10-K 1 d10k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 0-23155 TRIMERIS, INC. (Exact name of registrant as specified in its charter) DELAWARE 56-1808663 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3518 WESTGATE DRIVE DURHAM, NORTH CAROLINA 27707 (Address of principal executive offices, including zip code) (919) 419-6050 Registrant's telephone number, including area code: SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $.001 par value (Title of Class) 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. [ x ] Yes [ ] 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 Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, as of March 22, 2002 was approximately $825,278,000 (based on the last sale price of such stock as reported by the Nasdaq National Market System on March 22, 2002): The number of shares of the registrant's Common Stock outstanding as of March 25, 2002 was 18,698,792 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement to be filed by the Company with the Securities and Exchange Commission within 120 days after the end of the fiscal year are incorporated by reference in Part III of this Form 10-K. TRIMERIS, INC. FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 Table of Contents

Item Number Page ----------- ---- PART I. ------- Item 1. Business 1 -------- Item 2. Properties 32 ---------- Item 3. Legal Proceedings 32 ----------------- Item 4. Submission of Matters to a Vote of Security Holders 32 ---------------------------------------------------- PART II. -------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 33 --------------------------------------------------------------------- Item 6. Selected Financial Data 34 ----------------------- Item 7. Management's Discussion and Analysis of Financial Condition and ---------------------------------------------------------------- Results of Operations 36 --------------------- Item 7A. Quantitative and Qualitative Disclosures About Market Risk 45 ---------------------------------------------------------- Item 8. Financial Statements and Supplementary Data 45 ------------------------------------------- Item 9. Changes in and Disagreements With Accountants on Accounting ------------------------------------------------------------ and Financial Disclosure 45 ------------------------ PART III. --------- Item 10. Directors and Executive Officers of the Registrant 46 -------------------------------------------------- Item 11. Executive Compensation 46 ---------------------- Item 12. Security Ownership of Certain Beneficial Owners and Management 46 -------------------------------------------------------------- Item 13. Certain Relationships and Related Transactions 46 ---------------------------------------------- PART IV. -------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 47 ---------------------------------------------------------------- Signature Page II-1 -------------- Exhibit Index II-2 -------------

PART I. ------- Item 1. BUSINESS -------- Statements in this Annual Report on Form 10-K that are not historical fact are forward-looking statements. These forward-looking statements include statements regarding Trimeris, Inc.'s expectations, hopes, beliefs, intentions or strategies regarding the future and are subject to a number of known and unknown risks and uncertainties, many of which are beyond our control. While we believe these statements are accurate, our business is dependent on many factors, some of which are discussed in the "Risk Factors" and "Business" sections of this Annual Report on Form 10-K. Many of these factors are beyond our control and any of these and other factors could cause actual clinical and financial results to differ materially from the forward-looking statements made in this Annual Report on Form 10-K. The results of our previous clinical trials are not necessarily indicative of the results of future clinical trials. Please read the "Risk Factors" section in this Annual Report on Form 10-K for further information regarding these factors. We undertake no obligation to release publicly the results of any revisions to the statements contained in this report to reflect events or circumstances that occur subsequent to the date of this Annual Report on Form 10-K. TRIMERIS OVERVIEW We are engaged in the discovery and development of a new class of antiviral drug treatments called fusion inhibitors. Fusion inhibitors impair viral fusion, a complex process by which viruses attach to and penetrate host cells. If a virus cannot enter a host cell, the virus cannot replicate. By inhibiting the fusion process of particular types of viruses, our drug candidates under development offer a novel mechanism of action with the potential to treat a variety of medically important viral diseases. We are a development stage company that has sustained operating losses since our inception, and we expect these losses to continue. As of December 31, 2001, our accumulated deficit since beginning our operations in January 1993, was approximately $188.9 million. We have invested a significant portion of our time and financial resources in the development of T-20, our lead drug candidate. If we are unable to commercialize T-20, our business will be significantly harmed. In addition, we are engaged in segments of the biopharmaceutical industry that are intensely competitive and change rapidly. OUR DRUG CANDIDATES Our most advanced drug candidates, T-20 and T-1249, are for the treatment of human immunodeficiency virus--type I, or HIV. T-20 is our first generation fusion inhibitor which prevents HIV from entering and infecting cells. T-1249 is our second generation fusion inhibitor for the HIV virus. T-1249 is in an earlier stage of development than T-20 but is part of the same class of drug treatments, fusion inhibitors. The history of HIV treatment has demonstrated that the existence of multiple drugs within a drug treatment class allows for a variety of drug combinations and may help improve patient treatment. We believe that multiple types of anti-HIV fusion inhibitors may enhance HIV therapy by providing an even broader range of treatment options than a single fusion inhibitor would allow. Human pharmaceutical products, including our drug candidates, are subject to lengthy and rigorous preclinical testing and clinical trials and other extensive, costly and time-consuming procedures mandated by the United States Food and Drug Administration, or FDA, and foreign regulatory authorities. Clinical trials involve testing investigational drugs on healthy volunteers or on infected patients under the supervision of a qualified principal investigator. These trials typically are conducted in three sequential phases, although the phases may overlap with one another. . Phase I clinical trials involve giving an investigational drug to a small group of healthy human subjects or, more rarely, to a group of selected patients with a targeted disease or disorder. The goal of Phase I clinical trials is typically to test for safety. This includes testing for dose tolerance and analyzing how the drug behaves in the body, including analyzing absorption, metabolism, excretion, clinical pharmacokinetics, or the amount of drug present in a patient's bloodstream, and biodistribution, or how a drug is distributed in tissues and organs. . Phase II clinical trials involve a small sample of the actual intended patient population and seek to assess the effectiveness of the drug for the specific targeted indications, to determine dose tolerance and the optimal dose range and to gather additional information relating to safety and potential adverse effects. . Phase III clinical trials are initiated to establish further clinical safety and effectiveness of the investigational drug in a broader sample of the general patient population at geographically dispersed study sites in order to determine the overall risk-benefit ratio of the drug and to provide an adequate basis for all labeling for promotion and use. The results of the research and development, manufacturing analysis, preclinical testing, clinical trials and related information are submitted to the FDA in the form of a New Drug Application, or NDA, for approval of the marketing and shipment of the drug. T-20. To date, we have tested or are testing T-20 in more than 1,000 patients, with the longest duration of treatment exceeding approximately three years. These studies suggest that T-20 is well-tolerated and has potent antiviral activity, as demonstrated in the TRI-003 trial by a maximum reduction of approximately 40-fold in the number of copies of the HIV virus present in the patient's bloodstream after 14 days of dosing with T-20. A 40-fold reduction means that the number of copies of the HIV virus circulating in the patient's bloodstream was reduced by 97.5%, or to 2.5% of the original number. The most common adverse event reported in our clinical trials of T-20 has been mild to moderate local skin irritations at the site of injection, or injection site reactions. We currently have two ongoing Phase III clinical trials, T20-301 and T20-302, evaluating T-20, for which we have not yet collected clinically relevant data. We have reported data from two Phase I/II clinical trials and four Phase II trials for T-20. We also have two Phase II trials and two Phase III trials ongoing for which we do not currently plan to present clinical data, and one Phase I/II trial ongoing that we currently have no specific plans to present clinical data. We plan to commence additional Phase II and/or Phase IIIb/IV trials for T-20 throughout 2002. T-20 has received "fast track" designation by the FDA for the treatment of HIV. Fast track designation is granted to products that may provide a significant improvement in the safety or effectiveness of the treatment for a serious or life-threatening disease, and this designation is intended to expedite the drug development process. In February 2001, we presented 16 week interim data from T20-206, a 71 patient, dose comparison Phase II trial for T-20. Patients in T20-206 were randomly separated into four treatment groups, with the control group receiving a potent, or very strong, background regimen consisting of four different, currently-approved anti-HIV drugs--abacavir, amprenavir, efavirenz and ritonavir. The conventional approach to treating HIV, as represented by these four drugs, has been to lower viral loads, or the amount of HIV virus present in the bloodstream, by using drugs that inhibit the viral enzymes necessary for HIV to replicate. We designed T20-206 so that patients may receive these other currently approved drugs, in what is commonly referred to as a background regimen, in addition to T-20. The remaining three treatment groups are receiving various dosage levels of T-20 BID, or twice daily, by injection under the skin, or subcutaneous injections, along with the background regimen. The two highest T-20 dose groups received two injections twice daily, while the lowest T-20 dose group received one injection twice daily. At 16 weeks, the median reduction of viral load in the patient's blood from the viral load at the beginning of the trial, commonly referred to as baseline viral load, for all patients across the three T-20 treatment groups was 99.9%, compared to a median reduction of 99.3% for the control group. 2 In February 2002, we presented 48-week data from T20-206. At 48 weeks, the median reduction of viral load from baseline viral load for the combined T-20 treatment groups was 99.4%. compared to a median reduction of 98.7% for the control group. At 48 weeks 55% of patients (28 of 51) in the combined T-20 treatment groups achieved viral load levels of less than 400 copies/milliliter compared to 37% of patients (7 of 19) in the control group. 47% of patients (24 of 51) in the combined T-20 treatment groups achieved viral load levels of less than 50 copies/milliliter compared to 37% of patients (7 of 19) in the control group. Average CD4+ T-cell count increased by 132 cells/microliter in the combined T-20 treatment groups compared to an increase of 90 cells/microliter in the control group. CD4+ T-cells are responsible for mounting a body's immune response against infection. An increase in CD4+ T-cells generally indicates an improvement in the body's immune system. In February 2002 we presented 48-week data from T20-208, a 46 patient formulation comparison study of T-20. Patients in T20-208 received T-20 given as twice daily subcutaneous injections in combination with oral anti-HIV drugs selected for each patient on an individualized basis. At 48 weeks, 50% of patients (23 of 46) achieved viral load levels of less than 400 copies/milliliter. In addition, 93 % of patients (43 of 46) completed 48 weeks of treatment with the simpler dosing regimen of one injection twice daily that is currently being used in our Phase III clinical trials, T20-301, T20-302, and T20-305. In December 2001, we presented 24-week data from T20-204, a 12 patient pediatric Phase I/II trial for T-20. In T20-204, 12 pediatric patients were randomly assigned to two treatment groups to receive T-20 at different dosage levels in combination with a background regimen of other anti-HIV drugs. At 24 weeks, this trial showed that T-20 was well-tolerated by children and that children receiving the highest dose experienced a ten-fold reduction in viral load from baseline viral load. A ten-fold reduction in viral load from baseline viral load means that the number of copies of the HIV virus circulating in the patient's bloodstream was reduced by 90%, to one-tenth of the original number. In June 2001, we completed enrolling patients in a multi-center Phase III clinical trial, T20-301, in North America, Mexico and Brazil. T20-301 is a 48 week study which enrolled approximately 500 HIV-infected patients with a planned interim analysis at 24 weeks. In this trial, patients are randomly assigned to receive either T-20 plus an optimized background regimen of anti-HIV drugs, or an optimized regimen of anti-HIV drugs without T-20. For each patient, the optimized regimen is a combination of other anti-HIV drugs individually determined for that patient based on the genotypic and phenotypic analysis of the HIV virus in that patient's blood. A genotypic resistance analysis involves examination of the genetic sequence of the strains of virus present in the sample. A phenotypic resistance analysis involves an assessment of the ability of a drug to block infection caused by strains of a virus grown in culture. T-20 is being administered by twice daily injections under the skin, delivering 90 milligrams of T-20 each, using the formulation tested in our ongoing Phase II trial, T20-208. In T20-208, analysis of the highest dose group indicated that a patient received a delivered dose of 90 milligrams of T-20 per dose. In August 2001, we completed enrolling patients in T20-302, a multi-center Phase III clinical trial with a protocol, or trial design, similar to T20-301. This trial enrolled approximately 500 HIV-infected patients in Western Europe and Australia. Data from the 24-week interim analysis of these trials is currently expected to be available during the first half of 2002. Subject to analysis of data from the 24-week interim analysis of these trials, we currently expect to file an NDA for T-20 with the FDA during the second half of 2002. In November 2001, we announced with Roche the beginning of site selection and patient enrollment in the United States for T20-305, a safety study of T-20 in combination with oral anti-HIV drugs. We expect to conduct the study at various sites in North America, Europe, Brazil and Australia. This study is expected to enroll a total of 450 adults with high viral loads, defined as greater than 10,000 copies/milliliter, and low CD4+ T-cell counts, defined as less than 50 cells/microliter, around the world. This trial is currently underway and patient enrollment is in progress. We also have three rollover clinical trials, T20-210, T20-211, and T20-304, that allow participants in previous clinical trials to continue to receive T-20, and a Phase I/II clinical trial in pediatric patients, T20-310, ongiong. We currently do not have specific plans to present clinical data for these trials. 3 T-1249. Our second generation fusion inhibitor for HIV is T-1249. T-1249 has demonstrated potent, or strong, HIV suppression in cell culture, commonly referred to as in vitro, and is highly active against a wide range of HIV strains in vitro, including strains resistant to T-20. HIV is prone to genetic mutations that produce strains of HIV that are resistant to currently-approved anti-HIV therapies. Resistance occurs because viruses make trillions of copies of themselves and some copies will contain mutations in their genetic material. Mutations that confer a selective advantage, such as drug resistance, will enable mutant viruses to replicate even in the presence of an active drug. As a result, these mutants, while initially found in low frequency, can become the predominant strain in an infected patient undergoing drug therapy and can be transmitted to other individuals. Generally, an HIV virus that is resistant to one drug within a drug treatment class is likely to become resistant to the entire drug treatment class, a phenomenon known as cross-resistance. Attempts to reestablish suppression of HIV viral load by substituting different anti-HIV combinations from the same drug treatment class often fail because of cross-resistance. Studies suggest that currently, 10% to 20% of newly-infected HIV patients are infected with a strain of HIV that is resistant to at least one currently-approved anti-HIV drug. Despite the fact that T-20 and T-1249 are members of the same class of fusion inhibitors and have a similar mechanism of action, T-1249 appears to have a different resistance profile than T-20, meaning that types of viruses that have demonstrated the ability to become resistant to T-20 have not demonstrated the ability to become resistant to T-1249 in laboratory experiments. In addition, T-1249 has enhanced pharmacokinetic properties compared to T-20, which means T-1249 is expected to remain at higher levels in the bloodstream over time compared to T-20. We believe that this should permit T-1249 to be administered only once daily. T-1249 has also received "fast track" designation by the FDA for the treatment of HIV. In February 2001, we presented interim data from T1249-101, an ongoing Phase I/II trial of T-1249 administered alone and not in combination with any other anti-HIV drugs. This trial evaluates the safety and preliminary antiviral activity of T-1249 in 72 HIV-infected adults, substantially all of whom had previously received other anti-HIV drugs. Data from this trial suggest that T-1249 was well-tolerated over the 14-day period and produced dose-related decreases in HIV viral load. As a result of this data, we have amended the trial design to continue this trial at increasing doses of T-1249. Analysis of this data also suggests that a daily dose of T-1249, and not prior anti-HIV treatment experience, was the only variable that was associated with the viral load reduction among treatment-experienced patients. The most common adverse event reported in T1249-101 has been mild to moderate local skin irritations at the site of injection, or injection site reactions. In addition, two serious adverse events were reported in this clinical trial. One patient experienced a hypersensitivity reaction and another patient exhibited a low white blood cell count, or neutropenia. We are unable to determine whether T-1249 caused some of these side effects because there were no patients in our trial for comparison who did not receive T-1249. ROCHE AGREEMENT We have entered into an agreement with F. Hoffmann-La Roche Ltd, or Roche, to develop and market T-20 and T-1249 worldwide. Our agreement with Roche grants them an exclusive, worldwide license for T-20 and T-1249 and certain other compounds. Roche may terminate its license as a whole or for a particular country or countries in its sole discretion with advance notice. We will share development expenses and profits for T-20 and T-1249 in the United States and Canada equally with Roche. Outside of these two countries, Roche will fund all development costs and pay us royalties on net sales of T-20 and T-1249 for a specified term. In addition, Roche has agreed to pay us up to $68 million in upfront and milestone payments, of which we have received $12 million as of December 31, 2001. We have also entered into a research agreement with Roche to discover, develop and commercialize anti-HIV fusion inhibitor peptides. We will share equally the worldwide research, development and commercialization expenses and profits from the worldwide sales of anti-HIV fusion inhibitor peptides discovered after July 1, 1999. Our agreement with Roche grants them an exclusive, worldwide license for these peptides. Either party may terminate the agreement as a whole or for a particular drug, country or countries in its sole discretion with advance notice. The agreement expires in January 2003 and is renewable thereafter on an annual basis. 4 We have transferred the manufacturing process for the amounts of T-20 required in our clinical trials to four third party contract manufacturers, including Roche. We have selected Roche's manufacturing facility in Boulder, Colorado to manufacture the quantities of bulk drug substance of T-20 we will need if we are successful in commercializing T-20, and we have selected Roche and another third party to produce the finished drug product from such bulk drug substance. We currently expect the validation batches, which are batches produced in the commercial scale manufacturing equipment that will be submitted to the FDA, of T-20 drug substance to be completed in mid-2002. RESEARCH We are also currently using our platform technology to pursue research programs to develop fusion inhibitors that target respiratory syncytial virus, commonly known as RSV. In August 2001, we entered into a nonexclusive agreement with Array BioPharma, Inc. to collaborate to discover small molecule fusion inhibitors of HIV and RSV. Our principal executive office is located at 3518 Westgate Drive, Durham, North Carolina 27707, and our telephone number is (919) 419-6050. As used herein, "we," "us," "our," the "Company" and "Trimeris" refer to Trimeris, Inc. BUSINESS AND MARKET OVERVIEW OF VIRUSES Viruses are parasites that take over the intracellular machinery of a cell and use it to make components that are necessary for viral replication. Viruses cause disease when their uncontrolled replication interferes with the basic function of the invaded cells. Different types of viruses cause specific diseases because each type of virus is attracted to a particular kind of cell. For instance, HIV is a virus that invades and kills white blood cells and can result in death when the affected immune system stops protecting against infection. The attraction of a virus for the cell it infects is based upon a specific interaction between the receptors on the surface of the target cell and the virus. Viral infection of cells occurs through a cyclical, multi-step process, consisting of viral entry, intracellular replication, and release. For many viruses, viral entry occurs in several sequential steps: . the virus recognizes a receptor on the surface of a target cell and attaches to it; . viral proteins rearrange themselves to bring the virus and the target cell into close proximity; . the viral membrane fuses with the target cell membrane; and . the virus injects its genetic material into the target cell. Once the viral genetic material is inside the target cell, this material then directs the target cell to produce viral proteins and enzymes that are necessary to complete the replication cycle of the virus. When viral replication is completed, newly formed viruses are released from the cell. These newly formed viruses spread by infecting new cells. The cycle is repeated when the replicated virus infects the new cells. Antiviral therapy may target any stage of the viral life cycle. Marketed antiviral therapies typically target specific enzymes that viruses use. Other compounds, including ours, that are in clinical development focus on the entry of the viruses into target cells. 5 FUSOGENIC VIRUSES Fusogenic viruses, such as HIV, respiratory syncytial virus and human parainfluenza virus, have an outer lipid envelope which fuses to the membranes of target cells during entry. Fusogenic viruses have viral proteins on their surface that undergo specific rearrangements upon contact with a target cell. These structural rearrangements draw the virus to the cell and allow the viral membrane to fuse with the target cell membrane. Non-fusogenic viruses, such as papilloma and polio virus, do not have envelope membranes and enter cells directly. OVERVIEW OF HIV HIV is a fusogenic virus that currently affects approximately 940,000 people in North America and nearly 540,000 people in Western Europe. It is estimated currently that an additional 45,000 people are newly infected with HIV each year in the U.S. alone. HIV attacks a class of white blood cells known as CD4+ T-cells and macrophages that are responsible for mounting a body's immune response against infection. By infecting these cells, HIV progressively disables the immune system, resulting in opportunistic infections, neurological dysfunctions, malignancies, and death. The amount of HIV virus present in a patient's bloodstream has been shown to be related directly to the patient's prognosis: the higher the viral load, the more compromised the patient's immune system becomes and the more likely he is to succumb to progressive diseases. This progression into other diseases in its most advanced stage is known as AIDS. In treating HIV infection, it is critical to reduce the patient's viral load in order to prolong survival. While significant progress has been made in combating HIV, noncompliance with, and resistance to, current therapies have created a heightened demand for new HIV therapies that work by novel mechanisms of action, have unique resistance profiles, and have fewer side effects. The conventional approach to treating HIV has been to lower viral loads by using drugs to inhibit two of the viral enzymes that are necessary for the virus to replicate: reverse transcriptase, or RT, and protease. There are currently three classes of drugs that inhibit these two enzymes: nucleoside reverse transcriptase inhibitors, or NRTIs, non-nucleoside reverse transcriptase inhibitors, or NNRTIs, and protease inhibitors, or PIs. We will refer to NRTIs and NNRTIs collectively as RTIs. There are thirteen FDA-approved RTIs, and seven FDA-approved PIs. Therapies based on certain combinations of RTIs and PIs have driven HIV viral loads in many patients for sustained periods to below amounts that are detectable by current diagnostic methods, commonly known as detectable levels. In 1999, deaths attributable to HIV infection were reduced to approximately 15,000 from 36,000 in 1998 due to improvements in treatment regimens. Because of the results achieved by the combined use of RTIs and PIs, total sales of approved RTIs and PIs exceeded $3.1 billion in 2001 in the United States. CURRENT TREATMENT LIMITATIONS Despite the efficacy of these drugs, current HIV treatment continues to have limitations. These include toxic side effects, viral resistance to the drug, and complicated treatment regimens. Toxic side effects often occur when RTIs and PIs interact with cellular, rather than viral, enzymes and result in inhibition of normal cell functions in infected and uninfected cells. Because of these shortcomings, many HIV patients refuse to initiate therapy or refuse to adhere to the onerous therapeutic regimens. Current estimates suggest that only approximately one-third of people thought to be infected with HIV in the U.S., or only approximately 350,000 patients, are receiving anti-HIV drug therapy. In addition, an increasing number of patients on combination therapy are beginning to fail as the virus in their bloodstream acquires resistance to drugs included in combination therapy. Studies have shown that combination therapy fails to suppress viral load below detectable levels in a proportion of patients who begin therapy. 6 Side Effects and Noncompliance. Data suggest that some HIV-infected patients refuse to commence or continue taking RTIs and PIs, either alone or in combination, because of side effects and difficult dosing regimens. Among those patients who attempt to adhere to regimens of combination therapy, the harsh side effects and difficult dosing regimens often cause some patients to miss doses or stop treatment for extended periods. Severe side effects commonly associated with currently-approved anti-HIV drugs include: . neurological disorders, including nightmares, . gastrointestinal disorders, such as diarrhea and nausea, . diabetes-like symptoms, and . abnormal redistribution of body fat and elevated cholesterol counts. Dosing regimens that are common with many combination therapies of anti-HIV drugs can be onerous and can include: . up to 30 pills daily, including anti-HIV drugs and other medications, at varying intervals throughout the day, . specific dosing provisions such as taking pills with food or large volumes of liquid, . interrupting normal activities to take pills, and . inability to take other drugs at the same time because of adverse drug interactions. Even brief instances of noncompliance with the strict drug dosing regimens associated with these combination therapies may reduce the effectiveness of therapy and can accelerate a virus' resistance to the drugs. Data shows that currently, up to 40% of HIV patients do not fully comply with their therapeutic regimen. Resistance. HIV is prone to genetic mutations that produce strains of HIV that are resistant to currently-approved RTIs and PIs. Resistance occurs because viruses make trillions of copies of themselves and some copies will contain mutations in their genetic material. Mutations that confer a selective advantage, such as drug resistance, will enable mutant viruses to replicate even in the presence of an active drug. As a result, these mutants, while initially found in low frequency, can become the predominant strain in an infected patient undergoing drug therapy and can be transmitted to other individuals. Generally, an HIV virus that is resistant to one drug within a class is likely to become resistant to the entire class, a phenomenon known as cross-resistance. Attempts to reestablish suppression of HIV viral load by substituting different RT and PI combinations often fail because of cross-resistance. Studies suggest that currently, 10% to 20% of newly-infected HIV patients are infected with a strain of HIV that is resistant to at least one currently-approved anti-HIV drug. HIV FUSION INHIBITORS We have pioneered the discovery and development of a new class of anti-HIV compounds that works by a novel mechanism of action. This new class, called fusion inhibitors, or FIs, prevents one of the crucial steps in viral entry from occurring by blocking the conformational rearrangement of HIV's fusogenic protein, gp41. T-20 is a first generation FI which prevents HIV from entering and infecting cells. T-1249 is a rationally designed second generation FI in an earlier stage of development. 7 T-20 T-20 is a peptide that has been shown in clinical trials to cause a dose-dependent decrease in HIV viral load. To date, we have tested or are testing T-20 in more than 1,000 patients, with the longest duration of treatment exceeding approximately three years. These studies suggest that T-20 is well-tolerated and has potent antiviral activity. The most common adverse event reported has been mild to moderate injection site reactions. We currently have two ongoing Phase III clinical trials, T20-301 and T20-302, evaluating T-20, for which we have not yet collected clinically relevant data. We have reported data from two Phase I/II clinical trial and four Phase II trials for T-20. We also have two Phase II trials and two Phase III trials ongoing for which we do not currently plan to present clinical data, and one Phase I/II trial ongoing that we currently have no specific plans to present clinical data. We plan to commence additional clinical trials with respect to T-20 throughout 2002. T-20 has received "fast track" designation by the FDA for the treatment of HIV. MECHANISM OF ACTION T-20 is a 36 amino acid synthetic peptide that binds to a key region of an HIV surface protein called gp41. T-20 blocks HIV viral fusion by interfering with certain structural rearrangements within gp41 that are required for HIV to fuse to and enter a host cell. In the HIV infection process, the gp120 surface protein is stripped away from the virus after gp120 binds to host cell receptors. Two specific regions in the gp41 protein are thus freed and can bind to one another and cause the viral membrane to fuse with the host cell membrane. If T-20 is present in the bloodstream, it binds tightly to one of these regions within the gp41 protein and blocks the structural rearrangement necessary for the virus to fuse with the host cell. Since the virus cannot fuse with the host cell, it cannot penetrate and release its genetic material into the cell. HIV infection of the host cell is inhibited, and HIV replication within that cell is prevented. T-20 CLINICAL DEVELOPMENT The following table lists in summary form the clinical trials we have undertaken to evaluate T-20:

Number of Trial Patients Enrollment Data Date Number Phase Trial Design Enrolled Criteria Reported Reported Purpose ------------- ----------- -------------------- ----------- -------------- ------------ ------------- ------------------------- TRI-001 Phase I/II 3 mg, 10 mg, 30 mg 17 HIV-infected 14-day 1997 Proof of concept; or 100 mg BID via dose escalating IV monotherapy study TRI-003 Phase II 12.5 mg, 25 mg, 50 78 Heavily 28-day 1/1999 Route of mg, 100 mg via pretreated administration, dose pump or 50 mg, 100 comparison mg BID T20-204 Phase I/II 30 mg/m2-60 mg/m2 12 Ages 3-12, 12-week 1/2001 Safety, tolerability & BID HIV-infected 24-week 12/2001 pharmacokinetics T20-205 Phase II 50 mg BID plus 70 Heavily 16-week 9/1999 Rollover, chronic background regimen pretreated 32-week 1/2000 administration 48-week 7/2000 T20-206 Phase II 50 mg, 75 mg or 71 NNRTI 16-week 2/2001 Randomized, dose 100 mg BID plus Naive, PI 48-week 2/2002 comparison control regimen or experienced control regimen only T20-208 Phase II 50 mg carbonate 46 No anti-HIV 48-week 2/2002 Formulation and 75 mg, or 100 restrictions comparison mg carbonate, or 100 mg Tris formulation BID

8

T20-210 Phase II 90 mg BID plus In Rollover for Not -- Safety background regimen Process patients in currently T1249-101 planned T20-211 Phase II 90 mg BID plus In Rollover for Not -- Safety background Process patients in currently regimen previous planned T-20 trials T20-301 Phase III 90 mg BID plus Approx. Experienced 24-week Expected Safety, efficacy & background 500 with PIs, 1st Half pharmacokinetics regimen, or NNRTIs and 2002 background regimen NRTIs T20-302 Phase III 90 mg BID plus Approx. Experienced 24-week Expected Safety, efficacy & background 500 with PIs, 1st Half pharmacokinetics regimen, or NNRTIs and 2002 background regimen NRTIs T20-304 Phase III 90 mg BID plus In Rollover for Not -- Safety background regimen Process various currently pharmacological planned studies T20-305 Phase III 90 mg BID plus In High viral Not -- Safety background regimen Process load and low currently CD4+ T-cell planned count T20-310 Phase III BID dose determined In Ages 3-16, high No -- Safety, efficacy & by body weight, plus Process viral load, specific pharmacokinetics background regimen treatment plans experienced Various Phase II Various (drug-drug In Various Various Various Safety & * interaction, Process pharmacokinetics pharmacology, etc.) ------------- ----------- -------------------- ----------- -------------- ------------ ------------- -------------------------

* Includes various small clinical trials managed by Trimeris, Roche and others to evaluate various drug-drug interactions and pharmacokinetic issues. Interim Data from T20-206 (16 weeks and 48 weeks), T20-204 (12 weeks and 24 weeks), T20-205 (48 weeks), and T20-208 (48 weeks) T20-206. In June 1999, we initiated T20-206, a 48 week Phase II clinical trial for T-20 to assess the antiviral activity and long-term safety of T-20 when used in combination with other anti-HIV drugs. The trial consists of four treatment groups: . arm A who received only the background regimen of 300 mg of abacavir twice daily, 1200 mg of amprenavir twice daily, 200 mg of ritonavir twice daily, 600 mg of efavirenz once daily, and . arms B, C and D who received 50mg, 75mg, and 100 mg, respectively, of T-20 via twice daily subcutaneous injection in addition to the background regimen, with arm B receiving one injection twice daily and arms C and D receiving two injections twice daily. T20-206 enrolled 71 HIV-infected individuals at several sites in the United States. At entry in the trial, all enrolled patients had prior exposure to NRTIs and PIs, but no prior exposure to NNRTIs. In February 2001, we announced 16 week interim data from T20-206. At week 16, the median maximum reduction in HIV viral load from the viral load at the beginning of the trial for all patients ranged from 2.16 log10 or 99.3% to 2.84 log10 or 99.9% across the T-20 treatment groups. The median maximum reduction in HIV viral load for patients with HIV viral loads greater than 20,000 copies/milliliter at the beginning of the trial was 2.64 log10 or 99.8% across the T-20 treatment groups versus 1.55 log10 or 97.2% for the control arm only. Data from 16 weeks suggest that T-20 is safe and active in combination with other anti-HIV therapy. 9 In February 2002, we presented 48-week data from T20-206. At 48 weeks 55% of patients (28 of 51) in the combined T-20 treatment groups achieved viral load levels of less than 400 copies/milliliter compared to 37% of patients (7 of 19) for the control group. 47% of patients (24 of 51) in the combined T-20 treatment groups achieved viral load levels of less than 50 copies/milliliter compared to 37% (7 of 19) in the control group. Average CD4+ T-cell count increased by 132 cells/microliter in the combined T-20 treatment groups compared to an increase of 90 cells/microliter in the control group. T20-204. In November 1999, in collaboration with the Division of AIDS of the National Institute for Allergy and Infectious Diseases, or NIAID, we initiated a Phase I/II trial to evaluate the safety, tolerability and pharmacokinetics of T-20 in children living with HIV infection. The trial is managed by the Pediatric AIDS Clinical Trial Group, or PACTG, and has been designated as a fast-track study within the PACTG system. The trial is being conducted in two parts and has enrolled 12 pediatric patients ages three to 12. The first part, week one, examined safety parameters to establish a well-tolerated pediatric dose that provides target concentrations of T-20 in the blood. The second part, conducted over a twenty-four week period, evaluates the safety and tolerability of T-20 via twice daily subcutaneous injections in combination with a background of other anti-HIV drugs selected for each particular patient based on the patient's prior treatment history. Within seven days of dosing with T-20 as an addition to an inactive anti-HIV therapy, patients in the highest dose group had an average reduction in HIV viral load of approximately 10 fold from baseline at the beginning of the trial. At eight weeks, three of four patients in the lowest dose group and six of seven patients in the highest dose group continued to maintain a similar reduction in HIV viral load from baseline at the beginning of the trial. Data at the 12 week interim analysis suggest that short-term subcutaneous dosing of T-20 is well tolerated in pediatric patients. Of the 12 patients enrolled in the trial, one patient withdrew due to an aversion to the method of administration of T-20 via subcutaneous injection. In December 2001, we presented 24-week data from T20-204. At 24 weeks, this trial showed that T-20 was well-tolerated by children and that children receiving the highest dose of T-20 experienced a ten-fold reduction in viral load from baseline viral load. T20-205. T20-205 is an ongoing Phase II trial that has been extended beyond its initial 48-week protocol. This trial involves 71 patients from earlier T-20 Phase I/II studies. In T20-205, 50 mg of T-20 is administered via subcutaneous injection in combination with oral anti-HIV drugs. Combinations of the oral anti-HIV drugs were optimized based on genotypic and phenotypic analysis of each patient's virus. At 48 weeks, 41 of the 71 patients were evaluated. No patients discontinued this trial due to T-20 related toxicity, but 14 patients discontinued this trial due to a virologic failure, or HIV viral load decrease of less than 0.5 log10 from baseline at the beginning of the trial. At 48 weeks, 23 of 41 patients or 56 % exhibited a decrease in HIV viral load of more than 1.0 log10 or less than 400 copies/milliliter, and 16 of 41 patients or 39 % had an HIV viral load below 400 copies/milliliter. At 48 weeks, the patients continued to tolerate T-20. Data suggest that T-20 in combination with other anti-HIV drugs may contribute to a lasting and clinically relevant suppression of HIV in the blood in patients with extensive prior anti-HIV treatment. T20-208. In March 2000, we initiated T20-208, a Phase II clinical trial for T-20 that evaluates alternative formulations of T-20. The trial enrolled 46 patients, and evaluates two new formulations of T-20 compared to the formulation presently used in other ongoing clinical trials initiated prior to T20-208. All three formulations are given as twice daily subcutaneous injections in combination with oral anti-HIV drugs selected for each patient on an individualized basis. From this trial, an interim analysis of the highest dose group indicated that a patient received a delivered dose of 90 milligrams per dose. We designed our Phase III protocols to reflect this information from T20-208. 10 In February 2002 we presented 48-week data from T20-208. At 48 weeks, 50% of patients (23 of 46) achieved viral load levels of less than 400 copies/milliliter. In addition, 93% of patients (43 of 46) completed a full year of treatment with the simpler one injection twice daily dosing regimen that is currently being used in our Phase III clinical trials, T20-301, T20-302, and T20-305. OTHER ONGOING TRIALS OF T-20 T20-301. In June 2001, we completed enrolling patients in a multi-center Phase III clinical trial, T20-301, in North America, Mexico and Brazil. T20-301 is a 48 week study which enrolled approximately 500 HIV-infected patients with a planned interim analysis at 24 weeks. In this trial, patients are randomly assigned to receive either T-20 plus an optimized background regimen of anti-HIV drugs, or an optimized regimen of anti-HIV drugs without T-20. For each patient, the optimized regimen is a combination of other anti-HIV drugs individually determined for that patient based on the genotypic and phenotypic analysis of the HIV virus in that patient's blood. T-20 is being administered by twice daily injections under the skin, delivering 90 milligrams of T-20 each, using the formulation tested in our ongoing Phase II trial, T20-208. Data from the 24-week interim analysis of T20-301 is currently expected to be available during the first half of 2002. T20-302. In August 2001, we completed enrolling patients in T20-302, a multi-center Phase III clinical trial with a protocol, or trial design, similar to T20-301. This trial enrolled approximately 500 HIV-infected patients in Western Europe and Australia. Data from the 24-week interim analysis of T20-302 is currently expected to be available during the first half of 2002. Subject to analysis of data from the 24-week interim analysis of T20-301 and T20-302, we currently expect to file an NDA for T-20 with the FDA during the second half of 2002. T20-305. In November 2001, we announced with Roche the beginning of site selection and patient enrollment in the United States for T20-305, a safety study of T-20 in combination with oral anti-HIV drugs. We expect to conduct the study at various sites in North America, Europe, Brazil and Australia. This study is expected to enroll a total of approximately 450 adults with high viral loads, defined as greater than 10,000 copies/milliliter, and low CD4+ T-cell counts, defined as less than 50 cells/microliter, around the world. This trial is currently underway and patient enrollment is in progress. T20-310. T20-310 is a Phase I/II trial designed to evaluate long-term usage of T-20 in pediatric patients between the ages of 3 and 16. The trial is currently enrolling patients. We currently have no specific plans to present clinical data from this trial. Rollover Trials. We have several ongoing clinical trials that allow patients in previously completed clinical trials to continue receiving T-20 as long as they continue to receive clinical benefit. These trials are T20-210, T20-211, and T20-304. We currently have no plans to present clinical trial data on these trials. Side Effects. In all T-20 clinical studies to date, the most common adverse event was an injection site reaction that ranged from mild to moderate in severity and was characterized by redness of the skin, a bumpy thickening of the skin, and itching. Other adverse events included headache, nausea, fever, increased energy levels, weakness, diarrhea, and dizziness. We are unable to determine whether T-20 caused some of these results because the incidence of these adverse events was similar between those who received combinations that included T-20 and those who received combinations that did not include T-20. Antibodies. We have examined patient samples taken throughout the trials to assess potential antibody responses to T-20. Data at 48 weeks in the T20-205 trial show that T-20 does not appear to produce an immune response in the body that could compromise T-20's efficacy. Resistance. We are examining T-20 resistance trough analysis of blood samples taken from patients throughout several ongoing clinical trials, and augmenting these analyses with additional laboratory studies. Early genotypic and phenotypic analysis from patient samples from the TRI-003 study where T-20 was given as monotherapy or in addition to an ineffective drug regimen in HIV infected patients revealed that emergence of resistance to T-20 is possible. Extension of these studies to samples from the T20-205 study, where T-20 was given in combination with other anti-HIV drugs that are believed to be active, has demonstrated that the resistance profile of T-20 does not overlap with the resistance profiles of currently-approved anti-HIV drugs targeting the viral enzymes reverse transcriptase and protease. Studies with HIV viruses recovered from patients in the T20-205 study have demonstrated that T-20 is active against HIV viruses with genetic resistance to all three classes of currently approved anti-HIV drugs. In addition, T-20 has demonstrated additive or synergistic antiviral activity in laboratory studies when combined with representative members of the currently approved classes of anti-HIV drugs. 11 FUTURE T-20 CLINICAL TRIALS Throughout the remainder of 2002, we expect to initiate additional clinical trials in the U.S. and internationally. T-1249 T-1249 is our second generation fusion inhibitor for HIV virus. The history of HIV treatment has demonstrated that the existence of multiple drugs within the RT and PI classes have allowed for a variety of drug combinations and improved patient treatment. We believe that multiple HIV fusion inhibitors may enhance HIV therapy by providing an even broader range of treatment options. We intend to be a leader in HIV fusion inhibitors and to develop multiple drug candidates within this class. T-1249 binds to a region of the HIV gp41 surface protein that differs from, although overlaps the region bound to by T-20. Based on our knowledge of the structure of the gp41 protein, we designed T-1249, a 39 amino acid peptide, to bind more tightly to the gp41 protein, and included an amino acid sequence that we believe enhances the pharmacokinetic properties of the peptide. The pharmacokinetic properties of a drug relate to the level of a drug in the bloodstream. T-1249 has demonstrated favorable pharmacokinetics and potent HIV suppression in preclinical testing and is highly active against a wide range of HIV strains in vitro. Increased potency of T-1249 compared to T-20 may allow for lower drug quantities and less frequent dosing. The broad range of activity against many different strains of HIV in vitro, including those with genetic resistance to all three classes of currently approved anti-HIV drugs, and strains with decreased sensitivity to T-20, indicates that T-1249 may possess a resistance profile distinct from RTIs and PIs as well as T-20. T-1249 CLINICAL DEVELOPMENT T1249-101. In July 1999, we initiated T1249-101, a Phase I/II clinical trial designed to assess the safety and pharmacokinetics of T-1249. T1249-101 enrolled 72 HIV-infected individuals at several sites in the United States, with 61 patients completing the study. Three different daily doses of T-1249 were administered alone and not in combination with any other anti-HIV drugs for 14 days to HIV-infected adults by once or twice daily subcutaneous injection. Of the 72 patients randomized for the trial, nine withdrew before receiving T-1249 therapy, and two withdrew during the course of the therapy. For at least two weeks prior to entering the study, these patients had not received any other anti-HIV drugs. This trial protocol has been amended in order to evaluate further different daily doses of T-1249 by once daily subcutaneous injection and is ongoing. In February 2001, we announced interim data from T1249-101. Patients received T-1249 via once or twice daily subcutaneous injections alone and not in combination with any other anti-HIV drugs for 14 days at doses ranging from 6.25 milligrams per day to 50 milligrams per day. At entry into the trial, 98%, or 62 of 63, patients had a clinical history of exposure to a mean number of ten anti-HIV drugs. At 14 days, the median maximum reduction in viral load reduction from baseline at the beginning of the trial ranged from 0.1 log10 or 20.5% to 1.5 log10 or 96.8% across the treatment groups. Data suggest that T-1249 was well-tolerated over a 14-day period and there were dose-related decreases in HIV viral load. Analysis of this data also suggests that a daily dose of T-1249, and not prior anti-HIV treatment experience, was the only variable that was associated with the viral load reduction among treatment-experienced patients. Side Effects. In T1249-101 the most common adverse event was injection site reaction that ranged from mild to moderate in severity and was characterized by redness of the skin, a bumpy thickening of the skin, and itching. Other adverse events included headache, pyrexia, diarrhea, and dizziness. Two serious adverse events were reported by two patients in the clinical study that we believe were treatment related. One patient reported a hypersensitivity reaction which included a bumpy rash, fever and oral ulcers and one patient reported neutropenia, a low white blood cell count. We are unable to determine whether T-1249 caused some of these results because there were no patients in our trials for comparison who received combinations that did not include T-1249. Pharmacokinetic Analyses. Analyses of drug levels in the blood indicate that once-daily subcutaneous injection resulted in consistent blood levels of T-1249, with little variation throughout the dosing period. Therefore, we believe that once-daily subcutaneous injection will be the method of delivery 12 and dosing period in the ongoing and future trials. RESEARCH PROGRAMS VIRAL FUSION INHIBITOR PROGRAMS. Through our study and knowledge of the HIV fusion process, we have developed a proprietary technology platform aimed at discovering compounds that identify potential fusion targets in certain viruses that rely on fusion to penetrate host cells. Using our proprietary viral fusion platform technology, we have identified and filed patent applications disclosing numerous discrete peptide sequences that appear to inhibit fusion for several viruses. Our research programs for certain fusion viruses are set forth below. . Respiratory Syncytial Virus. RSV causes pediatric bronchiolitis and pneumonia. In addition, RSV affects the elderly and immune-compromised individuals and is also thought to be a co-factor in increasing the frequency of inner ear infections in children. We have identified a series of peptide RSV fusion inhibitors and small molecules that may be effective in preventing or treating RSV infection. The anti-RSV peptides have shown potent, specific and selective inhibition of RSV infection in preclinical animal model testing. The anti-RSV small molecules have exhibited potent activity against RSV in laboratory tests. In addition, we have developed proprietary molecular screens, which will enable us to search for additional small molecule fusion inhibitors that are active against RSV ROCHE RESEARCH AGREEMENT We have entered into a research agreement with Roche to discover, develop and commercialize anti-HIV fusion inhibitor peptides. We hope to discover longer acting and more potent anti-HIV fusion inhibitor peptides. We will share equally the worldwide research, development and commercialization expenses and profits from the worldwide sales of anti-HIV fusion inhibitor peptides discovered after July 1, 1999. Our agreement with Roche grants them an exclusive, worldwide license for these peptides. Either party may terminate the agreement as a whole or for a particular drug, country or countries in its sole discretion with advance notice. The agreement expires in January 2003 and is renewable thereafter on an annual basis. ARRAY BIOPHARMA AGREEMENT In August 2001, we entered into a non-exclusive agreement with Array BioPharma, Inc. or Array, to discover small molecule fusion inhibitors of HIV and RSV. We will initially screen a library of small molecule compounds provided by Array against HIV and RSV fusion protein targets. Array will use its drug discovery platform to select the optimal lead compounds. We will collaborate with Array to identify preclinical candidates and we will be responsible for further development of those candidates. Array will provide the initial library of compounds on a non-exclusive basis and will work exclusively with us on the HIV and RSV fusion protein targets during the term of the collaboration. We will work with Array on a non-exclusive basis on these targets. Array will be entitled to receive payments and royalties based on achievement of certain developmental and commercial milestones. 13 MANUFACTURING The synthetic manufacture of peptides historically has been complex and expensive. This constraint does not limit the commercialization of most peptide therapeutics, which are administered in relatively small doses. We anticipate dosing levels of T-20 to be relatively high compared to therapeutic peptides prescribed in other indications. We have developed a novel peptide manufacturing process, which we believe will allow us to produce T-20 and T-1249 on a large scale and cost-efficient basis. We have an issued patent on this process. We have transferred the manufacturing process to four third-party contract manufacturers, including Roche, for the amounts of T-20 required in our clinical trials. These third-party manufacturers have used this process to produce multi-kilogram quantities of T-20. We plan to increase the scale of this process to support the market demand that we anticipate for T-20, if it is approved by the FDA. We have selected Roche's manufacturing facility in Boulder, Colorado to manufacture the quantities of bulk drug substance of T-20 we will need if we are successful in commercializing T-20. We have selected one of Roche's manufacturing facilities and another third party to produce the finished drug product from such bulk drug substance. We currently expect the validation batches of T-20 drug substance to be completed in mid-2002. We are applying our novel process technology to the manufacture of T-1249 as well. Because of the complexity of manufacturing peptides, we cannot assure you that we will be able to manufacture commercial quantities of T-20 or T-1249 on a cost-efficient basis. For further information see - "Risk Factors - If sufficient amounts of our drug candidates cannot be manufactured on a cost-effective basis or we cannot obtain the quantities of raw materials required to manufacture our drug candidates, our financial condition and results of operations will be materially and adversely affected, and "--If we cannot maintain commercial manufacturing arrangements with third parties on acceptable terms, or if these third parties do not perform as agreed, the commercial development of our drug candidates could be delayed or otherwise materially and adversely affected." LICENSING AND COLLABORATIVE AGREEMENTS We have an ongoing program of business development which may lead to the establishment of collaborative and licensing arrangements with collaborative partners, licensees, licensors or other third parties. The purpose of these arrangements would be to seek regulatory approval of and to develop, manufacture and commercialize selected product candidates. These collaborations could provide us with: . funding, . research and development resources, . additional drug product candidates, . access to libraries of diverse compounds, and . clinical development, manufacturing, sales, marketing and distribution capabilities. In July 1999, we announced an agreement with Roche, to develop and market T-20 and T-1249 worldwide. We will share development expenses and profits for T-20 and T-1249 in the United States and Canada equally with Roche. Outside of these two countries, Roche will fund all development costs and pay royalties to us on net sales of T-20 and T-1249 for a specified term. Roche paid us $10 million up front and will provide us up to an additional $58 million in cash upon achievement of certain developmental, regulatory and commercial milestones. In December 2000, we received a $2 million milestone payment for commencement of a Phase III clinical trial, T20-301. As discussed above, we have selected Roche's facility in Boulder, Colorado to manufacture commercial quantities of T-20 bulk drug substance, and we have selected one of Roche's manufacturing facilities and another third party to produce the finished drug product from such bulk drug substance. Our agreement with Roche grants them an exclusive, world-wide license for T-20 and T-1249, and certain other compounds. Under the Roche agreement, a joint management committee consisting of members from Trimeris and Roche oversees the strategy for the collaboration. Roche may terminate its license for a particular country in its sole discretion with advance notice. If Roche decides to terminate the license for T-20 or T-1249 in a particular country, this could have a material and adverse effect on our 14 business, financial condition, and results of operations. For further information see - "Risk Factors - If Roche does not meet its contractral obligations to us, our research and development efforts and the regulatory approval and commercialization of our drug candidates could be delayed or otherwise materially and adversely affected." We have also entered into a research agreement with Roche to discover, develop and commercialize anti-HIV fusion inhibitor peptides, as discussed in more detail above. In August 2001, we signed an agreement with Array BioPharma, Inc. to discover small molecule fusion inhibitors of HIV and RSV, as discussed in more detail above. In December 2001, we signed an agreement with ConjuChem, which for a certain period, provides us with the exclusive right to negotiate terms and conditions of a worldwide right and license to ConjuChem's Drug Affinity Complex (DAC/TM/) technology to create long lasting DAC/TM/ compounds targeted for the treatment of HIV infection. Development of such compounds could lead to anti-HIV drugs with more convenient dosing. Our success could depend, in part, on the subsequent success of third parties in performing their obligations under collaborative and licensing arrangements. We expect to rely on Roche for many of these capabilities under our collaboration agreement with them. We cannot assure that the Roche collaboration or any other arrangements will be successful or will produce their intended results. We may not be able to maintain our existing arrangements or enter into new collaborative and license arrangements on acceptable terms. SALES, MARKETING AND DISTRIBUTION We have no experience in sales, marketing or distribution of pharmaceuticals. To the extent we successfully commercialize T-20 and/or T-1249, we currently plan to rely on Roche for the sales, marketing and distribution of these drug candidates, in accordance with the marketing terms contained in our development and license agreement with Roche. Roche may terminate this agreement at any time with advance notice. If Roche failed to market our drug candidates adequately and we were unable to reach agreement with one or more other marketing partners, we would be required to develop internal sales, marketing and distribution capabilities. We may not be able to establish cost-effective sales, marketing or distribution capabilities or make arrangements with third parties to perform these activities on acceptable terms on a timely basis, if at all. This would have a material adverse effect on our business, financial condition, results of operations and the market price of our stock. Any sales, marketing or distribution arrangements we establish with other parties, including our agreement with Roche, may give those parties significant control over important aspects of the commercialization of our drugs, including: . market identification; . marketing methods; . pricing; . drug positioning; 15 . composition of sales force; and . promotional activities. We may not be able to control the amount or timing of resources that Roche or any third party may devote to our drugs. PATENTS, PROPRIETARY TECHNOLOGY AND TRADE SECRETS Our success will depend, in part, on our ability, and the ability of our collaborator or licensors, to obtain protection for our products and technologies under United States and foreign patent laws, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. We own or have exclusive licenses to several issued United States patents, pending United States patent applications, and certain corresponding foreign patents and patent applications. Most of our issued United States patents issued to date are set to expire between 2013 and 2018. We also rely on trade secrets, know-how, and other proprietary information, which we seek to protect, in part, through the use of confidentiality agreements with employees, consultants, advisors and others. These agreements may not provide adequate protection for our trade secrets, know-how, or other proprietary information in the event of any unauthorized disclosure. Our employees, consultants, or advisors could disclose our trade secrets or proprietary information to competitors, which would be detrimental to us. COMPETITION We are engaged in segments of the biopharmaceutical industry, including the treatment of HIV, that are intensely competitive and change rapidly. If successfully developed and approved, our products will compete with numerous existing therapies. For example, at least twenty drugs are currently approved in the United States for the treatment of HIV. In addition, a number of companies are pursuing the development of novel pharmaceutical products that target the same diseases that we are targeting. Some companies, including several multi-national pharmaceutical companies, are simultaneously marketing several different drugs and may therefore be able to market their own combination drug therapies. We believe that a significant number of drugs are currently under development and will become available in the future for the treatment of HIV. The need for drugs that have a novel mechanism of action has stimulated interest in the inhibition of HIV entry into the cell. We believe that several companies are developing or attempting to develop HIV drug candidates that inhibit entry of the virus into the cell via mechanisms other than fusion. We believe that there is a significant future market for therapeutics that treat HIV and other viral diseases. However, we anticipate that we will face intense and increasing competition in the future as new products enter the market and advanced technologies become available. Existing products or new products for the treatment of HIV developed by our competitors may be more effective, less expensive, or more effectively marketed than any products eventually commercialized by us. Many of our competitors have significantly greater financial, technical and human resources than we have and may be better able to develop, manufacture, sell, market, and distribute products. Many of these competitors have products that have been approved or are in late-stage development. These competitors also operate large, well-funded research and development programs. In addition, smaller companies may prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and biotechnology companies. Furthermore, academic institutions, governmental agencies and other public and private research organizations are becoming increasingly aware of the commercial value of their inventions and are more actively seeking to commercialize the technology they have developed. 16 New developments in our areas of research and development are expected to continue at a rapid pace in both industry and academia. If our product candidates are successfully developed and approved, we will face competition based on: . the safety and effectiveness of the products, . the timing and scope of regulatory approvals, . availability of manufacturing, sales, marketing and distribution capabilities, . reimbursement coverage, . price, and . patent position. Our competitors may develop more effective or more affordable technology or products, or achieve earlier patent protection, product development, or product commercialization than we can. Our competitors may succeed in commercializing products more rapidly or effectively than we can, which could have a material adverse effect on our business, financial condition, results of operations and market price of our stock. GOVERNMENT REGULATION Human pharmaceutical products are subject to lengthy and rigorous preclinical testing and clinical trials and other extensive, costly and time-consuming procedures mandated by the FDA and foreign regulatory authorities. The regulatory approval process includes: . the establishment of the safety and effectiveness of each product candidate, and . confirmation by the FDA that good laboratory, clinical and manufacturing practices were maintained during testing and manufacturing. This process typically takes a number of years, depending upon the type, complexity, and novelty of the pharmaceutical product. This process is expensive and gives larger companies with greater financial resources a competitive advantage over us. We have never submitted a product candidate for approval by the FDA or any other regulatory authority for commercialization, and our product candidates may never be approved for commercialization or obtain the desired labeling claims. The steps required by the FDA before new drugs may be marketed in the United States include: . preclinical studies, . the submission to the FDA of a request for authorization to conduct clinical trials on an IND, . adequate and well-controlled clinical trials to establish the safety and efficacy of the drug for its intended use, . adequate control of a reliable manufacturing process, . submission to the FDA of an New Drug Application, or NDA, and . review and approval of the NDA by the FDA before the drug may be shipped or sold commercially. 17 In the United States, preclinical testing includes both culture and animal laboratory evaluation and characterization of the safety and efficacy of a drug and its formulation. Laboratories involved in preclinical testing must comply with FDA regulations regarding good laboratory practices. Preclinical testing results are submitted to the FDA as part of the IND and, unless there is objection by the FDA, the IND will become effective 30 days following its receipt by the FDA. Submission of an IND may never result in the commencement of human clinical trials. Clinical trials involve the administration of the investigational drug to healthy volunteers or to patients under the supervision of a qualified principal investigator. These trials typically are conducted in three sequential phases, although the phases may overlap with one another. Phase I clinical trials represent the initial administration of the investigational drug to a small group of healthy human subjects or, more rarely, to a group of selected patients with a targeted disease or disorder. The goal of Phase I clinical trials is typically to test for safety, dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical pharmacokinetics. Phase II clinical trials involve a small sample of the actual intended patient population and seek to assess the effectiveness of the drug for the specific targeted indications, to determine dose tolerance and the optimal dose range and to gather additional information relating to safety and potential adverse effects. Phase III clinical trials are initiated to establish further clinical safety and effectiveness of the investigational drug in a broader sample of the general patient population at geographically dispersed study sites in order to determine the overall risk-benefit ratio of the drug and to provide an adequate basis for all labeling for promotion and use. The results of the research and product development, manufacturing, preclinical testing, clinical trials and related information are submitted to the FDA in the form of an NDA for approval of the marketing and shipment of the drug. Our product candidates under development may never receive commercialization approval in any country on a timely basis, or at all, even after substantial time and expenditures. If we are unable to demonstrate the safety and effectiveness of our product candidates to the satisfaction of the FDA or foreign regulatory authorities, we will be unable to commercialize our product candidates. This would have a material adverse effect on our business, financial condition, results of operations and market price of our stock. Even if regulatory approval of a product candidate is obtained, the approval may limit the indicated uses for which the product candidate may be marketed. We, Roche and any existing or potential future collaborative partners are also subject to various federal, state and local laws and regulations relating to: . safe working conditions, . laboratory and manufacturing practices, . the experimental use of animals, and . the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents. Compliance with these laws, regulations and requirements may be costly and time-consuming and the failure to maintain such compliance by us or our existing and potential future collaborative partners could have a material adverse effect on our business, financial condition and results of operations. The FDA gave fast track designation for the treatment of HIV-infected individuals to T-20 in January 1999 and to T-1249 in May 1999. Fast track designation does not guarantee that T-20 or T-1249 will receive regulatory approval. 18 THIRD-PARTY REIMBURSEMENT AND HEALTH CARE REFORM MEASURES In the United States and elsewhere, sales of prescription drugs depend, in part, on the consumer's ability to obtain reimbursement for the cost of the drugs from third-party payors, such as private and government insurance programs. Third-party payors are increasingly challenging the prices charged for medical products and services in an effort to promote cost containment measures and alternative health care delivery systems. Because of the high cost of the treatment of HIV, many state legislatures are also reassessing reimbursement policies for this therapy. If third-party payor reimbursements for any drugs we commercialize are not available or are not available at a level that will allow us or our potential collaborative partners to sell these drugs on a competitive basis, our results of operations will be materially and adversely affected. In addition, an increasing emphasis in the United States on the reduction of the overall costs of health care through managed care has increased and will continue to increase the pressure to reduce the prices of pharmaceutical products. The announcement and/or adoption of these types of proposals or efforts could also materially and adversely affect our business, since the amount of revenues that we may potentially be able to generate in the future for any products we may commercialize could affect an investor's decision to invest in us, the amount of funds we decide to spend now on our development and clinical trial efforts, and/or our decision to seek regulatory approval for certain product candidates. Recently, several major pharmaceutical companies have offered to sell their anti-HIV drugs at or below cost to certain countries in Africa, which could adversely affect the reimbursement climate, and the prices that may be charged, for HIV medications in the United States and the rest of the world. Third-party payors could exert pressure for price reductions in the United States and the rest of the world based on these offers to Africa. This price pressure could limit the amount that we would be able to charge for our drugs. HUMAN RESOURCES As of February 28, 2002, we had 109 full-time employees, including a technical scientific staff of 76. None of our employees are covered by collective bargaining arrangements, and management considers relations with our employees to be good. SCIENTIFIC ADVISORY BOARD We have assembled a Scientific Advisory Board, or SAB, comprised of individuals we call Scientific Advisors. The Scientific Advisors are leaders in the fields of viral disease research and treatment. Members of our SAB review our research, development and operating activities and are available for consultation with management and staff relating to their respective areas of expertise. Our SAB holds regular meetings. Several of our individual Scientific Advisors have separate consulting relationships with us and meet more frequently, on an individual basis, with management and staff to discuss our ongoing research and development projects. Certain of our Scientific Advisors own our common stock and/or hold options to purchase our common stock. Our Scientific Advisors are expected to devote only a small portion of their time to our business. Our Scientific Advisors are all employed by other entities. Each Scientific Advisor has entered into a letter agreement with us that contains confidentiality and non-disclosure provisions that prohibit the disclosure of confidential information to anyone else. Such letter agreements also provide that all inventions, discoveries or other intellectual property that come to the attention of or are discovered by our Scientific Advisors while performing services under this letter agreement will be assigned to us. The current members of our SAB are as follows: Robert C. Gallo, M.D. Professor and Director, Institute of Human Virology -- University of Maryland Biotechnology Institute. Martin Hirsch, M. D., Professor of Medicine, Director of AIDS Clinical Trials Unit/Retrovirus Laboratory - Harvard Medical School 19 Eric Hunter, Ph.D. Professor of Microbiology, Director, Center for AIDS Research -- The University of Alabama at Birmingham. Joseph S. Pagano, M.D. Professor of Medicine and Microbiology and Immunology, Director of The Lineberger Comprehensive Cancer Center -- The University of North Carolina at Chapel Hill. Jerome J. Schentag, Pharm.D. Professor of Pharmacy and Pharmaceutics, Director, The Clinical Pharmacokinetics Laboratory, Millard Fillmore Hospital, Director, Center for Clinical Pharmacy Research -- The State University of New York at Buffalo School of Pharmacy. Judith M. White, Ph.D. Professor of Cell Biology and Microbiology -- University of Virginia. Richard J. Whitley, M.D. Loeb Eminent Scholar Chair in Pediatrics, Professor of Pediatrics, Microbiology and Medicine -- The University of Alabama at Birmingham. 20 RISK FACTORS You should carefully consider the risks described below before making an investment decision. If any of the following risks occur, our business, financial condition and results of operations could be materially and adversely affected. As a result, the market price of our common stock could decline, and you may lose all or part of your investment. We are a development stage company that has sustained operating losses since our inception, and we expect these losses to continue. We may never develop any drugs that achieve commercial viability. As of December 31, 2001, our accumulated deficit since beginning our operations in January 1993 was approximately $188.9 million. We had net losses of approximately $22.2 million in 1999, approximately $50.9 million in 2000 and approximately $66.7 million in 2001. Since inception, we have spent our funds on our drug development efforts, relating primarily to the development of our two lead product candidates, T-20 and T-1249. We expect that we will incur substantial losses for the foreseeable future and that these losses will increase significantly as we expand our research and development, preclinical testing, clinical trial and regulatory approval efforts and begin anticipated commercialization efforts related to T-20. We have not yet generated any revenues from product sales or royalties. We may not ever be able to generate any product revenues or royalties or become profitable if we do generate any revenues or royalties. If we cannot raise additional funds in the future, our ability to develop our drug candidates will suffer. The private placement of common stock that we completed in January 2002, raised net proceeds of approximately $41 million. Barring unforeseen developments, we anticipate that our existing capital resources will fund our capital requirements at least through the end of 2002. Because we do not expect to have an approved and marketable drug generating revenues at that time, we will require substantial additional funds after that time. If we do not obtain such financing, we will be required to delay, scale back or eliminate some of our planned preclinical testing, clinical trials, research and development programs and pre-marketing activities. We anticipate that our expenditures will increase as a result of the ongoing costs of our Phase III clinical trials, which are generally larger and more expensive than the Phase I and Phase II clinical trials we have conducted to date, the anticipated preparation and submission of an NDA to the FDA following receipt of data from our Phase III clinical trials, and the costs of pre-marketing activities that will need to be undertaken in anticipation of the commercialization of T-20. During the year ended December 31, 2001, we used net cash of approximately $60.6 million for operations, including research and development. We have financed our activities primarily through public offerings and private placements of our common stock and we expect to continue to rely primarily on sales of our equity securities to finance our activities for the foreseeable future. We may have difficulty raising funds by selling equity in the future. Our access to capital could be limited if we do not achieve continued progress in our research and development programs and our preclinical testing and clinical trials, and could be limited by overall market conditions. The public capital markets in which our common stock trades have been highly volatile and the general ability of companies to obtain additional equity financing, which was significantly more difficult in 2001 compared to 2000, is expected to remain difficult in 2002. Terrorists attacks such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001 and other attacks or acts of war may adversely affect the markets on which our common stock trades, our drug candidates, our financial condition and our results of operations. On September 11, 2001, the United States was the target of terrorist attacks of unprecedented scope. These attacks have caused major instability in the U.S. and other financial markets. There could be further acts of terrorism in the United States or elsewhere that could have a similar impact on financial markets. Leaders of the U.S. government have announced their intention to actively pursue and take military and other action against those believed to be behind the September 11, 2001 attacks and to initiate broader action against global terrorism. Armed hostilities or further acts of terrorism would cause further instability in financial markets and could directly impact our drug candidates, our financial condition and our results of operations. 21 Any additional financing we obtain may result in dilution to our stockholders, restrictions on our operating flexibility, or the transfer of particular rights to technologies or drug candidates. Although we have no specific plans to raise additional funds at the current time, we may raise additional funds in the future through equity or debt financings. If we raise funds by selling equity, we may dilute our stockholders' interest in us. Any debt financings may contain restrictive terms that would limit our operating flexibility. Additionally or alternatively, we may have to obtain funds through arrangements with collaborative partners. These partners may require us to relinquish rights to our technologies or drug candidates. Any of these forms of financing could materially and adversely affect our business, financial condition and results of operations. If we are unable to commercialize T-20, our lead drug candidate, our business will be materially harmed. We have invested a significant portion of our time and financial resources since our inception in the development of T-20. T-20 is our lead drug candidate and is our only drug candidate for which we have completed Phase II clinical trials and initiated Phase III clinical trials as of the date of this annual report. Our other drug candidate in clinical trials, T-1249, is at an earlier stage of clinical trial development. We anticipate that for the foreseeable future, our ability to generate revenues and profits, if any, will depend solely on the successful commercialization of T-20. Commercialization of T-20 will require success in our clinical trials, regulatory approval and the ability to have sufficient commercial quantities of T-20 manufactured on a cost-effective basis with the requisite quality. We cannot assure you that we will be able to commercialize T-20 or any other drug candidate. If our clinical trials are delayed or achieve unfavorable results, we may never obtain regulatory approval for our drugs or generate any revenues. In order to obtain the regulatory approvals necessary to sell a drug candidate commercially, we must demonstrate to the FDA and other applicable United States and foreign regulatory authorities that the drug candidate is safe and effective for use in humans for each target indication. We attempt to demonstrate this through a lengthy and complex process of preclinical testing and clinical trials, which typically takes a number of years. Delays or unanticipated increases in costs of clinical development, or failure to obtain regulatory approval or market acceptance for any of our drug candidates, could materially and adversely affect our financial condition and operating results. We have not yet submitted any of our drug candidates to the FDA or any other regulatory authority for approval of commercialization. To date: . we have completed initial preclinical testing of T-20 and T-1249; . we have completed collecting clinically relevant data with respect to two Phase I/II clinical trials of T-20 and four Phase II clinical trials of T-20; . we have four ongoing clinical trials of T-20, for which we do not currently plan to present data; . we have one ongoing clinical trial of T-20, for which we do not have a specific plan to present data; . we are continuing a Phase I/II clinical trial of T-1249, from which we have collected interim clinically relevant data and anticipate the collection of additional clinically relevant data in 2002; and . we have completed enrollment in two Phase III clinical trials for T-20, one in the United States, Mexico and Brazil, and one internationally, and we currently anticipate collecting clinically relevant data from these clinical trials in the first half of 2002 sufficient to support submission of an NDA for T-20 to the FDA in the second half of 2002. 22 Because these clinical trials to date have been limited to a relatively small number of patients, we cannot assure you that the results of these early clinical trials will support further clinical trials of T-20 or T-1249. We may not be able to demonstrate that potential drug candidates that appeared promising in preclinical testing and early clinical trials will be safe or effective in advanced clinical trials that involve larger numbers of patients. We also cannot assure you that the results of the clinical trials we have conducted and still intend to conduct will support our applications for regulatory approval. In particular, if the results of the Phase III trials we are currently conducting for T-20 do not demonstrate the safety and effectiveness of T-20 to the satisfaction of the FDA or foreign regulatory authorities, we will be unable to commercialize T-20. Even if we obtain regulatory approval for T-20, the results of these Phase III trials may indicate that T-20 is less safe or effective than expected, and any such approval may limit the indicated uses for which T-20 may be marketed. We may be required to redesign, delay or cancel our preclinical testing and clinical trials for some or all of the following reasons, any of which may adversely affect our results of operations: . unanticipated, adverse or ambiguous results from our preclinical testing or clinical trials; . change in the focus of our collaborative partner, Roche; . undesirable side effects that delay or extend the trials; . our inability to locate, recruit and qualify a sufficient number of patients for our trials; . difficulties in manufacturing sufficient quantities at the requisite quality of the particular drug candidate or any other components needed for our preclinical testing or clinical trials; . regulatory delays or other regulatory actions; . change in the focus of our development efforts; and . reevaluation of our clinical development strategy. In addition, due to uncertainties inherent in the clinical development process, we may underestimate the costs and/or length of time associated with clinical development of T-20 or T-1249. If sufficient amounts of our drug candidates cannot be manufactured on a cost-effective basis or we cannot obtain the quantities of raw materials required to manufacture our drug candidates, our financial condition and results of operations will be materially and adversely affected. T-20 and T-1249 are peptide-based therapeutics, which are drug treatments made from long chains of proteins called peptides, which in turn are composed of molecular building blocks called amino acids. T-20 is a large peptide composed of a precise 36 amino acid sequence. Large peptides are difficult and expensive to manufacture because the process of creating commercial quantities of a large peptide is lengthy and complicated. For example, we believe that, using traditional peptide synthesis methods, the process of creating a commercial quantity of T-20 could take more than a year, although to our knowledge no one has attempted to create such a quantity of peptides using traditional peptide synthesis methods. The novel process we and our third-party manufacturers are currently using to manufacture T-20 and intend to use to manufacture T-1249 requires approximately five months to complete and is extremely complicated, requiring over 100 separate, precisely controlled chemical reactions. As a result of this novel and complex manufacturing process, we may encounter unexpected difficulties or expense in manufacturing T-20 and T-1249. We may not be able to manufacture T-20 or T-1249 on a large-scale or cost-effective basis, or develop an alternate, more efficient manufacturing method for T-20, T-1249 or any future peptide drug candidates. Commercial production of T-20 and T-1249 will also require raw materials, including highly specialized amino acids, in amounts substantially greater than those required at our current stage of development. We may not be able to obtain these materials in sufficient quantities, quality or on a cost-effective basis to support the commercial manufacture of T-20 or T-1249. 23 In addition, the FDA must approve the facilities that will be used to manufacture commercial quantities of T-20 and T-1249 before commencement of commercial sales. Moreover, although we are in the process of developing alternate manufacturing plans in the event our intended manufacturing plan generates insufficient supplies of T-20 and T-1249, we do not have an alternate manufacturing plan in place at this time and it would take a significant amount of time to arrange for alternative sources of supply. We do not have insurance to cover any shortages or other problems in the manufacturing of our drug candidates. If we are unable to manufacture sufficient amounts of T-20 or T-1249 on a cost-effective basis, obtain the necessary quantities of raw materials or obtain the required FDA approvals, our financial condition and results of operations will be materially and adversely affected. If Roche does not meet its contractual obligations to us, our research and development efforts and the regulatory approval and commercialization of our drug candidates could be delayed or otherwise materially and adversely affected. As described in more detail in the section of this 10-K titled "Business - Roche Collaboration" we have entered into an agreement with Roche to develop and market T-20 and T-1249 worldwide, manufacture clinical and commercial quantities of T-20 and help conduct our clinical trials of T-20 and T-1249. In addition to sharing with us the development expenses and profits for T-20 and T-1249 in the United States and Canada and paying us royalties on net sales of T-20 and T-1249 outside of those countries, Roche has agreed to pay us up to $68 million in upfront and milestone payments, of which we have received $12 million as of December 31, 2001. In addition, we have entered into a research agreement with Roche to discover, develop and commercialize anti-HIV fusion inhibitor peptides. Our reliance on Roche in connection with these activities poses a number of risks, including the following: . Roche has the right to terminate our development and license agreement, including its marketing provisions, or the research agreement, in each case as a whole or with respect to any particular country or countries, at any time and from time to time in its sole discretion, even though we have a joint management committee consisting of members of Roche and Trimeris that oversees the strategy for our collaboration and research; . Roche may not devote sufficient resources to the research, development or marketing of our drugs; . Roche may not devote sufficient resources to manufacture T-20 in commercial quantities on a cost-effective basis and with the requisite quality; . disagreements with Roche could lead to delays in or termination of the research, development or commercialization of our drugs, or result in litigation or arbitration; . Roche may choose to devote fewer resources to the research, development and marketing of our drugs than it does to drugs of its own development, or may choose to compete with us by seeking, on its own or in collaboration with our competitors, alternate means of developing drug therapies for the diseases we have targeted; and . disputes may arise in the future with respect to the ownership of rights to technology developed with Roche. If any of the foregoing occurs or if Roche otherwise fails to fulfill any of its obligations to us in accordance with our agreements, our research and development efforts and clinical trials, and the regulatory approval and commercialization of our drug candidates, could be delayed or otherwise materially and adversely affected. We also may rely from time to time on the services of other third parties in connection with our research and development and clinical trial activities, including contract research organizations, manufacturers who produce clinical amounts of our drug candidates, licensors, collaborators and others. The failure of any of these persons to perform their obligations as agreed may also delay and otherwise adversely affect our research and development, clinical trial activities and regulatory approval of our drug candidates. 24 If we cannot maintain commercial manufacturing arrangements with third parties on acceptable terms, or if these third parties do not perform as agreed, the commercial development of our drug candidates could be delayed or otherwise materially and adversely affected. We have selected Roche's facility in Boulder, Colorado to manufacture commercial quantities of the bulk drug substance of T-20 in the event that we successfully commercialize T-20. We have selected one of Roche's manufacturing facilities and another third party to produce the finished drug product from such bulk drug substance. The manufacture of pharmaceutical products requires significant expertise and capital investment. Third-party manufacturers of pharmaceutical products often encounter difficulties in scaling up production, including problems involving production yields, quality control and assurance, shortage of qualified personnel, compliance with FDA regulations, production costs, and development of advanced manufacturing techniques and process controls. Our third-party manufacturers, including Roche, may not perform as agreed or may not remain in the contract manufacturing business for the time required to successfully produce and market our drug candidates. The number of third-party manufacturers with the expertise and facilities to manufacture bulk drug substance of T-20 on a commercial scale, using the manufacturing method described above, is extremely limited. We also intend to have additional third-party manufacturers produce the finished drug product from the bulk drug substance of T-20, by employing a process involving lyophilization, or freeze-drying. A limited number of third-party manufacturers have the capability to produce a finished drug product on a commercial scale through a process involving lyophilization. If our third-party manufacturers, including Roche, fail to deliver the required commercial quantities of bulk drug substance or finished drug product on a timely basis and at commercially reasonable prices, and we fail to promptly find one or more replacement manufacturers or develop our own manufacturing capabilities at a substantially equivalent cost and on a timely basis, the commercial development of our drug candidates could be delayed or otherwise materially and adversely affected. Our business is based on a novel technology called fusion inhibition, and unexpected side effects or other characteristics of this technology may delay or otherwise adversely affect the development, regulatory approval and/or commercialization of our drug candidates. The technology platform underlying our drug development program is novel because it is designed to discover drug candidates that treat viral infection by preventing the virus from fusing to and entering host cells that viruses use to reproduce themselves. The conventional approach to treating HIV, as represented by all currently-marketed anti-HIV drugs, is to inhibit specific viral enzymes that are necessary for HIV to replicate. We are not aware of any other approved anti-HIV pharmaceutical products that target the inhibition of viral fusion. As a result, existing preclinical and clinical data on the safety and efficacy of this technology are very limited. Although the most common adverse side effect reported with respect to T-20 to date has been mild to moderate local skin irritations at the site of injection, or injection site reactions, we may discover other unacceptable side effects during or after preclinical and clinical testing of our drug candidates, including side effects that may only become apparent after long-term exposure. 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 and/or commercialization of our drug candidates. Even if we are successful in developing a commercially viable drug, in order to become profitable we will need to maintain arrangements with third parties for the sale, marketing and distribution of our drug candidates or expend significant resources to develop these capabilities. We have no experience in sales, marketing or distribution of pharmaceuticals. To the extent we successfully commercialize T-20 and/or T-1249, we currently plan to rely on Roche for the sales, marketing and distribution of these drug candidates, in accordance with the marketing terms contained in our development and license agreement with Roche. Roche may terminate this agreement at any time with advance notice. If Roche failed to market our drug candidates adequately and we were unable to reach agreement with one or more other marketing partners, we would be required to develop internal sales, marketing and distribution capabilities. We may not be able to establish cost-effective sales, marketing or distribution capabilities or make arrangements with third parties to perform these activities on acceptable 25 terms on a timely basis, if at all. This would have a material adverse effect on our business, financial condition, results of operations and the market price of our stock. Any sales, marketing or distribution arrangements we establish with other parties, including our agreement with Roche, may give those parties significant control over important aspects of the commercialization of our drugs, including: . market identification; . marketing methods; . pricing; . drug positioning; . composition of sales force; and . promotional activities. We may not be able to control the amount or timing of resources that Roche or any third party may devote to our drugs. The HIV virus is likely to develop resistance to some of our drug candidates, which could adversely affect demand for those drug candidates and harm our competitive position. As discussed in the section of this 10-K titled "Business - Overview of HIV," HIV is prone to genetic mutations that can produce strains of HIV resistant to particular drug treatments. HIV has developed resistance, in varying degrees, to each of the currently approved anti-HIV drug treatments. As a result, combination therapy, or the prescribed use of three or more anti-HIV drugs, has become the preferred method of treatment for HIV-infected patients, because in combination these drugs may prove effective against strains of the HIV virus that have become resistant to one or more drugs in the combination. In the clinical trials we have conducted to date, the HIV virus has demonstrated the ability to develop resistance to T-20, as it has with respect to all other currently-marketed anti-HIV drugs. If the HIV virus in a short time period develops resistance to any of our drug candidates when used in combination therapy, it would adversely affect demand for those drug candidates and harm our competitive position. Our stock price is highly volatile, and you may not be able to sell our shares at or above the price you pay to acquire our shares. Our stock price has fluctuated substantially since our initial public offering in October 1997. The equity securities of many companies, including equity securities of many other biotechnology and pharmaceutical companies, have experienced extreme fluctuations in trading price and volume in recent months. Often, these fluctuations are unrelated to the companies' operating performance. Our common stock may not trade at the same levels as other biotechnology or pharmaceutical stocks, and biotechnology and pharmaceutical stocks in general may not sustain their current market prices. Any or all of the following could cause the market price of our common stock to fluctuate significantly after this offering: . changes in financial estimates or investment recommendations for us or our industry by securities analysts; . failure to meet clinical expectations of securities analysts or investors; . quarterly variations in our operating results, especially operating results that fall short of analysts' or investors' expectations in any given period; . market conditions in the biotechnology or pharmaceutical market or in the economy as a whole; . announcements by us or our competitors of new products, services, acquisitions, FDA actions, or strategic relationships; . departures of key personnel; . changes in business or regulatory conditions; . the trading volume of our common stock; and 26 . terrorist attacks, other attacks or acts of war that affect the markets on which our common stock trades, our drug candidates, our financial condition and our results of operations. We depend on patents and proprietary rights, which may offer only limited protection against infringement. If we are unable to protect our patents and proprietary rights, our assets and business could be materially harmed. Our success depends in part on our ability and the ability of our licensors to obtain, maintain and enforce patents and other proprietary rights for our drugs and technologies. Patent law relating to the scope of claims in the biotechnology field in which we operate is still evolving and surrounded by a great deal of uncertainty. Accordingly, we cannot assure you that our pending patent applications will result in issued patents. Because U.S. patent applications may be maintained in secrecy until a patent issues or is otherwise published, we cannot assure you that others have not filed patent applications for technology covered by our pending applications or that we were the first to invent the technology. Other companies, universities and research institutions have or may obtain patents and patent applications that could limit our ability to use, manufacture, market or sell our drug candidates or impair our competitive position. As a result, we may have to obtain licenses from other parties before we could continue using, manufacturing, marketing or selling our potential drugs. Those licenses may not be available on commercially acceptable terms, if at all. If we do not obtain required licenses, we may not be able to market our potential drugs at all or we may encounter significant delays in drug development while we redesign potentially infringing drugs or methods. In addition, although we own or exclusively license more than 20 issued United States patents, numerous pending United States patent applications, and corresponding foreign patents and patent applications, including issued patents and patent applications relating to T-20 and T-1249, the issuance of a patent is not conclusive as to its validity or enforceability, and third parties may challenge the validity or enforceability of our patents. We cannot assure you how much protection, if any, our patents will provide if we attempt to enforce them and/or if the patents are challenged in court or in other proceedings. It is possible that a competitor may successfully challenge our patents or that challenges will result in limitations of their coverage. In addition, the cost of litigation to uphold the validity of patents can be substantial. If we are unsuccessful in such litigation, third parties may be able to use our patented technologies without paying licensing fees or royalties to us. Moreover, competitors may infringe our patents or successfully avoid them through design innovation. To prevent infringement or unauthorized use, we may need to file infringement claims, which are expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or enforceable or may refuse to stop the other party from using the technology at issue on the grounds that its technology is not covered by our patents. Policing unauthorized use of our intellectual property is difficult, and we cannot assure you that we will be able to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States. Recently, several generic drug-makers in countries such as India have offered to sell HIV drugs currently protected under United States patents to patients in Africa at prices significantly below those offered by the drugs' patent holders in other countries. There is a risk that these drugs produced by the generic drug-makers could be illegally imported into the United States and other countries at prices below those charged by the drugs' patent holders. If any of these actions occur with respect to our drugs, it could limit the amount we could charge for our drugs. In addition to our patented technology, we also rely on unpatented technology, trade secrets and confidential information. We may not be able to effectively protect our rights to this technology or information. Other parties may independently develop substantially equivalent information and techniques or otherwise gain access to or disclose our technology. We require each of our employees, consultants and corporate partners to execute a confidentiality agreement at the commencement of an employment, consulting or collaborative relationship with us. However, these agreements may not provide effective protection of our technology or information or, in the event of unauthorized use or disclosure, they may not provide adequate remedies. 27 The occurrence of any of these risks could have a material adverse effect on our business, financial condition, results of operations and market price of our stock. We are subject to extensive and complex government regulation, including regulation by the FDA, which can entail significant costs and could delay, limit or prevent commercialization of our drug candidates. Our research and development activities, and the testing, development, manufacturing and commercialization of our drug candidates are subject to regulation by numerous governmental authorities in the United States and, to the extent that we may be engaged in activities outside of the United States, in other countries. In addition to proving to these authorities the safety and efficacy of our drug candidates through the clinical trial process, we must also prove that we and our clinical testing and manufacturing partners maintain good laboratory, clinical and manufacturing practices. In addition, the Federal Food, Drug and Cosmetic Act, the Public Health Service Act and other domestic and foreign statutes and regulations govern or affect the testing, manufacture, safety, labeling, storage, record keeping, approval, advertising and promotion of substances such as our drug candidates, as well as safe working conditions and the experimental use of animals. Noncompliance with applicable requirements can result in criminal prosecution and fines, recall or seizure of drugs, total or partial suspension of production, refusal of the government to approve product license applications, prohibitions or limitations on the commercial sale of drugs or refusal to allow us to enter into supply contracts. The FDA also has the authority to revoke product licenses and establishment licenses that it has previously granted. In addition, if compliance with these regulations proves more costly than anticipated, our financial condition and results of operations could be materially and adversely affected. We do not separately track as an accounting item the amounts we spend to comply with regulatory requirements, but the majority of our activities and expenditures to date, including our preclinical and clinical trial activities and expenditures, have been undertaken directly or indirectly in order to comply with applicable governmental regulations. Although it is impossible to predict with any degree of certainty the outcome of the regulatory approval process for our drugs, we believe that we currently are in compliance with applicable statutes, rules and regulations governing our research and development activities. A number of reasons, including those set forth below, may delay our regulatory submissions or cause us to cancel plans to submit proposed drug candidates for approval: . unanticipated preclinical testing or clinical trial reports; . changes in regulations, or the adoption of new regulations; . unanticipated enforcement of existing regulations; . unexpected technological developments; and . developments by our competitors. We face intense competition in our efforts to develop commercially successful drugs in the biopharmaceutical industry. If we are unable to compete successfully, our business will suffer. We are engaged in segments of the biopharmaceutical industry, including the treatment of HIV, that are intensely competitive and change rapidly. We expect that new developments in the areas in which we are conducting our research and development will continue at a rapid pace in both industry and academia. 28 If we successfully develop our drug candidates and gain regulatory approval for those drugs, they will compete with numerous existing therapies, as well as a significant number of drugs that are currently under development and will become available in the future for the treatment of HIV. For example: . At least 20 anti-HIV drugs are currently approved in the United States for the treatment of HIV, including drugs produced by GlaxoSmithKline, DuPont Pharmaceuticals, Merck, Roche and Abbott Laboratories. None of these currently-approved drugs are viral fusion inhibitors. . We believe that other companies may be currently engaged in research efforts to develop viral fusion inhibitors. To our knowledge, none of these potentially competing drug candidates have entered human clinical trials. . Several companies, including Progenics Pharmaceuticals, Pfizer and Aronex Pharmaceuticals, are in early stage human clinical trials with anti-HIV drug candidates that target viral processes different from those targeted by currently approved anti-HIV drugs, and different from the viral fusion process that our drug candidates target. We expect to face intense and increasing competition in the future as these new drugs enter the market and advanced technologies become available. Even if we are able to successfully develop T-20 or T-1249 and either drug candidate receives regulatory approval, we cannot assure you that existing or new drugs for the treatment of HIV developed by our competitors will not be more effective, less expensive or more effectively marketed and sold, than T-20, T-1249 or any other drug treatment for HIV that we may develop. Many of our competitors have significantly greater financial, technical, human and other resources than we do. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and biotechnology companies. For example, Progenics Pharmaceuticals has entered into a collaborative agreement with Roche for the development of its anti-HIV technology platform. Furthermore, academic institutions, governmental agencies and other public and private research organizations are becoming increasingly aware of the value of their inventions and are more actively seeking to commercialize the technology they have developed. Our drugs may not achieve market acceptance. T-20 and T-1249 are peptides and are delivered once or twice daily by injection under the skin. All of the currently approved drug treatments for HIV are delivered orally. Even if T-20 or T-1249 receives regulatory approval, patients and physicians may not readily accept daily injections of an anti-HIV drug treatment, which would limit their acceptance in the market. Peptides are also expensive to manufacture, which could result in prices for T-20 and T-1249 that are above prices of currently approved anti-HIV drug treatments. Even if T-20 or T-1249 receives regulatory approval, physicians may not readily prescribe T-20 or T-1249, due to cost-benefit considerations when compared with other anti-HIV drug treatments. In addition, higher prices could also limit our ability to receive reimbursement coverage for our drugs from third-party payors, such as private or government insurance programs. 29 Uncertainty relating to third-party reimbursement and health care reform measures could limit the amount we will be able to charge for our drugs and adversely affect our results of operations. In the United States and elsewhere, sales of prescription drugs depend, in part, on the consumer's ability to obtain reimbursement for the cost of the drugs from third-party payors, such as private and government insurance programs. Third-party payors are increasingly challenging the prices charged for medical products and services in an effort to promote cost containment measures and alternative health care delivery systems. Because of the high cost of the treatment of HIV, many state legislatures are also reassessing reimbursement policies for this therapy. If third-party payor reimbursements for any drugs we commercialize are not available or are not available at a level that will allow us or our potential collaborative partners to sell these drugs on a competitive basis, our results of operations will be materially and adversely affected. In addition, an increasing emphasis in the United States on the reduction of the overall costs of health care through managed care has increased and will continue to increase the pressure to reduce the prices of pharmaceutical products. The announcement and/or adoption of these types of proposals or efforts could also materially and adversely affect our business, since the amount of revenues that we may potentially be able to generate in the future for any products we may commercialize could affect an investor's decision to invest in us, the amount of funds we decide to spend now on our development and clinical trial efforts, and/or our decision to seek regulatory approval for certain product candidates. Recently, several major pharmaceutical companies have offered to sell their anti-HIV drugs at or below cost to certain countries in Africa, which could adversely affect the reimbursement climate, and the prices that may be charged, for HIV medications in the United States and the rest of the world. Third-party payors could exert pressure for price reductions in the United States and the rest of the world based on these offers to Africa. This price pressure could limit the amount that we would be able to charge for our drugs. If an accident or injury involving hazardous materials occurs, we could incur fines or liability, which could materially and adversely affect our business and our reputation. In our drug development programs, we use hazardous materials, including chemicals, radioactive compounds and infectious disease agents, such as viruses and HIV-infected blood. We believe that our handling and disposal of these materials comply with the standards prescribed by state and federal regulations, but we cannot completely eliminate the risk of contamination or injury from these materials. If there were such a contamination, injury or other accident, we could be held liable for any damages or penalized with fines. Although our general liability insurance coverage may cover some of these liabilities, the amount of the liability and fines could exceed our resources. We currently maintain general liability insurance coverage in the amount of approximately $1 million per occurrence and $2 million in the aggregate. If the testing or use of our drug candidates harms people, we could face costly and damaging product liability claims far in excess of our liability and indemnification coverage. Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing and marketing of pharmaceutical products, such as undesirable side effects or injury during clinical trials. In addition, the use in our clinical trials of drugs that we or our potential collaborators may develop and the subsequent sale of these drugs by us or our potential collaborators may cause us to bear a portion of product liability risks relating to these drugs. 30 We have obtained an advanced medical technology policy which includes limited product liability insurance coverage for our clinical trials in the amount of $5 million per occurrence and $5 million in the aggregate. However, insurance coverage is becoming increasingly expensive and we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against potential liabilities. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for drug candidates in development, but we cannot assure you that we will be able to obtain or maintain adequate product liability insurance on acceptable terms, if at all, or that such insurance will provide adequate coverage against our potential liabilities. Furthermore, our collaborators or licensees may not be willing to indemnify us against these types of liabilities and may not themselves be sufficiently insured or have a net worth sufficient to satisfy any product liability claims. Claims or losses in excess of any product liability insurance coverage, or indemnification payments, that may be obtained by us could have a material adverse effect on our financial condition. Our quarterly operating results are subject to fluctuations. If our operating results for a particular period deviate from the levels expected by securities analysts and investors, it could adversely affect the market price of our common stock. Our operating results are likely to fluctuate over time, due to a number of factors, many of which are outside of our control. Some of these factors include: . the status and progress of our collaborative agreement with Roche; . the status of our research and development activities; . the progress of our drug candidates through preclinical testing and clinical trials; . the timing of regulatory actions; . our ability to establish manufacturing, sales, marketing and distribution capabilities, either internally or through relationships with third parties; . technological and other changes in the competitive landscape; . changes in our existing or future research and development relationships and strategic alliances; and . the commercial viability of our drug candidates. As a result, we believe that comparing financial results for one period against another period is not necessarily meaningful, and you should not rely on our results of operations in prior periods as an indication of our future performance. If our results of operations for a period deviate from the levels expected by securities analysts and investors, it could adversely affect the market price of our common stock. If we lose any of our executive management or other key employees, we will have difficulty replacing them. If we cannot attract and retain qualified personnel on acceptable terms, the development of our drug candidates and our financial position may suffer. Because our business is very science-oriented and relies considerably on individual skill and experience in the research, development and testing of our drug candidates, we depend heavily on members of our senior management and scientific staff, including Dani P. Bolognesi, Ph.D., our Chief Executive Officer and Chief Scientific Officer. We have entered into employment agreements with Dr. Bolognesi, M. Nixon Ellis, Ph.D., our Executive Vice President and Chief Business Officer, and Robert R. Bonczek, our Chief Financial Officer and General Counsel. Unless earlier terminated in accordance with their terms, our employment agreements with each of Dr. Bolognesi, Dr. Ellis and Mr. Bonczek, respectively, automatically renew for a one or two year period at the end of the initial term of employment in each agreement. We have also entered into employment agreements with a few of our other key employees, but as a general matter we do not enter into employment agreements with our officers or employees. 31 Future recruitment and retention of management personnel and qualified scientific personnel is also critical to our success. We cannot assure you that we will successfully attract and retain sufficient numbers of qualified personnel on acceptable terms given the competition among biotechnology, pharmaceutical and health care companies, universities and non-profit research institutions for experienced management personnel and scientists. If we cannot attract and retain a sufficient number of qualified personnel or if a significant number of our key employees depart, our drug development efforts and the timing and success of our clinical trials may be materially and adversely affected. Even if we do hire and retain a sufficient number of qualified employees, the expense necessary to compensate them may adversely affect our operating results. In addition, we rely on scientific advisors and other consultants to assist us in formulating our research and development strategy. These consultants are employed by other parties and may have commitments to, or advisory or consulting agreements with, other entities, which may limit their availability to us. Future sales of common stock by our existing stockholders or key management could adversely affect our stock price. As of February 28, 2002, approximately 18,682,000 shares of our common stock were outstanding. Approximately 18,459,000 of the currently outstanding shares are freely transferable without restriction or further registration under the Securities Act, except to the extent held by one of our affiliates. The remainder of our outstanding shares are "restricted securities" which may be sold subject to the applicable limitations of Rule 144. In addition, as of February 28, 2002, options and warrants convertible or exercisable into approximately 2,611,000 shares of common stock were outstanding and we had reserved an additional 981,000 shares of common stock under our stock option plans and employee stock purchase plan. The market price of our common stock could decline as a result of sales by our existing stockholders or key management of shares of common stock in the market, or the perception that these sales could occur. A reduction in the price of our common stock could reduce the value of your investment in us and impair our ability to raise capital through the sale of additional equity securities. Item 2. Properties ---------- We lease approximately 15,000 square feet of office space at 3518 Westgate Drive, Durham, North Carolina. We lease this space under a sublease agreement that expires on December 31, 2003. We also lease approximately 29,000 square feet of laboratory and office space in Durham under a lease agreement that expires for part of the space on October 31, 2003 and for the remainder of the space on September 30, 2005, respectively. We also sublease approximately 18,000 square feet of laboratory and office space in Durham under a sublease agreement that expires on September 30, 2003. We believe that there will be suitable facilities available should additional space be needed. Item 3. Legal Proceedings ----------------- We are not a party to any material legal proceedings as of the date of this Annual Report on Form 10-K. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of 2001. 32 PART II. -------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters --------------------------------------------------------------------- Our Common Stock has traded on the Nasdaq National Market System under the Nasdaq symbol "TRMS" since our initial public offering at $12.00 per share was consummated on October 7, 1997. We have not paid cash dividends in the past and none are expected to be paid in the future. As of March 22, 2002 we had approximately 166 shareholders of record, and believe we had approximately 5,200 beneficial shareholders. The following table sets forth the high and low bid prices for our common stock for the period indicated as reported on the Nasdaq National Market System. Such quotations reflect inter-dealer prices without mark-up, mark-down or commissions and may not necessarily represent actual transactions. Year ended December 31, ----------------------- 2000 2001 High Low High Low --------------------------------------- 1st Quarter................... $67.75 $24.00 $57.06 $22.88 2nd Quarter................... $74.88 $25.00 $50.00 $26.10 3rd Quarter................... $75.50 $51.25 $51.79 $29.63 4th Quarter................... $79.81 $42.00 $44.97 $32.00 33 ITEM 6. SELECTED FINANCIAL DATA ----------------------- SELECTED FINANCIAL DATA (in thousands, except per share data) The selected financial data below is taken from the audited Financial Statements of the Company which are included elsewhere in this Form 10-K, or from audited Financial Statements not included in this Form 10-K. Please read the Financial Statements and Notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" while reading this selected financial data.

Cumulative from Inception (January 7, For the Years Ended December 31, 1993) to ---------------------------------------------------------------------- December 31, 1997 1998 1999 2000 2001 2001 ----------- ----------- ----------- ------------ ------------ ---------------- Statements of Operations Data: Revenue $ 431 $ 363 $ 4,681 $ 956 $ 1,304 $ 7,894 ----------- ----------- ----------- ------------ ------------ ------------ Operating expense: Research and development: Non-cash compensation.... 193 821 2,174 5,386 (969) 7,605 Other research and development expense.... 9,541 15,987 17,582 32,970 59,409 148,085 ----------- ----------- ----------- ------------ ------------ ------------ Total research and development expense.................... 9,734 16,808 19,756 38,356 58,440 155,690 ----------- ----------- ----------- ------------ ------------ ------------ General and administrative: Non-cash compensation...... 193 602 2,524 7,018 1,905 12,242 Other general and administrative expense... 2,403 4,299 6,156 8,115 11,873 37,706 ----------- ----------- ----------- ------------ ------------ ------------ Total general and administrative expense.................. 2,596 4,901 8,680 15,133 13,778 49,948 ----------- ----------- ----------- ------------ ------------ ------------ Total operating expenses.... 12,330 21,709 28,436 53,489 72,218 205,638 ----------- ----------- ----------- ------------ ------------ ------------ Operating loss.............. (11,899) (21,346) (23,755) (52,533) (70,914) (197,744) ----------- ----------- ----------- ------------ ------------ ------------ Interest income............. 584 1,755 1,729 6,114 4,362 14,666 Interest expense............ (113) (127) (161) (257) (189) (1,637) ----------- ----------- ----------- ------------ ------------ ------------ Total other income (expense) 471 1,628 1,568 5,857 4,173 13,029 ----------- ----------- ----------- ------------ ------------ ------------ Loss before cumulative effect of change in accounting principle (11,428) (19,718) (22,187) (46,676) (66,741) (184,715) Cumulative effect of change in accounting principle...... -- -- -- (4,180) -- (4,180) ----------- ----------- ----------- ------------ ------------ ------------ Net loss.................... $(11,428) $(19,718) $(22,187) $ (50,856) $ (66,741) $(188,895) =========== =========== =========== ============ ============ ============ Basic and diluted net loss per share (1): Before cumulative effect of accounting change......... $ (1.57) $ (1.87) $ (1.79) $ (3.00) $ (3.96) Accounting change........... -- -- -- (0.27) -- ----------- ----------- ----------- ------------ ------------ Basic and diluted net loss per share..................... $ (1.57) $ (1.87) $ (1.79) $ (3.27) $ (3.96) =========== =========== =========== ============ ============ Weighted average shares used in computing basic net loss per share (1)................. 7,295 10,547 12,411 15,548 16,870 =========== =========== =========== ============ ============

(1) Computed on the basis described in Note 1 to Financial Statements. 34

As of December 31, ---------------------------------------------------------------------- 1997 1998 1999 2000 2001 ----------- ----------- ------------ ------------ ------------ (in thousands) Balance Sheet Data: Cash and cash equivalents.................. $ 32,557 $ 16,920 $ 37,023 $ 31,349 $ 22,288 Working capital............................ 34,733 16,562 36,856 73,998 51,636 Total assets............................... 38,844 22,872 51,650 98,933 80,644 Long-term notes payable and capital lease obligations, less current portion.. 240 853 1,206 1,861 1,014 Deficit accumulated during the development stage.......................... (29,393) (49,111) (71,298) (122,154) (188,895) Total stockholders' equity................. 35,810 18,016 39,066 73,379 53,494

Selected Quarterly Financial Data (in thousands, except per share data) (unaudited) Q1 2000 Q2 2000 Q3 2000 Q4 2000 -------------- --------------- -------------- --------------- Statements of Operations Data: Revenue $ 210 $ 210 $ 210 $ 326 -------------- --------------- -------------- --------------- Operating expense: Research and development: Non-cash compensation.... 3,504 3,063 475 (1,656) Other research and development expense.... 5,042 8,199 6,825 12,904 -------------- --------------- -------------- --------------- Total research and development expense.................. 8,546 11,262 7,300 11,248 -------------- --------------- -------------- --------------- General and administrative: Non-cash compensation...... 3,606 3,438 1,158 (1,184) Other general and administrative expense... 1,637 1,794 1,929 2,755 -------------- --------------- -------------- --------------- Total general and administrative expense................. 5,243 5,232 3,087 1,571 -------------- --------------- -------------- --------------- Total operating expenses... 13,789 16,494 10,387 12,819 -------------- --------------- -------------- --------------- Operating loss............. (13,579) (16,284) (10,177) (12,493) -------------- --------------- -------------- --------------- Interest income............ 1,266 1,611 1,702 1,535 Interest expense........... (54) (57) (54) (92) -------------- --------------- -------------- --------------- Total other income, net.......... 1,212 1,554 1,648 1,443 -------------- --------------- -------------- --------------- Net loss before cumulative effect of change in accounting principle (12,367) (14,730) (8,529) (11,050) Cumulative effect of change in accounting principle (4,180) -- -- -- -------------- --------------- -------------- --------------- Net loss................... $ (16,547) $ (14,730) $ (8,529) $ (11,050) ============== =============== ============== =============== Basic and diluted net loss per share (1) Before cumulative effect of accounting change $ (0.83) $ (0.94) $ (0.54) $ (0.70) Accounting change (0.28) -- -- -- -------------- --------------- -------------- --------------- Basic and diluted net loss per share......................... $ (1.11) $ (0.94) $ (0.54) $ (0.70) ============== =============== ============== =============== Weighted average shares used in computing basic net loss per share (1) .................. 14,942 15,652 15,653 15,821 ============== =============== ============== ===============

35

Q1 2001 Q2 2001 Q3 2001 Q4 2001 -------------- --------------- -------------- --------------- Statements of Operations Data: Revenue $ 326 $ 326 $ 326 $ 326 -------------- --------------- -------------- --------------- Operating expense: Research and development: Non-cash compensation..... (3,276) 2,824 (1,690) 1,173 Other research and development expense..... 13,836 14,045 14,772 16,756 -------------- --------------- -------------- --------------- Total research and development expenses.................. 10,560 16,869 13,082 17,929 -------------- --------------- -------------- --------------- General and administrative: Non-cash compensation...... 490 557 421 437 Other general and administrative expense... 2,306 2,606 2,790 4,171 -------------- --------------- -------------- --------------- Total general and administrative expenses.................. 2,796 3,163 3,211 4,608 -------------- --------------- -------------- --------------- Total operating expenses..... 13,356 20,032 16,293 22,537 -------------- --------------- -------------- --------------- Operating loss............... (13,030) (19,706) (15,967) (22,211) -------------- --------------- -------------- --------------- Interest income.............. 1,403 1,196 1,044 719 Interest expense............. (45) (56) (48) (40) -------------- --------------- -------------- --------------- Total other income, net.......... 1,358 1,140 996 679 -------------- --------------- -------------- --------------- Net loss.................... $ (11,672) $ (18,566) $ (14,971) $ (21,532) ============== =============== ============== =============== Basic and diluted net loss per share (1) $ (0.73) $ (1.11) $ (0.86) $ (1.24) ============== =============== ============== =============== Weighted average shares used in computing basic net loss per share (1).............. 15,914 16,757 17,386 17,398 ============== =============== ============== ===============

(1) Computed on the basis described Note 1 to Financial Statements. The sum of quarterly net loss per share amounts does not equal the net loss per share for the year due to the effects of rounding. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS ------------- This discussion of our financial condition and the results of operations should be read together with the financial statements and notes contained elsewhere in this Annual Report on Form 10-K. Certain statements in this section and other sections are forward-looking. While we believe these statements are accurate, our business is dependent on many factors, some of which are discussed in the "Risk Factors" and "Business" sections of this Annual Report on Form 10-K. Many of these factors are beyond our control and any of these and other factors could cause actual clinical and financial results to differ materially from the forward-looking statements made in this Annual Report on Form 10-K. The results of our previous clinical trials are not necessarily indicative of the results of future clinical trials. Please read the "Risk Factors" section in this Annual Report on Form 10-K. We undertake no obligation to release publicly the results of any revisions to the statements contained in this report to reflect events or circumstances that occur subsequent to the date of this Annual Report on Form 10-K. CRITICAL ACCOUNTING POLICIES We believe the following accounting policies are the most critical to our financial statements. We believe they are important to the presentation of our financial condition, and require the highest degree of management judgment to make the estimates necessary to ensure their fair presentation. Revenue Recognition Under Staff Accounting Bulletin No. 101 Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" summarizes the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 provides guidance that it is appropriate to recognize revenue related to license and milestone payments over the research and development term of a collaboration agreement. The primary estimate we make in connection with the application of this policy is the length of the period of the research and development under our collaboration agreement with Roche. In the event our judgment of the length of this research and development term changes, the milestone revenue to be recognized under our 36 collaboration with Roche would change prospectively in accordance with Accounting Principles Board Opinion ("APB") No. 20, "Accounting Changes." If the term is expected to be longer, the amount of revenue recognized would be less per quarter than currently being recognized. If the term is expected to be shorter, the amount of revenue recognized would be more per quarter than currently being recognized. Calculation of Compensation Costs for Stock Options Granted to Non-Employees Compensation costs for stock options granted to non-employees are accounted for in accordance with SFAS No. 123 and Emerging Issues Task Force ("EITF") 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services," which require that such compensation costs be measured at the end of each reporting period to account for changes in the fair value of the Company's common stock until the options are vested. These costs are non-cash charges resulting from stock option grants to non-employees. The primary estimate we make in connection with the calculation of this expense is the future volatility of our stock price used to calculate the value of the stock options in the Black-Scholes option-pricing model. At December 31, 2001 we estimated the future volatility at 50% based on the implied future volatility for call options in Trimeris stock quoted on the Chicago Board Options Exchange in January 2002. A higher volatility would result in greater compensation costs, and a lower volatility would result in lower compensation costs for these stock options. Capitalization of Patent Costs The costs of patents are capitalized and are amortized using the straight-line method over the estimated remaining lives of the patents of 17-20 years from the date the patents are granted. These costs are primarily legal fees and filing fees related to the prosecution of patent filings. We perform a continuous evaluation of the carrying value and remaining amortization periods of these costs. In the event future expected cash flows derived from any patents are less than their carrying value, the related costs would be expensed at that time. Call Transaction Accounting In July 2000 and September 2001, we entered into derivative transactions with a financial institution that may be settled by selling shares of our stock to the financial institution at prices significantly higher than the market price per share of our stock at the inception of the transaction. We received proceeds from the sale of these call options that were accounted for as an increase to additional paid-in capital in accordance with Emerging Issues Task Force ("EITF") Issue No. 00-19, "Determination of Whether Share Settlement Is within the Control of the Company for Purposes of Applying EITF Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." An extensive list of requirements including the ability to settle the transaction by issuing stock are required by this EITF in order to allow accounting for proceeds received as an increase to additional paid-in capital. The contracts for our derivative transactions met the detailed requirements in this EITF. OVERVIEW We began our operations in January 1993 and are a development stage company. Accordingly, we have a limited operating history. Since our inception, substantially all of our resources have been dedicated to: . the development, patenting, preclinical testing and clinical trials of T-20 and T-1249, . the development of a manufacturing process for T-20 and T-1249, . production of drug material for future clinical trials, and . research and development and preclinical testing of other potential product candidates. 37 We have lost money since inception and, as of December 31, 2001, had an accumulated deficit of approximately $188.9 million. We have earned revenue only from federal small business innovative research grants, otherwise known as SBIR grants, an investigative contract, and from the amortization of an initial collaboration payment and a milestone payment from Roche, and have not generated any revenue from product sales or royalties. We may never generate any revenue from product sales or royalties. Development of current and future drug candidates will require significant additional, time-consuming and costly research and development, preclinical testing and extensive clinical trials prior to submission of any regulatory application for commercial use. We expect to incur substantial losses for the foreseeable future and expect losses to increase as our research and development, preclinical testing, drug production and clinical trial efforts expand. The amount and timing of our operating expenses will depend on many factors, including: . the status of our research and development activities, . product candidate discovery and development efforts, including preclinical testing and clinical trials, . the timing of regulatory actions, . the costs involved in preparing, filing, prosecuting, maintaining, protecting and enforcing patent claims and other proprietary rights, . our ability to work with Roche to manufacture, develop, sell, market and distribute T-20 and T-1249, . technological and other changes in the competitive landscape, . changes in our existing research and development relationships and strategic alliances, . evaluation of the commercial viability of potential product candidates, and . other factors, many of which are outside of our control. As a result, we believe that period-to-period comparisons of our financial results in the future are not necessarily meaningful. The past results of operations and results of previous clinical trials should not be relied on as an indication of future performance. If we fail to meet the clinical and financial expectations of securities analysts and investors, it could have a material adverse effect on the market price of our common stock. Our ability to achieve profitability will depend, in part, on our own or Roche's ability to successfully develop and obtain regulatory approval for T-20 and other product candidates, and our ability to develop the capacity, either internally or through relationships with third parties, to manufacture, sell, market and distribute approved products, if any. We may never generate significant revenues or achieve profitable operations. RESULTS OF OPERATIONS Comparison Of Years Ended December 31, 1999, 2000 and 2001 Revenue. Total revenue was $4.7 million, $956,000 and $1.3 million for 1999, 2000 and 2001, respectively. Total revenue for 1999 consisted of an up-front $10 million non-refundable payment from Roche, net of $5.4 million assigned to the warrant granted to Roche concurrent with the initiation of our collaboration, and $81,000 received under SBIR grants. Total revenue for 2000 and 2001 consists of the amortization of the $10.0 million non-refundable payment from Roche, net of the $5.4 million assigned to the warrant granted to Roche, and a $2.0 million milestone payment received from Roche in 2000, over the expected research and development period of our collaboration with Roche in accordance with Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements." Under SAB 101, $4.2 million was reported as the cumulative effect of a change in accounting principle at January 1, 2000 to be amortized into revenue over future years. 38 Research And Development Expenses. Total research and development expenses were $19.8 million, $38.4 million and $58.4 million for 1999, 2000 and 2001, respectively. Total research and development expenses include gross research and development expenses less Roche's share of such costs for T-20 and T-1249. Under our collaboration agreement, Roche and we shared equally the development costs incurred during the period from July 1, 1999 until December 30, 2001 for T-20 and T-1249. Total research and development expenses excluding non-cash compensation expense increased from $17.6 million in 1999 to $33.0 million in 2000 because during 2000 we: . continued three Phase II clinical trials and initiated one additional Phase I/II clinical trials for T-20, . initiated two Phase III clinical trials for T-20, . continued a Phase I clinical trial for T-1249, . continued manufacturing process development and purchase of drug material from third party manufacturers to supply future clinical trials of T-20 and T-1249, . continued preclinical research and testing of potential product candidates, . entered into lease agreements for additional laboratory space, and . increased the number of personnel to support these activities. Non-cash compensation expense increased from $2.2 million in 1999 to $5.4 million in 2000 primarily due to the effect that the higher market value of our stock at December 31, 2000 compared to the market value of our stock at December 31, 1999, had on the calculation of this expense under Emerging Issues Task Force ("EITF") 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" for stock options granted to non-employees. Total research and development expenses excluding non-cash compensation expense increased from $33.0 million in 2000 to $59.4 million in 2001 because during 2001 we: . completed enrollment in mid-2001 of two large Phase III clinical trials for T-20 that were initiated in late 2000, increasing the number of patients involved in T-20 clinical trials from approximately 200 during 2000 to over 1,200 during 2001, . continued four Phase II clinical trials for T-20, . continued a Phase I clinical trial for T-1249, . continued manufacturing process development and purchase of drug material from third party manufacturers to supply future clinical trials of T-20 and T-1249, . continued preclinical research and testing of potential product candidates, and . increased the number of personnel to support these activities. Non-cash compensation expense decreased from $5.4 million in 2000 to $969,000 in expense reversal in 2001 primarily due to the effect that the higher market value of our stock at December 31, 2000 compared to the market value of our stock at December 31, 2001, had on the calculation of this expense under EITF 96-18 for stock options granted to non-employees. The expense reversal resulted because the cumulative expense under EITF 96-18 for stock options previously granted to non-employees was greater at December 31, 2000 than at December 31, 2001 because of the reduction in the market value of our stock during 2001. 39 Total research personnel were 52, 60 and 70 at December 31, 1999, 2000 and 2001, respectively. We expect research and development expenses, net of the reimbursements for T-20 and T-1249 development costs from Roche, to increase in the future due to: . continuation of the two Phase III clinical trials for T-20, . preparation of materials for an anticipated submission of a New Drug Application for T-20 to the United States Food and Drug Administration following receipt of data from our Phase III clinical trials, . expanded clinical trials for T-20, T-1249 and other product candidates, . the manufacture of drug material for these trials, . increased preclinical research and testing of potential product candidates, and . increased number of personnel to support these activities. General And Administrative Expenses. Total general and administrative expenses were $8.7 million, $15.1 million and $13.8 million for 1999, 2000 and 2001, respectively. Total general and administrative expenses include gross general and administration expenses less Roche's share of pre-marketing expenses for T-20. Total general and administrative expenses excluding non-cash compensation expense increased from $6.2 million in 1999 to $8.1 million in 2000 because in 2000 we: . performed market research and pre-marketing activities related to T-20 that are shared with Roche, . added personnel to support our growth, and . incurred professional fees related to our patent portfolio. Non-cash compensation expense increased from $2.5 million in 1999 to $7.0 million in 2000 primarily due to the effect that the higher market value of our stock at December 31, 2000 compared to the market value of our stock at December 31, 1999, had on the calculation of this expense under EITF 96-18 for stock options granted to non-employees, and also due to additional option grants to non-employees. Total general and administrative expenses excluding non-cash compensation expense increased from $8.1 million in 2000 to $11.9 million in 2001 because in 2001 we: . performed additional market research and pre-marketing activities related to T-20 that are shared with Roche, . increased general and administrative personnel from 25 in 2000 to 30 in 2001 to support our growth, and . incurred professional fees related to our patent portfolio. Non-cash compensation expense decreased from $7.0 million in 2000 to $1.9 million in 2001 primarily due to the effect that the higher market value of our stock at December 31, 2000 compared to the market value of our stock at December 31, 2001, had on the calculation of this expense under EITF 96-18 for stock options granted to non-employees, and the fact that a former consultant became an employee during 2001. Total general and administrative employees were 19, 25 and 30 at December 31, 1999, 2000 and 2001, respectively. We expect administrative expenses to increase substantially in the future to support the anticipated expansion of product development activities, including pre-marketing activities undertaken in anticipation of the commercialization of T-20 that will be shared equally with Roche. 40 Other Income (Expense). Other income (expense) consists of interest income and expense. Total other income was $1.6 million, $5.9 million and $4.2 million for 1999, 2000 and 2001, respectively. The increase in 2000 was due to increased interest income because of higher cash and investment balances due to our private placement of stock that closed in February 2000. The decrease in 2001 was primarily due to lower interest income because of lower interest rates on our investment portfolio during 2001 compared to 2000 and also due to lower average investment balances in 2001 compared to 2000. We expect yields on our investment portfolio to continue to decrease in the future based on the current short-term interest rate environment. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily through the private placement of equity securities, the issuance of notes to stockholders, equipment lease financing, an initial public offering of common stock in October 1997, a public offering of common stock in June 1999, a private placement of common stock in February 2000, a private placement of common stock in May 2001, a private placement of common stock in January 2002, and the sale of call options on our stock. Net cash used by operating activities was $9.3 million, $24.8 million, and $60.6 million for 1999, 2000 and 2001, respectively. The cash used by operating activities was used primarily to fund research and development relating to T-20, T-1249, and other product candidates, and was lower for 1999 because of the $10.0 million non-refundable payment from Roche for the initiation of our collaboration for the development of T-20 and T-1249. Cash used by investing activities was $8.3 million for 1999 and $52.2 million for 2000. Cash provided by investing activities was $7.3 million for 2001. The increase in the amount used by investing activities in 1999 and 2000 was due to the purchase of short-term investments as a result of our offerings of common stock in 1999 and 2000, respectively. The cash provided by investing activities during 2001 was primarily a result of the sale of short-term investments to fund our operations. Cash provided by financing activities was $37.7 million for 1999, $71.4 million for 2000, and $44.2 million for 2001 primarily as a result of our sale of common stock during those years. As of December 31, 2001, we had $74.8 million in cash and cash equivalents and short-term-investments, compared to $93.4 million as of December 31, 2000. The decrease is primarily a result of funds used for operating activities, less proceeds of $43.4 million from the closing of a private placement of common stock in May 2001. We have experienced negative cash flows from operations since our inception and do not anticipate generating sufficient positive cash flows to fund our operations in the immediate future. Although we expect to share the future development costs for T-20 and T-1249 equally with Roche, we have expended, and expect to continue to expend in the future, substantial funds to pursue our product candidate and compound discovery and development efforts, including: . expenditures for clinical trials of T-20, T-1249 and other product candidates, . preparation of materials for an anticipated submission of a New Drug Application for T-20 to the United States Food and Drug Administration following receipt of data from our Phase III clinical trials, . pre-marketing and marketing activities undertaken in anticipation of the commercialization of T-20, . research and development and preclinical testing of other product candidates, . manufacture of drug material, and . the development of our proprietary technology platform. As of December 31, 2001, we had commitments of approximately $13.5 million to purchase product candidate materials and fund various clinical studies over the next twelve months contingent on delivery of the materials or performance of the services. Substantially all of these expenditures will be shared equally by Roche under our collaborative agreement. Under this collaborative agreement, we are 41 obligated to share equally the future development expenses for T-20 and T-1249 for the United States and Canada. We also expect to have capital expenditures of approximately $3.0 million during 2002 that will not be shared with Roche. Our share of these expenditures may be financed with capital or operating leases, debt or working capital. We expect that our existing capital resources, along with the $41 million received in a private placement of our common stock completed in January 2002, together with the interest earned thereon, will be adequate to fund our capital requirements at least through the end of 2002. We believe that substantial additional funds will be required after 2002. If adequate funds are not available through debt or equity financings, or collaborative arrangements, we will be required to delay, scale-back or eliminate certain preclinical testing, clinical trials and research and development programs, including our collaborative efforts with Roche. In the event Roche becomes unable or unwilling to share future development expenses for T-20 and T-1249, our capital requirements would increase substantially beyond our current expectations. Since our initial public offering in 1997, we have obtained the majority of our funding through public or private offerings of our common stock. We expect to continue to obtain our funding through public or private offerings of our common stock until such time, if ever, we are able to generate significant funds from operations. We may have difficulty raising additional funds by selling equity. If we fail to meet the clinical and financial expectations of securities analysts and investors, it could have a material adverse effect on the market price of our common stock and restrict or eliminate our ability to raise additional funds by selling equity. The public capital markets in which shares of our common stock are traded were extremely volatile during 2001, and the general ability of companies to obtain additional financing was more difficult in 2001 than in 2000 and is expected to remain difficult during 2002. The public equity markets for biotechnology companies have been extremely volatile in the first quarter of 2002. Drug candidates for several publicly-held biotechnology companies, including Cubist Pharmaceuticals, Inc., Dendreon Corp., Inspire Pharmaceuticals, Inc., Miravant Medical Technologies, Pharmacia Corp., and Pharmacyclics, Inc. failed to meet primary clinical endpoints in Phase III clinical trials, resulting in significant reduction in the market price of their common stock. The FDA's decision not to accept Imclone Systems, Inc's Biologics License Application (BLA) for ERBITUX(TM) also has contributed to the volatility of public equity markets for biotechnology companies. Therefore even if we do achieve positive clinical or financial results that meet or exceed the expectations of securities analysts and investors, the state of the public equity markets in general and particularly the public equity market for biotechnology companies may prohibit us from raising funds in the equity markets on acceptable terms or at all. Even if we are able to obtain additional funding through an equity financing, the terms of this financing could be highly dilutive to current shareholders. We may also attempt to obtain additional funding through debt financings and/or arrangements with new or existing collaborative partners. Any debt financings may contain restrictive terms that limit our operating flexibility. Arrangements with partners may require us to relinquish rights to our technologies or product candidates or to reduce our share of potential profits. This could have a material adverse effect on our business, financial condition or results of operations. Our future capital requirements and the adequacy of available funds will depend on many factors, including the availability of funds from Roche under our collaboration agreement, the condition of public capital markets, the results of clinical trials relating to T-20, the progress and scope of our product development programs, the magnitude of these programs, the results of preclinical testing and clinical trials, the need for additional facilities based on the results of these clinical trials and other product development programs, changes in the focus and direction of our product development programs, the costs involved in preparing, filing, processing, maintaining, protecting and enforcing patent claims and other intellectual property rights, competitive factors and technological advances, the cost, timing and outcome of regulatory reviews, changes in the requirements of the FDA, administrative and legal expenses, evaluation of the commercial viability of potential product candidates and compounds, the establishment of capacity, either internally or through relationships with third parties, for manufacturing, sales, marketing and distribution functions, and other factors, many of which are outside of our control. 42 The following table summarizes our material contractual commitments at December 31, 2001 (in thousands):

Contractual Obligation 2002 2003 2004 2005 Total -------------------------------------------------------------------------------------------------- Capital Leases $ 1,035 $ 782 $ 279 $ -- $ 2,096 Operating Leases 1,312 1,221 498 382 3,413 Other contractual obligations* 13,464 -- -- -- 13,464 ------------------------------------------------------------- Total $ 15,811 $ 2,003 $ 777 $ 382 $ 18,973 =============================================================

* Includes contracts to purchase product candidate materials and fund various clinical studies contingent on delivery of the materials or performance of the services. Substantially all of these costs will be shared equally with Roche. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements other than operating leases for our properties and the derivative transactions described below. These transactions represent call options sold on our stock to a third party financial institution and were entered into in order to generate cash from the option premiums and provide us with the opportunity to raise capital at prices significantly in excess of the market price at the time of the transaction. These contracts are expected to be settled by issuing shares of our stock in the event the options are exercised. We have no subsidiaries or other unconsolidated limited purpose entities, and we have not guaranteed or otherwise supported the obligations of any other entity. In September 2001, the Company entered into derivative transactions with a financial institution that we may settle by selling up to 107,000 shares of our stock to the financial institution at prices significantly higher than the market price per share of our stock at the inception of the transaction. Alternatively, we have the option to settle these contracts by making a cash payment to the financial institution for the underlying value of the derivative contracts to the financial institution on the settlement date. These contracts are expected to be settled by issuing shares of our stock in the event the options are exercised. All of these derivative transactions expire or mature in September 2002. We received $344,000 in proceeds for the sale of these call options that were accounted for as an increase to additional paid-in capital in accordance with accounting principles generally accepted in the United States of America at the time of the transaction. In July 2000, we entered into similar derivative transactions with a financial institution with respect to up to 300,000 shares of our stock. We received $2.8 million in proceeds for the sale of these call options that were accounted for as an increase to additional paid-in capital in accordance with accounting principles generally accepted in the United States of America at the time of the transaction. Concurrently, we entered into a second derivative transaction with the same financial institution on shares of its common stock at no net premium to either party. These contracts expired unexercised during July 2001. TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES We have no transactions with any current or former directors or senior management or entities that they control, other than those occurring in the normal course of these individuals performing their duties for Trimeris. For employees this includes salary, bonus, stock option grants, employee benefits, and expense reimbursement. For directors this includes stock option grants and expense reimbursement. TRIMERIS 401(K) PLAN We have a 401(k) Profit Sharing Plan (the "Plan") covering all qualified employees. Employees may elect a salary reduction from 1% to 12% as a contribution to the Plan. Employee contributions may not be invested in Trimeris stock. The Plan permits us to match employees' contributions. Beginning in 1998, we matched 100% of an employee's annual contributions with Trimeris stock, provided the employee was employed on the last day of the year. The number of shares issued is based on the employee's contributions to be matched divided by the closing price of Trimeris stock on the last trading day of the year. At 43 December 31, 2001 there were 42,000 shares of our stock held by the Plan. These shares vest ratably based on a participant's years of service and are fully vested after four years of service. Currently these shares are only tradable upon an employee's termination. During 2002, we expect to modify the plan to allow employees to sell vested shares on a regular basis. NET OPERATING LOSS CARRYFORWARDS As of December 31, 2001, we had a net operating loss carryforward of approximately $173.3 million. We have recognized a valuation allowance equal to the deferred asset represented by this net operating loss carryforward and therefore recognized no tax benefit. Our ability to utilize these net operating loss carryforwards may be subject to an annual limitation in future periods pursuant to the "change in ownership rules" under Section 382 of the Internal Revenue Code of 1986, as amended. See Note 7 of Notes to Financial Statements. ACCOUNTING AND OTHER MATTERS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement 133"). Statement 133 establishes standards for valuation and disclosure of derivative financial instruments and is effective for fiscal quarters of fiscal years beginning after June 15, 2000. The Company adopted this statement on January 1, 2001, and it had no effect on the Company's financial statements. In July 2001, the FASB issued Statement No. 141, "Business Combinations", and Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires that all business combinations be accounted for under the purchase method and prohibits use of the pooling-of-interests method. Statement 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. Statement 142 requires that goodwill (and intangible assets with indefinite useful lives) no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of the Statement, which will be January 1, 2002. We do not expect the adoption of Statement No. 141 or Statement No. 142 to have a material impact on our financial statements. SFAS No. 143, "Accounting for Asset Retirement Obligations", addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. This standard requires us to record the fair value of an asset retirement obligation as a liability in the period in which we incur a legal obligation associated with the retirement of tangible long-lived assets that results from the acquisition, construction, development and/or normal use of the assets. We also are required to record a corresponding increase to the carrying amount of the related long-lived asset and to depreciate that cost over the life of the asset. The liability is changed at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the initial fair value measurement. This statement is effective for the fiscal years beginning after June 15, 2002. At this time we believe that this standard will have no impact on our financial statements. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This standard provides guidance on differentiating between long-lived assets to be held and used, long-lived assets to be disposed of other than by sale and long-lived assets to be disposed of by sale. SFAS No. 144 supersedes FASB Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of". SFAS No. 144 also supersedes Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occuring Events and Transactions". We believe that this standard will have no impact on our financial statements. The FASB also issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on our financial statements and monitors the status of changes to issued exposure drafts and to proposed effective dates. 44 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK ------------------------------------------------------ Our exposure to market risk is primarily in our investment portfolio. We do not use derivative financial instruments for speculative or trading purposes. We have an investment policy that sets minimum credit quality standards for our investments. The policy also limits the amount of money we can invest in any one issue, issuer or type of instrument. We have not experienced any material loss in our investment portfolio. The table below presents the carrying value, which is approximately equal to fair market value, and related weighted-average interest rates for our investment portfolio at December 31, 2001. Fair market value is based on actively quoted market prices. Substantially all of our investments mature in twelve months or less, and have been given a rating of A1 or higher by a nationally recognized statistical rating organization or are the debt obligations of a federal agency. Carrying Average Amount Interest (thousands) Rate ----------- ---- Cash equivalents - fixed rate $ 21,704 2.21 % Short-term investments - fixed rate 52,512 3.67 % Overnight cash investments - fixed rate 584 0.45 % -------- --------- Total investment securities $ 74,800 3.24 % ======== ========= In September 2001, the Company entered into derivative transactions with a financial institution that we may settle by selling up to 107,000 shares of our stock to the financial institution at prices significantly higher than the market price per share of the Company's stock at the inception of the transaction. The Company received $344,000 in proceeds that were accounted for as an increase to additional paid-in capital in accordance with accounting principles generally accepted in the United States of America at the time of the transaction. Alternatively, the Company has the option to settle these contracts by making a cash payment to the financial institution for the underlying value of the derivative contracts to the financial institution on the settlement date. The Company intends to settle the contracts by issuing shares. All of these derivative transactions expire or mature in September 2002. In July 2000, the Company entered into a derivative transaction with a financial institution with respect to up to 300,000 shares of our stock. The Company received $2.8 million in proceeds that were accounted for as an increase to additional paid-in capital in accordance with accounting principles generally accepted in the United States of America at the time of the transaction. Concurrently, the Company entered into a second derivative transaction with the same financial institution on shares of its common stock at no net premium to either party. These contracts expired unexercised during July 2001. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- The information required by Item 8 is included in Item 14 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- There have been no changes in or disagreements with the Company's independent auditors, KPMG LLP. 45 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- The information required by Item 10 as to directors and executive officers is incorporated by reference from the Company's Proxy Statement to be filed by the Company with the Securities and Exchange Commission within 120 days after the end of the fiscal year. ITEM 11. EXECUTIVE COMPENSATION ---------------------- The information required by Item 11 is incorporated by reference from the Company's Proxy Statement to be filed by the Company with the Securities and Exchange Commission within 120 days after the end of the fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The information required by Item 12 is incorporated by reference from the Company's Proxy Statement to be filed by the Company with the Securities and Exchange Commission within 120 days after the end of the fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- The information required by Item 13 is incorporated by reference from the Company's Proxy Statement to be filed by the Company with the Securities and Exchange Commission within 120 days after the end of the fiscal year. 46 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ---------------------------------------------------------------- The following documents are filed as part of this report:

Page Number ----------- (a)1. Financial Statements -------------------- Independent Auditors' Report........................................................F-1 Balance Sheets as of December 31, 2000 and 2001....................................F-2 Statements of Operations for the Years Ended December 31, .......................... 1999, 2000 and 2001 and for the period from Inception to December 31, 2001........................................................................F-3 Statements of Stockholders' Equity for the period from Inception to December 31, 1998, and for the Years Ended December 31, 1999, 2000 and 2001............................................................................F-4 Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001 and for the period from Inception to December 31, 2001......F-5 Notes to Financial Statements.......................................................F-7

(a)2. Financial Statement Schedules ----------------------------- All financial statement schedules required under Regulation S-X are omitted as the required information is not applicable. (a)3. Exhibits -------- The Exhibits filed as part of this Form 10-K are listed on the Exhibit Index immediately preceding such Exhibits and are incorporated by reference. The Company has identified in the Exhibit Index each management contract and compensation plan filed as an exhibit to this Annual Report on Form 10-K in response to Item 14(c) of Form 10-K. (b) Reports on Form 8-K ------------------- None. . 47 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Trimeris, Inc.: We have audited the accompanying balance sheets of Trimeris, Inc. (A Development Stage Company) (the "Company") as of December 31, 2000 and 2001, and the related statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001 and for the cumulative period from the date of inception (January 7, 1993) to December 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 of America. 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 Trimeris, Inc. (A Development Stage Company) as of December 31, 2000 and 2001, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2001, and for the cumulative period from the date of inception (January 7, 1993) to December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Raleigh, North Carolina February 15, 2002 TRIMERIS, INC. (A Development Stage Company) BALANCE SHEETS (in thousands, except par value)

As of December 31, ------------------------------------- 2000 2001 --------------- ----------------- Assets Current assets: Cash and cash equivalents............................................. $ 31,349 $ 22,288 Short-term investments................................................ 62,025 52,512 Accounts receivable................................................... 4 2 Prepaid expenses...................................................... 393 354 --------------- ----------------- Total current assets............................................... 93,771 75,156 --------------- ----------------- Property, furniture and equipment, net of accumulated depreciation and amortization of $4,932 and $6,796 at December 31, 2000 and 2001, respectively............................................. 3,983 3,779 --------------- ----------------- Other assets: Patent costs, net of accumulated amortization of $46 and $89 at December 31, 2000 and 2001, respectively........................... 924 1,514 Equipment deposits.................................................... 255 195 --------------- ----------------- Total other assets............................................ 1,179 1,709 --------------- ----------------- Total assets.................................................. $ 98,933 $ 80,644 =============== ================= Liabilities and Stockholders' Equity Current liabilities: Accounts payable...................................................... $ 3,476 $ 2,694 Accounts payable - Roche.............................................. 9,556 12,869 Current installments of obligations under capital leases.............. 1,174 928 Accrued compensation.................................................. 1,359 2,048 Deferred revenue - Roche.............................................. 1,304 1,304 Accrued expenses...................................................... 2,904 3,677 --------------- ----------------- Total current liabilities..................................... 19,773 23,520 Obligations under capital leases, excluding current installments........ 1,861 1,014 Deferred revenue - Roche................................................ 3,920 2,616 --------------- ----------------- Total liabilities............................................. 25,554 27,150 --------------- ----------------- Stockholders' equity: Preferred Stock at $0.001 par value per share, authorized 10,000 shares; issued and outstanding zero shares at December 31, 2000 and 2001.......................................................... -- -- Common Stock at $0.001 par value per share, authorized 60,000 shares; issued and outstanding 15,863 and 17,414 shares at December 31, 2000 and 2001, respectively................................... 16 17 Additional paid-in capital............................................ 196,844 244,725 Deficit accumulated during the development stage...................... (122,154) (188,895) Deferred compensation................................................. (1,394) (2,533) Accumulated other comprehensive income................................ 76 189 Notes receivable from stockholders.................................... (9) (9) --------------- ----------------- Total stockholders' equity.................................... 73,379 53,494 --------------- ----------------- Commitments and contingencies Total liabilities and stockholders' equity $ 98,933 $ 80,644 =============== =================

See accompanying notes to financial statements. F-2 TRIMERIS, INC. (A Development Stage Company) STATEMENTS OF OPERATIONS (in thousands, except per share data)

For the Years Ended December 31, --------------------------------------------------- Cumulative from Inception (January 7, 1993) to December 31, 1999 2000 2001 2001 ------------ -------------- -------------- ---------------- Revenue.......................... $ 4,681 $ 956 $ 1,304 $ 7,894 ------------ -------------- -------------- ---------------- Operating expenses: Research and development: Non-cash compensation.... 2,174 5,386 (969) 7,605 Other research and development expense... 17,582 32,970 59,409 148,085 ------------ -------------- -------------- ---------------- Total research and development expense...... 19,756 38,356 58,440 155,690 ------------ -------------- -------------- ---------------- General and administrative: Non-cash compensation.... 2,524 7,018 1,905 12,242 Other general and administrative expense 6,156 8,115 11,873 37,706 ------------ -------------- -------------- ---------------- Total general and administrative expense... 8,680 15,133 13,778 49,948 ------------ -------------- -------------- ---------------- Total operating expenses. 28,436 53,489 72,218 205,638 ------------ -------------- -------------- ---------------- Operating loss............... (23,755) (52,533) (70,914) (197,744) ------------ -------------- -------------- ---------------- Other income (expense): Interest income ......... 1,729 6,114 4,362 14,666 Interest expense ........ (161) (257) (189) (1,637) ------------ -------------- -------------- ---------------- 1,568 5,857 4,173 13,029 ------------ -------------- -------------- ---------------- Loss before cumulative effect of change in accounting principle (22,187) (46,676) (66,741) (184,715) Cumulative effect of change in accounting principle -- (4,180) -- (4,180) ------------ -------------- -------------- ---------------- Net loss.................... $ (22,187) $ (50,856) $ (66,741) $ (188,895) ============ ============== ============== ================ Basic and diluted net loss per share: Before cumulative effect of accounting change............ $ (1.79) $ (3.00) $ (3.96) Accounting change............ -- (0.27) -- ------------ -------------- -------------- Basic and diluted net loss per share............... $ (1.79) $ (3.27) $ (3.96) ============ ============== ============== Weighted average shares used in per share computations.... 12,411 15,548 16,870 ============ ============== ============== Pro forma amounts assuming the accounting change is applied retroactively: Net loss..................... $ (26,286) ============ Basic and diluted net loss pers share........................ $ (2.12) ============

See accompanying notes to financialstatements. F-3 TRIMERIS, INC. (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY For the Period from Inception (January 7, 1993) to December 31, 1998 and the Years Ended December 31, 1999, 2000, and 2001 (in thousands)

Preferred Stock Common Stock Deficit -------------------------------- accumulated Accumulated Additional during the Other Number Par Number Par paid-in development Deferred Comprehensive of shares value of Shares value capital stage compensation Income --------- ------------------- ----------------------------------------------------------------- Balance at January 7, 1993 -- $ -- -- $ -- $ -- $ -- $ -- $ -- Issuances of Common Stock. -- -- 218 -- 2 -- -- -- Issuances of Series A Preferred Stock.......... 3,000 3 -- -- 1,997 -- -- -- Stock issuance costs........ -- -- -- -- (34) -- -- -- Common Stock issued in exchange for exclusive license.................. -- -- 96 -- 41 -- -- -- Common Stock issued in exchange for consulting services................. -- -- 6 -- 2 -- -- -- Loss for the period......... -- -- -- -- -- (1,311) -- -- --------- ------------------- ----------------------------------------------------------------- Balance as of December 31, 1993.................... 3,000 3 320 -- 2,008 (1,311) -- -- Issuances of Common Stock. -- -- 12 -- 5 -- -- -- Common Stock issued in exchange for consulting services............... -- -- 5 -- 2 -- -- -- Loss for the period....... -- -- -- -- -- (3,943) -- -- --------- ------------------- ----------------------------------------------------------------- Balance as of December 31, 1994................... 3,000 3 337 -- 2,015 (5,254) -- -- Issuances of Common Stock. -- -- 16 -- 8 -- -- -- Issuances of Series B Preferred Stock........ 20,636 21 -- -- 10,297 -- -- -- Stock issuance costs...... -- -- -- -- (27) -- -- -- Loss for the period....... -- -- -- -- -- (5,739) -- -- --------- ------------------- ----------------------------------------------------------------- Balance as of December 31, 1995................... 23,636 24 353 -- 12,293 (10,993) -- -- Issuances of Common Stock. -- -- 84 1 28 -- -- -- Issuances of Series B Preferred Stock.... 6,500 6 -- -- 3,244 -- -- -- Issuances of Series C Preferred Stock........ 3,333 3 -- -- 1,997 -- -- -- Stock issuance costs...... -- -- -- -- (26) -- -- -- Notes receivable from stockholders for the purchase of shares..... -- -- -- -- -- -- -- -- Loss for the period....... -- -- -- -- -- (6,972) -- -- --------- ------------------- ----------------------------------------------------------------- Balance as of December 31, 1996................... 33,469 33 437 1 17,536 (17,965) -- -- Issuances of Series C Preferred Stock........ 9,984 10 -- -- 5,981 -- -- -- Issuances of Series D Preferred Stock........ 9,048 9 -- -- 6,777 -- -- -- Issuances of Common Stock. -- -- 656 1 255 -- -- -- Conversion of Preferred Stock to Common Stock.. (52,501) (52) 6,262 6 46 -- -- -- Issuance of shares in initial public offering, -- -- 3,163 3 34,529 -- -- -- net Exercise of stock options. -- -- 32 -- 9 -- -- -- Repayment of notes receivable from stockholders..... -- -- -- -- -- -- -- -- Repurchase of Common Stock -- -- (1) -- -- -- -- -- Stock issuance costs...... -- -- -- -- (109) -- -- -- Issuances of Common Stock and options at below market value.................. -- -- -- -- 2,336 -- (2,336) -- Amortization of deferred -- compensation........... -- -- -- -- -- -- 386 Loss for the period....... -- -- -- -- -- (11,428) -- -- --------- ------------------- ----------------------------------------------------------------- Balance as of December 31, 1997................... -- -- 10,549 11 67,360 (29,393) (1,950) -- Reclassification of deferred compensation........... -- -- -- -- (202) -- 202 -- --------- ------------------- ----------------------------------------------------------------- Balance as of December 31, 1997................... -- -- 10,549 11 67,158 (29,393) (1,748) -- Exercise of stock options. -- -- 28 -- 10 -- -- -- Issuance of stock for 401(K) match........... -- -- 20 -- 236 -- -- -- Issuance of stock under Employee Stock Purchase Plan................... -- -- 40 -- 255 -- -- -- Amortization of deferred -- compensation........... -- -- -- -- 870 -- 553 -- Loss for the period....... -- -- -- -- -- (19,718) -- -- --------- ------------------- ----------------------------------------------------------------- Balance as of December 31, 1998.................. -- -- 10,637 11 68,529 (49,111) (1,195) -- Issuance of shares in public offering, net.......... -- -- 2,875 3 31,354 -- -- -- Exercise of stock options. -- -- 189 -- 1,157 -- -- -- Issuance of stock options to -- employees.............. -- -- -- -- 2,152 -- (2,152) Issuance of stock for 401( K) match............... -- -- 12 -- 292 -- -- -- Issuance of stock under Employee Stock Purchase Plan................... -- -- 22 -- 220 -- -- -- Repayment of notes receivable from stockholders........... -- -- -- -- -- -- -- -- Exercise of warrant, net.. -- -- 30 -- -- -- -- -- Amortization of deferred -- compensation........... -- -- -- -- 3,804 -- 894 --

Notes receivable Net from Stockholders' stockholders Equity ------------ ------------- Balance at January 7, 1993 $ -- $ -- Issuances of Common Stock. 2 Issuances of Series A Preferred Stock........ -- 2,000 Stock issuance costs...... -- (34) Common Stock issued in exchange for exclusive license...... -- 41 Common Stock issued in exchange for consulting services............... -- 2 Loss for the period....... -- (1,311) ------------- ------------- Balance as of December 31, 1993................... -- 700 Issuances of Common Stock. -- 5 Common Stock issued in exchange for consulting services............... -- 2 Loss for the period....... -- (3,943) --------------- -------------- Balance as of December 31, 1994................... (3,236) Issuances of Common Stock. 8 Issuances of Series B Preferred Stock -- 10,318 Stock issuance costs...... -- (27) Loss for the period....... -- (5,739) --------------- -------------- Balance as of December 31, 1995.................. 1,324 Issuances of Common Stock. -- 29 Issuances of Series B Preferred Stock -- 3,250 Issuances of Series C Preferred Stock........ -- 2,000 Stock issuance costs...... -- (26) Notes receivable from stockholders for the purchase of shares..... (14) (14) Loss for the period....... -- (6,972) --------------- -------------- Balance as of December 31, 1996................... (14) (409) Issuances of Series C Preferred Stock....... -- 5,991 Issuances of Series D Preferred Stock........ -- 6,786 Issuances of Common Stock. (254) 2 Conversion of Preferred Stock to Common Stock.. -- -- Issuance of shares in initial public offering, -- 34,532 net Exercise of stock options. -- 9 Repayment of notes receivable from stockholders........... 50 50 Repurchase of Common Stock -- -- Stock issuance costs...... -- (109) Issuances of Common Stock and options at below market value................. -- -- Amortization of deferred compensation.......... -- 386 Loss for the period...... -- (11,428) --------------- -------------- Balance as of December 31, 1997.................. (218) 35,810 Reclassification of deferred compensation.......... -- -- --------------- -------------- Balance as of December 31, 1997.................. (218) 35,810 Exercise of stock options. -- 10 Issuance of stock for 401( K) match.............. -- 236 Issuance of stock under Employee Stock -- 255 Purchase Plan......... -- Amortization of deferred compensation.......... -- 1,423 Loss for the period...... -- (19,718) --------------- -------------- Balance as of December 31, 1998.................. (218) 18,016 Issuance of shares in public offering, net......... -- 31,357 Exercise of stock options. -- 1,157 Issuance of stock options to employees............. -- -- Issuance of stock for 401( K) match.............. -- 292 Issuance of stock under Employee Stock -- 220 Purchase Plan........ -- Repayment of notes receivable from stockholders.......... 113 113 Exercise of warrant, net.. -- -- Amortization of deferred compensation.......... -- 4,698

F-4 Issuance of warrant....... -- -- -- -- 5,400 -- -- -- Loss for the period....... -- -- -- -- -- (22,187) -- -- --------- ------------------- ----------------------------------------------------------------- Balance as of December 31, 1999.................. -- $ -- 13,765 $ 14 $ 112,908 $ (71,298) $ (2,453) -- Loss for the period...... -- -- -- -- -- (50,856) -- -- Unrealized gain on available for sale securities... -- -- -- -- -- -- -- 76 Comprehensive income (loss) for period............ Issuance of shares in private placement, net -- -- 1,750 2 66,568 -- -- Exercise of stock options. -- -- 302 -- 2,507 -- -- -- Issuance of stock for 401(K) match................. -- -- 7 -- 386 -- -- -- Issuance of stock under Employee Stock Purchase Plan.................. -- -- 28 -- 334 -- -- -- Repayment of notes receivable from stockholders.......... -- -- -- -- -- -- -- -- Proceeds from sale of call options -- -- -- -- 2,796 -- -- -- Exercise of warrant, net. -- -- 11 -- -- -- -- -- Amortization of deferred compensation.......... -- -- -- -- 11,345 -- 1,059 --------- ------------------- ----------------------------------------------------------------- Balance as of December 31, 2000.................. -- $ -- 15,863 $ 16 $ 196,844 $(122,154) $ (1,394) $ 76 Loss for the period...... -- -- -- -- -- (66,741) -- -- Unrealized gain on available for sale securities.. -- -- -- -- -- -- -- 113 Comprehensive (loss) income for period............ Issuance of shares in private placement, net -- -- 1,396 1 43,384 -- -- -- Exercise of stock options. -- -- 127 -- 1,249 -- -- -- Issuance of stock for 401 (K) match............. -- -- 10 -- 481 -- -- -- Issuance of stock under Employee Stock Purchase Plan... -- -- 18 -- 348 -- -- -- Proceeds from sale of call options............... -- -- -- -- 344 -- -- -- Amortization of deferred compensation (reversal of compensation expense). -- -- -- -- (1,254) -- 2,190 -- Deferred compensation recorded for consultant that became an employee.... -- -- -- -- 3,329 -- (3,329) -- --------- ------------------- ----------------------------------------------------------------- Balance as of December 31, 2001.................. -- $ -- 17,414 $ 17 $ 244,725 $(188,895) $ (2,533) $ 189 ========= =================== =================================================================

Issuance of warrant....... -- 5,400 Loss for the period....... -- (22,187) --------------- -------------- Balance as of December 31, 1999.................. $ (105) $ 39,066 Loss for the period....... -- (50,856) Unrealized gain on available for sale securities... -- 76 -------------- Comprehensive income (loss) for period............ (50,780) Issuance of shares in private placement, net -- 66,570 Exercise of stock options. -- 2,507 Issuance of stock for 401(K) match................ -- 386 Issuance of stock under Employee Stock -- 334 Purchase Plan........ Repayment of notes receivable from stockholders......... 96 96 Proceeds from sale of call options -- 2,796 Exercise of warrant, net. -- -- Amortization of deferred compensation.......... -- 12,404 --------------- -------------- Balance as of December 31, 2000.................. $ (9) $ 73,379 Loss for the period...... -- (66,741) Unrealized gain on available for sale securities.. -- 113 -------------- Comprehensive (loss) income for period............ (66,628) Issuance of shares in private placement, net -- 43,385 Exercise of stock options. -- 1,249 Issuance of stock for 401 (K) match............. -- 481 Issuance of stock under Employee Stock Purchase Plan... -- 348 Proceeds from sale of call options............... -- 344 Amortization of deferred compensation (reversal of compensation expense). -- 936 Deferred compensation recorded for consultant that became an employee.... -- -- --------------- -------------- Balance as of December 31, 2001.................. $ (9) $ 53,494 =============== ==============

See accompanying notes to financial statements. F-5 TRIMERIS, INC. (A Development Stage Company) STATEMENTS OF CASH FLOWS (in thousands)

Cumulative from For the years ended December 31, Inception -------------------------------------------------- (January 7, 1993) to 1999 2000 2001 December 31, 2001 --------- ------------ ------------- ------------------ Cash flows from operating activities: Net loss....................................... $ (22,187) $ (50,856) $ (66,741) $ (188,895) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization of property, furniture and equipment......... 789 1,368 1,870 6,822 Non-cash compensation expense................ 4,698 12,404 936 19,847 Amortization of deferred revenue - Roche -- (956) (1,304) (2,260) Other amortization........................... 34 26 43 152 401 (K) plan stock match..................... 292 386 481 1,395 Provision for equipment held for resale ..... -- -- -- 61 Stock issued for consulting services ........ -- -- -- 5 Stock issued to repay interest on notes to stockholders.............................. -- -- -- 195 Debt issued for research and development .... -- -- -- 194 Cumulative effect of change in accounting principle ..................... -- 4,180 -- 4,180 Loss on disposal of property and equipment................................. -- -- -- 16 Decrease (increase) in assets: Accounts receivable and loans to employees .. 44 20 2 (2) Accounts receivable Roche.................... (144) 144 -- -- Prepaid expenses............................. 53 (125) 39 (354) Other assets................................. (40) (67) 60 (195) Increase (decrease) in liabilities: Accounts payable............................. 4,983 (2,683) (782) 2,694 Accounts payable - Roche .................... -- 9,556 3,313 12,869 Accrued compensation......................... 199 331 689 2,048 Accrued expenses............................. 1,947 (570) 773 3,587 Deferred revenue - Roche..................... -- 2,000 -- 2,000 ----------- ------------ ------------ ---------------- Net cash used by operating activities ....... (9,332) (24,842) (60,621) (135,641) ----------- ------------ ------------ ---------------- Cash flows from investing activities: Purchase of property, furniture and equipment .. (657) (716) (1,666) (3,886) Net sale (purchase) of short-term investments (7,519) (51,174) 9,626 (52,323) Equipment held for resale ...................... -- -- -- (61) Organizational costs........................... -- -- -- (8) Patent costs................................. (116) (307) (633) (1,604) ----------- ------------ ------------ ---------------- Net cash provided (used) by investing activities................................. (8,292) (52,197) 7,327 (57,882) ----------- ------------ ------------ ---------------- Cash flows from financing activities: Proceeds (payments) from notes payable ......... -- -- -- 6,150 Lease costs..................................... -- -- -- (13) Principal payments under capital lease obligations ................................. (520) (938) (1,093) (4,789) Proceeds from issuance of Common Stock, net..... 31,357 66,570 43,385 175,679 Proceeds from issuance of Preferred Stock....... -- -- -- 23,896 Proceeds from sale of call options.............. -- 2,796 344 3,140 Proceeds from exercise of stock options......... 1,157 2,507 1,249 4,932 Employee stock purchase plan stock issuance .... 220 334 348 1,157 Warrant issuance ............................... 5,400 -- -- 5,400 Repayment of notes receivable from stockholders 113 96 -- 259 ----------- ------------ ------------ ---------------- Net cash provided by financing activities....... 37,727 71,365 44,233 215,811 ----------- ------------ ------------ ---------------- Net increase (decrease) in cash and cash equivalents ................................. 20,103 (5,674) (9,061) 22,288 Cash and cash equivalents at beginning of period 16,920 37,023 31,349 -- ----------- ------------ ------------ ---------------- Cash and cash equivalents at end of period .... $ 37,023 $ 31,349 $ 22,288 $ 22,288 =========== ============ ============ ================ Supplemental disclosure of cash flow information: Cash paid during the period for interest........... $ 161 $ 257 $ 189 $ 1,551 =========== ============ ============ ================

Supplemental disclosures of noncash investing and financing activities are described in Note 10. See accompanying notes to financial statements. F-6 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Trimeris, Inc. (the "Company") was incorporated on January 7, 1993 to discover and develop novel therapeutic agents that block viral infection by inhibiting viral fusion with host cells. The financial statements have been prepared in accordance with Statement of Financial Accounting Standards No. 7, "Accounting and Reporting by Development Stage Enterprises," to recognize the fact that the Company is devoting substantially all of its efforts to establishing a new business and planned principal operations have not commenced. Management expects to raise additional capital to adequately fund its research and development and administrative expenses. The ability of the Company to raise these funds is dependent on a number of factors including current and potential investors and corporate partners. Cash and Cash Equivalents The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. Cash equivalents of $31.3 million and $22.3 million at December 31, 2000 and 2001, respectively, are stated at cost and consist primarily of overnight commercial paper, variable rate demand notes, commercial paper, and short-term debt securities. The carrying amount of cash and cash equivalents approximates fair value. Short-Term Investments Short-term investments, which consist of short-term debt securities, commercial paper and federal agency securities, are classified as available-for-sale securities, and are reported at fair value based generally on quoted market prices. The cost of securities sold is determined using the specific identification method when computing realized gains and losses. Unrealized gains and losses are included as a component of stockholders' equity until realized. In accordance with its investment policy, the Company limits the amount of credit exposure with any one issuer. These investments are generally not collateralized and typically mature within one year. Financial Instruments Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial Instruments," as amended, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value is defined in the SFAS as the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value is determined using available market information. Financial instruments other than short-term investments held by the Company include accounts receivable, notes receivable, accounts payable and obligations under capital leases. The Company believes that the carrying amount of these financial instruments approximates their fair value. F-7 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -CONTINUED Property, Furniture and Equipment Property, furniture and equipment are recorded at cost. Property, furniture and equipment under capital leases are initially recorded at the present value of minimum lease payments at the inception of the lease. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Property, furniture and equipment held under capital leases and leasehold improvements are amortized using the straight line method over the lesser of the lease term or estimated useful life of the asset, generally three years. Intangible Assets Management performs a continuing evaluation of the carrying value and remaining amortization periods of unamortized amounts of intangible assets. Any impairments would be recognized when the expected future operating cash flows derived from such intangible assets are less than their carrying value. There were no impairments identified during 1999, 2000 or 2001. The costs of patents are capitalized and are amortized using the straight-line method over the estimated remaining lives of the patents of 17-20 years from the date the patents are granted. Financing costs were incurred as part of the Company's capital lease agreements and are amortized straight-line over the lease term. Deferred Revenue - Roche The license fee and milestone payments received under our Roche collaboration are recorded as deferred revenue when received and recognized as revenue ratably over the remainder of the research and development period. Deferred revenue - Roche represents license and milestone payments received to be recognized as revenue in future periods. Research and Development Research and development costs, including the cost of producing drug material for clinical trials, are charged to operations as incurred. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company has established a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets. F-8 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -CONTINUED Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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. Net Loss Per Share In accordance with SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"), basic loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period after certain adjustments described below. Diluted net income per common share reflects the maximum dilutive effect of common stock issuable upon exercise of stock options, stock warrants, and conversion of preferred stock. Diluted net loss per common share is not shown, as common equivalent shares from stock options, and stock warrants, would have an antidilutive effect. At December 31, 1999, 2000 and 2001, there were 1,712,000, 1,817,000 and 2,161,000 options to purchase common stock outstanding, respectively. At December 31, 1999, 2000 and 2001 there was a warrant outstanding to purchase 362,000 shares of common stock. Stock-Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for employee stock-based compensation using the method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Compensation costs for stock options granted to non-employees are accounted for in accordance with SFAS No. 123 and Emerging Issues Task Force ("EITF") 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services," which require that compensation be measured at the end of each reporting period for changes in the fair value of the Company's common stock until the options are vested. Comprehensive Income SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), established standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income includes all non-owner changes in equity during a period and is divided into two broad classifications: net income and other comprehensive income ("OCI"). OCI includes revenue, expenses, gains, and losses that are excluded from earnings under generally accepted accounting principles. For the Company, OCI consists of unrealized gains or losses on securities available for sale. F-9 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -CONTINUED Segment Reporting SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," establishes standards for reporting information about the Company's operating segments. The Company operates in one business segment, the business of discovery, development and commercialization of novel pharmaceuticals. Adoption of SAB No. 101 Prior to the quarter ended December 31, 2000, the Company recognized license fee and milestone revenue upon receipt of payment and completion of the related milestone. During the quarter ended December 31, 2000, the Company adopted Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" issued by the Securities and Exchange Commission ("SEC") which summarizes the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 provides guidance that it is appropriate to recognize revenue related to license and milestone payments over the research and development term of a collaboration agreement. The cumulative effect of this change in accounting principle, $4.2 million or $(0.27) per share, was reported as a cumulative effect of a change in accounting principle retroactive to January 1, 2000 and relates to the $4.6 million previously recognized as revenue in connection with the initiation of our collaboration with Roche in 1999. In each of 2000 and 2001, $840,000 of the $4.2 million was recognized as revenue. 2. SHORT-TERM INVESTMENTS The following is a summary of available-for-sale securities. Estimated fair values of available-for-sale securities are based generally on quoted market prices.

Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value -------------- ------------- ------------- ----------- December 31, 2000 Corporate debt securities, maturing in less than 1 year $ 53,937 $ 80 $ 7 $54,010 Corporate debt securities, maturing in 1 to 5 years 574 2 -- 576 Commercial paper, maturing in less in less than 1 year 7,438 1 -- 7,439 -------------- ------------- ------------- ----------- $ 61,949 $ 83 $ 7 $62,025 ============== ============= ============= =========== December 31, 2001 Corporate debt securities, maturing in less than 1 year $ 28,805 $ 192 $ -- $28,997 Corporate debt securities, maturing in 1 to 5 years 1,057 1 -- 1,058 Other debt securities, maturing in less than 1 year 12,159 -- -- 12,159 Federal agency securities, maturing In less than 1 year 9,265 19 38 9,246 Federal agency securities, maturing in 1 to 5 years 1,037 15 -- 1,052 -------------- ------------- ------------- ----------- $ 52,323 $ 227 $ 38 $52,512 ============== ============= ============= ===========

F-10 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS-CONTINUED The Company has classified all of its short-term investments as current assets because management expects these investments to be used during 2002 for current operations. There were no sales of these investments or realized gains or losses during 1999, 2000 or 2001. 3. LEASES The Company is obligated under various capital leases for furniture and equipment that expire at various dates during the next three years. The gross amount of furniture and equipment and related accumulated amortization recorded under capital leases and included in property, furniture and equipment were as follows at December 31, 2000 and 2001 (in thousands): 2000 2001 ---------------- --------------- Furniture and equipment................... $ 4,026 $ 3,475 Less accumulated amortization............. (1,591) (2,175) ---------------- --------------- $ 2,435 $ 1,300 ================ =============== The Company also has several non-cancelable operating leases, primarily for office space and office equipment, that extend through September 2005. Rental expense, including maintenance charges, for operating leases during 1999, 2000 and 2001 was $782,000, $929,000, and $1.0 million respectively. Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments as of December 31, 2001 (in thousands) are:

CAPITAL OPERATING LEASES LEASES --------------- ------------------- Year ending December 31: 2002.............................................. $ 1,035 $ 1,312 2003.............................................. 782 1,221 2004.............................................. 279 498 2005.............................................. -- 382 --------------- ------------------- Total minimum lease payments......................... 2,096 $ 3,413 =================== Less amount representing interest.................... 154 --------------- Present value of net minimum capital lease payments.. 1,942 Less current installments of obligations under capital leases.......................................... 928 --------------- Obligations under capital leases, excluding current Installments..................................... $ 1,014 ===============

Under a warrant agreement dated August 24, 1993 with a lessor, the Company issued a warrant to acquire Series B Preferred Stock at the initial Series B Preferred Stock per share offering price, such that the aggregate purchase price for the shares equals $119,000. During the year ended December 31, 1995, the lease was amended to increase the credit limit and a warrant to purchase shares valued at an additional $71,000 was granted to the lessor. These warrants converted to warrants to purchase common stock at the time of the Company's initial public offering. The shares were issued during 1999. F-11 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS-CONTINUED 4. PROPERTY, FURNITURE AND EQUIPMENT Property, furniture and equipment consists of the following at December 31, 2000 and 2001 (in thousands):

2000 2001 ----------------- ---------------- Furniture and equipment.............................. $ 4,208 $ 6,389 Leasehold improvements............................... 681 711 Furniture and equipment under capital lease.......... 4,026 3,475 ----------------- ---------------- 8,915 10,575 Less accumulated depreciation and amortization....... (4,932) (6,796) ----------------- ---------------- $ 3,983 $ 3,779 ================= ================

5. STOCKHOLDERS' EQUITY In June 2000, the Company's Certificate of Incorporation was amended to grant the Company the authority to issue 70,000,000 shares of stock consisting of 60,000,000 shares of Common Stock, par value $0.001 per share, and 10,000,000 shares of Preferred Stock, par value $0.001 per share. At December 31, 2000 and 2001, loans with an interest rate of 8% totaling $9,000, respectively, were outstanding to a former employee of the Company for purchase of shares of the Company's Common Stock. This amount has been presented as a reduction of stockholders' equity in the statement of stockholders' equity. Public Offerings of Stock In October 1997, the Company closed its initial public offering of common stock at $12 per share. The net proceeds of the offering, including the proceeds received in connection with the exercise of the Underwriters' over-allotment option which closed in November 1997, were approximately $34.5 million after deducting applicable issuance costs and expenses of approximately $3.4 million. In connection with the public offering, all the outstanding preferred stock was converted into 6,261,615 shares of the Company's common stock. In June 1999, the Company closed a public offering of common stock at $11.75 per share. The net proceeds of the offering, including the proceeds received in connection with the exercise of the Underwriters' over-allotment option, were approximately $31.4 million after deducting applicable issuance costs and expenses of approximately $2.4 million. In February 2000, the Company closed a private placement of 1.75 million shares of common stock at $40.50 per share. The net proceeds of the offering were approximately $66.6 million after deducting applicable issuance costs and expenses of approximately $4.2 million. In May 2001, the Company closed a private placement of approximately 1.4 million shares of common stock at $33.00 per share. The net proceeds of the offering were approximately $43.4 million after deducting applicable issuance costs and expenses of approximately $2.7 million. F-12 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS-CONTINUED Derivative Transactions In September 2001, the Company entered into derivative transactions with a financial institution that may be settled by selling up to 107,000 shares of its stock to the financial institution at prices significantly higher than the market price per share of the Company's stock at the inception of the transaction. The Company received $344,000 in proceeds that were accounted for as an increase to additional paid-in capital in accordance with EITF Issue No. 00-19, "Determination of Whether Share Settlement Is within the Control of the Company for Purposes of Applying EITF Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." Alternatively, the Company has the option to settle these contracts by making a cash payment to the financial institution for the underlying value of the derivative contracts to the financial institution on the settlement date. The Company intends to settle the contracts by issuing shares. All of these derivative transactions expire or mature in September 2002. In July 2000, the Company entered into a derivative transaction with a financial institution that may be settled by selling up to 300,000 shares of its stock to the financial institution at prices significantly higher than the market price per share of the Company's stock at the inception of the transaction. The Company received $2.8 million in proceeds that were accounted for as an increase to additional paid-in capital in accordance with EITF Issue No. 00-19. Concurrently, the Company entered into a second derivative transaction with the same financial institution on shares of its common stock at no net premium to either party. These contracts expired unexercised during July 2001. Preferred Stock The Board of Directors has the authority to issue shares of Preferred Stock and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, and liquidation preferences, without any further vote or action by the stockholders. 6. STOCK OPTION PLAN In 1993, the Company adopted a stock option plan which allows for the issuance of non-qualified and incentive stock options. During 1996, the Trimeris, Inc. New Stock Option Plan (the "Stock Option Plan") was implemented and replaced the 1993 plan. Under the Stock Option Plan, as amended, the Company may grant non-qualified or incentive stock options for up to 4,102,941 shares of Common Stock. The exercise price of each incentive stock option shall not be less than the fair market value of the Company's Common Stock on the date of grant and an option's maximum term is ten years. Outstanding incentive stock options have been issued at prices ranging from $.34 to $78.50 per share. The vesting period generally occurs ratably over four years. At December 31, 2001, there were approximately 938,000 options remaining available for grant. All incentive stock options which had been granted under the 1993 plan were cancelled at inception of the Stock Option Plan while the non-qualified stock options remain outstanding at an exercise price of $.43. No more grants will be made under the 1993 plan. Stock option transactions for the years ended December 31, 1999, 2000 and 2001 are as follows:

Weighted Weighted Weighted Average Average Average 1999 Exercise 2000 Exercise 2001 Exercise Price Price Price ------------ ----------- ------------- ----------- ----------- ---------- Options outstanding at January 1...... 1,035,000 $ 6.31 1,712,000 $ 9.93 1,817,000 $ 22.19 Granted............. 961,000 12.88 441,000 60.13 578,000 40.22 Exercised........... (189,000) 6.12 (302,000) 8.31 (127,000) 9.82 Cancelled........... (95,000) 7.84 (34,000) 20.62 (107,000) 34.73 ------------ ----------- ------------- ----------- ----------- ---------- Options outstanding at end of period... 1,712,000 $ 9.93 1,817,000 $ 22.19 2,161,000 $ 27.12 ============ =========== ============= =========== =========== ==========

F-13 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS-CONTINUED The following summarizes information about stock options outstanding as of December 31, 2001:

Options Outstanding Options Exercisable ----------------------------------------------------- ------------------------------- Weighted Average Number Remaining Weighted Weighted Range of Exercise Outstanding Contractual Average Exercise Number Average Price as of 12/31/01 Life Price Exercisable Exercise Price --------------------- ---------------- ------------- ------------------ -------------- ---------------- $ 0.34-1.00 126,000 4.76 $ 0.47 126,000 $ 0.47 $ 5.88-8.00 324,000 6.31 $ 7.88 284,000 $ 7.90 $ 9.00-11.625 559,000 7.30 $ 11.60 360,000 $ 11.60 $ 11.626-29.00 298,000 8.19 $ 20.82 132,000 $ 18.10 $ 29.01-45.10 342,000 9.49 $ 40.87 16,000 $ 40.37 $ 45.11-61.875 392,000 8.56 $ 54.29 184,000 $ 56.88 $ 61.876-78.50 120,000 8.75 $ 66.96 22,000 $ 66.69 ---------------- ------------- ------------------ -------------- ---------------- $ 0.34-78.50 2,161,000 7.78 $ 27.12 1,124,000 $ 19.10 ================ ============= ================== ============== ================

The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, compensation cost related to stock options issued to employees would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. For the year ended December 31, 1997, the Company recorded a deferred charge of $2,336,000, representing the difference between the exercise price and the deemed fair value of the Company's Common Stock for 348,000 shares of Common Stock and 132,000 shares subject to Common Stock Options granted in 1997. In 1999, the Company recorded a deferred charge of $2,152,000, representing the difference between the fair value of the Company's Common Stock on the date of grant and the fair value of the Company's Common Stock on the date of shareholder approval for 654,000 shares subject to common stock options. In 2001, the Company recorded a deferred charge of $3,329,000 representing the difference between the fair value of the Company's Common Stock on the date a former consultant became an employee, and the exercise price of the Common Stock Options held at that date. Compensation expense for employee stock options was $894,000, $1.1 million and $2.2 million for 1999, 2000 and 2001, respectively. Compensation costs for stock options granted to non-employees are accounted for in accordance with SFAS No. 123 and EITF 96-18 over the service period that generally coincides with vesting, generally four years. The measurement date for the calculation of compensation expense is considered to be the date when all services have been rendered or the date that options are fully vested. Compensation expense is recognized during interim periods up to the measurement date based on changes in the fair value of the Company's common stock. Compensation expense for non-employee stock options of $3.8 million and $11.3 million, for the years ended December 31, 1999 and 2000, respectively, was recorded as an increase to additional paid-in capital. Compensation expense reversal of $1.3 million for the year ended December 31, 2001, was recorded as a decrease to additional paid-in capital. F-14 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS-CONTINUED SFAS 123 permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25. Had the Company determined compensation expense based on the fair value at the grant date for its stock-based plans under SFAS 123, the Company's net loss and basic loss per share would have been increased to the pro forma amounts indicated below for the years ended December 31:

1999 2000 2001 ------------------ ---------------- ---------------- Net loss: As reported................. $ (22,187) $ (50,856) $ (66,741) Compensation cost recorded under APB 25............. 894 1,059 2,190 Compensation cost resulting from common stock options, restricted stock and employee stock purchase plan............ (2,553) (8,334) (12,174) ------------------ ---------------- ---------------- Pro forma .................. $ (23,846) $ (58,131) $ (76,725) ================== ================= ================= Basic and diluted loss per share: As reported.............. $ (1.79) $ (3.27) $ (3.96) Pro forma................ $ (1.92) $ (3.74) $ (4.55)

The fair value of common stock options is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:

1999 2000 2001 ---------------- ----------------- ----------------- Estimated dividend yield 0.00% 0.00% 0.00% Expected stock price volatility 86.0% 91.4% 50.0% Risk-free interest rate 5.20% 6.30% 4.00% Expected life of options 5 years 5 years 5 years Expected life of employee stock purchase plan options 2 years 2 years 2 years

The effects of applying SFAS 123 for disclosing compensation cost may not be representative of the effects on reported net income for future years because pro forma net loss reflects compensation costs only for stock options granted in 1995 and subsequent years and does not consider compensation cost for stock options granted prior to January 1, 1995. F-15 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS-CONTINUED 7. INCOME TAXES At December 31, 2001, the Company has net operating loss carryforwards (NOL's) for federal and state income tax purposes of approximately $173.3 million which expire in varying amounts between 2008 and 2021. The Company has research and development credits of $4.4 million which expire in varying amounts between 2008 and 2021. The Tax Reform Act of 1986 contains provisions which limit the ability to utilize net operating loss carryforwards in the case of certain events including significant changes in ownership interests. If the Company's NOL's are limited, and the Company has taxable income which exceeds the permissible yearly NOL, the Company would incur a federal income tax liability even though NOL's would be available in future years. The components of deferred tax assets and deferred tax liabilities as of December 31, 2000 and 2001 are as follows: 2000 2001 ---------------- ------------------ (in thousands) Deferred tax assets: Tax loss carryforwards $ 40,967 $ 66,804 Tax credits 2,203 4,365 Reserves and accruals 6,031 5,603 ---------------- ------------------ 49,201 76,772 Valuation allowance (49,201) (76,772) ---------------- ------------------ Net deferred asset -- -- Deferred tax liabilities: Deferred tax liability -- -- ---------------- ------------------ Net deferred tax assets $ -- $ -- (liability) ================ ================== The Company has established a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets. The increase in the valuation allowance was approximately $8.5 million, $21.0 million and $27.6 million for the years ended December 31, 1999, 2000 and 2001, respectively. F-16 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS-CONTINUED The reasons for the difference between the actual income tax benefit for the years ended December 31, 1999, 2000 and 2001 and the amount computed by applying the statutory federal income tax rate to losses before income tax benefit are as follows (in thousands):

% of Pre- % of Pre- % of Pre- 1999 tax Loss 2000 tax Loss 2001 tax Loss ---------- ----------- ---------- ---------- ----------- ---------- Income tax benefit at statutory rate $(7,544) (34.00)% $(17,292) (34.00)% $(22,692) (34.00)% State income taxes, net of federal benefit -- -- -- -- -- -- Non-deductible meals and entertainment expenses 26 0.12% 14 0.03% 13 0.02% Non-deductible compensation 304 1.37 % 361 0.70% 745 1.12% Additional deductible compensation -- -- (1,410) (2.77)% (501) (0.75)% Generation of research credit (839) (3.78)% (569) (1.12)% (2,162) (3.24)% Change in federal portion of valuation allowance 8,053 36.29% 18,896 37.16% 24,597 36.85% ---------- ---------- ---------- ---------- ---------- ---------- Income tax benefit $ -- -- $ -- -- $ -- -- ========== ========== ========== ========== ========== ==========

8. EMPLOYEE BENEFIT PLANS 401 (K) Plan The Company has a 401(k) Profit Sharing Plan (the "Plan") covering all qualified employees. Participants may elect a salary reduction from 1% to 12% as a contribution to the Plan. Modifications of the salary reductions may be made quarterly. The Plan permits the Company to match participants' contributions. Beginning in 1998, the Company matched 100% of a participant's contributions with Company stock, provided the participant was employed on the last day of the year. The number of shares issued is based on the contributions to be matched divided by the closing price of the Company's stock on the last trading day of the year. During 1999, 12,000 shares were issued and compensation expense of $292,000 was recognized. During 2000, 7,000 shares were issued, and compensation expense of $386,000 was recognized. During 2001, 10,000 shares were issued, and compensation expense of $481,000 was recognized. These shares vest ratably based on a participant's years of service and are fully vested after four years of service. The normal retirement age shall be the later of a participant's 65th birthday or the fifth anniversary of the first day of the Plan year in which participation commenced. The Plan does not have an early retirement provision. Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan which permits eligible employees to purchase newly issued common stock of the Company up to an aggregate of 250,000 shares. Under this plan, employees may purchase from the Company a designated number of shares through payroll deductions at a price per share equal to 85% of the lesser of the fair market value of the Company's common stock as of the date of the grant or the date the right to purchase is exercised. A total of 22,000, 28,000, and 18,000 shares were issued under this plan in 1999, 2000, and 2001, respectively. F-17 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS-CONTINUED Post-Retirement Health Insurance Continuation Plan In June 2001, the Company adopted a post-retirement health insurance continuation plan ("the Plan"). Employees who have achieved the eligibility requirements of 60 years of age and 10 years of service are eligible to participate in the Plan. The Plan provides participants the opportunity to continue participating in the Company's group health plan after their date of retirement. Participants will pay the cost of health insurance premiums for this coverage, less any contributions by the Company, currently capped at $300 per month per participant. The components of net periodic post-retirement benefits cost and the significant assumptions of the Plan for 2001 consisted of the following: 2001 ------------------------ (in thousands) Service cost $ 7 Interest cost 1 Amortization of prior service costs 2 ------------------------ Total $ 10 ======================== The Plan's status as of December 31 was as follows: 2001 ------------------------- (in thousands) Accumulated post-retirement benefit obligation $ (47) Unrecognized prior service cost 35 Unrecognized net loss 2 ------------------------- Accrued post-retirement benefit cost $ (10) ========================= The accumulated post-retirement benefit obligation was determined using a discount rate of 7.25%. A one percent decrease in the discount rate would increase the accumulated post-retirement benefit obligation at December 31, 2001 by approximately $11,000. The assumed medical care cost trend rate is 12% for 2002, declining ratably to 6% in 2008. A change in the assumed medical care cost trend rate does not affect the accumulated post-retirement benefit obligation since the benefit is a fixed contribution amount by the Company. 9. ROCHE COLLABORATION In July 1999, the Company announced an agreement with F. Hoffmann-La Roche Ltd., or Roche, to develop and market T-20 and T-1249 worldwide. In the United States and Canada, the Company and Roche will share equally development expenses and profits for T-20 and T-1249. Outside of these two countries, Roche will fund all development costs and pay the Company royalties on net sales of these products. Roche made a nonrefundable initial cash payment to the Company of $10 million during 1999, and a milestone payment of $2 million in 2000. Roche will provide up to an additional $56 million in cash upon achievement of developmental, regulatory and commercial milestones. This agreement with Roche grants them an exclusive, world-wide license for T-20 and T-1249, and certain other compounds. Under this agreement with Roche, a joint management committee consisting of members from Trimeris and Roche oversees the strategy for the collaboration. Roche may terminate its license for a particular country in its sole discretion with advance notice. F-18 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS-CONTINUED In July 1999, the Company granted Roche a warrant to purchase 362,000 shares of Common Stock at a purchase price of $20.72 per share. The warrant is exercisable prior to the tenth annual anniversary of the grant date and was not exercised at December 31, 2001. The fair value of the warrant of $5.4 million was credited to additional paid-in capital in 1999, and as a reduction of the $10 million up-front payment received from Roche. The value was calculated using the Black-Scholes option-pricing model using the following assumptions: estimated dividend yield of 0%; expected stock price volatility of 86.00 %; risk-free interest rate of 5.20%; and expected option life of 10 years. In June 2001, the Company announced a research agreement with Roche to discover, develop and commercialize novel generations of HIV fusion inhibitor peptides. Roche and Trimeris will equally fund worldwide research, development and commercialization costs, as well as share equally in profits from worldwide sales of new HIV fusion inhibitor peptides discovered after July 1, 1999. The Company had a $20 million financing agreement with Roche accessible at the Company's option on a quarterly basis beginning in July 1999 and expiring on December 31, 2000. No amounts were borrowed under this agreement. 10. SUPPLEMENTARY CASH FLOW INFORMATION Capital lease obligations of $1,119,000, $2,050,000 and $0 were incurred in 1999, 2000 and 2001, respectively, for leases of new furniture and equipment. 11. COMMITMENTS AND CONTINGENCIES The Company is involved in certain claims arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the financial position or results of operations of the Company. The Company is in dispute with a consultant regarding the amount of payment of a fee for services rendered. The Company has recorded its estimate of the amount due for the services provided, however the ultimate resolution of this matter cannot presently be determined. In the event the Company is required to pay the fee currently demanded by the consultant, it could have a material effect on the Company's results from operations. As of December 31, 2001, the Company had commitments of approximately $13.5 million to purchase product candidate materials and fund various clinical studies over the next twelve months contingent on delivery of the materials or performance of the services. Substantially all of these expenditures will be shared equally by Roche under our collaborative agreement. Under this collaborative agreement, Trimeris and Roche are obligated to share equally the future development expenses for T-20 and T-1249 for the United States and Canada. 12. SUBSEQUENT EVENT In January 2002, the Company closed a private placement of approximately 1.3 million shares of common stock at $34.00 per share. The net proceeds of the offering were approximately $41.0 million after deducting applicable issuance costs and expenses of approximately $1.8 million. F-19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Trimeris, Inc. -------------- (Registrant) March 25, 2002 /s/ DANI P. BOLOGNESI -------------- -------------------------------------- Dani P. Bolognesi, Ph.D. Chief Executive Officer and Chief Scientific Officer 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.

Signature Capacity Date --------- -------- ---- /s/ DANI P. BOLOGNESI Chief Executive Officer (principal March 25, 2002 ------------------------------ executive officer), Chief -------------- Dani P. Bolognesi, Ph.D. Scientific Officer and Director /s/ ROBERT R. BONCZEK Chief Financial Officer and March 25, 2002 ------------------------------ General Counsel -------------- Robert R. Bonczek (principal financial officer) /s/ M. NIXON ELLIS Chief Business Officer and March 25, 2002 ------------------------------ Executive Vice President -------------- M. Nixon Ellis /s/ TIMOTHY J. CREECH Director of Finance and March 25, 2002 ------------------------------ Secretary (principal accounting officer) -------------- Timothy J. Creech /s/ JEFFREY M. LIPTON Chairman of the Board of Directors March 25, 2002 ------------------------------ -------------- Jeffrey M. Lipton /s/ E. GARY COOK Director March 25, 2002 ------------------------------ -------------- E. Gary Cook, Ph.D. /s/ CHARLES A. SANDERS Director March 25, 2002 ------------------------------ -------------- Charles A. Sanders, M.D. /s/ J. RICHARD CROUT Director March 25, 2002 ------------------------------ -------------- J. Richard Crout, M.D. /s/ KEVIN TANG Director March 25, 2002 ------------------------------ -------------- Kevin Tang

II-1 EXHIBIT INDEX

(a) Exhibits 3.1 * Amended and Restated Bylaws of the Registrant. 3.2 /f/ Fourth Amended and Restated Certificate of Incorporation of the Registrant 4.1 * Specimen certificate for shares of Common Stock. 4.2 * Description of Capital Stock (contained in the Fourth Amended and Restated Certificate of Incorporation of the Corporation of the Registrant, filed as Exhibit 3.2). 10.1 * License Agreement dated February 3, 1993, between the Registrant and Duke University. 10.2 * Cooperation and Strategic Alliance Agreement dated April 21, 1997, between the Registrant and MiniMed Inc. 10.3 /j/ Trimeris, Inc. Amended and Restated Stock Incentive Plan. 10.4 * Trimeris, Inc. Employee Stock Purchase Plan. 10.5 * Sixth Amended and Restated Registration Rights Agreement dated June 27, 1997, by and among the Registrant and certain stockholders of the Registrant. 10.6 * Form of Indemnification Agreements. 10.7 * License Agreement dated September 9, 1997 between the Registrant and The New York Blood Center. 10.8 /a/ Master Lease Agreement dated May 28, 1998 between the Company and Finova Technology Finance, Inc. 10.9 /b/ Prototype Defined Contribution Plan and Trust for the Trimeris, Inc. Employee 401 (k) Plan. 10.10 /a/ Adoption Agreement for the Trimeris, Inc. Employee 401 (k) Plan. 10.11 /b/ Chief Executive Employment Agreement between Trimeris and Dani P. Bolognesi dated April 21, 1999. 10.12 /c/ Development and License Agreement between Trimeris and Hoffmann-La Roche dated July 1, 1999 (Portions of this exhibit have been omitted pursuant to an order of the Commission granting confidential treatment.). 10.13 /c/ Financing Agreement between Trimeris, Inc. and Roche Finance Ltd. dated as of July 9, 1999. 10.14 /c/ Registration Rights Agreement between Trimeris, Inc. and Roche Finance Ltd. dated as of July 9, 1999. 10.15 /c/ Lease between Trimeris, Inc. and University Place Associates dated April 14, 1999 10.16 /c/ Sublease Agreement between Trimeris, Inc. and Blue Cross and Blue Shield of North Carolina dated May 15, 1999. 10.17 /c/ Lease Agreement between Hamad Jassim Althani and Blue Cross and Blue Shield of North Carolina, relating to Sublease Agreement filed as Exhibit 10.21 hereto 10.18 /d/ Executive Agreement between Trimeris and Robert R. Bonczek dated January 7, 2000. 10.19 /e/ Employment Agreement between Trimeris, Inc. and M. Nixon Ellis dated March 31, 2000. 10.20/g/ Research Agreement between Trimeris, Inc., F. Hoffmann-La Roche Ltd, and Hoffmann-La Roche, Inc. dated January 1, 2000 (portions of this exhibit have been omitted pursuant to an order of the Commission granting confidential treatment). 10.21/h/ Form of Purchase Agreement dated as of May 7, 2001 by and between Trimeris, Inc. and the purchasers set forth on the signature page thereto. 10.22 Lease Assignment and Modification Agreement dated as of September 27, 2001 between Trimeris, Inc., Blue Cross and Blue Shield of North Carolina, and Hamad Jassim Althani. 10.23 Third Amendment to Lease dated as of November 30, 2001 between Hamad Jassim Althani and Trimeris, Inc. 10.24 Sublease Agreement dated as of December 14, 2001 between Trimeris, Inc. and Triangle Pharmaceuticals, Inc.

II-2 10.25 Second Amendment dated as of January 21, 2002 between University Place Properties, LLC and Trimeris, Inc. 10.26/i/ Form of Equity Option Confirmation for Call Transaction. 10.27/k/ Form of Purchase Agreement dated as of January 23, 2002 by and between Trimeris, Inc. and the purchasers set forth on the signature page thereto. 23 Consent of KPMG LLP ------------------- * Incorporated by reference to Trimeris' Registration Statement on Form S-1, as amended (File No. 333-31109) initially filed with the Commission on July 11, 1997. (a) Incorporated by reference to Trimeris' Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. (b) Incorporated by reference to Trimeris' Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (c) Incorporated by reference to Trimeris' Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. (d) Incorporated by reference to Trimeris' Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Commission on March 29, 2000. (e) Incorporated by reference to Trimeris' Quarterly Report on Form 10-Q for the quarter ended March 31, 2000. (f) Incorporated by reference to Trimeris' 2000 Definitive 14A filed with the Commission on May 16, 2000. (g) Incorporated by reference to Trimeris' Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. (h) Incorporated by reference to Trimeris' Current Report on Form 8-K filed on May 11, 2001. (i) Incorporated by reference to Trimeris' Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. (j) Incorporated by reference to Trimeris' Registration Statement on Form S-8 filed with the Commission on November 30, 2001. (k) Incorporated by reference to Trimeris' Current Report on Form 8-K filed with the Commission on January 30, 2002. All financial statement schedules have been omitted because either they are not required, are not applicable, or the information is otherwise set forth in the Financial Statements and Notes thereto. II-3