Leucovorin
in large, controlled clinical trials for patients with metastatic gastric
cancer. The results discussed the two trials conducted in the United Kingdom
with respect to Aphton's anti-gastrin immunogen.

The results discussed above updated the results presented in May 2001 at the
annual meeting of the ASCO in San Francisco with respect to two studies
conducted in the United Kingdom on Aphton's anti-gastrin 17 immunogen.

In the first trial, conducted at the Royal Free Hospital, University College in
London, 30 patients with histologically proven locally advanced or metastatic
pancreatic cancer were immunized with Aphton's anti-gastrin 17 immunogen, at
different doses. Of the patients immunized with the lower dose, 46% responded
with antibodies to gastrin, while 82% responded at the higher dose. Median
survival (50%) for all patients, both lower and higher doses, was 187 days and
median survival for patients responding with anti-gastrin 17 antibodies was 217
days. For comparison, median survival for patients receiving best supportive
care is approximately 130 days.

In a larger, second trial conducted at the Queens Medical Center, University of
Nottingham, 37 patients immunized with anti-gastrin 17 immunogen were compared
with 37 patients receiving best supportive care. In this larger study, the
patients received only the higher dose. Median survival was 297 days, or 9.9
months, as compared to the control group, which had a median survival of 109
days, or 3.6 months. This represents a factor of 2.75, or a 175% increase in
median survival. Moreover, more than a third of the immunized patients gained
weight, which is highly unusual for patients with advanced pancreatic cancer.
For further comparison, the patients receiving Aphton's anti-gastrin 17
immunogen had a median survival of 9.9 months, whereas the chemotherapeutic
gemcitabine, the only approved drug for pancreatic cancer in the United States,
had a median survival of approximately 5.5 months, in the pivotal trial upon
which its approval was based.

Orphan Drug status for G17DT for both pancreatic cancer and gastric (stomach)
cancer indications

On January 22, 2003 Aphton announced that it had received official notification
that the Committee for Orphan Medicinal Products (COMP) had recommended to the
European Commission of the EU that Aphton's anti-gastrin immunogen G17DT be
granted Orphan Drug status for both pancreatic cancer and gastric (stomach)
cancer indications.

On December 19, 2002, Aphton announced that it had received official notice from
the Therapeutic Goods Administration (TGA), the regulatory authority in
Australia equivalent to the U.S. FDA, granting its anti-gastrin G17DT Immunogen
Orphan-Drug status for treatment of both pancreatic cancer and gastric (stomach)
cancer. Unlike in the United States, the Australian orphan-drug designation
automatically confers priority evaluation for the drug ahead of other
evaluations.

On July 23, 2002, Aphton announced that it had received official notice from the
FDA granting its anti-gastrin G17DT Immunogen Orphan-Drug status for treatment
of gastric (stomach) cancer. The indication designated was broader than the
indication originally sought by Aphton.

On July 17, 2002, Aphton announced that it had received official notice from the
FDA granting its anti-gastrin G17DT immunogen Orphan-Drug designation for
treatment of adenocarcinoma of the pancreas. The indication designated was
broader than the indication originally sought by Aphton.

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The term "orphan-drug" in the United States refers to a product that treats a
rare disease affecting fewer than 200,000 Americans. Orphan-Drug Status confers
a 7-year period of exclusive marketing rights for G17DT for this indication,
thereby protecting it from similar drugs of the same class. In addition, Aphton
is qualified to apply for grant amounts totaling up to $900,000 over a 3-year
period, with a maximum of $300,000 per year. Furthermore, the requirement for a
$300,000 user fee that is payable with the submission of a New Drug Application
is waived for an Orphan Drug.

Results of other studies and reviews

On May 23, 2002, at the annual meeting of the American Gastroenterological
Association (AGA) being held in San Francisco, Aphton collaborators received a
Blue Ribbon Award Poster of Distinction for one of the four scientific posters
relating to Aphton's anti-gastrin immunogen (G17DT), the gastrin family of
growth factors and their receptors, the inhibition of these growth factors and
receptors, their role in tumor growth, new blood vasculature (angiogenesis) and
apoptosis, or cell suicide.

The Blue Ribbon Award was given for Aphton's studies showing that both gastrin
17 (G-17) and the precursor gly-G-17 are able to induce specific growth
responses that lead to the branching and tubular networks characteristic of
angiogenesis, in a human endothelial cell system (cells responsible for the
development of new blood vasculature). Most importantly, the studies showed that
the angiogenic stimulus in this cell system was equal in magnitude to that
caused by VEGF, which has received much attention in the scientific and drug
development literature. Furthermore, the studies showed that neutralization of
G-17 and gly-G-17 by Aphton's anti-G17-DT caused a strong and significant
reversal of (angiogenic) effects confirming their specificity of action. The
studies also demonstrated in these angiogenic cells, at both the molecular and
protein level, that gastrin/CCK-2 receptor was expressed, and that
gastrin/CCK-2R in these blood vessel forming cells was of the type that had 3
times increased affinity for gly-gastrin than for G-17 (amidated) gastrin, which
is characteristic of the receptors found in metastatic tumors. It was concluded
that these studies presented evidence for an angiogenic role for gastrin, in
addition to its widely acknowledged role as a growth factor for GI-cancer cells
and its spread.

A second study reported upon at the meeting investigated the mechanism of action
by which an Aphton monoclonal antibody (Mab) targeted against the receptor to
which G-17 binds, called the CCKB/Gastrin receptor, is taken up by a liver tumor
cell, enters the cell nucleus and results in cell death. Five liver cancer
(hepatoma) cell lines, both human and animal, were studied. The results showed
that in all five cell lines, uptake of the (Aphton) labeled anti-CCK-BR antibody
was correlated with apoptosis. The study concluded that a direct relationship
between the uptake of the antibody and cell death by apoptosis existed. This
observation has important implications in the treatment of CCK-BR positive
tumors including hepatomas where there are limited therapeutic options."

A third study presented findings on the varying structure of the receptors for
gastrin 17 and gly-gastrin 17 during the progression of malignancy; and a fourth
study investigated the effect of Aphton's anti-gastrin immunogen (G17DT) on
human pancreatic cancer cells, concluding that gastrin inhibition increases the
potency of the cytotoxic agent Gemcitabine in pancreatic cancer.

In June, 2001, scientists in collaboration with Aphton published a peer-reviewed
article with the new findings that the genes for both the gastrointestinal
hormone gastrin and its receptor are "switched on" at the earliest stages of
pre-malignancy in stomach cells, helping to fuel their progression to cancer.
The article entitled: "Expression of Gastrin in Developing gastric
Adenocarcinoma" appeared in the issue of British Journal of Surgery, 2001 Volume
88.

On May 15, 2002, Dr. Jaffer Ajani, MD presented the first results from a Phase
III clinical trial at the MD Anderson Cancer Center in Houston, Texas, in
treating patients with advanced, metastatic stomach cancer with Aphton's
anti-gastrin 17 immunogen. Dr. Ajani, began the discussion by describing the
worldwide incidence, stage of disease and expected (short) survival time at
detection, and very high death rate statistics for stomach cancer (the highest
annual number of deaths worldwide of all cancers after lung cancer). He noted
that there is no approved therapy currently available; chemotherapy is
considered palliative, only. Dr. Ajani then proceeded directly to provide the
interim results of the trial with patients with metastatic stomach cancer who
were treated with Aphton's anti-gastrin 17 immunogen and chemotherapy with
cisplatin and 5FU.

-10-

Of the six reported evaluable patients:

1) The first patient had six large liver metastases. After treatment with
Aphton's immunogen and the ehemos, all of the metastases disappeared
completely (unexpectedly), as shown by repeated CAT scans. The
"before" and "after" photos were dramatic. This is termed a "complete
response."

2) Two of the patients had tumor volume shrinkage of greater than 50%.
This is termed a "partial response."

3) Three of the patients had tumor volume shrinkage of less than 50%.
This is termed a "moderate response."

Thus all (100%) of the patients responded. Fifty percent of the patients were
partial or greater responses, including a complete response. Since the remaining
50% were moderate responses, none even had to be termed "stable" (as yet), which
is the cytostatic state hoped for and to be expected from depriving cells of the
growth factor gastrin 17.

Anti-Gastrin Immunogen Alliance

In 1997 Aphton signed an agreement with Pasteur Merieux Connaught (now called
"Aventis Pasteur") ("Aventis Pasteur" or "Aventis") for a strategic alliance for
all human cancer applications of its anti-gastrin immunogen product, including
stomach/esophageal, colorectal, and pancreatic cancers. Under the terms of the
twenty-year agreement, Aphton is responsible for product development, clinical
trials and regulatory agency approvals, and Aventis Pasteur is responsible for
and will fund the promotion, advertising, marketing, distribution and sale of
Aphton's anti-gastrin vaccine in North America, Mexico and Europe. In addition,
Apthon and Aventis Pasteur have entered into agreements providing for the supply
of certain components of the anti-gastrin immunogen (as well as other Aphton
products) from Aventis Pasteur to Aphton. See our full discussion of the Aventis
Pasteur agreements under Strategic Alliances in this Section.

GnRH pharmaccine

Overview

Aphton has developed an anti-hormone immunogen, GnRH pharmaccine, for human
cancer indications, one that targets the reproductive hormone Gonadotropin
Releasing Hormone (GnRH). By neutralizing (blocking) GnRH, the immunogen shuts
down the production of estrogen and progesterone (in females) and testosterone
(in males), which are normally produced in their respective gonadal organs.
Estrogen fuels breast cancer and testosterone fuels prostate cancer. The
biological blockage, like physical castration, should be efficacious in the
treatment of prostate and breast cancers. Aphton's anti-GnRH immunogen induces
biological blockage.

In 2001 Aphton successfully completed a pilot Phase I/II safety and dose ranging
trial and has reported on the results through a news release and in a
publication with collaborating scientists in the United Kingdom, in a
peer-reviewed journal. The primary purpose of the safety and dose ranging trial
was to demonstrate safety; the secondary purpose was to gather data using
various doses of immunogen and to show that a biological castration could be
induced with Aphton's immunogen.

Aphton's GnRH pharmaccine reduced, in some patients at the lowest dose level,
gonadal testosterone to levels achieved by surgical castration. This biological
castration demonstrated "proof of concept" in man. In addition, the prostate
cancer "progression" marker, Prostate Specific Antigen (PSA), was reduced
markedly in these patients to very low levels, in some cases from triple-digit
to single-digit.

Aphton is completing a Phase II clinical trial in Europe to treat prostate
cancer patients who have failed hormone therapy (called hormone refractory
patients), with a combination immuno-chemo therapy regimen comprised of GnRH
pharmaccine, and the chemotherapeutic taxotere. Such patients will likely have
been treated with a GnRH agonist drug (to achieve a chemical castration) or an
orchiectomy (a surgical castration), following therapy for the primary tumor,
but will have metastases, relapsed and have a rising PSA.

Strategic Alliance

-11-

In June 1998, Aphton and GlaxoSmithKline signed a Collaboration and License
agreement, granting GlaxoSmithKline exclusive rights worldwide to Aphton's GnRH
related patents and proprietary technology. The agreement covers the diagnosis,
treatment and prevention of GnRH product are prostate, breast, ovarian and
endometrial cancer. Additional medical indications for the anti-GnRH product are
endometriosis, polycystic ovaries, uterine fibroids, contraception, infertility
and precocious puberty. Under terms of the agreement, Aphton and GlaxoSmithKline
are collaborating in a joint product development program, with GlaxoSmithKline
responsible for phase III clinical trials and regulatory approvals, and for
worldwide marketing and distribution of approved products. The agreement uses a
royalty mechanism based on product sales, in dollars, worldwide to determine
Aphton's revenues. See our full discussion of the GlaxoSmithKline license
agreement under Strategic Alliances in this Section.

GERD

Aphton is also developing its anti-Gastrin immunogen approach for the treatment
of gastroesophageal reflux disease (GERD), also known as "severe heartburn."
GERD affects more than 20% of the adult population. Prescription drugs to treat
this problem have annual revenues of over $13 billion. Aphton believes its
therapy for GERD, which is not yet partnered with any drug company, will obviate
major risks associated with current therapies while still providing their
benefits, as well as providing more symptomatic relief, in this symptom-driven
disease, for which current therapies are inadequate in approximately 50% of the
patients. As a preliminary to conducting a Phase III trial for GERD, Aphton has
conducted a limited Phase II trial in Europe to optimize the product, given the
different performance-profile desired for this major, non-cancer application and
has initiated a comprehensive Phase II trial in Europe, but is not currently
recruiting patients pending further funding.

Immunocontraceptive

Aphton's anti-hCG immunocontraceptive product, which is being developed to
prevent pregnancy, has been in a Phase II trial, funded by the World Health
Organization (WHO) and is currently awaiting further funding by WHO for further
development. See our discussion of the WHO strategic alliance under Strategic
Alliances in this Section.

Equine Anti-Gastrin Immunogen

In 1997, the Company entered into a strategic alliance with Schering-Plough
Animal Health covering all animal health applications of our anti-gastrin
immunogen. See our discussion of the Schering-Plough Animal Health agreement
under Strategic Alliances in this Section.

Technology

Aphton's approach to the treatment of major diseases is to employ (anti)
"hormone therapy." Aphton's hormone therapy involves neutralizing, or blocking,
certain hormones that play a critical role in these diseases. This is
accomplished by immunizing the patients with a product called, appropriately, an
"immunogen," that induces in them a directed antibody response which
neutralizes, and removes from circulation, the targeted hormone.

Aphton has developed an innovative and proprietary active immunization
technology platform to create effective immunogens, which are products
administered like vaccines. The immunogens harness and direct the body's immune
system to generate antibodies, which bind to specific peptide portions of the
administered immunogen. These antibodies cross-react (bind) with targeted "self"
molecules, such as hormones, when they encounter that portion of the hormone,
which is similar to the peptide portion of the administered immunogen. Because
diseases involving hormones are not pathogen (microorganism) driven, they have
not been viewed traditionally as being susceptible to treatment with immunogens
to activate the body's immune system against targeted hormones. Instead, the
traditional pharmaceutical industry approach to controlling these diseases has
been to treat them with synthetic drugs. However, these drugs typically must be
administered in relatively large quantities and on a daily or more frequent
basis, giving rise to patient compliance problems, and often have adverse side
effects.

-12-

Aphton's immunogens create a strong antibody response from the patient's own
immune system (which effectively becomes a "drug factory") and have a more
potent and longer-lasting therapeutic effect. Aphton's technology enables it to
specifically target a small sequence within the hormone to be neutralized, in
order to achieve a specific desired biological and physiological response. This
approach directs all of the immunogen-induced antibodies to the targeted hormone
sequence. At the same time it minimizes the possibility of undesired
physiological consequences through cross-reactivity of the immunogen with any
self molecule or portion thereof, other than the specifically-targeted hormone
sequence. This avoids the possibility of autoimmune disease where the antibody
production is not "turned off." This is because the antibody production can only
be "turned on and kept on" in the presence of the foreign, "carrier" portion of
the immunogen (see below). Indeed, without a "booster shot" of the immunogen,
the antibodies wane (diminish) and are cleared by the body, over time. Aphton's
products may be administered in much smaller dosages and on a much less frequent
basis than pharmaceutical drugs; typically twice a year. This virtually
eliminates the problem of patient compliance, which is associated with
pharmaceutical drugs.

Aphton's anti-gastrin immunogen product, for example, consists of:

(a) A synthetic peptide, which is similar to a portion of the hormone
gastrin 17 which is targeted to be neutralized (i.e., blocked or
prevented from reaching and binding to its receptor).

(b) A "carrier," Diphtheria Toxoid (DT), foreign to the body, to which a
number of the synthetic peptides in (a) are chemically bound
(conjugated). This makes them available to be both bound to and,
together with the DT, internalized by "B-cells." DT contains the
structures (epitopes) which, when internalized and "presented" on
B-cells and Macrophages, are bound to by "T-cells." By binding to
these foreign epitopes, these T-cells in turn, proliferate and signal
the B-cells, which bind to the peptides in (a) to proliferate and to
"mass produce" the desired antibodies (all of which bind to the
peptide in (a)).

(c) A proprietary, slow-release "suspender" which contains (a) and (b).
This "delivery vehicle" is designed to enable the achievement of four
objectives, concurrently: i) a high antibody response; ii) a long
antibody response; iii) no systemic toxicity; and iv) long-term
stability, or "shelf-life."

The anti-gastrin product, which is administered by injection, with booster shots
at approximately six-month intervals, thus induces antibodies in the patient
which bind with the peptide in (a) above and which also bind (cross-react) with
and neutralize gastrin 17 (when they encounter that portion on gastrin 17 which
is similar to peptide (a)). Gastrin 17 is known to drive (or fuel) colorectal,
stomach, liver and pancreatic cancer. Neutralizing gastrin 17 inhibits both the
growth and metastasis (spread) of these gastrointestinal cancers. In addition,
the anti-gastrin product uniquely neutralizes glycine-extended gastrin 17, which
has also been shown recently to be secreted by and to fuel these
gastrointestinal system cancers.

Gastrin 17 is also responsible for the production of the bulk of stomach acid
(approximately 90% in humans), the reduction of which is therapeutic for GERD
and for both peptic ulcers and non-steroidal anti-inflammatory drug (NSAID)
- - induced ulcers (NSAID examples include aspirin and ibuprofen).

Aphton's anti-GnRH product is similarly constructed. In this case, the synthetic
peptide sequence in (a) represents the hormone GnRH, which is targeted to be
neutralized. Neutralizing GnRH inhibits the production of estrogen, progesterone
and testosterone. Inhibiting estrogen (and progesterone) is therapeutic for
women with breast cancer, endometrial cancer, ovarian cancer and endometriosis.
Inhibiting testosterone is therapeutic for men with prostate cancer.

Aphton's immunocontraceptive product, which prevents pregnancy in humans, is
also similarly constructed. In this case, the so-called "C-terminal" peptide
portion of the hormone hCG (which is targeted to be neutralized) is synthesized.
A second, unique epitope (peptide), located on the hormone hCG, is also
conjugated to the immunogen, which enhances efficacy. By not using a larger
portion of the hCG molecule, Aphton avoids inducing unwanted antibodies against
other hormones in the woman (LH and FSH), which share domains with some portions
of the hormone hCG. Pregnancy is prevented by immunizing the woman; this induces
antibodies which bind to and neutralize hCG.

-13-

Strategic Alliances

Aventis Pasteur

In February 1997, Aphton signed an agreement with Pasteur Merieux Connaught (now
called Aventis Pasteur), for a strategic alliance for all human cancer
applications of its anti-gastrin immunogen product, including
stomach/esophageal, colorectal, and pancreatic cancers. Under the terms of the
twenty-year agreement, Aphton is responsible for product development, clinical
trials and regulatory agency approvals, and Aventis Pasteur is responsible for
and will fund the promotion, advertising, marketing, distribution and sales of
Aphton's anti-gastrin vaccine in North America and Europe. In addition, Aphton
and Aventis Pasteur have entered into agreements providing for the supply of
certain components of the anti-gastrin immunogen (as well as other Aphton
products) from Aventis Pasteur to Aphton.

In addition to the license and co-promotion agreement, we entered into
agreements with Aventis Pasteur providing for the supply of the anti-gastrin
immunogen product from us to Aventis Pasteur for distribution and sale by
Aventis Pasteur pursuant to the license and co-promotion agreement, as well as
the supply of Diphtheria Toxoid and/or Tetanus Toxoid from Aventis Pasteur to us
for use in the anti-gastrin immunogen product (as well as other Aphton
products). Aventis Pasteur will fund the costs associated with product
introduction, promotion, advertising and marketing throughout the territory
covered by the agreement. Under the terms of the agreement, in addition to
upfront consideration aggregating $10 million, including $1 million cash and a
supply commitment (of Diphtheria Toxoid and/or Tetanus Toxoid suitable for human
use) of $9 million, we will receive the majority of the profits from sales of
the anti-gastrin immunogen product. Diphtheria Toxoid and/or Tetanus Toxoid
suitable for human use is not readily obtained on the open market in such large
quantities as will be supplied to us as part of the upfront consideration. The
$10 million upfront consideration has been classified as a license payment and
has been deferred and will be recognized for financial statement (accounting)
purposes as revenue within the twenty-year period of the agreement. The revenue
recognition will begin once regulatory agency approval to market the product has
been received and will be recognized ratably over the remaining period of the
contract, which ends February 13, 2017. We do not speculate on the timing of
regulatory approvals.

Either party may terminate the agreement for, among other things, uncured
material breach or certain events of bankruptcy or insolvency. Aventis Pasteur
has the right to terminate the agreement, following completion of Phase III
clinical trials in the event that it determines that for safety and efficacy
reasons it does not wish to co-promote, market or sell the product. In the event
that the agreement is terminated due to a material breach by Aventis Pasteur,
all rights of Aventis Pasteur granted by the agreement will be terminated.
However, Aventis Pasteur's obligations with regard to the $10 million upfront
consideration, both the cash and our rights to the full $9 million in
unconditional supply commitment, survive termination of the agreement. There is
no provision under the agreement for the unconditional supply commitment to be
satisfied by Aventis Pasteur with a cash payment. In the event that the
agreement is terminated due to a material breach by us, we will, among other
things, grant Aventis Pasteur a co-exclusive license, under our patents and
know-how in North America and Europe and the product trademarks, to make and
sell the anti-gastrin immunogen product in exchange for royalty payments to the
other party at a royalty rate based on a percentage of net sales.

On December 20, 2002, Aphton signed a Letter of Intent to restructure its
co-promotion and marketing collaboration with Aventis Pasteur. Consummation of
the transactions contemplated by the Letter of Intent was subject to, among
other conditions to be determined by the parties, Aventis' completion of due
diligence to its satisfaction, approval of the transaction by Aventis' and
Aphton's respective Board of Directors, and negotiation and execution of
definitive agreements for the transaction that were mutually agreeable to
Aventis and Aphton. The transactions contemplated by the Letter of Intent
include, in part, the granting of exclusive worldwide rights to Aphton's active
immunization targeting gastrin or its receptor(s), including, but not limited
to, G17DT, for all oncology indications, and also to monoclonal antibodies under
development by Aphton targeting gastrin or its receptor(s), for all oncology
indications. Aphton would receive an initial payment under the restructured
agreement, and would be entitled to receive milestone payments upon achieving
certain goals and royalties on sales. Aventis would be responsible for the cost
of all preclinical, clinical development and registration activities. On March
31, 2003, Aphton announced that its Board of Directors determined that it is not
in the best interests of Aphton's shareholders to restructure the existing
Co-Promotion and Marketing Agreement with Aventis Pasteur to treat human cancers
with G17DT and that the

-14-

Letter of Intent dated December 20, 2002 was allowed to expire. Aphton and
Aventis Pasteur will continue operating pursuant to the terms and conditions of
their existing Co-Promotion and Marketing Agreement.

GlaxoSmithKline

In June 1998, Aphton and GlaxoSmithKline signed a Collaboration and License
agreement, granting GlaxoSmithKline exclusive rights worldwide to Aphton's
GnRH-related patents and proprietary technology. The agreement covers the
diagnosis, treatment and prevention of GnRH-related cancers and other diseases
in humans. Human cancer indications for the anti-GnRH product are prostate,
breast, ovarian and endometrial cancer. Additional medical indications for the
anti-GnRH product are endometriosis, polycystic ovaries, uterine fibroids,
contraception, infertility and precocious puberty. Under terms of the agreement,
Aphton and GlaxoSmithKline are collaborating in a joint product development
program, with GlaxoSmithKline responsible for phase III clinical trials and
regulatory approvals, and for worldwide marketing and distribution of approved
products. The agreement uses a royalty mechanism based on product sales, in
dollars, worldwide to determine Aphton's revenues.

Under terms of the agreement, we are collaborating with GlaxoSmithKline in a
joint product development program, with GlaxoSmithKline responsible for
worldwide marketing and distribution of approved products. Under the agreement
as amended, we are responsible for the initial cost of product development prior
to the acceptance of the anti-GnRH product by both parties. Our product
development work is reviewed on an ongoing basis with GlaxoSmithKline and after
the acceptance of the product by both parties for development, GlaxoSmithKline
is responsible for the funding of the development costs of the accepted product,
clinical trials and approvals for worldwide marketing and distribution up to an
agreed amount.

As part of the agreement, GlaxoSmithKline made an equity investment in 1998 of
$5,000,000 for 237,867 shares of newly issued Aphton common stock. Either party
may terminate the agreement for, among other things, uncured material breach or
certain events of bankruptcy or insolvency. Under the agreement as amended, if
the anti-GnRH product has not been formally accepted by both parties, either
party may terminate the agreement in 2002. In 2002, both parties agreed to
continue this agreement. Once the product has been accepted for further
development, GlaxoSmithKline may only terminate the agreement for safety,
efficacy or economical reasons and Aphton may terminate for the reasons stated
above. During the term of the agreement, GlaxoSmithKline will have full access
to all matters encompassed within our patents and know-how relating to the
anti-GnRH product. Upon termination or expiration of the agreement,
GlaxoSmithKline will cease to have the right to use or sell the anti-GnRH
product, and all registrations and intellectual property rights in the anti-GnRH
product will be fully transferred to us. Until the agreement is terminated or
otherwise expires, any invention or discovery made jointly by GlaxoSmithKline
and us during the development program will be jointly owned, and the product
trademarks and any intellectual property developed by GlaxoSmithKline will be
owned by them.

Schering-Plough Animal Health

In August 1997, we entered into a strategic alliance with Schering-Plough Animal
Health covering all animal health applications of our anti-gastrin immunogen.
Schering-Plough, in terms of annual sales, is one of the largest animal
healthcare companies in the world. Equine (horse) ulcers was selected as the
first indication to be pursued under the alliance. Under the terms of the
ten-year agreement, we have granted Schering-Plough an exclusive license in the
United States to promote, distribute and sell the anti-gastrin immunogen product
under our patents and know-how.

World Health Organization

In January 1995, we announced a relationship with WHO and another research
party, for the development and testing of an immunocontraceptive product (which
prevents pregnancy), under which we received exclusive rights for the
manufacture, distribution and supply of the immunocontraceptive product
worldwide, for the term of the applicable patents on a patent-by-patent basis.
In exchange for these rights, we make payments to support certain research by
the research party.

In the event that a safe and effective product is developed, we have undertaken
to WHO to dedicate a portion of our production capacity for the product to
produce and supply the product to public sector agencies in developing countries
only, according to a cost-related pricing structure. Either party may terminate
the agreement for uncured

-15-

material breach by the other party. In the event that we have ceased and
continue to cease to perform our obligations under the contract, WHO may
terminate the agreement and we will grant WHO an exclusive, royalty-free license
to our technology to develop, manufacture and supply immunocontraceptive
products to public sector agencies in developing countries only, as well as a
non-exclusive, royalty-bearing license to develop, manufacture and supply
immunocontraceptive products in developed countries and to the private sector
generally. Once the immunocontraceptive product has reached a certain
development stage and subject to certain consequences, WHO may be released from
its obligations under the agreement for lack of funds or after an assessment of
safety and efficacy of the product and Aphton will be released from its
obligations.

Manufacturing and Marketing

Absent or together with a strategic alliance or corporate partnering
relationship (such as those with Aventis Pasteur and GlaxoSmithKline) which may
impact on the following, Aphton plans to commercialize its products by executing
long-term contracts with third parties, including major pharmaceutical
companies, to manufacture its products and by contracting with similar drug
companies to market, sell and distribute its products.

The contract (outsourcing) manufacturing approach leverages on the large and
available manufacturing resources of pharmaceutical industry companies. Aphton
has contracted with drug manufacturing sources which are providing Aphton's
immunogens for toxicology studies and clinical trials. Aphton's outsourcing of
marketing, distribution and sales, as exemplified by the Aventis Pasteur and
GlaxoSmithKline agreements, similarly leverages on the large and effective sales
forces of the major pharmaceutical companies. Aphton's capital formation,
personnel and plant and equipment requirements, together with associated risks,
are clearly greatly reduced by such a commercialization strategy, which Aphton
pioneered. In fact, the outsourcing of non-core functions has now been adopted
by major drug companies. This strategy significantly enhances Aphton's ability
to achieve rapid market penetration and growth and to exploit the benefits of
the patent life of its products.

Strategy

Aphton's product development and commercialization strategy differs
significantly from the normal "licensing" of products to third parties. By using
this strategy, Aphton can retain a significantly larger degree of control of the
product development and commercialization, and a larger share of profits and
earnings, if any, resulting therefrom. Under typical licensing (with royalty
payments which are generally a small percentage of sales), the opposite would be
the case. By avoiding the industry norm of "corporate partnering" with drug
companies in its earlier development stages, and by both undertaking and
overcoming the associated risks during product development, Aphton has earned
and retained its options and the ability to optimally carry out its
commercialization approach. This strategy was successfully validated with
Aphton's agreements with Aventis Pasteur and GlaxoSmithKline.

Patents and Trade Secrets

Proprietary protection for Aphton's products is central to the Company's
business. Aphton's policy is to protect its technology by, among other things,
filing patent applications in worldwide markets of interest for products which
it considers important and intends to market. In that regard, Aphton has filed
patent applications and has continued to receive patents for its products, both
domestic and foreign. As of December 31, 2002 we held 31 issued patents.
Additional patent applications are in preparation or being filed or are pending
in the US and in other countries. Aphton intends to continue filing additional
patent applications relating to its products and, when appropriate, improvements
in its technology and other specific products that it develops.

Competition

The biotechnology and pharmaceutical industries are subject to rapid and intense
technological change. Our competitors include major pharmaceutical companies and
specialized biotechnology firms supported by universities and research
institutions. Our current competitive position with respect to each of our
products is summarized in the following table.

-16-

Product Indication(s) Competition
------- ------------ -----------

Anti-Gastrin 17 (G17DT) Advanced The only FDA-approved treatment currently available for pancreatic
for Gastrointestinal pancreatic cancer is Gemcitabine, which is manufactured by Eli Lily. Our
Cancers cancers anti-Gastrin 17 (G17DT) product is intended to be used as a non-toxic
monotherapy, or as a therapy administered with Gemcitabine. We
believe that Pharmacia & Upjohn, AstraZeneca and other pharmaceutical
companies are also developing pancreatic cancer therapy.

Anti-Gastrin 17 (G17DT) Advanced stomach There is currently no FDA-approved drug available for gastric cancer
for Gastric and cancer and/or or gastro-esophageal cancer. FDA-approved chemotherapies used to
Gastro-Esophageal esophagus cancers treat cancer in other indications, as well as experimental cancer
Cancers drugs in clinical trials, are currently being tried on patients with
advanced gastric cancer or gastro-esophageal cancer. Roche
Laboratories and Bristol-Myers Squibb, among others, are our
competitors in this market.

GnRH Pharmaccine Reproductive There is currently no FDA-approved drug for advanced prostate cancer
system cancers patients who have failed the GnRH agonists, Leuprolide or Goserelin.
We believe several other pharmaceutical companies, including
Pharmacia Upjohn, Immunex and AstraZeneca, are conducting clinical
trials for this class of patients.

Anti-Gastrin 17 (G17DT) Gastro-intestinal Proton Pump Inhibitors are approved for treatment of GERD. Unlike
for Gastro-Esophageal ulcerations and G17DT, none of the products currently available a) inhibits the
Reflux Disease (GERD) GERD effects of gastrin on the lower esophageal sphincter causing abnormal
transient LES relaxations typically associated with GERD, which are
believed to contribute heavily to the inadequate symptomatic relief
of current drugs, or b) treats hyper-gastrinemia, which results from
standard of care therapy using Proton Pump Inhibitors (PPIs).

Immuno- Contraception Prevent The use of a contraceptive vaccine eliminates patient compliance
pregnancy in problems that are inherent with oral medications and intrusive
humans devices made by our competitors in the current birth control market.

Our competitive position depends on the safety and efficacy of products, the
timing of regulatory approval and commercial introduction, and the effectiveness
of marketing and sales efforts. Our success also depends on our ability to form
strategic alliance relationships with other companies with greater marketing
resources than ours, attract and retain qualified personnel, and secure
sufficient capital resources for the often substantial period between
technological conception and commercial sales.

Some of our competitors have far greater financial resources, larger research
staffs and more extensive physical facilities. These competitors may develop
products that are more effective than ours and may be more successful than us at
producing and marketing their products. In addition, many specialized
biotechnology firms have formed collaborations with large, established companies
to support the research, development and commercialization of products that may
be competitive with ours.

-17-

Regulation

Government regulation in the United States and foreign countries is a
significant factor in the development and marketing of all of Aphton's products
and in Aphton's ongoing research and development activities. Clinical trials,
manufacture and marketing of Aphton's products are expected to undergo extensive
testing and approval processes by the Food and Drug Administration (FDA) and
equivalent foreign regulatory authorities, including those of the European
Union.

Aphton conducts human clinical trials with the objective of obtaining regulatory
approvals in the key markets, worldwide. The regulatory requirements and status
of each of our products are summarized in the following table.

-18-

Directors and Executive Officers

The directors and executive officers of the Company are set forth below:

Name: Position(s):
- ----- ------------

Philip C. Gevas Chairman of the Board of Directors,
President and Chief Executive Officer
William A. Hasler Vice Chairman of the Board, Director
and Co-Chief Executive Officer
Robert S. Basso Chairman of Compensation and Audit
Committees and Director
Georges Hibon Director
Nicholas John Stathis, Esq. Director
Frederick W. Jacobs Vice President, Chief Financial
Officer, Treasurer and Chief Accounting
Officer

Philip C. Gevas - 69, Chairman of the Board of Directors, President and Chief
Executive Officer. Mr. Gevas has served as Director, President and Chief
Executive Officer since co-founding Aphton in 1981. Mr. Gevas conceived and
directed the development of Aphton's inventions which have resulted in numerous
patents for Aphton for the treatment of colorectal, pancreatic, liver,
esophageal and stomach cancers, and GERD. After serving as an officer in the
United States Air Force, Mr. Gevas had experience in the defense industry in
management, science and engineering. Mr. Gevas has the degrees of M.E., and M.S.
Mathematics (Stevens Institute of Technology) and M.S.E.E. (Ohio State
University).

William A. Hasler - 61, Vice Chairman of the Board, Director and Co-Chief
Executive Officer. Mr. Hasler has served as Director of the Company since 1991.
Mr. Hasler's expertise and experience in management are focused both on strategy
and in operations, in the execution of plans and programs. Prior to his
appointment as Aphton's Co-Chief Executive Officer in July 1998, Mr. Hasler was
Dean of both the Graduate School and Undergraduate School of Business at the
University of California, Berkeley for more than five years. Earlier, Mr. Hasler
was Vice Chairman of KPMG Peat Marwick, responsible for management consulting
worldwide. He is currently also the Chairman and director of Solectron Corp.,
director of Stratex Networks and Ditech Communications, trustee of Schwab Funds,
and public governor of the Pacific Exchange.

Robert S. Basso - 58, Director. Mr. Basso has served as director since 1984. Mr.
Basso has served as Chairman of Correspondent Services Corporation (CSC) and as
Managing Director of UBS PaineWebber Inc. for more than ten years. Previously,
Mr. Basso was President of Broadcort Capital Corporation and Managing Director
of Merrill Lynch, Pierce, Fenner & Smith.

Georges Hibon - 65, Director. Mr. Hibon has served as directors since 2001. For
the past ten years, Mr. Hibon has served as Chairman and Chief Executive Officer
of Pasteur Merieux Connaught, NA and a member of its Board of Directors.
Previously, Mr. Hibon was President of Merck France. The French Government
awarded Mr. Hibon the honor of "Chevalier de la Legion d'Honor" for outstanding
military and civilian accomplishments.

Nicholas John Stathis, Esq. - 79, Director. Mr. Stathis has served as director
since 1994. Previously, Mr. Stathis served counsel at White & Case LLP, was a
partner at Botein, Hays & Sklar; Watson, Leavenworth, Kelton & Taggart; and at
Hopgood, Calimafde, Kalil, Blaustein & Judlowe. Mr. Stathis practiced in all
phases of patent, trademark, copyright and unfair competition law.

-19-

Frederick W. Jacobs - 47, Vice President, Chief Financial Officer, Treasurer and
Chief Accounting Officer. Mr. Jacobs has been with Aphton since 1989.
Previously, Mr. Jacobs, a CPA, was Chief Financial Officer of BestCare, a Health
Maintenance Organization from 1986 to 1989 and before that served on the staff
of PricewaterhouseCoopers (then Coopers & Lybrand) providing audit and tax
services.

Aphton's Bylaws authorize the Board of Directors to fix the number of directors
from time to time by a vote of the majority of the entire Board of Directors
(including any vacancies). All directors currently hold office until their
successors have been elected. Officers are elected to serve, subject to the
discretion of the Board of Directors, until their successors are appointed.
Directors do not receive any fees for service on the Board. Board members are
reimbursed for their expenses for each meeting attended. There are no family
relationships among executive officers or directors of Aphton.

Aphton's Audit Committee is composed of Messrs. Basso, Hibon and Stathis. The
Compensation Committee is composed of Messrs. Basso and Stathis. Messrs. Basso,
Hibon and Stathis are non-executive Board Members.

Principal Scientific Officers

In addition to Aphton's executive officers Philip C. Gevas, William A. Hasler,
Aphton's principal scientific officers are:

Paul Broome, MB., Ch.B., MFPM (University of Sheffield Medical School, UK) - 53,
Vice President and Medical Director for Clinical Trials and Regulatory Affairs,
Europe - Asia. Dr Broome has been with Aphton since 1994. His years of clinical
experience includes the responsibility at Glaxo for clinical trials which
provided data for US (FDA) and the United Kingdom Medicines Control Agency (MCA)
registration of the indication for ranitidine (Zantac) as maintenance therapy,
which became the world's largest-selling drug. Later, Dr. Broome was Medical
Director of a leading company in the United kingdom which provides services
ranging from consulting and R&D through clinical trials, regulatory affairs and
the registration of drugs for marketing approval from government regulatory
agencies.

William D. Perkins, Ph.D. - 65, Vice President, Director for Clinical Trials and
Regulatory Affairs, North America. Prior to joining Aphton Corporation in 2000,
Dr. Perkins had years of experience in the medical field. He has been actively
involved in oncology/immunology clinical trials, including directing all phases
of clinical trial development, from Phase I through post-marketing approval
(Phase IV). Dr. Perkins has been a major contributor to the formulation and
writing of both investigational new drug (IND) applications and of new drug
application (NDA) submissions to the FDA. Previous senior professional
responsibilities in clinical trials and medical affairs include affiliations
with ILEX Oncology (NASDAQ: ILXO), Elan Corporation PLC (NYSE: ELN) and Novartis
(NYSE: NVS).

Richard Ascione, Ph.D. (Princeton University) - 65, Vice President, Director of
Aphton's Laboratory of Molecular Medicine. Dr. Ascione has been with Aphton
since 1994. Dr. Ascione directs R&D in the area of Molecular Biology and works
closely with Aphton's Laboratory of Immunobiology in research and product
development. Previously, Dr. Ascione was a professor in the Department of
Experimental Oncology and Associate Director of the Center for Molecular and
Structural Biology at the Hollings Cancer Center and the Medical University of
South Carolina, respectively, in Charleston, South Carolina. Earlier, Dr.
Ascione was with the National Cancer Institute (NCI) of the National Institutes
of Health (NIH), where he served as Deputy Chief of NCI's Laboratory of
Molecular Oncology. Dr. Ascione has published over sixty-five peer-reviewed
papers, several book chapters and articles related to the molecular biology and
gene regulation of cancer, human retroviruses and HIV/AIDS.

Theo de Roij, Ph.D., D.V.M. - 53, Vice President, Business and Product
Development. Prior to joining Aphton in 1998, Dr. de Roij served for more than
one year as Director of Business Development at GlaxoSmithKline Biologicals
S.A., responsible for its worldwide business development activities. Previously,
Dr. de Roij was employed by the Animal Health Division of Solvay, S.A., where he
held several senior positions, including responsibility for worldwide business
development and strategic planning.

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Peter Blackburn, Ph.D. - 53, Vice President, Program Development and
Manufacturing. Dr. Blackburn has been with Aphton since 1997. Previously, Dr.
Blackburn was Executive Vice President and Chief Operating Officer of Applied
Microbiology, Inc. Earlier, he was involved in academic research in protein
chemistry at Rockefeller University, New York, working in the laboratory of two
recipients of the Nobel Prize for Chemistry. Dr. Blackburn has published
numerous papers in peer-reviewed journals and is the inventor on numerous US and
foreign patents.

Dov Michaeli, M.D. (University of California, San Francisco), Ph.D. (University
of California, Berkeley) - 67, Senior Vice President, Director of Medical
Science and Chief Medical Officer. Dr. Michaeli has been with Aphton since 1989.
Dr. Michaeli is a senior member of Aphton's management team with extensive
experience in clinical medicine and scientific research. Previously, Dr.
Michaeli was a professor at the University of California, San Francisco
(Departments of Biochemistry and Surgery) for twenty years. Dr. Michaeli has
numerous patents and over fifty published articles and book chapters.

Administrative and Scientific Staff

Donald Henderson - Vice President and Managing Director, Finance and
Administration, Europe. Previously, Mr. Henderson, a chartered accountant, held
financial management positions at a number of pharmaceutical companies.

Jeannette L. Whitmore - Vice President, Director, Investor and Media Relations,
Corporate Communications. Previously, Ms. Whitmore held positions in business
administration in the medical and healthcare fields.

Stephen L. Karr, Jr., Ph.D., University of California, Davis, Dr. Karr joined
the Company soon after its founding in 1981 and serves as Vice President and
General Manager of the Laboratory of Immunobiology. He is responsible for the
Laboratory's daily operations, including program planning, budgeting and
control. As Project Manager, Dr. Karr is responsible for the experimental design
and implementation of special projects. Dr. Karr, who is also an
immunoparasitologist, is an inventor of numerous Aphton patents. Dr. Karr has
sixteen publications and had presented twenty papers prior to joining the
Company.

Stephen Grimes, Ph.D., University of California - Vice President of the
Laboratory of Immunology. Dr. Grimes joined Aphton immediately after its
founding and is responsible for research and development in immunology and for
the experimental design and implementation of immunology-based projects. He also
serves as the principal scientific deputy for Aphton's clinical trials. Dr.
Grimes is a co-inventor of numerous issued patents of the Company and additional
patents in preparation and pending. Dr. Grimes joined Aphton upon finishing his
doctoral dissertation at the University of California, Davis.

None of our directors or officers is involved, or has ever been involved, in any
litigation, administrative or governmental proceeding in the past five years
that are material to an evaluation of their ability and their integrity. Aphton
has 56 employees, of which 48 work primarily in Research and Development.

Scientific Advisory Board

The members of Aphton's Scientific Advisory Board, which functions primarily as
a review board for research projects and for product development programs, in
addition to its senior staff members, are:

Robert J. Scibienski, Ph.D., University of California, Los Angeles. A
co-founder of Aphton, Dr. Scibienski focuses on immunology-related basic
technology at Aphton, currently addressing immune system regulation,
antigen presentation and gene interactions. Dr. Scibienski is a co-inventor
of issued Aphton patents and a number of patent applications of Aphton. Dr.
Scibienski is Associate Professor, Department of Medical Microbiology and
Immunology and Director of the campus-wide Central Hybridoma Facility at
the University of California, Davis. Dr. Scibienski has over thirty
publications.

Demosthenes Pappagianis, M.D. (Stanford School of Medicine), Ph.D.
(University of California, Berkeley). A co-founder of Aphton, Dr.
Pappagianis is its principal resource on the mechanisms of infection of
pathogens and of host defenses. Professor and Chairman (1967-1985) in the
Department of Medical Microbiology and Immunology at the University of
California, Davis, Dr. Pappagianis is widely recognized in the field of
infectious diseases. He is a Diplomate of the National Board of Medical
Examiners and Diplomate of the

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American Board of Medical Microbiology. In addition, he is a Fellow of the
Infectious Diseases Society of America and an Associate Member of the Armed
Forces Epidemiological Board. Dr. Pappagianis has over one hundred
publications.

Vernon C. Stevens, Ph.D. Professor of Reproductive Biology, Ohio State
University. Dr. Stevens is recognized worldwide as one of the pre-eminent
authorities on vaccines, contraception and synthetic peptide based
immunogen formulations. He pioneered the development of synthetic peptide
immunogens for human use, particularly for Aphton's immunocontraceptive
product, which prevents pregnancy, under development with the World Health
Organization (WHO).

Richard L. Littenberg, M.D. A co-founder of Aphton, Dr. Littenberg is an
emeritus member of Aphton's Scientific Advisory Board and is a co-inventor
of three Aphton patent filings. Dr. Littenberg is Board Certified in both
Internal Medicine and Nuclear Medicine and a Diplomate of the National
Board of Medical Examiners and is President and Chief Executive Officer of
HMG. Dr. Littenberg received his M.D. degree from the State University of
New York. He has practiced internal and nuclear medicine for over twenty
years. He has participated in clinical trials for major pharmaceutical
companies and has engaged in gastrointestinal, cancer and cardiovascular
research.

Eliezer Benjamini, Ph.D., University of California, Berkeley. A co-founder
of Aphton, Dr. Benjamini is an emeritus member of the Scientific Advisory
Board and is a co-inventor of two Aphton patents. Dr. Benjamini retired as
a full Professor in the Department of Medical Microbiology and Immunology
at the University of California, Davis, where he holds the title of
Professor Emeritus. Dr. Benjamini is widely recognized in the field of
immunology. He has received awards from industry and academia, including
the Distinguished Scientists Award in Virology and Immunology (1984) which
was given for his pioneering work in the development of synthetic peptide
vaccines. Dr. Benjamini has over one hundred publications and is co-author,
with Dr. Sidney Leskowitz, of Immunology: A Short Course, a textbook for
medical students.

Other scientists (consultants) participate when their expertise is needed
on a specific project.

-22-

Glossary of Selected Terms

Adenocarcinoma: cancer that originates in glandular
epithelial cells that line certain
internal organs.

Adjuvant Treatment: an ancillary treatment that is given to
patients in addition to a primary
treatment to enhance the effectiveness
of the primary treatment. For example,
in colon cancer, chemotherapy often is
given as an adjuvant treatment following
surgery to remove the primary cancer
from the colon.

Antibody: a protein produced by certain white
blood cells as part of an immune
response. These proteins, called
antibodies, bind in a specific manner to
a separate molecule and neutralize or
inhibit its biological activity.

Antigen: any substance that can induce antibodies
(B-cells) or activate T-cells, which
bind to it.

Cancer Vaccine: technically a misnomer: a large
weakly-antigenic molecule derived from
the surface of cancer cells, which when
combined with a foreign molecule (e.g.,
virus) induces a stronger immune
response against it and, then, where
located on the surface of the cancer
cells.

Control Group: the patient group (or arm) of a clinical
trial that receives the placebo or a
standard treatment for a disease,
against which the experimental drug is
compared.

Gastrin: a hormone produced in the stomach that
regulates stomach acid secretion and
stimulates the proliferation of
gastrointestinal cells and
adenocarcinomas of the gastrointestinal
tract. It occurs in the body in several
forms, including gastrin 17 (a 17 amino
acid peptide) and gastrin 34 (a 34 amino
acid peptide).

Gonadotropin Releasing Hormone (GnRH): a hormone secreted in the hypothalmus
that stimulates the release of other
reproductive hormones (including
ultimately, testosterone, estrogen and
progesterone).

Hapten: a small molecule (peptide), not
antigenic by itself, that can be bound
to by antibodies. It can be made
antigenic and elicit such antibodies
when joined to a foreign molecule
(carrier).

Hormone: a chemical substance produced by an
organ or cells of an organ in one part
of the body, and carried in the blood to
another organ or part of the body; and
which has a specific regulatory effect
on the activity of the body including
growth, metabolism and reproduction.

human Chorionic Gonadotropin (hCG): a female hormone secreted by a
fertilized egg necessary to start
pregnancy.

Immune System: the complex group of organs and cells
which has the ability to fight infection
and disease.

Immunogen: any molecule capable of inducing the
immune system to produce an antibody
response against it.

Metastasis: a process by which cancer cells spread
from the primary tumor to distant sites
such as the lung, liver, bone, or
brain. A cancer that has spread is said
to be metastatic, and the distant tumors
are called metastases.

Peptide: a molecule composed of amino acids that
are linked to each other in a sequence.

Placebo: an inert non-drug substance that is
given to the control group for
comparison to a new experimental drug,
usually in a randomized clinical trial.

Randomized Clinical Trial: a clinical trial with at least two arms,
in which the decision as to which arm a
new patient is assigned is, by design,
made by chance.

Standard Treatment: a currently accepted treatment for a
given disease. The drug treatment often
given to one group (or arm) of patients
in a clinical trial. The standard
treatment can serve as the control arm,
in place of a placebo, for comparison to
a new experimental drug treatment.

Treatment Group: the patient group, or arm, of a clinical
trial that receives the new experimental
drug treatment.

Vaccine: an immunogen consisting of an attenuated
or killed microorganism, administered to
induce the immune system to produce
antibodies to fight an infectious
disease.

Vaccine - Like: an immunogen consisting of a synthetic
hapten (peptide) joined together with a
foreign molecule, administered to induce
the immune system to produce antibodies
against the peptide.

-23-

Item 2. Properties

We do not own any real property. We presently lease research and development
facilities in Yolo County, California and in Leicestershire County, United
Kingdom. We lease our corporate headquarters in Miami, Florida. We believe that
these facilities are suitable for our operations for the foreseeable future.
These leases expire at various dates through December 31, 2007. Rental expense
for these leases for the year ended December 31, 2002 was approximately
$151,992, for the eleven month period ended December 31, 2001 was approximately
$73,000 and for the year ended January 31, 2001 was approximately $103,000. The
minimum rental commitment for the year ending December 31, 2003 is $153,000, for
the year ended December 31, 2004, $140,000, for the year ended December 31,
2005, $56,000, for the year ended December 31, 2006, $57,000, for the year ended
December 31, 2007, $34,000 and none thereafter. The leases provide various
options to renew, but we may or may not choose to renew any of the leases. We
may or may not relocate one or more of our facilities based on strategic
planning.

Item 3. Legal Proceedings

We are not involved, and have never been involved, in any litigation,
administrative or governmental proceeding and none is believed by our management
to be threatened.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

-24-

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

The common stock of Aphton has been trading on Nasdaq's National Market System
since June 2, 1994. Aphton had been traded in the Nasdaq Small-Cap Issues
(formerly over-the-counter) market since April 1, 1991, the date of Aphton's
initial public offering. The following table sets forth high and low price
information, provided by Nasdaq Historical Research Department, for each full
quarter beginning after December 31, 2001. Aphton's common stock is traded under
the symbol "APHT."

For The Year Ended December 31, 2001: High Low
1st Quarter $25.75 $12.13
2nd Quarter $24.82 $14.40
3rd Quarter $21.98 $ 6.95
4th Quarter $18.60 $ 9.01
For The Year Ended December 31, 2002:
1st Quarter $16.00 $9.60
2nd Quarter $12.00 $6.08
3rd Quarter $7.58 $2.16
4th Quarter $4.34 $1.28

We have never paid any cash dividends on our common stock. Although there are no
restrictions that currently limit our ability to pay cash dividends, we intend
to retain all future earnings, if any, until we generate sufficient revenues to
allow for the payment of dividends. We do not expect to pay any cash dividends
in the foreseeable future.

In August 2001, we closed a $14,250,036 million financing of unregistered equity
securities with several institutional investors. Aphton sold 1,187,503 million
shares of common stock at $12.00 per share. These shares were subsequently
registered in September 2001. The purchase agreement relating to the August 2001
transaction contained an anti-dilution provision that would be triggered in the
event that shares of common stock are issued below $12.00 per share before
October 2001.

On February 7, 2002, Aphton sold 1,345,000 shares of registered common stock at
$12.70 per share and received gross proceeds of $17.1 million.

On March 21, 2002, Aphton sold 1,200,000 shares of registered common stock at
$10.50 per share and received gross proceeds of $12.6 million. Because the
shares of common stock were issued below $12.00 per share, the anti-dilution
provision contained in the August 2001 purchase agreement was triggered and as a
result, on April 9, 2002, we issued 169,643 unregistered shares of common stock
to certain of our investors.

On September 26, 2002, Aphton sold 2,500,000 shares of registered common stock
at $2.00 per share and received gross proceeds of $5 million.

On December 6, 2002, Aphton sold 1,520,000 shares of registered common stock at
$2.375 per share and received gross proceeds of approximately $3.6 million.

Subsequent to year end, on February 24, 2003, we sold to an institutional
investor 500,000 shares of registered common stock at $2.96 per shares receiving
gross proceeds of approximately $1.48 million and 150,000 unregistered warrants
in a private placement at $0.125 per warrant for gross proceeds of $18,750. Each
warrant has registration rights and entitles the holder thereof to purchase a
share of our common stock at a price of $2.96 per share for the next five years.

As of December 31, 2002, Aphton had approximately 300 shareholders of record and
approximately 5,000 beneficial holders of its common stock.

-25-

Item 6. Selected Financial Data

SELECTED FINANCIAL INFORMATION

The selected financial data set forth below with respect to Aphton's statements
of operations and balance sheets for the year ended December 31, 2002, eleven
months ended December 31, 2001, the years ended January 31, 2001, 2000 and 1999
and the nine months ended January 31, 1998 are derived from audited financial
statements and should be read together with the financial statements and related
notes included in this Annual Report. All selected financial data are not
covered by the independent accountants' report. The data presented below should
be read together with the financial statements, related notes, and other
financial information included herein.

In 1998, we changed our fiscal year-end from April 30 to January 31. In May
2000, we changed accountants from PricewaterhouseCoopers LLP to Ernst & Young
LLP. The change is discussed in Item 9 of this Report. In March 2001, we changed
our fiscal year-end from January 31 to December 31.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Results of Operations

Year Ended December 31, 2002, Eleven Months Ended December 31, 2001 and the Year
Ended January 31, 2001

During the year ended December 31, 2002, the we reported a net loss of
$39,990,001. During this period we had no contract revenues. The investment
earnings on cash and current investments for the year ended December 31, 2002
was $114,539 compared to $393,768 for the eleven months ended December 31, 2001.
This significant decrease was due to lower average cash balances and interest
rates. Total research and development expenditures increased $9,155,874 in the
year ended December 31, 2002 over the eleven months ended December 31, 2001.
This 32% increase was a result of an additional month in the year ended December
31, 2002 and the increased clinical trial costs associated with the development
of our products. Research and development expenses were reduced by

-26-

approximately $150,000. This reduction corresponds with an adjustment of the
same amount for unrealized loss on investment securities. We allow certain
employees to defer a portion of compensation, and we transfer this amount into
an investment account that the employee then directs the investment of the
funds. The related investment securities are held by us, and are subject to our
the general creditors. These employees direct the investment of the funds, and
the changes in value in these investments are recognized as unrealized gains and
losses in the statement of operations with a corresponding increase or decrease
to the carrying value of the investment account. The same amount is used to
adjust research and development expense and the corresponding liability for
employees' wages and benefits payable. Unrealized holding losses on trading
securities and the corresponding decrease in research and development expense
totaled approximately $150,000 for the year ended December 31, 2002,
approximately $660,000 in the eleven month period ending December 31, 2001 and
approximately $990,000 for the year ended January 31, 2001.

During the eleven months ended December 31, 2001, we reported a net loss of
$31,264,455. During this period we had no contract revenues. The investment
earnings on cash and current investments for the eleven months ended December
31, 2001 was $393,768, compared to $1,554,661 for the year ended January 31,
2001. This significant decrease was due to lower average cash balances and
interest rates. Total research and development expenditures increased
$13,374,272 in the eleven months ended December 31, 2001 over the year ended
January 31, 2001. This 87% increase was a result of the increased clinical trial
costs associated with the development of our products.

We do not accumulate cost information by major development product. Many costs
are applicable to more than one product. We receive reimbursements from our
strategic partners for some of our research and development expenses and these
expenses are not included in our costs. We estimate that 93% of our research and
development costs are spent on gastrointestinal and reproductive system cancers.
There are no payment or penalty milestones associated with any of the projects,
all of which are in Phase II or III clinical trials. We do not speculate on the
timing of approvals by regulatory authorities.

During the year ended January 31, 2001, we reported a net loss of $16,397,139.
During this period we had no contract revenues. The investment earnings on cash
and current investments for the year was $1,554,611. This significant increase
was due to higher average cash balances. Total research and development
expenditures increased by $4,480,822 to $15,302,183. Research and development
cash expenditures were approximately $5,468,000 greater in the year ended
January 31, 2001 than in the year ended January 31, 2000 but were offset by the
approximately $990,000 decrease described above. This increase was a result of
the increased clinical trial costs associated with the development of our
products.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement is effective for Aphton beginning January 1, 2003. Management does not
expect that adoption of this standard will have a material impact on the
Company's financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement eliminates the required classification of gain or loss on
extinguishment of debt as an extraordinary item of income and states that such
gain or loss be evaluated for extraordinary classification under the criteria of
Accounting Principles Board Opinion No. 30, "Reporting Results of Operations."
This statement also requires sale-leaseback accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions, and makes various other technical corrections to existing
pronouncements. Aphton is required to implement SFAS No. 145 on January 1, 2003.
Aphton does not expect this statement to have a material impact on Aphton's
consolidated financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." This statement requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred rather than the date of an entity's commitment to an exit
plan. Aphton is

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required to implement SFAS No. 146 on January 1, 2003 for transactions that
occur after December 31, 2002. Aphton does not expect this statement to have a
material impact on the Company's consolidated financial position or results of
operations.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No. 148
is effective for fiscal years and interim periods ending after December 15,
2002. SFAS No. 148 does not amend SFAS 123 to require companies to account for
employee stock options using the fair value method. Aphton adopted the
disclosure provisions required under SFAS No. 148 effective December 31, 2002.

-28-

Liquidity and Capital Resources

We finance our operations through the sale of our equity securities, convertible
debentures and licensing fees. These funds provide us with the resources to
operate our business, attract and retain key personnel and scientific staff,
fund our research and development program, pre-clinical testing and clinical
trials, obtain the necessary regulatory approvals and develop our technology and
products.

Liquidity

During the year ended January 31, 2001, Aphton received net proceeds of $15.5
million from the closing of a private financing with several international
biotechnology/healthcare funds. Aphton issued 491,509 shares of common stock.

In August 2001, we sold approximately 1,187,503 shares of unregistered common
stock at $12.00 per share and received gross proceeds of approximately $14.25
million. These shares were subsequently registered in September, 2001. The
purchase agreement relating to the August 2001 transaction contained an
anti-dilution provision that would be triggered in the event that shares of
common stock are issued below $12.00 per shares before October 2001.

On February 7, 2002, we sold 1,345,000 shares of registered common stock at
$12.70 per share and received gross proceeds of $17.1 million.

On March 21, 2002, we sold 1,200,000 shares of registered common stock at $10.50
per share for gross proceeds of $12.6 million. Because the shares of common
stock were issued below $12.00 per share, the anti-dilution provision contained
in the August 2001 purchase agreement was triggered and as a result, on April 9,
2002, we issued 169,643 unregistered shares of common stock to certain of our
investors.

On September 26, 2002, we sold 2,500,000 shares of registered common stock at
$2.00 per shares and received gross proceeds of $5 million.

In December 6 2002, we sold 1,520,000 shares of registered common stock at
$2.375 per share and received gross proceeds of approximately $3.6 million.

Indebtedness

On December 20, 2002, we issued and sold a convertible, redeemable, 5-year,
interest bearing debenture (note) to Aventis for proceeds of $3 million. The
note is convertible at Aventis' option under certain conditions into shares of
our common stock at a conversion price substantially equivalent to the market
price of the common stock at the time of conversion. We have the right and
obligation to redeem the note under certain conditions at any time within the
next 5 years.

-29-

Recent Developments

Additional Financing

Subsequent to year end, on February 24, 2003, we sold to an institutional
investor 500,000 shares of registered common stock at $2.96 per shares receiving
gross proceeds of $1.48 million and 150,000 unregistered warrants in a private
placement at $0.125 per warrant for gross proceeds of $18,750. Each warrant has
registration rights and entitles the holder thereof to purchase a share of our
common stock at a price of $2.96 per share for the next five years.

Subsequent to year end, on March 31, 2003, we issued and sold in a private
placement convertible, redeemable, 5-year, interest-bearing notes and warrants
to three institutional investors, including a substantial participation by two
existing investors in Aphton, for proceeds of $15 million in the first tranche
closing on March 31. The Notes are convertible at a fixed price of $2.50 per
share; as part of the transaction we also issued to the investors five year
warrants with a fixed exercise price of $2.70 per share (both are at a premium
to the market price of the common stock as of the last closing price), unless
otherwise adjusted prior to conversion pursuant to the provisions of the notes
and warrants. We have the right and obligation to redeem the notes under certain
conditions at any time after the third year from the issuance date. The
securities have registration rights. In addition, and subject to certain
conditions, we are obligated to sell and one of the investors is obligated to
purchase an additional $5 million of such notes and warrants convertible into
shares of our common stock, also with registration rights, in the second
tranche. In compliance with regulatory requirements, we intend to hold a
shareholder's meeting to approve certain aspects of the transaction; in
connection with the shareholder's meeting, we have already secured irrevocable
proxies from certain of our existing shareholders to vote in favor of the
transaction and believe that it will have a strong favorable majority vote.

The selected pro forma financial information summarized below shows the effect
of the net proceeds from the equity financing transaction received on February
21, 2003 and February 24, 2003 and from the convertible debt financing completed
on March 31, 2003] as if the closing of that transaction had occurred, and the
net proceeds from those transactions had taken place, on December 31, 2002.

Balance Sheet Data: Pro Forma December 31 December 31,
2002 2002
---- ----
Cash and current investments(1) $19,971,277 $ 8,573,277
Total assets(1) $32,388,980 $15,990,980
Convertible Debentures(1) $18,000,000 $ 3,000,000
Total Liabilities(1) $45,316,616 $27,316,616
Total stockholders' equity (deficit) $ 9,927,636 $(11,325,636)
Weighted average shares outstanding 20,789,615 20,747,948
- -----------------------
(1) Subject to certain conditions, including, without limitation, (i) our
common stock continuing to be listed on the Nasdaq and it not having been
suspended from trading or having been threatened with delisting by the
Nasdaq, or having fallen below the minimum standards for continued listing,
(ii) no event of default having occurred under the convertible debentures
then outstanding, (iii) our performance of our obligation to deliver shares
of our common stock upon the conversion of the then outstanding notes and
warrants, (iv) payment of interest on a timely basis, and (iv) our share
price remaining above $3.00 a share, one investor will be obligated to
purchase an additional $5 million of convertible debentures. If and when SF
Capital Partners Limited purchases the convertible debentures, our pro
forma December 31, 2002 (i) cash and current investments total would be
$24,971,277, (ii) total assets would be 37,388,980, (iii) Convertible
debentures total would be $23,000,000, and (iv) Total liabilities would be
$50,316,616.

The unaudited pro forma financial information is not necessarily indicative of
Aphton's future results of operations. The unaudited pro forma financial
information should be read in conjunction with this section captioned
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and with our financial statements and related notes included in this
report.

Nasdaq Listing

On October 15, 2002 and on November 1, 2002, we received notices from the staff
of the Nasdaq National Market that our common stock had failed to maintain
certain minimum requirements for continued listing on the Nasdaq National Market
and both of the notices suggested that we may want to consider applying to
transfer our securities to the Nasdaq Smallcap Market. We were subsequently
advised by Nasdaq that we had regained compliance with certain minimum
requirements for continued listing on the Nasdaq National Market and that our
common stock would continue to be listed on the Nasdaq National Market, pending
future review.

Because our share price is below $3 per share, we are currently not in
compliance with the continued listing requirements of the Nasdaq National Market
and as a result our common stock may be delisted. In the event that our common
stock is delisted from the Nasdaq National Market, we would apply to list our
common shares on the

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Nasdaq Smallcap Market. Even if we had to move our securities from the Nasdaq
National Market, we believe that we satisfy all the criteria for listing our
common stock on the Nasdaq Smallcap Market which, among others, requires that
our share price not fall below $1. There is no assurance, however, that our
application for trading our common stock on the Nasdaq Smallcap Market would be
accepted or, if accepted, that we would be able to maintain eligibility for
continued listing on the Nasdaq Smallcap Market. If our common stock were to be
delisted from the Nasdaq National Market and not accepted for listing on the
Nasdaq Smallcap Market, it could adversely affect our ability to raise funds
through stock and debt issuances.

Strategic Outlook

We intend to reduce our spending during the next twelve months by more than 60%
to less than $16 million from approximately the $40 million during the 12 months
of fiscal year 2002. We will pursue our primary objective of filing for approval
to market G17DT for monotherapy for advanced pancreatic cancer patients in the
European Union, Canada and Australia by September 2003. We currently have a
strategic alliance with Aventis Pasteur whereby Aventis Pasteur will exclusively
promote, advertise, market, distribute and sell our anti-gastrine vaccine
(G17DT) in North America and Europe. We intend to license G17DT to third parties
to treat human cancers in other markets worldwide, including Japan. We also
intend to license, worldwide, products based on our monoclonal antibody platform
targeting gastrin receptors on gastrointestinal system cancers and license,
worldwide, G17DT for the treatment of gastroesophageal reflux disease.

We believe that our existing and anticipatec capital resources which are
comprised primarily of cash and short-term cash investments, including the
proceeds of equity or other convertible debt financings or other financings and
interest thereon, would enable us to maintain our currently planned operations
through the year ending December 31, 2003. Our working capital and capital
requirements will depend upon numerous factors, including the following: the
progress of our research and development program, pre-clinical testing and
clinical trials; the timing and cost of obtaining regulatory approvals; the
levels of resources that we devote to product development, manufacturing and
marketing capabilities; technological advances; competition; and collaborative
arrangements or strategic alliances with other drug companies, including the
further development, manufacturing and marketing of certain of our products, our
ability to maintain our listing status at the Nasdaq National Market or, if
necessary, the Nasdaq Smallcap Market and our ability to obtain funds from such
strategic alliances or from other sources. Many of these factors are beyond our
control. In the event that we require additional funds, we may be required to
sell additional equity securities, convertible debt or otherwise, or obtain
funds through arrangements with collaborative partners. If we are unable to
complete such transactions, we may be required to delay, reduce the scope of, or
eliminate one or more of our research or development programs.

We have incurred recurring operating losses since inception and have a negative
working capital at December 31, 2002 of approximately $5.4 million. Our
independent auditors added a paragraph to its opinion on the consolidated
financial statements for the year ending December 31, 2002 with respect to our
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the financings completed subsequent to December 31,
2002. Management believes that the receipt and application of proceeds from
these financings, including the $15 million financing completed on March 31,
2003, the second $5 million tranche it expects to complete and our plan to
reduce spending to less than $16 million during the next 12 months will allow us
to operate into the first quarter of 2004, without any additional funds.
Accordingly, management believes that after the receipt of these funds, the
substantial doubt about our ability to continue as a going concern will no
longer exist.

Critical Accounting Policies

The SEC has recently issued Financial Reporting Release No. 60, "Cautionary
Advice Regarding Disclosure About Critical Accounting Policies" (FRR 60),
suggesting companies to provide additional disclosure and commentary on those
accounting policies considered most critical. FRR 60 considers an accounting
policy to be critical if it is important to a company's financial condition and
results, and requires significant judgment and estimates on the part of
management in its application. Aphton believes the following represent the
critical accounting policies of Aphton as contemplated by FRR 60. For a summary
of all Aphton's significant accounting policies, including the critical
accounting policies discussed below, see Note 2 to the accompanying financial
statements.

Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates, however
management believes such differences are unlikely to be significant.

Research and Development Expenses
Research and development costs are expensed as incurred. These costs include
internal research and development costs, the salaries of dedicated personnel,
the allocated salaries of personnel who also perform general and administrative
tasks, the costs of the dedicated research and development facilities and the
costs of contracted researchers. There is no allocation of administrative
expense or corporate costs to research and development costs.

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General and Administrative Expenses
General and administrative expenses represent expenses not clearly related to
research and development expense. A significant portion of these expenses are
related to intellectual property/patent legal costs and salaries, which are
typically excluded from research and development according to Statement of
Financial Accounting Standards No. 2 "Accounting for Research and Development
Costs."

Equipment and Improvements
Equipment and improvements are depreciated using accelerated methods over the
estimated economic lives (5-7 years) of the assets. Improvements are amortized
over the term of the lease, or the life of the asset, whichever is shorter,
using the straight-line method. Betterments that substantially extend the useful
life of equipment and furniture generally reduce the accumulated depreciation of
the respective asset.

Income Taxes
Aphton accounts for income taxes pursuant to Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," which requires an asset
and liability approach in accounting for income taxes. Under this method, the
amount of deferred tax asset or liability is calculated by applying the
provisions of enacted tax laws to the differences in the bases of assets and
liabilities for financial and income tax purposes. Income tax expense is the tax
payable for the period and the change during the period in deferred tax assets
and liabilities. Aphton regularly reviews its deferred tax assets for
recoverability and establishes a valuation allowance based upon historical
losses, projected future taxable income and the expected timing of the reversals
of existing temporary differences. As a result of this review, Aphton has
established a full valuation allowance against its deferred tax assets.

Investment Securities
Investment securities consist principally of debt securities issued by the US
Treasury and other US Government agencies and corporations and investment in
other securities, including mutual funds.

Investment securities are classified into three categories and accounted for as
follows: (1) Held-to-maturity securities are debt securities that Aphton has the
positive intent and ability to hold to maturity. These securities are reported
at amortized cost. (2) Trading securities are securities which are bought and
held principally for the purpose of selling them in the near term. These
securities are reported at fair value, with unrealized gains and losses included
in current earnings. (3) Available-for-sale securities are debt and equity
securities not classified as either held-to-maturity or trading securities.
Aphton does not have available-for-sale securities. Gains and losses realized on
the sales of investment securities are determined using the specific
identification method.

Aphton's trading securities consist of mutual funds and relate to a Company plan
whereby certain individuals may forego immediate receipt of wages. In connection
therewith, Aphton establishes a liability for accrued wages and records the
related compensation expense as services are performed. Further, Aphton
segregates an amount of funds in investment accounts equal to the liability for
accrued wages. The investment accounts (trading securities) remain assets of
Aphton, and are subject to the general creditors of Aphton. Upon transfer of the
funds to the investment accounts, the employees direct the specific investment
of the funds. The changes in value in the investment accounts (trading
securities) are recognized as unrealized gains and losses in the statements of
operations, with a corresponding increase or decrease to research and
development expense and the liability for employees' wages and benefits.

Concentrations of Credit Risk
Aphton's short-term cash investments are held in several financial institutions
and consist principally of insured money market accounts and cash management
accounts that are collateralized by or invested in U.S. Government and U.S.
Government agency securities.

Aphton's held-to-maturity securities consist of marketable debt securities.
These securities are issued by a diversified selection of corporate and U.S.
government agencies with strong credit ratings. Aphton's investment policy
limits the amount of credit exposure with any one institution. Other than
asset-backed securities, these debt securities are generally not collateralized.
Aphton has not experienced any material losses due to credit impairment on
investments in marketable debt securities in any year.

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Unconditional Supply Commitment
Aphton has the unconditional right to receive supplies originally aggregating $9
million from Aventis Pasteur. Aphton's policy is to review the current market
prices of available supplies, if any, to assure that they remain above the
stated Aventis Pasteur contract price of the materials and that the right to
receive the supplies remains unimpaired. Aventis Pasteur is one of the largest
pharmaceutical vaccine manufacturers in the world. Aphton monitors the financial
performance of Aventis Pasteur to assure that they will continue to be able to
perform under the contract, wherein the special order supplies are to be
provided from supplies manufactured by Aventis Pasteur in large quantities and
sold to many customers, including the U.S. Government, as part of Aventis
Pasteur's basic franchise (business). The contract allows for inflation based
increases in the per unit costs of the supplies which Aphton and Aventis Pasteur
believe are sufficient to assure that there will be no future financial hardship
incurred by Aventis Pasteur in the execution of the agreement.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk.

Aphton's market risks are all immaterial. Investment securities consist
principally of debt securities issued by the US Treasury and other US Government
agencies and corporations and investment in other securities, including mutual
funds.

Item 8. Financial Statements and Supplementary Data.

Financial Statements are set forth in this report beginning at page 42.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

Aphton changed accountants from PricewaterhouseCoopers LLP to Ernst & Young LLP,
effective May 19, 2000, for the year ended January 31, 2001.
PricewaterhouseCoopers LLP was dismissed effective May 19, 2000. The reports of
PricewaterhouseCoopers LLP on the financial statements of the registrant for the
past two years contained no adverse opinion or other disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principle.

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PART III

Item 10. Directors and Executive Officers of the Registrant.

The information required for this item is incorporated by reference to the
section captioned "Election of Directors" in Aphton's Proxy Statement for the
Annual Meeting of Stockholders. The information under the sections captioned
"Directors and Executive Officers," "Principal Scientific Officers,"
"Administrative and Scientific Staff," and "Scientific Advisory Board" in Item 1
of this Form 10-K is also incorporated by reference in this section.

Item 11. Executive Compensation

The information required for this item is incorporated by reference to the
section captioned "Executive Compensation" in Aphton's Proxy Statement for the
Annual Meeting of Stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

The information required for this item is incorporated by reference to the
section captioned "Election of Directors" of Aphton's Proxy Statement for the
Annual Meeting of Stockholders.

Item 13. Certain Relationships and Related Transactions.

Not applicable.

Item 14. Disclosure Controls and Procedures

(a) Evaluation of disclosure controls and procedures

Based on their evaluations as of a date within 90 days of the filing date of
this report, Aphton's principal executive officer and principal financial
officer have concluded that Aphton's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act) are
effective to ensure that information required to be disclosed by Aphton in
reports that it files or submits under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC.

(b) Changes in internal controls

There were no significant changes in Aphton's internal controls or in other
factors that could significantly affect these internal controls subsequent to
the date of its most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) Documents filed as part of this Form 10-K

(i) Financial Statements:

Reports of Independent Certified Public Accountants

Balance Sheets

Statements of Operations

Statements of Stockholders' (Deficit) Equity

Statements of Cash Flows

Notes to the Financial Statements

(ii) Financial Statements Schedules:

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Financial Statement Schedules are omitted because they are either not
required, not applicable, or the information is included in the Financial
Statements or Notes thereto.

(b) Exhibits

Exhibit Number Description

3.1 Certificate of Incorporation (Incorporated by reference
to Exhibit B of the Registrant's Definitive Proxy
Statement filed October 8, 1997)

3.3 By-Laws (Incorporated by reference to Exhibit C of the
Registrant's Definitive Proxy Statement filed October
8, 1997)

10.1A Collaboration and License Agreement by and between
Aphton Corporation and SmithKline Beecham PLC (now
GlaxoSmithKline) dated as of June 12, 1998
(Incorporated by reference to the Registrant's Amended
Annual Report on Form 10-K/A for the year ended January
31, 2001 filed on January 29, 2002).

10.1B Amendment No. 1 dated May 10, 2000 to the Collaboration
and License Agreement by and between Aphton Corporation
and SmithKline Beecham PLC dated as of June 12, 1998
(Incorporated by reference to the Registrant's Amended
Annual Report on Form 10-K/A for the year ended January
31, 2001 filed on January 29, 2002).

10.1C Amendment No. 2 dated July 2, 2001 to the Collaboration
and License Agreement by and between Aphton Corporation
and SmithKline Beecham PLC dated as of June 12, 1998,
as amended through Amendment No. 1dated May 10, 2000
(Incorporated by reference to the Registrant's Amended
Annual Report on Form 10-K/A for the year ended January
31, 2001 filed on January 29, 2002).

10.2A Co-Promotion Agreement and License by and between
Aphton Corporation and Connaught Laboratories Limited
dated as of February 14, 1997 (Incorporated by
reference to the Registrant's Amended Annual Report on
Form 10-K/A for the year ended January 31, 2001 filed
on January 29, 2002).

10.2B Aphton Supply Agreement by and between Aphton
Corporation and Connaught Laboratories Limited (a
Pasteur Merieux Connaught company, now Aventis Pasteur)
dated as of August 1, 1998 (Incorporated by reference
to the Registrant's Amended Annual Report on Form
10-K/A for the year ended January 31, 2001 filed on
January 29, 2002).

10.2C PMC Supply Agreement by and between Aphton Corporation
and Connaught Laboratories Limited dated as of August
1, 1998 (Incorporated by reference to the Registrant's
Amended Annual Report on Form 10-K/A for the year ended
January 31, 2001 filed on January 29, 2002).

10.2D Letter Agreement by and between Aphton Corporation and
Connaught Laboratories Limited dated as of August 25,
1998 (Incorporated by reference to the Registrant's
Amended Annual Report on Form 10-K/A for the year ended
January 31, 2001 filed on January 29, 2002).

10.3A Debenture Purchase Agreement, dated as of December 20,
2002, between Aphton Corporation and Aventis
Pharmeceuticals Inc.

10.3B Series A Convertible Debenture due 2007, dated December
20, 2002, issued by Aphton Corporation to Aventis
Pharmeceuticals Inc.

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10.4A Engagement Letter, dated February 20, 2003, among
Aphton Corporation, Wharton Capital Partners, Ltd. And
Wharton Capital Markets, LLC (Incorporated by reference
to the Registrant's Current Report on Form 8-K filed on
February 24, 2003).

10.4B Stock Purchase Agreement, dated as of February 24,
2003, by and between Aphton Corporation and Mainfield
Enterprises Inc. (Incorporated by reference to the
Registrant's Current Report on Form 8-K filed on
February 24, 2003).

10.4C Registration Rights Agreement, dated as of February 24,
2003, by and between Aphton Corporation and Mainfield
Enterprises Inc.

10.4D Warrant to purchase Common Stock, dated February 24,
2003, issued by Aphton Corporation to Mainfield
Enterprises Inc.

10.5A Securities Purchase Agreement, dated as of March 31,
2003, by among Aphton Corporation and SF Capital
Partners Ltd., Heartland Value Fund and Smith Barney
Fundamental Value Fund Inc. (Incorporated by reference
to the Registrant's current report on Form 8-K filed on
March 31, 2003).

10.5B Registration Rights Agreement, dated as March 31, 2003,
by and among Aphton Corporation and SF Capital Partners
Ltd., Heartland Value Fund and Smith Barney
Fundamental Value Fund Inc. (Incorporated by reference
to the Registrant's current report on Form 8-K filed on
March 31, 2003).

10.5C Form of Senior Convertible Note due 2008, dated March
31, 2003, issued by Aphton Corporation to SF Capital
Partners Ltd., Heartland Value Fund and Smith Barney
Fundamental Value Fund Inc. (Incorporated by reference
to the Registrant's current report on Form 8-K filed on
March 31, 2003).

10.5D Form of Warrant to purchase Common Stock, dated March
31, 2003, issued by Aphton Corporation to SF Capital
PartnersLtd., Heartland Value Fund and Smith Barney
Fundamental Value Fund Inc. (Incorporated by reference
to the Registrant's current report on Form 8-K filed on
March 31, 2003).

23.1 Consent of Ernst & Young LLP, Independent Certified
Public Accountants.

99.1 Certification of the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

99.2 Certification of the Chief Financial Officer pursuant
to 18 U.S.C. of Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

(c) Reports on Form 8-K

Aphton filed the following current reports on Form 8-K for fiscal year
ended December 31, 2002:

- on January 23, 2002, announcing the completion of patient recruitment
for Aphton's gastric cancer clinical trial;
- on January 31, 2002, announcing the effectiveness of a registration
statement on Form S-3 to sell 1,500,000 shares of Aphton's common
stock;
- on February 5, 2002, disclosing the existence of an underwriting
agreement among Aphton, UBS Warburg LLC and Morgan Keegan & Co., Inc.;
- on February 5, 2002, announcing the sale of 1,345,000 shares of
Aphton's common stock;
- on February 7, 2002, announcing the closing of the offer and sale of
1,345,000 shares of Aphton's common stock;
- on February 11, 2002, disclosing that a scientific collaborator of
Aphton had announced interim results of a gastric cancer Phase II
clinical trial at the 12th International Congress in Paris on
anti-cancer treatment;
- on March 18, 2002, disclosing certain preliminary unaudited summary
financial information of Aphton for the period ended December 31,
2001;
- on March 18, 2002, disclosing the existence of an underwriting
agreement between Aphton and Morgan

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Keegan & Co., Inc.;
- on March 21, 2002, announcing the closing of the offer and sale of
1,200,000 shares of Aphton's common stock.
- On May 20, 2002, announcing the interim gastric cancer impressive
results presented at the American Society of Clinical Oncology;
- On June 12, 2002, announcing the continued impressive interim results
with 61% more cancer patients previously reported;
- On June 17, 2002, announcing that the Food and Drug Administration
(FDA) granted orphan drug status for anti-gastrin immunogen for
pancreatic cancer;
- July 23, 2002, announcing that the FDA granted orphan drug status for
anti-gastrin immunogen for gastric cancer;
- On July 29, 2002, disclosing the preparation to file Investigational
New Drug application with the FDA to examine whether G17DT may be
efficacious for Gastro-esophageal Reflux Disease (GERD);
- On July 31, 2002, disclosing further impressive results with 72
stomach cancer patients;
- On September 23, 2002, announcing fast track designation approved by
the FDA for anti-gastrin immunogen for pancreatic cancer;
- On September 23, 2002, attaching the placement agency agreement with
Life Science Group, Inc. to sell 2,500,000 shares of common stock;
- On September 26, 2002, disclosing receipt of gross proceeds of
$5,000,000 for the sale of 2,500,000 shares of common stock under Form
S-3 (File No. 333-92058);
- On October 28, 2002, announcing the 53% increased median survival time
in European Phase III trial for pancreatic cancer;
- On November 6, 2002, announcing the receipt of approval to initiate
clinical trial in Europe for GERD;
- On December 3, 2002, attaching placement agency agreement with Life
Science Group, Inc to sell 1,520,000 shares of common stock for gross
proceeds of $3,610,000;
- On December 6, 2002, announcing receipt of $3,610,000 gross proceeds
under Form S-3 (File No. 333-92058);
- On December 19, 2002, announcing that Australia granted orphan drug
designation for anti-gastric immunogen for both gastric and pancreatic
cancers;
- On December 20, 2002, announcing sale of note for$3 million and the
signing of the letter of intent to restructure existing co-promotion
agreement with Aventis;

Subsequent to year-end, Aphton filed the following current reports on
Form 8-K.

- On February 6, 2003, announcing the reported latest tumor responses
from Phase II gastric cancer trial;
- On February 21, 2003, announcing the fast track designation approved
by the FDA for G17DT combined with Cisplatin and 5-FU;
- On February 24, 2003, attaching the stock purchase agreement with
Mainfield Enterprises Inc. and engagement letter with Wharton Capital
to sell 500,000 shares of common stock for gross proceeds of
$1,480,000;
- On February 24, 2003,disclosing unaudited year-end financial results
for tye year 2002;
- On March 6, 2003, announcing the Phase III data with G17DT for
pancreatic cancer patients presented to overseas regulatory agency.
- On March 31, 2003, announcing sale of senior convertible note for $15
million to SF Capital Partners Ltd., Heartland Value Fund and Smith
Barney Fundamental Value Fund Inc.
- On March 31, 2003, announcing expiration of letter of intent between
Aphton and Aventis.

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Dated: March 31, 2003 APHTON CORPORATION

By: PHILIP C. GEVAS
Chairman of the Board, Chief Executive Officer,
and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

Signatures Title Date

/s/ Philip C. Gevas
------------------------------------ Chairman of the Board, Chief Executive Officer March 31, 2003
and President
PHILIP C. GEVAS

/s/ William A. Hasler
------------------------------------ Vice Chairman of the Board, Director and March 31, 2003
Co-Chief Executive Officer
WILLIAM A. HASLER

/s/ Nicholas John Stathis March 31, 2003
------------------------------------ Director

NICHOLAS JOHN STATHIS

/s/ Robert S. Basso Director March 31, 2003
------------------------------------

ROBERT S. BASSO

/s/ Frederick W. Jacobs Vice President, Treasurer, Chief Financial March 31, 2003
------------------------------------ Officer and Chief Accounting Officer
FREDERICK W. JACOBS

-38-

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
(Section 302 Certification of the Sarbanes-Oxley Act of 2002)

I, Philip C. Gevas, certify that:

1. I have reviewed this Annual Report on Form 10-K of Aphton Corporation;

2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report;

3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a - 14 and 15d - 14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and

c) presented in this Annual Report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
Annual Report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

/S/ Philip C. Gevas
- ---------------------------------------
Philip C. Gevas
Chief Executive Officer

March 31, 2003

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CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
(Section 302 Certification of the Sarbanes-Oxley Act of 2002)

I, Frederick W. Jacobs, certify that:

1. I have reviewed this Annual Report on Form 10-K of Aphton Corporation;

2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report;

3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a - 14 and 15d - 14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and

c) presented in this Annual Report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

b) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

c) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
Annual Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

/S/ Frederick W. Jacobs
- ---------------------------------------
Frederick W. Jacobs
Chief Financial Officer

March 31, 2003

-40-

INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS

Page

Reports of Independent Certified Public Accountants

Balance Sheets - December 31, 2002 and 2001

Statements of Operations -
for the year ended December 31, 2002, eleven months ended December 31, 2001
and the year ended January 31, 2001

Statements of Stockholders' (Deficit) Equity -
for the year ended December 31, 2002, eleven months ended December 31, 2001
and the year ended January 31, 2001

Statements of Cash Flows -
for the year ended December 31, 2002, eleven months ended December 31, 2001
and the year ended January 31, 2001

Notes to the Financial Statements

-41-

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors and Stockholders
Aphton Corporation

We have audited the accompanying balance sheets of Aphton Corporation as of
December 31, 2002 and December 31, 2001 and the related statements of
operations, stockholders' (deficit) equity and cash flows for the year ended
December 31, 2002, the eleven months ended December 31, 2001 and the year ended
January 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aphton Corporation as of
December 31, 2002 and December 31, 2001, and the results of its operations and
its cash flows for the year ended December 31, 2002, for the eleven months ended
December 31, 2001 and the year ended January 31, 2001, in conformity with
accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming Aphton
Corporation will continue as a going concern. As more fully described in Note 2,
the Company has incurred recurring operating losses since inception and has
negative working capital at December 31, 2002 of approximately $5.4 million.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.

/s/ Ernst & Young LLP

Miami, Florida
March 26, 2003

-42-

APHTON CORPORATION
Balance Sheets

Assets December 31, December 31,
2002 2001

Current Assets:
Cash and current investments:
Cash and short-term cash investments $7,824,182 $3,176,717
Investment securities-trading 749,095 1,147,417
Investment securities-held-to-maturity - 1,999,006
---------- ----------
Total cash and current investments 8,573,277 6,323,140
Other assets (including current portion of
unconditional supply commitment) 374,740 595,390
---------- ----------
Total current assets 8,948,017 6,918,530
Equipment and improvements, at cost,
net of accumulated depreciation and amortization 245,063 188,597
Unconditional supply commitment 6,797,900 6,875,515
----------- -----------
Total assets $15,990,980 $13,982,642
=========== ===========

Liabilities and Stockholders' Deficit

Liabilities:
Current liabilities:
Accounts payable and other $14,316,616 $10,715,430
----------- -----------
Total current liabilities 14,316,616 10,715,430
Convertible debenture 3,000,000 -
Deferred revenue 10,000,000 10,000,000
------------ -----------
Total liabilities 27,316,616 20,715,430
------------ -----------

Commitments

Stockholders' Deficit:
Preferred stock, $0.001 par value -
Authorized: 2,000,000 shares
Issued and outstanding: none - -
Common stock, $0.001 par value -
Authorized: 30,000,000 shares
Issued and outstanding: 24,201,639 shares at
December 31, 2002 and 17,386,996 shares
at December 31, 2001 24,202 17,387
Additional paid in capital 128,956,652 93,566,314
Purchase warrants 298,900 298,900
Accumulated deficit (140,605,390) (100,615,389)
------------ -----------
Total stockholders' deficit (11,325,636) (6,732,788)
------------ -----------
Total liabilities and stockholders' deficit $15,990,980 $13,982,642
============ ===========

The accompanying notes are an integral part of the financial statements.

-43-

APHTON CORPORATION
Statements of Operations
for the year ended December 31, 2002, the eleven months
ended December 31, 2001
and the year ended January 31, 2001

December 31, December 31, January 31,
2002 2001 2001

Revenue: $ - $ - $ -
------------- ----------- --------------
Costs and Expenses:
General and administrative 2,269,652 2,319,539 1,661,910
Research and development 37,682,329 28,676,455 15,302,183
------------- ----------- --------------
Total costs and expenses 39,951,981 30,995,994 16,964,093
------------- ----------- --------------
Loss from operations 39,951,981 30,995,994 16,964,093
------------- ----------- --------------
Other Income (expense):
Dividend and interest income 114,539 393,768 1,554,611
Unrealized losses from investments (152,559) (662,229) (987,657)
-------------- ------------- --------------
Net loss $(39,990,001) $(31,264,455) $(16,397,139)
-------------- ------------- --------------
-------------- ------------- --------------
Per share data
Basic and diluted loss per common share $(1.93) $(1.87) $(1.02)
-------------- ------------- --------------
-------------- ------------- --------------
Weighted average number of
common shares outstanding 20,747,948 16,739,267 16,100,108
-------------- ------------- --------------
-------------- ------------- --------------

The accompanying notes are an integral part of the financial statements.

APHTON CORPORATION
Statements of Stockholders' (Deficit) Equity
for the year ended December 31, 2002,
the eleven months ended December 31, 2001
and the year ended January 31, 2001

Additional
Common Stock Paid in Purchase Accumulated
Shares Amount Capital Warrants Deficit Total

Balance, January 31, 2000 15,592,984 $15,593 $64,799,784 $198,900 $ (52,953,795) $12,060,482
-
Exercise of purchase
Warrants 115,000 115 246,385 - 246,500
Sale of stock, net 491,509 491 15,246,309 - - 15,246,800
Net loss - - - - (16,397,139) (16,397,139)
---------- ------- ---------- ----------- --------------- -------------
Balance, January 31, 2001 16,199,493 16,199 80,292,478 198,900 (69,350,934) 11,156,643
---------- ------- ---------- ----------- --------------- -------------
Sale of stock, net 1,187,503 1,188 13,273,836 - - 13,275,024
Issuance of warrants - - - 100,000 - 100,000
Net loss - - - - (31,264,455) (31,264,455)
---------- ------- ----------- ----------- -------------- -------------
Balance, December 31, 2001 17,386,996 17,387 93,566,314 298,900 (100,615,389) (6,732,788)
Exercise of purchase -
Warrants 80,000 80 19,920 - 20,000
Sale of stock, net 6,734,643 6,735 35,370,418 - - 35,377,153
Net loss - - - - (39,990,001) (39,990,001)
----------- ------- ------------ -------- -------------- -------------
Balance, December 31, 2002 24,201,639 $24,202 $128,956,652 $298,900 $(140,605,390) $(11,325,636)
=========== ======= ============ ======== ============== ==============

The accompanying notes are an integral part of the financial statements.

-44-

APHTON CORPORATION
Statements of Cash Flows
for the year ended December 31, 2002,
the eleven months ended December 31, 2001
and the year ended January 31, 2001

December 31, December 31, January 31,
2002 2001 2001

Cash flows from operating activities:
Cash paid to suppliers and employees $(35,648,620) $(24,593,507) $(15,467,013)
Sale (purchase) of trading securities 245,764 (156,467) (259,957)
Losses from trading securities (152,559) (662,229) (987,657)
Interest and dividends received 114,539 393,768 1,554,611
------------- ------------- -------------
Net cash used in operating activities (35,440,876) (25,018,435) (15,160,016)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of held to maturity securities - (15,311,311) (59,471,854)
Proceeds from maturity of held to
maturity securities 1,999,006 26,815,000 52,788,000
Capital expenditures (157,818) (92,138) (61,116)
------------- ------------- -------------
Net cash provided by (used in) 1,841,188 11,411,551 (6,744,970)
investing activities ------------- ------------- -------------

Cash flows from financing activities
Proceeds from convertible debenture 3,000,000 - -
Sales of stock 35,397,153 13,275,024 15,493,300
------------- ------------- -------------
Cash received from financing activities 38,397,153 13,275,024 15,493,300
------------- ------------- -------------
Net (decrease) increase in cash and
short-term cash investments 4,647,465 (331,860) (6,411,686)
Cash and short-term cash investments:
Beginning of period 3,176,717 3,508,577 9,920,263
------------- ------------- -------------

End of period $7,824,182 $3,176,717 $3,508,577
------------- ------------- -------------
------------- ------------- -------------

Reconciliation of net loss to net cash
used in operating activities
Net loss $(39,990,001) $(31,264,455) $(16,397,139)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock purchase warrants - 100,000 -
Depreciation and amortization 101,352 69,978 68,029
Unrealized losses from investments 152,559 662,229 987,657
Non-cash employee research and
development credit (152,559) (662,229) (987,657)
Changes in -
Investment securities-trading 398,322 (156,466) 379,581
Other assets 220,650 188,269 45,311
Unconditional supply commitment 77,615 874,149 820,000
Accounts payable and other 3,751,186 5,170,090 (75,798)
------------- ------------- -------------
Net cash used in operating activities: $(35,440,876) $(25,018,435) $(15,160,016)
------------- ------------- -------------
------------- ------------- -------------

The accompanying notes are an integral part of the financial statements.

-45-

APHTON CORPORATION
Notes to the Financial Statements

1. Organization and Operations

Aphton Corporation is a biopharmaceutical company in late-stage clinical trials
for four cancer indications. Aphton is developing products using its innovative
vaccine-like technology for neutralizing hormones that participate in
gastrointestinal system and reproductive system cancer and non-cancer diseases;
and for the prevention of pregnancy. Aphton has strategic alliances with Aventis
Pasteur (NYSE: AVE), GlaxoSmithKline (NYSE: GSK), Schering Plough Animal Health
(NYSE: SGP), and the World Health Organization (WHO).

Basis of Presentation and Management's Plans regarding Liquidity

The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States for a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business.

The Company has incurred recurring operating losses since inception. At December
31, 2002, the Company has an accumulated deficit and negative working capital of
approximately $141 million and $5.4 million, respectively. The Company has
financed its research and development activities through debt and equity
financings, licensing fees and contracted research and development fees, and
interest thereon, from its inception.

The Company intends to reduce its spending during the next twelve months by more
than 60% to less than $16 million from the approximately $40 million during the
twelve months of fiscal year 2002. The Company will pursue its primary objective
of filing for approval to market G17DT for monotherapy for advanced pancreatic
cancer patients in the European Union, Canada and Australia by September 2003.
The Company currently has a strategic alliance with Aventis Pasteur whereby
Aventis Pasteur will exclusively promote, advertise, market, distribute and sell
its anti-gastrine vaccine (G17DT) in North America and Europe. The Company
intends to license G17DT to third parties to treat human cancers in other
markets worldwide, including Japan. The Company also intends to license,
worldwide, products based on its monoclonal antibody platform targeting gastrin
receptors on gastrointestinal system cancers and license, worldwide, G17DT for
the treatment of gastroesophageal reflux disease.

As part of its efforts to improve its liquidity and financial condition, the
Company is currently pursuing various financing alternatives to address its cash
needs for the year ended December 31, 2003. There can be no guarantee that the
Company will be successful or that it will obtain sufficient funding to address
its cash needs for the year ended December 31, 2003. Management believes that
the receipt and application of proceeds from these financings, including the $15
million financing completed on March 31, 2003, the second $5 million tranche it
expects to complete and the Company's plan to reduce spending to less than $16
million during the next 12 months will allow the Company to operate into the
first quarter of 2004, without any additional funds, which would alleviate the
substantial doubt about the Company's ability to continue as a going concern.
However, if the Company is unsuccessful in its efforts to obtain additional
financing the Company may be required to delay, reduce the scope of, or
eliminate one or more of its research or development programs.

The Company's working capital and capital requirements will depend upon numerous
factors, including the following: the progress of its research and development
program, pre-clinical testing and clinical trials; the timing and cost of
obtaining regulatory approvals; the levels of resources that it devotes to
product development, manufacturing and marketing capabilities; technological
advances; competition; and collaborative arrangements or strategic alliances
with other drug companies, including the further development, manufacturing and
marketing of certain of its products, our ability to maintain its listing status
at the Nasdaq National Market or, if necessary, the Nasdaq Smallcap Market and
its ability to obtain funds from such strategic alliances or from other sources.
Many of these factors are beyond the Company's control.

On October 15, 2002 and on November 1, 2002, the Company received notices from
the staff of the Nasdaq National Market that its common stock had failed to
maintain certain minimum requirements for continued listing on the Nasdaq
National Market and both of the notices suggested that the Company may want to
consider applying to transfer its securities to the Nasdaq Smallcap Market. The
Company was subsequently advised by Nasdaq that it had regained compliance with
certain minimum requirements for continued listing on the Nasdaq National Market
and that its common stock would continue to be listed on the Nasdaq National
Market, pending future review.

Because its share price is below $3 per share, the Company is currently not in
compliance with the continued listing requirements of the Nasdaq National Market
and as a result its common stock may be delisted. In the event that the
Company's common stock is delisted from the Nasdaq National Market, it would
apply to list its common stock on the Nasdaq Smallcap Market. Even if the
Company had to move its securities from the Nasdaq National Market, the Company
believes that it satisfies all the criteria for listing its common stock on the
Nasdaq Smallcap Market, which includes that its share price not fall below
$1.00. There is no assurance, however, that the Company's application for
trading its common stock on the Nasdaq Smallcap Market would be accepted or, if
accepted, that the Company would be able to maintain eligibility for continued
listing on the Nasdaq Smallcap Market. If the Company's common stock were to be
delisted from the Nasdaq National Market and not accepted for listing on the
Nasdaq Smallcap Market, it could adversely affect the Company's ability to raise
funds through stock and debt issuances.

Aphton's fiscal year end was changed in March, 2001 from January 31 to December
31, effective for the 11 month period ending December 31, 2001.

2. Summary of Significant Accounting Policies

Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (U.S.) requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates, however, management believes
such differences are unlikely to be significant.

Research and Development Expenses
Research and development costs are expensed as incurred. These costs
include internal research and development costs, the salaries of dedicated
personnel, the allocated salaries of personnel who also perform general and
administrative tasks, the costs of the dedicated research and development
facilities and the costs of contracted researchers. There is no allocation
of administrative expense or corporate costs to research and development
costs.

General and Administrative Expenses
General and administrative expenses represent expenses not clearly related
to research and development expense. A significant portion of these
expenses are related to intellectual property/patent legal costs and
salaries, which are typically excluded from research and development
according to Statement of Financial Accounting Standards No. 2 "Accounting
for Research and Development Costs."

Equipment and Improvements
Equipment and improvements are depreciated using accelerated methods over
the estimated economic lives (five to seven years) of the assets.
Improvements are amortized over the term of the lease, or the life of the
asset, whichever is shorter, using the straight-line method. Betterments
that substantially extend the useful life of equipment and furniture
generally reduce the accumulated depreciation of the respective asset.

Income Taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach in accounting for income taxes.
Under this method, the amount of deferred tax asset or liability is
calculated by applying the provisions of enacted tax laws to the
differences in the bases of assets and liabilities for financial and income
tax purposes. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.

-46-

Per Share Data
The Company complies with SFAS No. 128, "Earnings per Share," which
specifies the computation, presentation and disclosure requirements for
earnings per share. The Company's basic loss per common share was
calculated by dividing net loss by the weighted average number of common
shares outstanding. The Company's potential common shares are
anti-dilutive, and accordingly, basic and diluted loss per share are the
same. Such potential common shares consist of purchase warrants (See Note
7) and could potentially dilute basic earnings per share in the future.

Cash Equivalents
The Company considers all highly liquid debt instruments, including
short-term cash investments with initial or remaining maturity from date of
purchase of three months or less, to be cash equivalents.

Investment Securities
Investment securities consist principally of debt securities issued by the
U.S. Treasury and other U.S. Government agencies and corporations and
investment in other securities, including mutual funds.

Investment securities are classified into three categories and accounted
for as follows: (1) Held-to-maturity securities are debt securities that
the Company has the positive intent and ability to hold to maturity. These
securities are reported at amortized cost. (2) Trading securities are
securities which are bought and held principally for the purpose of selling
them in the near term. These securities are reported at fair value, with
unrealized gains and losses included in current earnings. (3)
Available-for-sale securities are debt and equity securities not classified
as either held-to-maturity or trading securities. The Company does not have
available-for-sale securities. Gains and losses realized on the sales of
investment securities are determined using the specific identification
method.

Concentrations of Credit Risk
The Company's short-term cash investments are held in several financial
institutions and consist principally of insured money market accounts and
cash management accounts that are collateralized by or invested in U.S.
Government and U.S. Government agency securities.

The Company's held-to-maturity securities consist of marketable debt
securities. These securities are issued by a diversified selection of
corporate and U.S. government agencies with strong credit ratings. The
Company's investment policy limits the amount of credit exposure with any
one institution. Other than asset-backed securities, these debt securities
are generally not collateralized. The Company has not experienced any
material losses due to credit impairment on investments in marketable debt
securities in any year.

Impairment of the Unconditional Supply Commitment
As discussed in Note 3, the Company has the unconditional right to receive
supplies originally aggregating $9 million from Aventis Pasteur. The
Company's policy is to review the current market prices of available
supplies, if any, to assure that they remain above the stated Aventis
Pasteur contract price of the materials and that the right to receive the
supplies remains unimpaired. Aventis Pasteur is one of the largest
pharmaceutical vaccine manufacturers in the world. The Company monitors the
financial performance of Aventis Pasteur to assure that they will continue
to be able to perform under the contract, wherein the special order
supplies are to be provided from supplies manufactured by Aventis Pasteur
in large quantities and sold to many customers, including the U.S.
Government, as part of Aventis Pasteur's basic franchise (business). The
contract allows for inflation based increases in the per unit costs of the
supplies which the Company and Aventis Pasteur believe are sufficient to
assure that there will be no future financial hardship incurred by Aventis
Pasteur in the execution of the agreement.

Comprehensive Income
The Company complies with SFAS No. 130, "Reporting Comprehensive Income,"
which established standards for reporting comprehensive income (defined to
include net income, unrealized gains and losses on available-for-sale
investment securities, foreign currency adjustments and certain other items
not included in the income statement). The Company does not have elements
of other comprehensive income other than net loss.

-47-

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement is effective for the Company beginning January 1, 2003. Management
does not expect that adoption of this standard will have a material impact on
the Company's financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement eliminates the required classification of gain or loss on
extinguishment of debt as an extraordinary item of income and states that such
gain or loss be evaluated for extraordinary classification under the criteria of
Accounting Principles Board Opinion No. 30, "Reporting Results of Operations."
This statement also requires sale-leaseback accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions, and makes various other technical corrections to existing
pronouncements. The Company is required to implement SFAS No. 145 on January 1,
2003. The Company does not expect this statement to have a material impact on
the Company's consolidated financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." This statement requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred rather than the date of an entity's commitment to an exit
plan. The Company is required to implement SFAS No. 146 on January 1, 2003 for
transactions that occur after December 31, 2002. The Company does not expect
this statement to have a material impact on the Company's consolidated financial
position or results of operations.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No. 148
is effective for fiscal years and interim periods ending after December 15,
2002. SFAS No. 148 does not amend SFAS 123 to require companies to account for
employee stock options using the fair value method. The Company adopted the
disclosure provisions required under SFAS No. 148 effective December 31, 2002.

The Company accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees," as amended and interpreted.
Accordingly, no compensation expense is recorded for warrants issued to
employees in fixed amounts and with fixed exercise prices at least equal to the
fair market value of the Company's common stock at the date of grant. The
Company has adopted the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," through disclosure only. All stock-based awards to nonemployees
are accounted for at their fair value in accordance with EITF 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services".

There were 909,180 employee stock purchase warrants granted in the year ended
December 31, 2002, which expire October 1, 2021. Based on Black-Scholes values,
for the year ended December 31, 2002, the pro forma net loss would be
approximately $42 million and the pro forma loss per common share would be
approximately $2.04.

There were 800,360 employee stock purchase warrants granted in the eleven month
period ended December 31, 2001, which expire October 1, 2021. Based on
Black-Scholes values, for the eleven month period ended December 31, 2001, the
pro forma net loss would be approximately $34 million and the pro forma loss per
common share would be approximately $2.05. There were 10,000 stock purchase
warrants granted in the eleven month period ended December 31, 2001, which
expire October 1, 2021, to a non-employee. Based on Black-Scholes values, for
the period ended December 31, 2001, the net loss was increased by approximately
$100,000.

There were 36,000 employee stock purchase warrants granted in the year ended
January 31, 2001. Based on Black-Scholes values, for the year ended January 31,
2001, the pro forma net loss would be $16,908,699 and the pro forma loss per
common share would be $1.05. There were 150,000 employee stock purchase warrants
granted in 2000. Based on Black-Scholes values, for the year ended January 31,
2000, the pro forma net loss would be $13,231,796 and the pro forma loss per
common share would be $.90.

The following assumptions were used in the Black-Scholes option pricing model
for the 909,180 purchase warrants granted in the year ended December 31, 2002 to
employees. The stock price and exercise price of these nineteen-year warrants
were set at $1.91 on the date of grant, which was November 5, 2002. The
risk-free rate of return used was 6.0%. The expected dividend yield used was 0%.
The expected time to exercise used was 18.75 years. The expected volatility used
was 100%.

The following assumptions were used in the Black-Scholes option pricing model
for the 800,360 and 10,000 purchase warrants granted in the eleven month period
ended December 31, 2001 to employees and non-employees, respectively. The stock
price and exercise price of these twenty-year warrants were set at $14.75 on the
date of grant, which was October 1, 2001. The risk-free rate of return used was
7.0%. The expected dividend yield used was 0%. The expected time to exercise
used was 19.75 years. The expected volatility used was 100%.

The following assumptions were used in the Black-Scholes option pricing model
for the 36,000 and 150,000 purchase warrants granted to employees in the years
ended January 31, 2001 and 2000, respectively. The stock price and exercise
price were set at $14.75 on the date of grant, which was May 2000 and 1999,
respectively. The stock price and exercise price were set at $14.75 on the date
of grant, which was May 2000 and 1999, respectively. The risk-free rate of
return used was 7.0%. The expected dividend yield used was 0%. The expected time
to exercise used was 10 years. The expected volatility used was 100%.

3. License and Co-Promotion Agreements

In June 1998, Aphton and SmithKline Beecham (now GlaxoSmithKline) signed a
Collaboration and License agreement, granting GlaxoSmithKline exclusive rights
worldwide to Aphton's GnRH-related patents and proprietary technology. The
agreement covers the diagnosis, treatment and prevention of GnRH-related cancers
and other diseases in humans. Human cancer indications for the anti-GnRH product
are prostate, breast, ovarian and endometrial cancer. Additional medical
indications for the anti-GnRH product are endometriosis, polycystic ovaries,
uterine fibroids, contraception, infertility and precocious puberty. Under terms
of the agreement, Aphton and GlaxoSmithKline are collaborating in a joint
product development program, with GlaxoSmithKline responsible for clinical
trials and regulatory approvals, and for worldwide marketing and distribution of
approved products. The agreement uses a royalty mechanism based on product
sales, in dollars, worldwide to determine Aphton's revenues. As part of the
Agreement, GlaxoSmithKline made an equity investment of $5,000,000 for 237,867
shares of newly issued Aphton common stock.

On February 14, 1997 Aphton signed an agreement with Pasteur Merieux Connaught
(Rhone-Poulenc Group) which is now known as Aventis Pasteur, a leader in medical
science and research and one of the world's largest vaccine manufacturers and
marketers, for a strategic alliance for all human cancer applications of the
Company's anti-gastrin immunogen product including stomach, colorectal, liver
and pancreatic cancers. Under the terms of the 20-year

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license and co-promotion agreement, Aphton will be responsible for product
development, clinical trials and regulatory agency approvals, and Aventis
Pasteur will be responsible for promotion, advertising, marketing, distribution
and sales of the anti-gastrin immunogen product in the United States, Canada,
Europe (including the C.I.S. countries) and Mexico. In addition, Aphton and
Aventis Pasteur entered into agreements providing for: (a) the supply of the
anti-gastrin immunogen product from Aphton to Aventis Pasteur; and (b) the
supply of certain components of the anti-gastrin immunogen product (as well as
other Aphton products) from Aventis Pasteur to Aphton. Aventis Pasteur will fund
the costs associated with product introduction, promotion, advertising and
marketing throughout the territory covered by the agreement. Under the terms of
the agreement, in addition to upfront consideration aggregating $10 million,
including $1 million cash and the supply commitment (of material suitable for
human use) of $9 million, Aphton will receive the majority of the profits from
sales of the anti-gastrin immunogen product with the balance of profits to be
retained by Aventis Pasteur.

The supply commitment of materials suitable for human use consists of Diphtheria
Toxoid and/or Tetanus Toxoid. Aphton may use some or all of the unconditional
supply commitment in the product under development with Aventis Pasteur or
Aphton may use some or all of the supply commitment on other current product
lines or on research and development. The supply commitment of material suitable
for human use is not readily obtained on the open market in such large
quantities. By comparison to lower quality material available in smaller
quantities management estimates that the market value of the supplies is
substantially greater than the carrying value of $9 million, if they could be
obtained. The carrying value of the supplies is based on the negotiated License
Fee. The amount of material to be received is based on negotiated per unit
costs, which are well below the per unit costs of lower quality materials
available in smaller quantities.

The $10 million upfront consideration has been classified as a license payment
and has been deferred and will be recognized for financial statement
(accounting) purposes as revenue within the twenty-year period of the agreement.
The revenue recognition will begin once regulatory agency approval to market the
product has been received and will be recognized ratably over the remaining
period of the contract, which ends February 13, 2017. The Company does not
speculate on the timing of regulatory approvals.

Under the agreement, Aventis Pasteur shall have the right to terminate upon one
hundred eighty (180) days prior notice to Aphton, in the event that it
determines, following completion of Phase III clinical trials of the
gastrointestinal cancer product (and receipt by Aventis Pasteur of the results
and supporting data obtained in such trials), that for safety and efficacy
reasons it does not wish to co-promote, market or sell the Product. In addition,
either party may terminate the agreement by (a) mutual agreement, (b) for
uncured material breach and (c) due to liquidation, insolvency, etc. Further,
under the agreement, none of the aggregate $10 million consideration, either the
cash or the Company's rights to the full $9 million in unconditional supply
commitment, is refundable to Aventis Pasteur under any conditions. There is no
provision under the agreement for the unconditional supply commitment to be
satisfied by Aventis Pasteur with a cash payment. (The $10 million license
payment was recognized for tax purposes in the year ended April 30, 1997.)

4. Equipment and Improvements

At December 31, 2002 and 2001, equipment and improvements consisted of the
following:

December 31, December 31,
2002 2001
----- -----
Laboratory equipment $ 681,690 $ 546,158
Leasehold improvements 398,232 398,232
Office and laboratory furniture and fixtures 255,267 232,980
----------- ----------
1,335,188 1,177,370
Less accumulated depreciation and amortization (1,090,125) (988,773)
----------- ----------
$245,063 $188,597
=========== ==========

5. Accounts Payable and Other

At December 31, 2002 and 2001, accounts payable and other was composed of :

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December 31, December 31,
2002 2001
---- ----
Trade accounts payable $13,314,943 $9,316,764
Accrued wages payable (see Note 6) 749,095 1,147,417
Employee benefits payable 252,578 251,249
----------- -----------
$14,316,616 $10,715,430
=========== ===========

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6.

Investment Securities

Securities classified as trading and held-to-maturity at December 31, 2002 and
2001 are summarized below. Estimated fair value is based on quoted market prices
for these or similar investments.

December 31, Unrealized Unrealized
2002 Cost Gains Losses Fair Value
------------ ---- ---------- ---------- ----------

Trading securities (carried at fair value): $901,654 $-- $152,559 $749,095

December 31, Unrealized Unrealized
2002 Cost Gains Losses Fair Value
------------ ---- ---------- ---------- ----------

Trading securities (carried at fair value): $1,809,646 $-- $662,229 $1,147,417

Securities held to maturity (carried at amortized cost): $1,999,006 $-- $-- $1,999,006

The Company held no available-for-sale investment securities at December 31,
2002 or 2001.

The carrying values of all investment securities held at December 31, 2002 and
2001 are summarized below:

Security December 31, December 31,
- -------- 2002 2001
---- ----

Trading securities $749,095 $1,147,417
Securities held-to-maturity maturing within one year - 1,999,006
--------- ----------
Total short-term investments $749,095 $3,146,423
========= ==========

The Company's trading securities consist of mutual funds and relate to a Company
plan whereby certain individuals may forego immediate receipt of wages. In
connection therewith, the Company establishes a liability for accrued wages and
records the related compensation expense as services are performed. Further, the
Company segregates an amount of funds in investment accounts equal to the
liability for accrued wages. The investment accounts (trading securities) remain
assets of the Company, and are subject to the general creditors of the Company.
Upon transfer of the funds to the investment accounts, the employees direct the
specific investment of the funds. The changes in value in the investment
accounts (trading securities) are recognized as unrealized gains and losses in
the statements of operations, with a corresponding increase or decrease to
research and development expense and the liability for employees' wages and
benefits. Unrealized holding losses on trading securities and the corresponding
decrease in research and development expense totaled approximately $150,000 in
the year ended December 31, 2002. Unrealized holding losses on trading
securities and the corresponding decrease in research and development expense
totaled approximately $660,000 in the eleven month period ended December 31,
2001. Unrealized holding losses on trading securities and the corresponding
decrease in research and development expense totaled approximately $990,000 in
the year ended January 31, 2001.

7. Common Stock, Preferred Stock and Purchase Warrants

Common Stock -

On February 7, 2002, Aphton sold 1,345,000 shares of registered common stock at
$12.70 per share and received gross proceeds of $17.1 million.

On March 21, 2002, Aphton sold 1,200,000 shares of registered common stock at
$10.50 per share and received gross proceeds of $12.6 million. Because the
shares of common stock were issued below $12.00 per share, the anti-dilution
provision contained in the August 2001 purchase agreement was triggered and as a
result, on April 9, 2002, we issued 169,643 unregistered shares of common stock
to certain of our investors.

On September 26, 2002, Aphton sold 2,500,000 shares of registered common stock
at $2.00 per share and received gross proceeds of $5 million.

On December 6, 2002, Aphton sold 1,520,000 shares of registered common stock at
$2.375 per share and received gross proceeds of approximately $3.6 million.

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Preferred Stock -

The Company has 2,000,000 shares of authorized preferred stock, none of
which has ever been issued.

Purchase Warrants -

Each purchase warrant ("warrant") described below is exercisable for one
share of common stock and is subject to the restrictive holding
requirements of SEC Rule 144. The terms of the warrant range from 8 to 23
years. In December, 1999 there were 1,000,000 warrants with an exercise
price of $14.75 reserved for future use of which 810,360 were issued in the
eleven month period ended December 31, 2001. In November, 2002 there were
1,000,000 warrants with an exercise price of $1.91 reserved for future use
of which 909,180 were issued in the year ended December 31, 2002.

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The following table summarizes
purchase warrant activity over Weighted-Average
the past three fiscal periods: Number of Shares Exercise Price
---------------- ----------------
Outstanding at January 31, 2000 1,804,400 $13.58
Granted 36,000 $14.75
Exercised (115,000) $2.14
----------
Outstanding at January 31, 2001 1,725,400 $14.37
Granted 810,360 $14.75
Exercised - N/A
Outstanding at December 31, 2001 2,535,760 $14.49
Granted 909,180 $1.91
Exercised
(80,000) $0.25
----------
Outstanding at December 31, 2002 3,364,940 $11.43
==========
Exercisable at January 31, 2001 1,725,400 $14.37
Exercisable at December 31, 2001 2,029,400 $14.43
Exercisable at December 31, 2002 3,055,097 $12.74

For warrants outstanding and exercisable at December 31, 2001, the exercise
price ranges and average remaining lives were:

Warrants Outstanding and Exercisable
------------------------------------

Range of Exercise Number Average Average Number Average Average
Prices Outstanding Period (1) Price (2) Exercisable Period (1) Price (2)

$.25 to $14.00 1,361,580 16.8 $5.71 968,900 13.9 $7.25
$14.01 to $14.99 1,580,360 15.9 $14.75 1,663,197 16.0 $14.75
$15.00 to $24.00 423,000 12.9 $17.42 423,000 12.9 $17.42
--------- ---------
3,364,940 15.9 $11.43 3,055,097 14.9 $12.74
========= =========

(1) Weighted average remaining term in years
(2) Weighted average exercise price

8. Income Taxes

Gross deferred tax assets result from net operating loss and income tax credit
carryforwards. Realization of these assets is dependent on the Company's ability
to generate sufficient future taxable income, prior to the expiration of the
carryforwards, which is dependent on the completion of research and development
activities and successful marketing of the Company's various products. Due to
the uncertainties related to the above and in accordance with guidance contained
in SFAS No. 109, a valuation allowance has been provided for these deferred tax
assets. Accordingly, these assets do not appear in the Company's balance sheet
at December 31, 2002 and 2001. The changes in the valuation allowance in the
year ended December 31, 2002 and the eleven month period ended December 31, 2001
and the year ended January 31, 2001 were $9,580,000, $13,611,000 and $5,553,000,
respectively.

Deferred tax assets consisted of: December 31, 2002 December 31, 2001
----------------- -----------------
Net operating losses $41,207,000 $31,990,000
Deferred license payment revenues 3,800,000 3,800,000
Expenses deductible in future periods 381,000 531,000
Federal and State tax credits 3,637,000 3,124,000
------------- ------------
Total deferred tax assets 49,025,000 39,445,000
Valuation allowance (49,025,000) (39,445,000)
------------- ------------
Net deferred tax assets $ -- $ --
============= ============

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At December 31, 2002, for Federal income tax purposes, the Company had net
operating loss carryforwards of approximately $124,228,000 and various income
tax credit carryforwards, primarily research and experimentation, aggregating
$3,080,000, which expire at various dates through 2023.

At December 31, 2002, for California income tax purposes, the Company had
various income tax credit carryforwards, primarily research and experimentation,
aggregating $554,000, which expire at various dates through 2014.

For financial reporting purposes, a valuation allowance has been recognized to
offset the deferred tax assets related to these carryforwards.

The reconciliation of income tax computed at the U.S. federal statutory rate
applied to the Company's net loss is as follows:

Year ended Eleven months ended Year ended
December 31, 2002 December 31, 2001 January 31, 2001
----------------- ----------------- ----------------

Tax at U.S. statutory rate (34.00)% (34.00)% (34.00)%
State taxes, net of federal benefit ( 4.00)% ( 4.00)% ( 4.00)%
Non-deductible items and other 0.65% 0.65% 1.09%
Change in valuation allowance 37.35% 37.35% 36.91%
------- ------- -------
- % - % - %
======= ======= =======

9. Commitments

The Company has noncancelable facilities leases expiring at various dates
through December 31, 2007. The leases provide various options to renew. The
minimum rental commitment for the year ending December 31, 2003 is $153,000, for
the year ended December 31, 2004 is $140,000, for the year ended December 31,
2005 is $56,000, for the year ended December 31, 2006 is $57,000, for the year
ended December 31, 2007 is $34,000 and none thereafter. Rental expense for these
leases for the year ended December 31, 2002 was approximately $151,992, for the
eleven month period ended December 31, 2001 was approximately $73,000 and for
the year ended January 31, 2001 was approximately $103,000. Rental expense is
allocated between research and development expense and general and
administrative expense, based on use, in the accompanying statements of
operations.

10. Selected Quarterly Financial Data (unaudited)

Selected unaudited quarterly financial data for the year ended December 31, 2002
and the eleven months ended December 31, 2001 are summarized below.

Statement of Operations Data: For the First Second Third Fourth
year December 31, 2002 Quarter Quarter Quarter Quarter
------- -------- ------- --------

Research and development expenditures $9,690,247 $9,311,658 $10,180,407 $ 8,650,017
Dividend and interest income $ 22,288 $ 49,325 $ 29,011 $ 13,915
Net loss $(10,087,036) $(9,834,698) $(10,923,844) $(9,294,423)
Basic and diluted net loss per share $(0.54) $(0.49) $(0.52) $(0.40)
Weighted average shares outstanding 18,740,210 20,101,639 20,966,639 23,188,386

Statement of Operations Data: For the Two Months
eleven months ended Ended Second Third Fourth
December 31, 2001 March 31, 2001 Quarter Quarter Quarter
-------------------------------------- ----------------- -------- -------- --------

Research and development
expenditures $3,306,175 $5,648,381 $7,550,430 $12,171,469
Dividend and interest income $ 136,561 $ 123,611 $ 79,620 $ 53,976

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Net loss $(3,475,187) $(6,453,059) $(8,139,156) $(13,197,053)
Basic and diluted net loss per share $(0.21) $(0.40) $(0.48) $(0.76)
Weighted average shares outstanding 16,199,493 16,199,493 16,991,161 17,386,996

The sum of the quarterly basic and diluted net loss per share does not equal the
basic and diluted net loss per share for the year ended December 31, 2002 and
for the eleven months ended December 31, 2001 as a result of rounding.

11. Subsequent Events

Subsequent to year end, on February 24, 2003, the Company sold to an
institutional investor 500,000 shares of registered common stock at $2.96 per
shares receiving gross proceeds of $1.48 million and 150,000 unregistered
warrants in a private placement at $0.125 per warrant for gross proceeds of
$18,750. Each warrant has registration rights and entitles the holder thereof to
purchase a share of the Company's common stock at a price of $2.96 per share for
the next five years.

Subsequent to year end, on March 31, 2003, issued and sold in a private
placement convertible, redeemable, 5-year, interest-bearing notes and warrants
to three institutional investors, including a substantial participation by two
existing investors in the Company, for proceeds of $15 million in the first
tranche closing; the proceeds will be wired today. The notes are convertible at
a fixed price of $2.50 per share; as part of the transaction Aphton also issued
to the investors five year warrants with a fixed exercise price of $2.70 per
share (both are at a premium to the market price of the common stock as of the
last closing price), unless otherwise adjusted prior to conversion pursuant to
the provisions of the notes and warrants. The Company has the right and
obligation to redeem the notes under certain conditions at any time after the
third year from the issuance date. The securities have registration rights. In
addition, and subject to certain conditions, the Company is obligated to sell
and one of the investors is obligated to purchase an additional $5 million of
such notes and warrants convertible into shares of our common stock, also with
registration rights, in the second tranche. In compliance with regulatory
requirements, Aphton intends to hold a shareholder's meeting to approve certain
aspects of the transaction; in connection with the shareholder's meeting, the
Company has already secured irrevocable proxies from certain of its existing
shareholders to vote in favor of the transaction and believes that it will have
a strong favorable majority vote.

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