FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

(Mark One)

Commission file number 0-19591

EPIMMUNE INC.

5820 Nancy Ridge Drive
San Diego, California 92121
(Address of principal executive offices and zip code)

(858) 860-2500
(Registrant’s telephone number, including area code)

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

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

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

Common Stock: $.01 par value 16,004,263 shares outstanding as of August 11, 2004.

EPIMMUNE INC.
QUARTERLY REPORT
FORM 10-Q

*		No information provided due to inapplicability of item.
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

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PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

EPIMMUNE INC.

See accompanying notes.

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EPIMMUNE INC.

See accompanying notes.

4

EPIMMUNE INC.

See accompanying notes.

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EPIMMUNE INC.

1.

Basis of Presentation

The interim unaudited condensed financial statements contained herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. In management’s opinion, the unaudited information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Interim results are not necessarily indicative of results to be expected for the full year. The financial statements should be read in conjunction with the audited consolidated financial statements and disclosures thereto included in the Company’s Form 10-K, as amended, for the year ended December 31, 2003.

The Company has an accumulated deficit of $159.3 million as of June 30, 2004. The Company’s ability to attain profitable operations is dependent upon obtaining sufficient working capital to complete the successful development of its products, FDA approval of its products, achieving market acceptance of such products and achievement of sufficient levels of revenue to support the Company’s cost structure. With existing cash and interest earned thereon, along with receipts from existing grants and contracts, the Company expects to be able to maintain its current level of operations through 2005, based on anticipated expenditures for, among other things, outside costs related to clinical trials and development activities for its new NIH contract for a preventative HIV vaccine, product formulation and manufacturing of product for use in clinical trials, medical and clinical consultant costs and preclinical development costs for additional vaccine candidates. If the Company is unable to obtain additional funding, it will be required to delay, reduce the scope of or eliminate one or more of its research and development projects, sell the Company or certain of its assets or technologies, or dissolve and liquidate all of its assets.

Earnings per share (“EPS”) is computed in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128 requires dual presentation of basic and diluted earnings per share. Basic EPS includes no dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period, excluding owned but unvested shares. There were 38,779 and 408,493 owned but unvested shares as of June 30, 2004 and June 30, 2003, respectively that were excluded from the earnings per share calculation. Diluted EPS reflects the potential dilution of securities that could share in our earnings, such as common stock equivalents that may be issuable upon exercise of outstanding common stock options or warrants as well as all shares of preferred stock, which may be converted into common stock. Prior to the application of the treasury stock method, common stock equivalents of 6,663,708 and 3,538,642 for the three months ended June 30, 2004 and 2003 have been excluded from EPS as the effect is antidilutive. The following table shows total shares outstanding as of June 30, 2004 and June 30, 2003, respectively, on a fully diluted basis, assuming full vesting and conversion of all common stock equivalents upon exercise of outstanding common stock options and warrants as well as conversion of all shares of preferred stock:

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

As required under SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, the pro forma effects of stock-based compensation on net income and net earnings per common share have been estimated at the date of grant using the Black-Scholes option pricing model based on the following weighted average assumptions for June 30, 2004 and June 30, 2003: risk-free interest rates of 4% and 6%, respectively; dividend yield of 0 for both periods; and a weighted average expected life for all options of six years. The volatility factor assumptions of the expected market price of the Company’s common stock were 90% and 123% for June 30, 2004 and 2003, respectively.

For purposes of adjusted pro forma disclosures, the estimated fair value of the options is amortized to expense over the option’s vesting period. The effect of applying SFAS No. 123 for purposes of providing pro forma disclosures is not likely to be representative of the effects on the Company’s operating results for future years because changes in the subjective input assumptions can materially affect future value estimates. Pro forma information for the three and six months ended June 30, 2004 and 2003 is as follows:

2.

Genencor International, Inc. and Innogenetics NV

In July 2001, the Company entered into a collaboration with Genencor International, Inc. for vaccines to treat or prevent hepatitis B virus, hepatitis C virus and human papilloma virus. Pursuant to the agreement, Epimmune exclusively licensed to Genencor its PADRE^® and epitope technologies for vaccines to treat or prevent hepatitis B, hepatitis C and human papilloma virus. In connection with this collaboration, the Company received an upfront license fee, which is being amortized over the collaboration term. In addition, Genencor made an initial ten percent equity investment in Epimmune common stock at a premium to the market price. The agreement provided for the Company to receive up to a total of approximately $60 million in payments, including the initial equity investment but excluding royalties. In January 2002, Epimmune received a payment from Genencor for achievement of the first milestone, identification of a product candidate to treat chronic hepatitis B infection. In February 2004, the Company announced it had earned a milestone payment from Genencor as a result of Genencor filing an IND for a vaccine to treat hepatitis B. The milestone payments were recognized as revenue when received. The collaboration revenues have been recognized as incurred. In addition, Genencor fully funded Epimmune’s research in these specific indications and was obligated to pay the Company royalties on sales of any products that may have been developed under the collaboration. All revenues from Genencor have been included in related party revenue. The initial collaboration had a term through September 2003, and in October 2002, was extended to September 2004.

In March 2004, Genencor assigned its rights under the collaboration and license agreements to Innogenetics NV, which does not own an equity position in the Company and is not a related party. In connection with the assignment to Innogenetics, the Company extended the collaboration term with

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Innogenetics through September 2005 and is now amortizing the remaining unamortized portion of the license fee over the extended term. In addition, Genencor agreed not to sell or otherwise dispose of any of the Company’s common stock it held, without the Company’s prior approval, for a minimum of twelve months. Innogenetics has the right to terminate the collaboration early, upon three months written notice, if Epimmune breaches its obligations under the collaboration agreement or upon certain force majeure events.

3.

National Cancer Institute

In March 2004, the Company received a grant from the National Cancer Institute (NCI), an institute of the National Institutes of Health (NIH), to define and conduct preclinical testing of a multi-epitope, clinical vaccine candidate for ovarian and breast cancer. The Company will collaborate with investigators at the University of Washington on the program with an objective of designing a vaccine to induce helper T cell (HTL) responses directed against multiple Tumor Associated Antigens (TAA), in order to prevent or delay disease recurrence after surgery and chemotherapy. The Phase I grant has a total potential value of approximately $0.6 million over two years. From the Phase I program, it is contemplated that a multi-epitope based vaccine will be designated for development and clinical testing in a potential Phase II program. The Company will record the revenues from the grant as the services are performed.

In May 2004, the Company received a grant from the NCI to support its continuing and detailed analysis of the immune responsiveness of patients immunized with the Company’s multi-epitope cancer vaccine candidate, EP-2101. The Company is currently conducting two Phase I/II trials with its EP-2101 vaccine, one in colorectal cancer and one in non-small cell lung cancer (NSCLC), at various sites in the U.S. The grant has a total potential value of approximately $0.8 million over two years. The Company will record the revenues from the grant as the services are performed.

4.

Private Placement

In April 2004, the Company completed a private placement of 2,466,379 shares of common stock and warrants to purchase up to 1,233,188 shares of common stock to selected institutional and accredited investors, including current shareholders, for a total purchase price of $5.5 million. The Company received net proceeds of $5.0 million. Each security issued was the combination of one share of common stock and, for each two shares of common stock purchased, a warrant to purchase one share of common stock. Each security was priced at the market value of $2.2125, which was equal to or greater than the sum of the closing bid price of Epimmune common stock as quoted on the Nasdaq National Market on the date of execution of the purchase agreements, and $0.0625, the imputed value of a warrant to purchase one share of common stock. In addition, the Company issued warrants to purchase an aggregate of 250,000 shares of its common stock to a placement agent for services rendered in connection with the private placement. Each warrant, including the warrant issued to the placement agent, has a three-year term and an exercise price equal to 120% of $2.2125 or $2.655 per share.

The Company’s stockholders’ equity was $9.3 million and $9.7 million as of March 31, 2004 and December 31, 2003, respectively. On April 1, 2004, the Company received a letter from the Nasdaq National Market notifying the Company that it was not in compliance with the minimum $10.0 million stockholders’ equity requirement for continued listing on the Nasdaq National Market. After receipt of the proceeds from the private placement, the Company believes that it satisfies the $10.0 million continued listing requirement of the Nasdaq National Market as of the date of filing of this report. The Company’s ongoing compliance with the minimum stockholders’ equity requirement will be monitored by the Nasdaq National Market and, if the Company does not comply with the minimum stockholders’ equity requirement at the time of its quarterly report for the second quarter of 2004 or at any other time in the future, the Company may be subject to delisting. As of June 30, 2004, the Company’s stockholders’ equity was $13.5 million.

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

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

Epimmune^® and PADRE^® are our trademarks and EIS^® and ImmunoSense^® are our service marks.

Since 1997, we have devoted substantially all of our resources to the discovery and development of potential therapeutic and prophylactic products. To date, we have not received any revenues from the sale of products. We began a Phase I/II clinical trial targeting HIV in September 2002 and a Phase I/II clinical trial targeting lung and colorectal cancer in February 2003. We have funded our research and development primarily from equity-derived working capital and through strategic alliances and collaborations with other companies. We have not been profitable since our inception and expect to incur substantial operating losses for at least the next several years. As of June 30, 2004, our accumulated deficit was approximately $159.3 million.

In July 2001, we entered into a collaboration with Genencor International, Inc. for vaccines to treat or prevent hepatitis B virus, hepatitis C virus and human papilloma virus. In February 2004, we announced that we had earned a milestone payment from Genencor as a result of Genencor filing an Investigational New Drug Application, or IND, for a vaccine to treat hepatitis B, the lead program in the collaboration. In March 2004, Genencor assigned its rights under our collaboration to Innogenetics NV. In connection with the assignment by Genencor, we extended the collaboration term with Innogenetics through September 2005. Innogenetics has the right to terminate the collaboration early, upon three months written notice.

In April 2004, we completed a private placement of 2,466,379 shares of common stock and warrants to purchase up to 1,233,188 shares of common stock to selected institutional and accredited investors, including current shareholders, for a total purchase price of $5.5 million. We received net proceeds of $5.0 million. The purchase price of each security, which is the combination of one share of common stock and, for each two shares of common stock purchased, a warrant to purchase one share of common stock, was priced at the market value of $2.2125, which was equal to or greater than the sum of the closing bid price of our common stock as quoted on the Nasdaq National Market on the date of execution of the purchase agreements, and $0.0625, the imputed value of a warrant to purchase one share of common stock. In addition, we issued warrants to purchase an aggregate of 250,000 shares of our common stock to a placement agent for services rendered in connection with the private placement. Each warrant, including the warrant issued to the placement agent, has a three-year term and an exercise price equal to 120% of $2.2125 or $2.655 per share.

Critical Accounting Policies

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

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policies affect the significant judgments and estimates used in the preparation of our consolidated financial statements (see Note 1 to our financial statements on page F-7 of the Form 10-K, as amended, filed for the year ended December 31, 2003).

Revenue Recognition

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

Patents

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

Investment Policy

The primary objective of our investment activities is to preserve principal while at the same time achieving competitive yields, without significantly increasing risk. To achieve this objective, we primarily invest in cash and money market accounts as well as A1 or P1 or higher rated debt securities with maturities of less than two years, with the weighted average maturity not to exceed eighteen months. We also attempt to minimize our portfolio risk by placing constraints on how much of our portfolio may be held in a specific type of investment such as asset-backed securities or collateralized mortgage obligations as well as limiting our holdings in any one issuer. At June 30, 2004, our investment portfolio included only cash and money market accounts and had no fixed-income securities.

Results of Operations

Three months ended June 30, 2004, as compared with three months ended June 30, 2003.

We had total revenues of $1.9 million in the three months ended June 30, 2004 compared to $1.8 million in the three months ended June 30, 2003. In the three months ended June 30, 2004, a $1.2 million increase in research grants and contract revenue was offset by a $1.0 million decrease in related party revenue and a $0.1 million decrease in licensing and milestone revenue. The increase in research grants and contract revenue during the second quarter of 2004 was primarily due to reimbursement under new grants and contracts received from the NIH in the second half of 2003 and recognition of reimbursements under our collaboration agreement with Innogenetics as contract revenue rather than related party revenue following Genencor’s assignment of its rights under our collaboration and license agreements to Innogenetics. Innogenetics does not own an equity position in Epimmune and, therefore, is not a related

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party and reimbursements under our collaboration agreement with them are now recorded as contract revenue. The decrease in related party revenue during the three months ended June 30, 2004, compared to the three months ended June 30, 2003, was also a result of the assignment by Genencor to Innogenetics. The decrease in licensing and milestone revenue during the second quarter of 2004 was a result of previously received evaluation and license option fees being fully amortized into revenue by the end of 2003.

Research and development expenses decreased to $2.2 million in the three months ended June 30, 2004 from $2.8 million in the three months ended June 30, 2003. The decrease in the three months ended June 30, 2004 relates primarily to reductions in labor and associated costs as a result of our work force reduction in September 2003. Also, the 2003 results included charges for the manufacture of vaccine for one of our HIV product candidates.

General and administrative costs were approximately $0.5 million in the three months ended June 30, 2004 and $1.0 million in the three months ended June 30, 2003. The decrease in the second quarter of 2004 was primarily due to the inclusion of a write-off of approximately $0.5 million for legal, investment banking, accounting and other expenses, during the second quarter of 2003, related to our previously proposed merger with Anosys, Inc., which was terminated.

Net interest income was negligible in the three months ended June 30, 2004 and approximately $0.1 million in the three months ended June 30, 2003. The decrease in interest income was primarily due to the prepayment, in the second quarter of 2003, of the interest bearing note issued for the purchase of shares by Dr. Emile Loria, our president and chief executive officer, in January 2001.

Six months ended June 30, 2004 as compared with six months ended June 30, 2003.

In the six months ended June 30, 2004, we had total revenues of $4.4 million, as compared to $3.2 million in revenue in the six months ended June 30, 2003. The increase in the six months ended June 30, 2004 relates primarily to a $2.4 million increase in research grants and contract revenue, offset by a $1.0 million decrease in related party revenue and a $0.2 million decrease in licensing and milestone revenue. The increase in research grants and contract revenue during the first six months of 2004 was primarily due to reimbursement under new grants and contracts received from the NIH in the second half of 2003 and recognition of reimbursements under our collaboration agreement with Innogenetics as contract revenue rather than related party revenue following Genencor’s assignment of its rights under our collaboration and license agreements to Innogenetics. Innogenetics does not own an equity position in Epimmune and, therefore, is not a related party and reimbursements under our collaboration agreement with them are now recorded as contract revenue. The decrease in related party revenue during the six months ended June 30, 2004, compared to the six months ended June 30, 2003, was also a result of the assignment by Genencor to Innogenetics. The decrease in licensing and milestone revenue during the first six months of 2004 was a result of previously received evaluation and license option fees being fully amortized into revenue by the end of 2003.

Research and development expenses decreased to $4.6 million in the six months ended June 30, 2004 from $5.4 million in the six months ended June 30, 2003. The decrease in the six months ended June 30, 2004 relates primarily to reductions in labor and associated costs as a result of our work force reduction in September 2003. Also, the 2003 results included charges for the manufacture of vaccine for one of our HIV product candidates. We expect to incur research and development costs in 2004 for, among other things, outside costs related to clinical trials and development activities for our new NIH contract for a preventive HIV vaccine, product formulation and manufacturing of product for use in clinical trials, medical and clinical consultant costs and preclinical development costs for additional vaccine candidates.

General and administrative costs were approximately $1.2 million in the six months ended June 30, 2004 and $1.7 million in the six months ended June 30, 2003. The decrease in the first six months of 2004 was primarily due to the inclusion of a write-off of approximately $0.5 million for legal, investment banking,

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accounting and other expenses, during the 2003 period, related to our previously proposed merger with Anosys, which was terminated. We expect our general and administrative expenses to continue to decrease in 2004 over corresponding 2003 levels due to reductions in labor and associated costs as a result of our work force reduction in September 2003.

Net interest income was negligible in the six months ended June 30, 2004 and approximately $0.1 million in the six months ended June 30, 2003. The decrease in interest income was primarily due to the prepayment, in the second quarter of 2003, of the interest bearing note issued for the purchase of shares by Dr. Emile Loria, our president and chief executive officer, in January 2001.

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

Liquidity and Capital Resources

We have financed operations since inception primarily through private placements of equity securities, two public common stock offerings, revenues under collaborative research and development agreements, grant revenues, certain asset divestitures and interest income. Through June 30, 2004, we had raised approximately $170.1 million from the sale of equity securities. As of June 30, 2004, we had 17,791,835 shares outstanding on an as-converted to common stock basis, assuming conversion of preferred shares.

As of June 30, 2004, our cash and cash equivalents were $9.7 million compared to $6.4 million at December 31, 2003. The increase was due to a private placement in April 2004 in which we raised net proceeds of approximately $5.0 million. The proceeds of the private placement were partially offset by cash used for operations, primarily to fund three ongoing clinical trials. We expect to continue to use our cash and cash equivalents to fund our ongoing and future clinical trials, as well as drug research and development programs.

Capital expenditures were approximately $0.1 million in the six months ended June 30, 2004 and in the six months ended June 30, 2003. In the past, we have financed our laboratory equipment and research and office facilities primarily through operating lease arrangements and a note payable. We fully paid off our note payable as of the end of the first quarter of 2003. During 2004, we anticipate that payments related to capital expenditures will increase modestly compared to 2003 levels to a range of approximately $0.3 million to $0.4 million, primarily for the purchase of equipment to support our clinical trials. We will also pay approximately $0.6 million in rent on our lease commitments during 2004. The future minimum rental commitment for the lease of our facility will range from approximately $0.6 million to $0.7 million each year over six years, based upon pre-established annual rent increases.

Payments related to capitalized patent expenses were $0.4 million in the six months ended June 30, 2004 and in the six months ended June 30, 2003. We expect payments related to patents to be relatively flat in 2004 compared to 2003 as we anticipate seeing a full year of benefit of our portfolio consolidation with one outside law firm, and as we continue to perform administrative tasks in house whenever possible as we pursue filings and claims in our intellectual property portfolio.

Although we expect our use of cash to continue decreasing in 2004, we expect to incur higher research and development expenditures in 2004 compared to 2003 levels in connection with our ongoing drug research and development programs, including costs related to clinical trials, research and development activities on sponsored programs and on grants and contracts, preclinical testing of product candidates and manufacturing of clinical supplies. We intend to seek collaborative research and development relationships with suitable corporate partners and U.S. government agencies. We have in the past and may in the future also license to third parties some of our technology in markets that we are not pursuing

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ourselves or through our collaborations. Any agreements that may result from these discussions may not successfully reduce our funding requirements or, if entered into, may be terminated.

We currently anticipate that total revenue for 2004 will be in the range of $8.5 million to $10.0 million, which includes anticipated grant and contract revenue, related party revenue and certain license fees. Our estimate assumes that we recognize revenue from milestone or licensing payments under existing agreements with third parties related to the licensing of our technology. We also anticipate that operating expenses for the full year 2004 will be between approximately $14.0 million and $15.0 million, compared to $14.4 million in 2003. The possible rise in expenses relates to our ongoing Phase I/II clinical trials targeting HIV, lung cancer and colorectal cancer and an increase in expenses under funded grants and contracts from the NIH. We also anticipate using some of our cash in 2004 to fund certain activities in our collaboration with Bavarian Nordic. We will share equally with Bavarian Nordic in all research related expenses not covered under our HIV vaccine contract from the NIH and have included these anticipated expenditures in our operating expense forecast for 2004. We will also become liable in 2004 for payment of license fees of up to $0.1 million.

With existing cash and interest earned thereon, along with receipts from existing grants and contracts, we expect to be able to maintain our current level of operations through 2005, based on anticipated expenditures for, among other things, outside costs related to clinical trials and development activities for our new NIH contract for a preventative HIV vaccine, product formulation and manufacturing of product for use in clinical trials, medical and clinical consultant costs and preclinical development costs for additional vaccine candidates.. We will continue to spend substantial amounts on research and development, including amounts spent for manufacturing clinical supplies, conducting clinical trials for our product candidates and advancing development of certain sponsored and partnered programs. Therefore, we will need to obtain additional funding. We do not have committed external sources of funding and may not be able to obtain any additional funding, especially if volatile market conditions persist for biotechnology companies. If we are unable to obtain additional funding, we will be required to delay, further reduce the scope of or eliminate one or more of our research and development projects, sell the Company or certain of its assets or technologies, or dissolve and liquidate all of its assets. As of June 30, 2004, we had approximately $9.7 million in cash and cash equivalents. Our future operational and capital requirements will depend on many factors, including:

•		whether we are able to secure additional financing on favorable terms, or at all;
•		the costs associated with our clinical trials for our vaccine targeting HIV, which began in September 2002, including the status of our contract with the NIH;
•		the costs associated with our clinical trials for our vaccine targeting lung and colorectal cancer, which began in February 2003;
•		progress with other preclinical testing and clinical trials in the future;
•		our ability to establish and maintain collaboration and license agreements and any government contracts and grants;
•		the actual revenue we receive under our collaboration and license agreements;
•		the actual costs we incur under our research collaboration with Bavarian Nordic;
•		the actual payment of license fees which may become payable at the option of the licensor;
•		the time and costs involved in obtaining regulatory approvals;

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•		the costs involved in filing, prosecuting, enforcing and defending patent claims and any other proprietary rights;
•		competing technological and market developments;
•		changes in our existing research relationships;
•		continued scientific progress in our drug discovery programs; and
•		the magnitude of our drug discovery and development programs.

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

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ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At June 30, 2004, our investment portfolio included only cash and money market accounts and had no fixed-income securities. There would be no material impact to our investment portfolio, in the short term, associated with any change in interest rates and any decline in interest rates over time will reduce our interest income, while increases in interest rates over time will increase our interest income.

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RISK FACTORS

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

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

We will continue to spend substantial amounts on research and development, including amounts spent for manufacturing clinical supplies, conducting clinical trials for our product candidates and advancing development of certain sponsored and partnered programs. Therefore, we will need to raise additional funding, in addition to the approximately $5.5 million we raised in April 2004. We do not have committed external sources of funding and may not be able to obtain any additional funding, especially if volatile market conditions persist for biotechnology companies. If we are unable to obtain additional funding, we will be required to delay, further reduce the scope of or eliminate one or more of our research and development projects, sell the Company or certain of its assets or technologies, or dissolve and liquidate all of its assets. As of June 30, 2004, we had approximately $9.7 million in cash and cash equivalents. Our future operational and capital requirements will depend on many factors, including:

•		whether we are able to secure additional financing on favorable terms, or at all;
•		the costs associated with our clinical trials for our vaccine targeting HIV, which began in September 2002, including the status of our contract with the NIH;
•		the costs associated with our clinical trials for our vaccine targeting lung and colorectal cancer, which began in February 2003;
•		progress with other preclinical testing and clinical trials in the future;
•		our ability to establish and maintain collaboration and license agreements and any government contracts and grants;
•		the actual revenue we receive under our collaboration and license agreements;
•		the actual costs we incur under our research collaboration with Bavarian Nordic;
•		the actual payment of license fees which may become payable at the option of the licensor;
•		the time and costs involved in obtaining regulatory approvals;
•		the costs involved in filing, prosecuting, enforcing and defending patent claims and any other proprietary rights;
•		competing technological and market developments;
•		changes in our existing research relationships;
•		continued scientific progress in our drug discovery programs; and
•		the magnitude of our drug discovery and development programs.

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We intend to seek additional funding through collaboration and license agreements, government research grants or equity or debt financings. In the event we are able to obtain financing, it may not be on favorable terms. In addition, we may not be able to enter into additional collaborations to reduce our funding requirements. If we acquire funds by issuing securities, dilution to existing stockholders will result, in addition to the dilution that occurred as a result of our September 2003 and April 2004 financings. If we raise funds through additional collaborations and license agreements, we will likely have to relinquish some or all of the rights to product candidates or technologies that we may have otherwise developed ourselves. If we are unable to obtain funding, we may be required to engage in another restructuring, cease development of some product candidates, further reduce the scope of our operations, sell the Company or certain of its assets or technologies or cease operations.

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

In order to continue trading on The Nasdaq National Market, we must comply with The Nasdaq National Market’s continued listing requirements, which require that we maintain a minimum stockholders’ equity of $10.0 million and a minimum closing bid price of $1.00 per share. Our stockholders’ equity was $9.3 million and $9.7 million as of March 31, 2004 and December 31, 2003, respectively, which did not satisfy the $10.0 million continued listing requirement. As of June 30, 2004, our stockholders’ equity was $13.5 million and we satisfy the $10.0 million continued listing requirement as of the date of filing of this report. The Nasdaq National Market will monitor our ongoing compliance with listing requirements. If we fail to satisfy The Nasdaq National Market’s continued listing requirements at the time of our next quarterly report on Form 10-Q or at any other time in the future, our common stock may be delisted from The Nasdaq National Market. The delisting of our common stock may result in the trading of the stock on The Nasdaq SmallCap Market or the OTC Bulletin Board. Consequently, a delisting of our common stock from The Nasdaq National Market may reduce the liquidity of our common stock and adversely affect our ability to raise additional necessary capital.

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

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

•		the results of preclinical studies may be inconclusive, or they may not be indicative of results that will be obtained in human clinical trials;
•		after reviewing test results, we or our collaborators may abandon projects that we might previously have believed to be promising;
•		we, our collaborators or regulators may suspend or terminate clinical trials if the participating subjects or patients are being exposed to unacceptable health risks;
•		we may have to delay clinical trials as a result of scheduling conflicts with participating clinicians and clinical institutions, or difficulties in identifying and enrolling patients who meet trial eligibility criteria;

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•		safety and efficacy results attained in early human clinical trials may not be indicative of results that are obtained in later clinical trials; and
•		the effects our vaccine candidates have may not be the desired effects or may include undesirable side effects or other characteristics that preclude regulatory approval or limit their commercial use if ever approved.

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

Some of our programs are funded by the government and the government may not allocate funds for these programs in future fiscal years.

We fund certain of our research and development related to our HIV, cancer and malaria programs pursuant to multi-year grants and contracts from the government. The government is under no obligation to and may not fund these programs over their full term which would have a significant impact on our ability to continue development of our HIV, cancer and malaria programs.

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

We have experienced significant operating losses since our inception in 1987. As of June 30, 2004, we had an accumulated deficit of $159.3 million. We expect to continue to incur substantial operating expenses and net operating losses for the foreseeable future, which may hurt our ability to continue operations. We have not generated revenues from the commercialization of any product. All of our revenues to date have consisted of contract research and development revenues, license and milestone payments, research grants, certain asset divestitures and interest income. We expect that substantially all of our revenues for the foreseeable future will result from similar sources. To achieve profitable operations, we, alone or with collaborators, must successfully identify, develop, register and market proprietary products. We do not expect to generate revenues from the commercialization of any product for at least six years (and this would assume approval of either our HIV or lung and colorectal product candidates, which may not occur). We may not be able to generate sufficient product revenue to become profitable. Even if we do achieve profitability, we may not be able to sustain or increase our profitability on a quarterly or yearly basis.

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

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

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

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

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

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

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

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

The biotechnology industry continues to undergo rapid change, and competition is intense and is expected to increase. Our competitors may succeed in developing technologies, vaccines or other

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therapeutic products that are more effective than any of the products we are developing, which would render our technology and products obsolete and noncompetitive.

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

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

•		pharmaceutical companies;
•		chemical companies;
•		specialized biotechnology companies;
•		academic institutions; and
•		research organizations.

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

Our vaccines under development address a range of cancer and infectious disease markets. The competition in these markets is extremely formidable. There are 27 drugs currently approved in the United States for HIV and according to a PhRMA 2003 report on pharmaceutical drug development, there were 83 new product candidates in clinical development for HIV and related conditions, including 15 HIV vaccines. In addition, according to the PhRMA 2003 report, there were 395 new product candidates in clinical development for the treatment of cancer, and at least 30 companies were developing more than 50 vaccines against various cancers. An important factor in competition may be the timing of market introduction of our vaccines and competitive products. Accordingly, the relative speed with which we can develop vaccines, complete the clinical trials and approval processes and supply commercial quantities of the vaccines to the market are expected to be important competitive factors. We expect that competition among products approved for sale will be based, among other things, on product effectiveness, safety, reliability, availability, price and patent position.

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

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

If we become involved in litigation or interference proceedings, we may incur substantial expense, and the proceedings may divert the attention of our technical and management personnel, even if we ultimately prevail. An adverse determination in proceedings of this type could subject us to significant liabilities, allow our competitors to market competitive products without obtaining a license from us, prohibit us from marketing vaccines or other products or require us to seek licenses from third parties

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that may not be available on commercially reasonable terms, if at all. If we cannot obtain such licenses, we may be restricted or prevented from developing and commercializing our product candidates.

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

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

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

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

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

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

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

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

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

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

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trials, data from Phase III or other pivotal clinical trials may not be consistent with earlier data or be sufficient to support regulatory approval.

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

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

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

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

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

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

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

Our collaborations and license arrangements generally pose the following risks:

•		collaborators and licensees may not pursue further development and commercialization of potential products resulting from our collaborations or may elect not to renew research and development programs;
•		collaborators and licensees may delay clinical trials, underfund a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require new formulation of a product candidate for clinical testing;
•		expected revenue might not be generated because milestones may not be achieved and product candidates may not be developed;
•		collaborators and licensees could independently develop, or develop with third parties, products that could compete with our future products;
•		the terms of our contracts with our current or future collaborators and licensees may not be favorable to us in the future;

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•		a collaborator or licensee with marketing and distribution rights to one or more of our products may not commit enough resources to the marketing and distribution of our products, limiting our potential revenues from the commercialization of a product;
•		disputes may arise delaying or terminating the research, development or commercialization of our product candidates, or result in significant and costly litigation or arbitration; and
•		collaborations and licensee arrangements may be terminated and we will experience increased operating expenses and capital requirements if we elect to pursue further development of the product candidate.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The market prices for securities of biotechnology companies, including our common stock, have historically been highly volatile, and the market from time to time has experienced significant price and volume fluctuations that are not necessarily related to the operating performance of such companies. From January 1, 2003 through June 30, 2004, our closing stock price has ranged from $0.760 to $3.166 and has been and will continue to be influenced by general market and industry conditions. In addition, the following factors may have a significant effect on the market price of our common stock:

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

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

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

As of June 30, 2004, our officers, directors and those stockholders owning at least five percent of our outstanding stock together control approximately 33.3% of our outstanding common stock as converted and Pharmacia, now part of Pfizer, holds 100% of our preferred stock. If some or all of these officers, directors and principal stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval or disapproval of any proposed merger or financing or other business combination transaction. The interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders. For instance, officers, directors and principal stockholders, acting together, could cause us to enter into transactions or agreements that we would not otherwise consider. Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of our company otherwise favored by our other stockholders. This concentration of ownership also could depress our stock price.

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ITEM 4.	CONTROLS AND PROCEDURES

(a)

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective as of the evaluation date.

(b)

Changes in Internal Controls

There have been no changes in our internal controls during the period covered by this report that has materially affected, or is likely to materially affect, our internal controls.

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PART II.	OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS

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

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

The Company’s 2004 Annual Meeting of Stockholders, or the Annual Meeting, was held on June 15, 2004. The matters voted on at the Annual Meeting were:

1.		To elect the members of the Board of Directors.
2.		To approve an amendment to the Epimmune Inc. 2000 Stock Plan, as amended, to increase the number of shares of the Company’s Common Stock available for issuance under such plan from 1,600,000 to 2,600,000 shares.
3.		To ratify the selection by the Audit Committee of the Company’s Board of Directors of Ernst & Young LLP, as independent auditors for the Company, for the year ending December 31, 2004.
4.		To approve an amendment to the Company’s Amended and Restated Certificate of Incorporation to (i) increase the total number of authorized shares from 35,000,000 to 50,000,000 and (ii) increase the number of authorized shares of Common Stock from 25,000,000 to 40,000,000.

At the Annual Meeting, 13,104,661 shares of Common Stock out of a total of 15,992,001 shares of Common Stock outstanding at the record date were represented in person or by proxy, 859,666 shares of Series S Preferred Stock (1,237,950 on an as converted to common stock basis) out of a total of 859,666 shares of Series S Preferred Stock (1,237,950 on an as converted to common stock basis) outstanding at a record date were represented in person or by proxy and 549,622 shares of Series S-1 Preferred Stock out of a total of 549,622 shares of Series S-1 Preferred Stock outstanding at the record date were represented in person or by proxy. The holder of preferred stock votes its shares on all matters to be voted upon at the Annual Meeting on an as-converted to common stock basis.

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

1.

Election of the members of the Board of Directors.

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2.

Approve an amendment to the Epimmune Inc. 2000 Stock Plan, as amended, to increase the number of shares of the Company’s Common Stock available for issuance under such plan from 1,600,000 to 2,600,000 shares.

3.

Ratify the selection by the Audit Committee of the Company’s Board of Directors of Ernst &Young LLP, as independent auditors for the year ending December 31, 2003.

4.

To approve an amendment to the Company’s Amended and Restated Certificate of Incorporation to (i) increase the total number of authorized shares from 35,000,000 to 50,000,000 and (ii) increase the number of authorized shares of Common Stock from 25,000,000 to 40,000,000.

ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

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(5)		Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998, filed with the SEC on November 16, 1998.
(6)		Incorporated by reference to the Company’s Form 8-K, filed with the SEC on July 16, 1999.
(7)		Incorporated by reference to the Company’s Definitive Proxy Statement, filed with the SEC on Form DEF 14A on July 28, 1999.
(8)		Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999, filed with the SEC on November 15, 1999.
(9)		Incorporated by reference to the Company’s Registration Statement on Form S-8, filed with the SEC on July 2, 2004.
(10)		Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001, filed with the SEC on March 29, 2002.

(b)

Reports on Form 8-K

1.)		The Company filed a Report on Form 8-K on April 13, 2004 announcing the completion of a private placement of common stock and warrants to purchase common stock.
2.)		The Company filed a Report on Form 8-K on May 10, 2004 announcing its financial results for the quarter ended March 31, 2004.
3.)		The Company filed a Report on Form 8-K on June 7, 2004 announcing preliminary data from ongoing Phase I/II clinical trials.
4.)		The Company filed a Report on Form 8-K on July 14, 2004 announcing the presentation of preliminary HIV clinical trial data and notice of NIH intention to fund $2.8 million for Malaria vaccine development.

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EPIMMUNE INC.

SIGNATURES

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

	EPIMMUNE INC.
Dated: August 11, 2004	By:	/s/ Emile Loria
		Emile Loria, M.D.
		President, Chief Executive Officer and Director (Principal Executive Officer)

Dated: August 11, 2004	By:	/s/ Robert De Vaere
		Robert De Vaere
		Vice President, Finance and Administration, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

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