<DOCUMENT>
<TYPE>10-K/A
<SEQUENCE>1
<FILENAME>d10ka.txt
<DESCRIPTION>FORM 10-K/A
<TEXT>

<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                  FORM 10-K/A

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

                  For the fiscal year ended December 31, 2000

[_]   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.)

                       4727 UNIVERSITY DRIVE, SUITE 100
                         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 29, 2001 was approximately $375,216,000 (based on the
last sale price of such stock as reported by the Nasdaq National Market System
on March 29, 2001):

 The number of shares of the registrant's Common Stock outstanding as of March
                            23, 2001 was 15,951,356

                      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.
<PAGE>

Trimeris, Inc.

Amendment No. 1 on Form 10-K/A to the Annual Report on Form 10-K for the year
ended December 31, 2000.

     This Amendment No. 1 on Form 10-K/A is being filed in order to include
additional disclosure in the Selected Financial Data table in Item 6, in Item
7A, Quantitative and Qualitative Disclosure of Market Risk, and in the Statement
of Stockholders' Equity for the Period from Inception (January 7, 1993) to
December 31, 1997, and note 1 of the financial statements in Item 14. This
Amendment No. 1 also discloses the restatement of the Company's financial
statements as of December 31, 1999, and for the years ended December 31, 1998
and 1999, and for the cumulative period from inception (January 7, 1993) to
December 31, 1999, as previously disclosed on the Company's Form 10-K/A for the
year ended December 31, 1999 filed with the Commission on March 30, 2001. This
Amendment No. 1 also includes a revised business description and revised risk
factors in Item 1.

     The items amended are as follows:

     Part I Item 1      Business
     Part II Item 6     Selected Financial Data
     Part II Item 7A    Quantitative and Qualitative Disclosure of Market Risk
     Part IV Item 14    Exhibits, Financial Statement Schedules and Reports on
                        Form 8-K

     Also, a new consent of KPMG LLP is filed herewith as Exhibit 23.  No other
     items have been amended.

                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Amendment No. 1 on Form 10-K/A
to be signed on its behalf by the undersigned, thereunto duly authorized.

                                              Trimeris, Inc.
                                              --------------
                                                 (Registrant)

July 24, 2001                             /s/ Dani P. Bolognesi
-------------                             ---------------------------------
                                              Dani P. Bolognesi, Ph.D.
                                              Chief Executive Officer and
                                              Chief Scientific Officer
                                              (principal executive officer)

                                       1
<PAGE>

                                    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 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.

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 many
serious 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 March 31,
2001, our accumulated deficit since beginning our operations in January 1993,
was approximately $133.8 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 measuring how a drug is distributed in tissues and
        organs.

                                       2
<PAGE>

     .  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 T-20 in more than 200 patients, with the
longest duration of treatment exceeding approximately two 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 II clinical trials with respect to T-
20, T20-208 and T20-210, for which we have not yet collected clinically relevant
data and we recently initiated two Phase III clinical trials. We plan to
commence additional Phase II or Phase III trials for T-20 throughout 2001. 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, and interim data from T20-204,
a 12 patient pediatric Phase I/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 by twice daily injections under the skin, along
with the background regimen. 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.

     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 eight weeks, this trial showed
that T-20 was well-tolerated by children and that children receiving the higher
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 November 2000, we began 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 will enroll up to 525 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 will be a combination of other anti-HIV drugs individually
determined for that patient based on the genotypic and phenotypic analysis of
the

                                       3
<PAGE>

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
will be 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 January
2001, we also began enrolling patients in T20-302, a multi-center Phase III
clinical trial with a protocol, or trial design, similar to T20-301. This trial
will enroll up to 525 HIV-infected patients in Western Europe and Australia.

     T-1249. Our second generation fusion inhibitor for HIV is T-1249. T-1249
has demonstrated potent, or strong, HIV suppression in 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 T-1249 appears to be
active against viruses that have become resistant to T-20. In addition, T-1249
has enhanced pharmacokinetic properties compared to T-20, which means T-1249
remains at higher levels in the bloodstream 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 two week 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.

     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 the
date hereof.

     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
<PAGE>

     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 to manufacture
the quantities of bulk drug substance of T-20 we will need if we are successful
in commercializing T-20, and we are in the process of selecting a third party to
produce the finished drug product from such bulk drug substance.

     We are also currently pursuing research programs to develop fusion
inhibitors that target respiratory syncytial virus, commonly known as RSV.

     Our principal executive office is located at 4727 University 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.

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.

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.

                                       5
<PAGE>

Overview of HIV

     HIV is a fusogenic virus that currently affects approximately 920,000
people in North America and nearly 540,000 people in Western Europe. It is
estimated currently that an additional 41,000 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 nine FDA-approved RTIs, and six 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 worldwide sales of approved RTIs and PIs exceeded $4.6 billion in 1999.

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 even in 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 33% 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.

     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.

                                       6
<PAGE>

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, 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.

     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 T-20 in more than
200 patients, with the longest duration of treatment exceeding approximately two
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 have completed collecting clinically
relevant data with respect to two Phase I/II clinical trials of T-20 and three
Phase II clinical trials of T-20.

     We are continuing two Phase II clinical trials of T-20 from which we
currently anticipate completing the collection of clinically relevant data in
late 2001. We have commenced two Phase III clinical trials for T-20, one in the
United States 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 to the FDA. We plan to commence
additional clinical trials throughout 2001. T-20 has received "fast track"
designation by the FDA for the treatment of HIV.

                                       7
<PAGE>

     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:


<TABLE>
<CAPTION>
                                                 Number of
  Trial                                          Patients     Enrollment
 Number       Phase          Trial Design        Enrolled     Criteria         Status              Purpose
--------------------------------------------------------------------------------------------------------------------
<S>       <C>         <C>                     <C>           <C>              <C>            <C>

TRI-001    Phase I/II   3 mg, 10 mg, 30 mg or          17    HIV-infected     Completed      Proof of concept;
                        100 mg BID via IV for                                                dose escalating
                        14 days                                                              monotherapy study

TRI-003    Phase II     12.5 mg, 25 mg, 50             78    Heavily          Completed      Route of
                        mg, 100 mg via pump                  pretreated                      administration, dose
                        or 50 mg, 100 mg BID                                                 comparison
                        for 28 days
T20-204    Phase I/II   30 mg/m2-60 mg/m2 BID          12    Ages 3-12,       Ongoing        Safety, tolerability &
                                                             HIV-infected                    pharmacokinetics
T20-205    Phase II     50 mg BID plus                 70    Heavily          Ongoing        Rollover, chronic
                        background regimen                   pretreated                      administration
T20-206    Phase II     50 mg, 75 mg or 100            71    NNRTI Naive,     Ongoing        Randomized, dose
                        mg BID plus control                  PI experienced                  comparison
                        regimen or control
                        regimen only
T20-208    Phase II     50 mg carbonate and            60    No anti-HIV      Ongoing        Formulation comparison
                        75 mg, or 100 mg                     restrictions
                        carbonate, or 100 mg
                        Tris formulation BID
T20-210    Phase II     90 mg BID plus                 52    Completion of    Ongoing        Safety
                        background regimen                   T1249-101
T20-301    Phase III    90 mg BID plus                525    Experienced      Ongoing        Safety, efficacy &
                        background regimen                   with PIs,                       pharmacokinetics
                                                             NNRTIs and
                                                             NRTIs
T20-302    Phase III    90 mg BID plus                525    Experienced      Ongoing        Safety, efficacy &
                        background regimen                   with PIs,                       pharmacokinetics
                                                             NNRTIs and
                                                             NRTIs
--------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       8
<PAGE>

     Interim Data from T20-206 (16 weeks), T-20-204 (12 weeks) and T20-205 (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 injections in addition to the background
        regimen.

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/microliter 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.

     T20-206 is ongoing and the next analysis of data is scheduled to occur
based on 48-week data.

     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.

     T20-204 is ongoing and the next analysis of data is scheduled to occur
based on 24-week data.

     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 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/ml,
and 16 of 41 patients or 39 % had an HIV viral load below 400 copies/ml.

                                       9
<PAGE>

     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.

     Other Ongoing Trials of T-20

     T20-208.  In March 2000, we initiated T20-208, a Phase II clinical trial
for T-20 that will evaluate alternative formulations of T-20, which could lead
to a simpler dosing regimen.  The trial is designed to enroll up to 60 patients,
and will evaluate 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 will be 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 90mg per dose.  We
designed our Phase III protocols to reflect this information from T20-208.  T20-
208 is ongoing and we expect to complete the collection of clinically relevant
data from this trial in 2001.

     T20-210.  In June 2001, we initiated T20-210, a Phase II clinical trial for
T-20 that provides T-20 to patients who completed our T1249-101 trial.  The
trial is designed to enroll up to 52 patients and will evaluate the safety of T-
20 in patients who previously received T-1249 in the T-1249-101 trial.  In T20-
210, 90 mg of T-20 is administered via twice daily subcutaneous injections plus
a background regimen selected by the physician.  T20-210 is ongoing and we
expect to collect clinically relevant data from the trial prior to submission of
the NDA to the FDA.

     T20-301.  In November 2000, we began enrollment of T20-301, a 48-week Phase
III clinical trial in North America, Mexico, and Brazil, that evaluates the
safety and pharmacokinetics of T-20 in up to 525 HIV-infected patients who had
previously used all three classes of currently-approved anti-HIV drugs.  In this
trial, patients are randomly assigned to receive an optimized background regimen
of other anti-HIV drugs alone or in combination with twice daily subcutaneous
injections delivering 90 mg of T-20 each.  The background regimen is optimized
based on the genotype and phenotype of the patient's virus.  T20-301 is ongoing
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 to the FDA.

     T20-302.  In January 2001, we began enrollment of T20-302, a 48-week Phase
III clinical trial in Western Europe and Australia.  The protocol for T20-302 is
substantially similar to T20-301 and also involves up to 525 HIV-infected
patients.

     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 currently conducting T-20 resistance analysis of
patients' blood samples taken throughout several ongoing clinical trials.  Early
genotypic and phenotypic analysis from the 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. We are conducting additional analysis to evaluate the emergence of
T-20 resistance, when T-20 is given in combination with other anti-HIV drugs
that are believed to be active.  We expect however, that any resistance profile
of T-20 will not overlap with the resistance profiles of currently-approved
anti-HIV drugs because of T-20's novel mechanism of action.

                                       10
<PAGE>

     Future T-20 Clinical Trials

     Throughout the remainder of 2001, 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
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 suggests that T-1249 may possess a resistance
profile distinct from RT 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 injection under the skin.
This trial is ongoing and we currently anticipate completing the collection of
clinically relevant data from this trial in 2002.

     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
mg per day to 50 mg 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.


     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 and dosing
period in the ongoing and future trials.

                                       11
<PAGE>

Other 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.

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 higher than 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 clinical manufacturing process to four third-party contract manufacturers,
including Roche, who have produced various quantities of T-20.  Three third-
party manufacturers are currently using 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 to supply the commercial quantities of
bulk drug substance of T-20 we will need if we are successful in commercializing
T-20, and we are in the process of selecting a third-party to produce the
finished drug product from such bulk drug substance.  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."

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.

                                       12
<PAGE>

     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.

     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 business, financial
condition, and results of operations.  For further information see - "Risk
Factors - 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."

     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.

     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. We expect to rely on Roche for many of these functions for T-20
and T-1249.  We may develop capabilities in some of these areas. In other areas,
however, we may rely on Roche or other marketing partners or other arrangements
with third parties. In the event that Roche does not market our product
candidates, or we are unable to reach agreement with one or more marketing
partners to market these products, we may be required to develop internal sales,
marketing and distribution capabilities. We may not be able to make arrangements
with third parties on acceptable terms, if at all, or to establish cost-
effective sales, marketing, or distribution capabilities of our own.

     If we establish sales, marketing, or distribution arrangements with other
parties, they may have significant control over important aspects of the
commercialization of our products. We may not be able to control the amount and
timing of resources that any other third party may devote to our products or
prevent any third party from pursuing alternative technologies or products that
could result in the development of products that compete with our products.  For
further information see - "Risk Factors - 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."

                                       13
<PAGE>

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. Our issued United States patents 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.  For
further information see - "Risk Factors -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."


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 17 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.

                                       14
<PAGE>

     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.  For further information see - "Risk Factors - 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."

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,

 .  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.

                                       15
<PAGE>

     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 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.  For further information see - "Risk Factors - 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."

                                       16
<PAGE>

Third-Party Reimbursement And Health Care Reform Measures

     In the United States and elsewhere, sales of prescription pharmaceuticals
are dependent, in part, on the consumer's ability to be reimbursed for the cost
of the drugs by third-party payors, such as government agencies and private
insurance plans. 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. A majority of
HIV-infected patients taking anti-HIV drugs, however, are reimbursed by third-
party payors for the cost of their therapies. If we succeed in bringing one or
more products to the market, these products may not be considered cost-effective
and reimbursement to the consumer may not be sufficient to allow us to sell our
products on a competitive basis. Economic, political and regulatory influences,
including the efforts of governments and third-party payors to contain or reduce
the cost of health care through various means, will continue to affect the
business and financial condition of pharmaceutical companies. A number of
legislative and regulatory proposals aimed at changing health care systems have
been proposed, both domestically and abroad, in recent years. Because of the
high cost of the treatment of HIV, many state legislatures are reassessing
reimbursement policies for this therapy. In addition, the emphasis in the United
States on reducing the overall costs of health care through managed care has
increased, and will continue to increase, the pressure on pharmaceutical
pricing. Recently, several major pharmaceutical companies have offered to sell
their HIV drugs at or below cost to certain third-world nations in Africa.  The
effect of these offers on the reimbursement climate, and prices that may be
charged for, HIV medications in the United States and the rest of the developed
world is difficult to predict.  There is a risk that third-party payors could
exert pressure for price reductions in the United States and the rest of the
developed world based on these offers to Africa.  This price pressure could
limit the amount that we would be able to charge for our products. We cannot
predict whether legislative or regulatory proposals will be adopted or the
effect such proposals or managed care efforts may have on our business. However,
the announcement and/or adoption of these proposals or efforts could have a
material adverse effect on our business, financial condition, results of
operations and the market price of our stock.  For further information see -
"Risk Factors - 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."

Human Resources

     As of June 28, 2001, we had 98 full-time employees, including a technical
scientific staff of 67. 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
Advisors 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:

                                       17
<PAGE>

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

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.

                                       18
<PAGE>

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 March 31, 2001, our accumulated deficit since beginning our
operations in January 1993 was approximately $133.8 million. We had net losses
of approximately $19.7 million in 1998, approximately $22.2 million in 1999,
approximately $50.9 million in 2000 and approximately $11.7 million in the first
quarter of 2001. Since inception, we have spent our funds on our drug
development efforts, relating primarily to the development of 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 of 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 May 2001, raised
net proceeds of approximately $43.4 million.  Barring unforeseen developments,
we anticipate that our existing capital resources will fund our capital
requirements through the middle 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, 2000, we used net cash of approximately $24.8 million for operations,
including research and development, and net cash of approximately $52.2 million
for investing activities.

     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 volatile
and the general ability of companies to obtain additional equity financing has
become more difficult thus far in 2001 compared to 2000.

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
and financial condition.

                                       19
<PAGE>

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 hereof. Our other
drug candidate in clinical trials, T-1249, is at an earlier stage of clinical
trials. 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 three Phase II clinical trials of T-
     20;
  .  we are continuing two Phase II clinical trials of T-20 from which we
     currently anticipate completing the collection of clinically relevant data
     in late 2001;
  .  we have commenced a Phase I/II clinical trial of T-1249, from which we
     currently anticipate completing the collection of clinically relevant data
     in 2002; and
  .  we have commenced two Phase III clinical trials for T-20, one in the United
     States 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 to the FDA.

     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;

                                       20
<PAGE>

        .   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 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.

     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 Item 1, Business, 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

                                       21
<PAGE>

upfront and milestone payments, of which we have received $12 million as of the
date hereof. 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.

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 to manufacture commercial quantities of the bulk
drug substance of T-20 in the event that we successfully commercialize T-20, and
we are in the process of selecting 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

                                       22
<PAGE>

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 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.

                                       23
<PAGE>

     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 Item 1, Business, 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:

     .  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 or strategic relationships;

     .  departures of key personnel;

     .  changes in business or regulatory conditions; and

     .  the trading volume of our common stock.

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

                                       24
<PAGE>

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, 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 and exclusively license 17 issued United
States patents, 24 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, will be given to our patents 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 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.

     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

                                       25
<PAGE>

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.

     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 17 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.

                                       26
<PAGE>

     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.

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
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.

                                       27
<PAGE>

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.

     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

                                       28
<PAGE>

     .  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, will be up for renewal in April 2003, March 2002 and September
2001, respectively. 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.

     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 July 16, 2001, approximately 17,380,000 shares of our common stock
were outstanding. Once our registration statement on Form S-3 filed with the
Securities and Exchange Commission on May 11, 2001, as amended, becomes
effective, approximately 17,306,000 of the currently outstanding shares will be
freely transferable without restriction or further registration under the
Securities Act. 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 July 16, 2001, options, warrants and other convertible
securities convertible or exercisable into approximately 2,444,000 shares of
common stock were outstanding and we had reserved an additional 1,233,000 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.

                                       29
<PAGE>


                                   PART II.
                                   --------



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.

<TABLE>
<CAPTION>
                                                                                                             Cumulative
                                                                                                               from
                                                                                                              Inception
                                                                                                             (January 7,
                                                      For the Years Ended December 31,                        1993) to
                                                                                                              December
                                       -------------  ------------  ------------  ----------  ------------       31,
                                            1996          1997          1998         1999         2000          2000
                                       -------------  ------------  ------------  ----------  ------------  ------------
                                                                   (restated)     (restated)
                                                                      (2)             (2)
<S>                                     <C>           <C>          <C>          <C>            <C>           <C>
Statements of Operations
Data:
Revenue                                  $   55      $     431      $    363     $   4,681      $    956     $   6,590
                                       -----------  ------------  -----------  ------------  ------------  -------------
Operating expense:
 Research and development:
  Non-cash compensation...........           --            193           821         2,174         5,386         8,574
  Other research and
   development expense............        5,146          9,541        15,987        17,582        32,970        88,676
                                       ----------  -------------  -----------  ------------  ------------  -------------
Total research and development
  expense........................         5,146          9,734        16,808        19,756        38,356        97,250
  General and administrative:
   Non-cash compensation........             --            193           602         2,524         7,018        10,337
   Other general and
    administrative expense.....           1,761          2,403         4,299         6,156         8,115        25,833
                                       ----------  -------------  -----------  ------------  ------------  -------------
Total general and administrative
  expense........................         1,761          2,596         4,901         8,680        15,133        36,170
                                       ----------  -------------  -----------  ------------  ------------  -------------
Total operating expenses..........        6,907         12,330        21,709        28,436        53,489       133,420
                                       ----------  -------------  -----------  ------------  ------------  -------------
Operating loss....................       (6,852)       (11,899)      (21,346)      (23,755)      (52,533)     (126,830)
                                       ----------  -------------  -----------  ------------  ------------  -------------
Interest income...................           47            584         1,755         1,729         6,114        10,304
Interest expense..................         (167)          (113)         (127)         (161)         (257)       (1,448)
                                       ----------  -------------  -----------  ------------  ------------  -------------
Total other income (expense)               (120)           471         1,628         1,568         5,857         8,856
                                       ----------  -------------  -----------  ------------  ------------  -------------
Loss before cumulative effect of
 change in accounting principle          (6,972)       (11,428)      (19,718)      (22,187)      (46,676)     (117,974)
Cumulative effect of change in                                                                                  (4,180)
                                       ----------  -------------  -----------  ------------  ------------  -------------
 accounting principle............            --             --            --            --        (4,180)
                                       ----------  -------------  -----------  ------------  ------------  -------------
Net loss..........................      $(6,972)      $(11,428)     $(19,718)      (22,187)     $(50,856)    $(122,154)
                                       ==========  =============  ===========  ============  ============  =============
Basic and diluted net loss per
 share (1):
Before cumulative effect of
 accounting change...............       $ (1.48)        $(1.57)       $(1.87)       $(1.79)     $  (3.00)
Accounting change.................           --             --            --            --         (0.27)
                                       ----------  -------------  -----------  ------------  ------------

Basic and diluted net loss per
 share...........................        $(1.48)        $(1.57)       $(1.87)       $(1.79)     $  (3.27)
                                       ==========  =============  ===========  ============  ============
Weighted average shares   used
 in computing basic net loss per
  share (1).......................        4,705          7,295        10,547        12,411        15,548
                                       ==========  =============  ===========  ============  ============

</TABLE>

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

                                       30
<PAGE>

<TABLE>
<CAPTION>
                                                                      As of December 31,
                                           ----------------------------------------------------------------------------
                                                 1996          1997           1998           1999            2000
                                           -------------- -------------- -------------  --------------  ---------------
                                                                         (in thousands)
                                                                         (restated)      (restated) (2)
<S>                                              <C>          <C>           <C>           <C>              <C>
Balance Sheet Data:
Cash and cash equivalents..................      $    132     $ 32,557      $ 16,920      $ 37,023         $  31,349
Working capital (deficiency)...............        (1,305)      34,733        16,562        36,856            73,998
Total assets...............................         1,684       38,844        22,872        51,650            98,933
Long-term notes payable and capital
 lease obligations, less current portion...           575          240           853         1,206             1,861
Accumulated deficit........................       (17,965)     (29,393)      (49,111)      (71,298)         (122,154)
Total stockholders' equity (deficit).......          (409)      35,810        18,016        39,066            73,379
</TABLE>

                       Selected Quarterly Financial Data
                     (in thousands, except per share data)
                                  (unaudited)

<TABLE>
<CAPTION>
                                               Q1 1999           Q2 1999           Q3 1999           Q4 1999
                                          -----------------  ----------------  ----------------  ----------------
Statements of Operations Data:              (restated) (3)    (restated) (3)    (restated) (3)    (restated) (3)
Revenue                                          $      81          $     --          $  4,600          $     --
                                          -----------------  ----------------  ----------------  ----------------
<S>                                         <C>               <C>               <C>               <C>
Operating expense:
Research and development
   expenses....................                      4,117             5,420             3,369             6,850
General and administrative
   expenses....................                      1,753             1,789             2,178             2,960
                                           ----------------  ----------------  ----------------  ----------------
Total operating expenses.......                      5,870             7,209             5,547             9,810
                                           ----------------  ----------------  ----------------  ----------------
Operating loss.................                     (5,789)           (7,209)             (947)           (9,810)
                                           ----------------  ----------------  ----------------  ----------------

Interest income................                        231               257               633               608
Interest expense...............                        (42)              (43)              (28)              (48)
                                           ----------------  ----------------  ----------------  ----------------
Total other income, net........                        189               214               605               560
                                           ----------------  ----------------  ----------------  ----------------

Net loss.......................                  $  (5,600)          $(6,995)             (342)          $(9,250)
                                          =================  ================  ================  ================
Basic and diluted net loss per share (1)         $   (0.52)          $ (0.61)          $ (0.03)          $ (0.67)
                                          =================  ================  ================  ================
Weighted average shares   used in
 computing basic net loss per
share (1)......................                     10,677            11,521            13,678            13,721

                                          =================  ================  ================  ================
</TABLE>


<TABLE>
<CAPTION>
                                               Q1 2000           Q2 2000           Q3 2000           Q4  2000
                                          -----------------  ----------------  ----------------  ----------------
Statements of Operations Data:                (restated)        (restated)        (restated)
Revenue                                          $     210          $    210          $    210          $    326
                                          -----------------  ----------------  ----------------  ----------------
<S>                                          <C>                <C>               <C>                  <C>
Operating expense:
Research and development
   expenses...................                       8,546            11,262             7,300            11,248
General and administrative
   expenses...................                       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
                                           ================  ================  ================  ================
</TABLE>

(3) See 1999 Form 10-K/A filed with the Securities and Exchange Commission on
    March 30, 2001.

                                       31
<PAGE>

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.
Substantially all of our contracts are denominated in US dollars, therefore we
have no material foreign currency risk. 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, and we
believe the market risk exposure in our investment portfolio has remained
consistent over this period.


     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, 2000. Our investments are generally most
vulnerable to changes in short-term interest rates in the United States.
Substantially all of our investments mature in twelve months or less, therefore
we believe that the risk of material loss of principal due to changes in
interest rates is minimal.


                                            Carrying             Average
                                             Amount             Interest
                                           (thousands)            Rate
                                           -----------            ----

Cash equivalents - fixed rate                $ 30,775              6.74%
Short-term investments - fixed rate            62,025              6.67%
Overnight cash investments - fixed rate           574              5.99%
                                             --------              -----
Total investment securities                  $ 93,374              6.69%
                                             ========              =====

     In July 2000, we entered into a derivative transaction with a financial
institution that may be settled by selling up to 300,000 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. We received $2.8
million in proceeds that were accounted for as an increase to additional paid-in
capital in accordance with generally accepted accounting principles at the time
of the transaction. Concurrently, we entered into a second derivative
transaction with the same financial institution on shares of our common stock at
no net premium to either party. Under this transaction, we may elect to settle
by issuing up to 125,000 shares of our common stock to the financial institution
at prescribed prices significantly higher than the market price of our stock at
the date of the transaction and receive a net cash payment from the financial
institution. 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. We
intend to settle the contracts by issuing shares. In December 2000 these
contracts were amended to allow settlement in unregistered shares of our common
stock. All of these derivative transactions expire or mature in July 2001. The
financial institution has advised us that it has engaged and may continue to
engage in transactions, including the buying and selling of shares of our common
stock, to offset its risks related to these transactions, which may or may not
affect the market price of our stock.

                                       32
<PAGE>

                                    PART IV
                                    -------


Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
         ----------------------------------------------------------------

    The following documents are filed as part of this report:

<TABLE>
<CAPTION>
                                                                                             Page Number
                                                                                             -----------

(a)1.  Financial Statements
       --------------------
       <S>                                                                                   <C>
       Independent Auditors' Report.......................................................       F-1
       Balance Sheets as of  December 31, 1999 (restated) and 2000........................       F-2
       Statements of Operations for the Years Ended December 31,..........................
          1998 (restated), 1999 (restated) and 2000 and for the period from Inception to
          December 31, 2000...............................................................       F-3
       Statements of Stockholders' Equity (Deficit) for the period from Inception to
          December 31, 1997, and for the Years Ended December 31, 1998 (restated), 1999
          (restated) and 2000.............................................................       F-4
       Statements of Cash Flows for the Years Ended December 31,
          1998 (restated), 1999 (restated) and 2000 and for the period from Inception to
          December 31, 2000...............................................................       F-5
       Notes to Financial Statements......................................................       F-7
</TABLE>

(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 Annual Report on 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.

                                       33
<PAGE>

                         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, 1999 and 2000, and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 2000 and for the cumulative
period from the date of inception (January 7, 1993) to December 31, 2000. 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, 1999 and 2000, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2000, and for the cumulative period from the date of
inception (January 7, 1993) to December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, the Company has restated its
1998 statements of operations, stockholders' equity, and cash flows, and its
1999 financial statements.

March 23, 2001                                                   KPMG LLP
Raleigh, North Carolina

                                      F-1
<PAGE>

                                TRIMERIS, INC.
                         (A Development Stage Company)

                                BALANCE SHEETS
                       (in thousands, except par value)


<TABLE>
<CAPTION>
                                                                                             As of December 31,
                                                                                        ----------------------------
                                                                                         1999              2000
                                                                                        -------------   ------------
                                                                                          (restated)
<S>                                                                                     <C>             <C>
Assets
Current assets:
   Cash and cash equivalents.........................................................       $ 37,023        $  31,349
   Short-term investments............................................................         10,775           62,025
   Accounts receivable - Roche.......................................................            144               --
   Accounts receivable...............................................................             24                4
   Prepaid expenses..................................................................            268              393
                                                                                           ---------        ---------
    Total current assets.............................................................         48,234           93,771
                                                                                           ---------        ---------
Property, furniture and equipment, net of accumulated depreciation and
 amortization of $3,564 and $4,932 at December 31, 1999 and 2000, respectively.....            2,585            3,983
                                                                                           ---------        ---------

Other assets:
 Patent costs, net of accumulated amortization of $20 and $46 at December 31,
    1999 and 2000, respectively......................................................            643              924
 Equipment deposits..................................................................            188              255
                                                                                           ---------        ---------
     Total other assets..............................................................            831            1,179
                                                                                           ---------        ---------
     Total assets....................................................................       $ 51,650        $  98,933
                                                                                           =========        =========


Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable...................................................................       $  6,159        $   3,476
  Accounts payable - Roche ..........................................................             --            9,556
  Current installments of obligations under capital leases...........................            717            1,174
  Accrued compensation...............................................................          1,028            1,359
  Deferred revenue - Roche...........................................................             --            1,304
  Accrued expenses...................................................................          3,474            2,904
                                                                                           ---------        ---------
      Total current liabilities......................................................         11,378           19,773
Obligations under capital leases, excluding current installments.....................          1,206            1,861
Deferred revenue - Roche ............................................................             --            3,920
                                                                                           ---------        ---------
      Total liabilities..............................................................         12,584           25,554
                                                                                           ---------        ---------

Stockholders' equity:
  Preferred Stock at $0.001 par value per share, authorized 10,000 shares; issued and
     outstanding zero shares at December 31, 1999 and 2000...........................             --               --
  Common Stock at $0.001 par value per share, authorized 60,000 shares; issued
     and outstanding 13,765 and 15,863 shares at December 31, 1999 and
     2000, respectively..............................................................             14               16
  Additional paid-in capital.........................................................        112,908          196,844
  Deficit accumulated during the development stage...................................        (71,298)        (122,154)
  Deferred compensation..............................................................         (2,453)          (1,394)
  Accumulated other comprehensive income.............................................             --               76
  Notes receivable from stockholders.................................................           (105)              (9)
                                                                                           ---------        ---------
     Total stockholders' equity .....................................................         39,066           73,379
                                                                                           ---------        ---------
Commitments and contingencies
     Total liabilities and stockholders' equity......................................       $ 51,650        $  98,933
                                                                                            ========        =========
</TABLE>

                See accompanying notes to financial statements.

                                      F-2
<PAGE>

                                TRIMERIS, INC.
                         (A Development Stage Company)

                           STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)



<TABLE>
<CAPTION>
                                                      For the Years Ended December 31,                        Cumulative from
                                                ---------------------------------------                           Inception
                                                                                                             (January 7, 1993)
                                                     1998                1999                2000              to December 31,
                                                                                                                     2000
                                               -----------------   -----------------    ----------------     ---------------------
                                                  (restated)           (restated)
<S>                                            <C>                 <C>                  <C>                  <C>
Revenue......................................  $             363   $           4,681    $            956     $               6,590
                                               -----------------   -----------------    ----------------     ---------------------


Operating expenses:
     Research and development:
         Non-cash compensation...............                821               2,174               5,386                     8,574
         Other research and development
           expense...........................             15,987              17,582              32,970                    88,676
                                               -----------------   -----------------    ----------------     ---------------------
     Total research and development
         expense.............................             16,808              19,756              38,356                    97,250
                                               -----------------   -----------------    ----------------     ---------------------
     General and administrative:
         Non-cash compensation...............                602               2,524               7,018                    10,337
         Other general and administrative
           expense...........................              4,299               6,156               8,115                    25,833
                                               -----------------   -----------------    ----------------     ---------------------
     Total general and administrative
         expense.............................              4,901               8,680              15,133                    36,170
                                               -----------------   -----------------    ----------------     ---------------------
         Total operating expenses............             21,709              28,436              53,489                   133,420
                                               -----------------   -----------------    ----------------     ---------------------
     Operating loss..........................            (21,346)            (23,755)            (52,533)                 (126,830)
                                               -----------------   -----------------    ----------------     ---------------------


Other income (expense):
         Interest income.....................              1,755               1,729               6,114                    10,304
         Interest expense....................               (127)               (161)               (257)                   (1,448)
                                                           1,628               1,568               5,857                     8,856
                                               -----------------   -----------------    ----------------     ---------------------
Loss before cumulative effect of change in
  accounting principle.......................            (19,718)            (22,187)            (46,676)                 (117,974)

 Cumulative effect of change in accounting
  principle..................................                 --                  --              (4,180)                   (4,180)

                                               -----------------   -----------------    ----------------     ---------------------

  Net loss...................................  $         (19,718)  $         (22,187)   $        (50,856)    $            (122,154)
                                               =================   =================    ================     =====================


Basic and diluted net loss per share:
   Before cumulative effect of
     accounting change.......................  $           (1.87)  $           (1.79)   $          (3.00)

   Accounting change.........................                 --                  --               (0.27)
     Basic and diluted net loss per
       share.................................  $           (1.87)  $           (1.79)   $          (3.27)
                                               =================   =================    ================
Weighted average shares used
    in per share computations................             10,547              12,411              15,548
                                               =================   =================    ================
</TABLE>


                See accompanying notes to financial statements.

                                      F-3
<PAGE>

                                TRIMERIS, INC.
                         (A Development Stage Company)
                       STATEMENT OF STOCKHOLDERS' EQUITY
 For the Period from Inception (January 7, 1993) to December 31, 1997 and the
                Years Ended December 31, 1998, 1999, and 2000
                                (in thousands)

<TABLE>
<CAPTION>
                                                             Preferred Stock         Common Stock                       Deficit
                                                        ---------------------------------------------                 accumulated
                                                                                                         Additional   during the
                                                           Number of      Par     Number of      Par       paid-in    development
                                                            shares       value     Shares       value      capital       stage
                                                        --------------------------------------------------------------------------
<S>                                                       <C>            <C>      <C>           <C>      <C>           <C>
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, net......       --             --    3,163           3     34,529             --
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             --
Amortization of deferred compensation...................       --             --       --          --         --             --
Loss for the period.....................................       --             --       --          --         --        (11,428)
                                                           -------        ----------------       ------------------------------
Balance as of December 31, 1997.........................       --             --   10,549          11     67,360        (29,393)
Reclassification of deferred compensation...............       --             --       --          --       (202)            --
                                                           -------        ----------------       ------------------------------
Balance as of December 31, 1997.........................       --             --   10,549          11     67,158        (29,393)
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 restated).........       --             --       --          --        870             --
Loss for the period (restated)..........................       --             --       --          --         --        (19,718)
                                                           -------        ----------------       ------------------------------
Balance as of December 31, 1998 (restated)..............       --          $  --   10,637         $11    $68,529      $ (49,111)
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 (restated).......       --             --       --          --      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          --         --             --

<CAPTION>
                                                                             Accumulated
                                                                               Other             Notes                Net
                                                               Deferred     Comprehensive     receivable          Stockholders'
                                                             compensation      Income      from stockholders         Equity
                                                        -----------------------------------------------------    ----------------
<S>                                                          <C>            <C>            <C>                    <C>
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, net.....             --              --                 --            34,532
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........................         (2,336)             --                 --                --
Amortization of deferred compensation..................            386              --                 --               386
Loss for the period....................................             --              --                 --           (11,428)
                                                        -----------------------------------------------------    ----------------
Balance as of December 31, 1997........................         (1,950)             --               (218)           35,810
Reclassification of deferred compensation..............            202              --                 --                --
                                                        -----------------------------------------------------    ----------------
Balance as of December 31, 1997........................         (1,748)             --               (218)           35,810
Exercise of stock options..............................             --              --                 --                10
Issuance of stock for 401( K) match....................             --              --                 --               236
Issuance of stock under Employee Stock
  Purchase Plan........................................             --              --                 --               255
Amortization of deferred compensation (restated).......            553              --                 --             1,423
Loss for the period (restated).........................             --              --                 --           (19,718)
                                                        -----------------------------------------------------    ----------------
Balance as of December 31, 1998 (restated).............       $ (1,195)             --          $    (218)       $   18,016
Issuance of shares in public offering, net.............             --              --                 --            31,357
Exercise of stock options..............................             --              --                 --             1,157
Issuance of stock options to employees (restated)......         (2,152)             --                 --                --
Issuance of stock for 401( K) match....................             --              --                 --               292
Issuance of stock under Employee Stock
  Purchase Plan........................................             --              --                 --               220
Repayment of notes receivable from
  stockholders.........................................             --              --                113               113
Exercise of warrant, net...............................             --              --                 --                --
</TABLE>

                                      F-4
<PAGE>

<TABLE>
<S>                                                       <C>         <C>        <C>           <C>       <C>          <C>
Amortization of deferred compensation
    (restated).......................................           --            --          --          --        3,804          --
Issuance of warrant (restated).......................           --            --          --          --        5,400          --
Loss for the period (restated).......................           --            --          --          --           --     (22,187)
Balance as of December 31, 1999 (restated)...........           --    $       --      13,765   $      14  $   112,908  $  (71,298)
Loss for the period..................................           --            --          --          --           --     (50,856)
Unrealized gain on available for sale
    securities.......................................           --            --          --          --           --          --
  Comprehensive income 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 options........................           --            --          --          --        2,796          --
Exercise of warrant, net.............................           --            --          11          --           --          --
Amortization of deferred compensation................           --            --          --          --       11,345          --
                                                       -----------    ----------------------   ----------------------------------
Balance as of December 31, 2000......................           --    $       --      15,863   $      16  $   196,844  $ (122,154)
                                                       ===========    ======================   ==================================

<CAPTION>
<S>                                                     <C>                 <C>            <C>                    <C>
Amortization of deferred compensation
    (restated).......................................                894               --                 --               4,698
Issuance of warrant (restated).......................                 --               --                 --               5,400
Loss for the period (restated).......................                 --               --                 --             (22,187)
                                                                                                                  --------------
Balance as of December 31, 1999 (restated)...........        $    (2,453)              --        $      (105)     $       39,066
Loss for the period..................................                 --               --                 --             (50,856)
Unrealized gain on available for sale
    securities.......................................                 --               76                 --                  76
                                                                                                                  --------------
  Comprehensive income 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
    Purchase Plan....................................                 --               --                 --                 334
Repayment of notes receivable from
  stockholders.......................................                 --               --                 96                  96
Proceeds from sale of options........................                 --               --                 --               2,796
Exercise of warrant, net.............................                 --               --                 --                  --
Amortization of deferred compensation................              1,059               --                 --              12,404
                                                        -------------------------------------------------------------------------
Balance as of December 31, 2000......................        $    (1,394)     $        76         $       (9)      $      73,379
                                                        =========================================================================
</TABLE>

                See accompanying notes to financial statements.

                                      F-5
<PAGE>

                                TRIMERIS, INC.
                         (A Development Stage Company)

                           STATEMENTS OF CASH FLOWS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                                          Cumulative from
                                                               For the years ended December 31,                Inception
                                                        -------------------------------------------
                                                            1998           1999           2000           (January 7, 1993) to
                                                                                                           December 31, 2000
                                                        -------------  -------------  -------------      ---------------------
                                                           (restated)    (restated)
<S>                                                     <C>            <C>            <C>                <C>
Cash flows from operating activities:
    Net loss.......................................      $    (19,718)   $   (22,187)   $   (50,856)           $     (122,154)
    Adjustments to reconcile net loss to net cash
     used by operating activities:
     Depreciation and amortization of property,
       furniture and equipment.....................              606            789          1,368                     4,952
     Non-cash compensation expense.................            1,423          4,698         12,404                    18,911
     Amortization of deferred revenue - Roche......               --             --           (956)                     (956)
     Other amortization............................               12             34             26                       109
     401 (K) plan stock match......................              236            292            386                       914
     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....               33             44             20                        (4)
     Accounts receivable Roche.....................               --           (144)           144                        --
     Prepaid expenses..............................             (315)            53           (125)                     (393)
     Other assets..................................              (61)           (40)           (67)                     (255)
     Increase (decrease) in liabilities:
     Accounts payable..............................              454          4,983         (2,683)                    3,476
     Accounts payable - Roche......................               --             --          9,556                     9,556
     Accrued compensation..........................              221            199            331                     1,359
     Accrued expenses..............................              322          1,947           (570)                    2,814
     Deferred revenue - Roche......................               --             --          2,000                     2,000
                                                        -------------  -------------  -------------      ---------------------
     Net cash used by operating activities.........          (16,787)       (9,332)        (24,842)                  (75,020)
                                                        -------------  -------------  -------------      ---------------------
Cash flows from investing activities:
    Purchase of property, furniture and equipment..             (212)         (657)           (716)                   (2,220)
    Net sale (purchase) of short-term investments..            1,607        (7,519)        (51,174)                  (61,949)
    Equipment held for resale......................               --            --              --                       (61)
    Organizational costs...........................               --            --              --                        (8)
    Patent costs...................................              (99)         (116)           (307)                     (971)
                                                        -------------  -------------  -------------      ---------------------
    Net cash provided (used) by investing
       activities..................................            1,296        (8,292)        (52,197)                  (65,209)
                                                        -------------  -------------  -------------      ---------------------
Cash flows from financing activities:
    Proceeds (payments) from notes payable.........               --            --              --                     6,150
    Lease costs....................................               --            --              --                       (13)
    Principal payments under capital lease
      obligations..................................             (411)         (520)           (938)                   (3,696)
    Proceeds from issuance of Common Stock, net....               --        31,357          66,570                   132,294
    Proceeds from issuance of Preferred Stock......               --            --              --                    23,896
    Proceeds from sale of options..................               --            --           2,796                     2,796
    Proceeds from exercise of stock options........               10         1,157           2,507                     3,683
    Employee stock purchase plan stock issuance....              255           220             334                       809
    Warrant issuance...............................               --         5,400              --                     5,400
    Repayment of notes receivable from
      stockholders.................................               --           113              96                       259
                                                       -------------  -------------  -------------      ---------------------
    Net cash provided (used) by financing
      activities...................................             (146)       37,727          71,365                   171,578
                                                       -------------  -------------  -------------      ---------------------
    Net increase (decrease) in cash and cash
      equivalents..................................          (15,637)       20,103          (5,674)                   31,349
Cash and cash equivalents at beginning of period...           32,557        16,920          37,023                        --
                                                       -------------  -------------  -------------      ---------------------
Cash and cash equivalents at end of period.........      $    16,920    $   37,023     $    31,349            $       31,349
                                                       =============  =============  =============      =====================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest...........      $       127    $      161     $       257            $        1,362
                                                       =============  =============  =============      =====================
</TABLE>

  Supplemental disclosures of noncash investing and financing activities are
                             described in Note 9.

                See accompanying notes to financial statements.

                                      F-6
<PAGE>

                                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
$36.5 million and $31.1 million at December 31, 1999 and 2000, 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 corporate debt
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.  Gross unrealized gains and
losses were insignificant at December 31, 1999.  At December 31, 2000 gross
unrealized gains were $83,000 and gross unrealized losses were $7,000. There
were no sales of these investments or realized gains or losses during 1998, 1999
or 2000.

     Financial Instruments

     Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
about Fair Value of Financial Instruments," as amended by SFAS No. 119,
"Disclosures about Derivative Financial Instruments and Fair Value of Financial
Instruments," 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 due to the short-term
maturity of these instruments.

                                      F-7
<PAGE>

                                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 1998, 1999 or 2000.

     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
<PAGE>

                                 TRIMERIS, INC.
                         (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS-Continued

  Use of Estimates

  The preparation of financial statements in conformity with generally accepted
accounting principles 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, 1998, 1999 and
2000, there were 1,035,000, 1,712,000 and 1,817,000 options to purchase common
stock outstanding, respectively. At December 31, 1999 and 2000 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.

  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.

                                      F-9
<PAGE>

                                TRIMERIS, INC.
                         (A Development Stage Company)

                   NOTES TO FINANCIAL STATEMENTS -Continued


  Adoption of SAB No. 101

     The Company previously 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
2000, $840,000 of the $4.2 million was recognized as revenue.

  Restatements

     The financial statements for the year ended December 31, 1999 have been
restated to reflect a reduction in revenue for the $5.4 million fair value of a
warrant issued to Roche in July 1999, with a corresponding increase to
additional paid-in capital. These financial statements have also been restated
to record in 1999 a reimbursement received from Roche during 1999 for clinical
trial drug inventory on hand at July 1, 1999. This reimbursement had been
previously recognized during 1999 and 2000 as the inventory was consumed. The
financial statements for the years ended December 31, 1998 and 1999 have been
restated to account for stock options issued to non-employees as variable plan
awards in accordance with EITF Issue No. 96-18, rather than as fixed awards as
previously reported. The financial statements for the cumulative period from
inception (January 7, 1993) to December 31, 1999 have also been restated for the
matters discussed above. The net impact of the restatements described above
increased net loss for 1998 by $716,000 or $0.09 per share, increased net loss
for 1999 by $7.6 million or $0.62 per share, and increased the cumulative net
loss from inception (January 7, 1993) to December 31, 1999 by $8.3 million.

The following tables set forth the statement of operations and balance sheet
data, as originally reported and as restated as of December 31, 1999 and for the
years ended December 31, 1998 and 1999, and the adjustments resulting from the
restatements.  The footnote following the tables describes the adjustments.

                                     F-10
<PAGE>

                                TRIMERIS, INC.
                         (A Development Stage Company)

                   NOTES TO FINANCIAL STATEMENTS -Continued

BALANCE SHEET DATA
(in thousands, except par value)


<TABLE>
<CAPTION>
                                                                                        As of December 31, 1999
                                                                          -----------------------------------------------------
                                                                          As Previously
                                                                             Reported     Adjustment             As Restated
                                                                          ---------------------------            --------------
<S>                                                                       <C>             <C>                    <C>
Assets
Current assets:
 Cash and cash equivalents................................................ $    37,023                              $ 37,023
 Short-term investments...................................................      10,775                                10,775
 Accounts receivable - Roche..............................................         144                                   144
 Accounts receivable......................................................          24                                    24
 Prepaid expenses.........................................................         268                                   268
                                                                           -----------                              --------
    Total current assets..................................................      48,234                                48,234
                                                                           -----------                              --------
Property, furniture and equipment, net....................................       2,585                                 2,585
                                                                           -----------                              --------

Other assets:
 Patent costs, net........................................................         643                                   643
 Equipment deposits.......................................................         188                                   188
 Other assets, net........................................................          --                                    --
                                                                           -----------                              --------
     Total other assets...................................................         831                                   831
                                                                           -----------                              --------
     Total assets......................................................... $    51,650                              $ 51,650
                                                                           ===========                              ========

Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
  Accounts payable........................................................ $     6,159                              $  6,159
  Current installments of obligations under capital leases................         717                                   717
  Accrued compensation....................................................       1,028                                 1,028
  Accrued expenses........................................................       3,474                                 3,474
                                                                           -----------                              --------
      Total current liabilities...........................................      11,378                                11,378
Obligations under capital leases, excluding current installments..........       1,206                                 1,206
Deferred revenue..........................................................         729       (729)       (C)              --
                                                                           ----------------------                   --------
      Total liabilities...................................................      13,313       (729)                    12,584
                                                                           ----------------------                   --------

Stockholders' equity (deficit):
  Preferred Stock.........................................................          --                                    --
  Common Stock............................................................          14                                    14
  Additional paid-in capital..............................................     105,580      7,328   (A), (B)         112,908
  Deficit accumulated during the development stage........................     (62,990)    (8,308)       (D)         (71,298)
  Deferred compensation...................................................      (4,162)     1,709        (B)          (2,453)
  Notes receivable from stockholders......................................        (105)                                 (105)
                                                                           ----------------------                   --------
     Total stockholders' equity ..........................................      38,337        729                     39,066
                                                                           ----------------------                   --------
     Total liabilities and stockholders' equity........................... $    51,650  $      --                   $ 51,650
                                                                           ======================                   ========
</TABLE>

                                     F-11
<PAGE>

                                TRIMERIS, INC.
                         (A Development Stage Company)

                   NOTES TO FINANCIAL STATEMENTS -Continued

STATEMENTS OF OPERATIONS DATA
(in thousands, except per share data)

<TABLE>
<CAPTION>
                                                            For the Year Ended December 31, 1999
                                           --------------------------------------------------------------
                                                   As
                                                Previously
                                                 Reported         Adjustment              As Restated
                                           -----------------------------------          -----------------
                                           ------------------------------------         -----------------
<S>                                        <C>                   <C>                    <C>
Revenue..................................     $   10,081         $   (5,400)       (A)    $     4,681
                                           ------------------------------------         -----------------

Operating expenses:
    Research and development:
       Non-cash compensation.............            981              1,193        (B)          2,174
       Other research and development
         expense.........................         18,311               (729)       (C)         17,582
    Total research and development
         expense.........................         19,292                464                    19,756
                                           ------------------------------------         -----------------
     General and administrative:
       Non-cash compensation.............            796              1,728        (B)          2,524
       Other general and administrative
         expense.........................          6,156                                        6,156
                                           ------------------------------------         -----------------
    Total general and administrative
         expense.........................          6,952              1,728                     8,680
                                           ------------------------------------         -----------------
        Total operating expenses.........         26,244              2,192                    28,436
                                           ------------------------------------         -----------------
    Operating loss.......................        (16,163)            (7,592)                  (23,755)
                                           ------------------------------------         -----------------

Other income (expense):
        Interest income..................          1,729                                        1,729
        Interest expense.................           (161)                                        (161)
                                           ------------------------------------         -----------------
                                                   1,568                                        1,568
                                           ------------------------------------         -----------------
     Net loss............................     $  (14,595)        $   (7,592)              $   (22,187)
                                           ====================================         =================

   Basic net loss per share..............     $    (1.17)        $    (0.62)              $     (1.79)
                                           ====================================         =================

   Weighted average shares used
     in per share computations...........         12,511                           (E)         12,411
                                           ====================================         =================
</TABLE>

                                     F-12
<PAGE>

                                TRIMERIS, INC.
                         (A Development Stage Company)

                   NOTES TO FINANCIAL STATEMENTS -Continued

<TABLE>
<CAPTION>
                                                            For the Year Ended December 31, 1998
                                           -------------------------------------------------------------------
                                                   As
                                               Previously
                                                Reported          Adjustment                  As Restated
                                           ---------------------------------------         -------------------
                                           ---------------------------------------         -------------------
<S>                                        <C>                  <C>                        <C>
Revenue................................      $       363                                        $        363
                                           ---------------------------------------         -------------------
Operating expenses:
    Research and development:
       Non-cash compensation...........              434                    387      (B)                 821
       Other research and development
        expense........................           15,987                                              15,987
                                           ---------------------------------------         -------------------
    Total research and development
         expense.......................           16,421                    387                       16,808
                                           ---------------------------------------         -------------------
     General and administrative:
       Non-cash compensation...........              273                    329      (B)                 602
       Other general and administrative
         expense.......................            4,299                                               4,299
                                           ---------------------------------------         -------------------
    Total general and administrative
         expense.......................            4,572                    329                        4,901
                                           ---------------------------------------         -------------------
       Total operating expenses........           20,993                    716                       21,709
                                           ---------------------------------------         -------------------
    Operating loss.....................          (20,630)                  (716)                     (21,346)
                                           ---------------------------------------         -------------------
Other income (expense):
       Interest income................             1,755                                               1,755
       Interest expense...............              (127)                                               (127)
                                           ---------------------------------------         -------------------
                                                   1,628                                               1,628
                                           ---------------------------------------         -------------------
     Net loss..........................      $   (19,002)           $      (716)                $    (19,718)
                                           =======================================         ===================

 Basic net loss per share..............      $     (1.78)           $     (0.09)                $      (1.87)
                                           =======================================         ===================

 Weighted average shares used
     in per share computations.........           10,647                             (E)              10,547
                                           =======================================         ===================
</TABLE>

(A)  A warrant to purchase 362,000 shares of our stock was granted to Roche
     simultaneously with the signing of our collaboration in July 1999.  There
     was no value attributed to this warrant in the 1999 financial statements as
     required under SFAS 68 and EITF Issue 96-18.  Because the warrant was fully
     vested and non-forfeitable when issued, the measurement date was the issue
     date and no subsequent measures of fair value are required.  The value of
     the warrant was calculated as disclosed in Note 8 to the financial
     statements.

     Statement of Operations.   Reflects a reduction of $5.4 million in the
     revenue recognized from the $10 million up-front payment from Roche.

     Balance Sheet.  Reflects an increase of $5.4 million in additional paid-in
     capital for the fair value of the warrant.

                                      F-13
<PAGE>

                                TRIMERIS, INC.
                         (A Development Stage Company)

                   NOTES TO FINANCIAL STATEMENTS -Continued

(B)  Compensation costs for options granted to non-employees were previously
     accounted for under SFAS 123 and EITF 96-18 as if the grant date was the
     measurement date.  The value of the option was calculated at the initial
     grant date using the Black-Scholes option-pricing model.  This value was
     recorded as an increase to additional paid-in capital and deferred
     compensation, and deferred compensation was amortized as compensation costs
     over the vesting period of the individual option.

     However, due to the terms and conditions of the awards the grant date was
     not the performance commitment date.  Based on the facts and circumstances,
     these awards have a final measurement date when the counterparty's
     performance is complete.  Therefore, under EITF 96-18, these grants should
     be accounted for as variable plan awards.  Restated compensation expense is
     calculated as follows.  The value of each option is recalculated each
     period based on the terms of each option and the end of period share price
     using the Black-Scholes option-pricing model.  The cumulative compensation
     expense vested is calculated each period using this value.  Compensation
     expense is then adjusted each period using the guidance in FASB
     Interpretation No. 28 with a corresponding entry to additional paid-in
     capital.

     Statement of Operations.  Reflects the change in non-cash compensation
     expense using the variable plan calculation method described above.

     Balance Sheet.  Reflects the change in deferred compensation and additional
     paid-in capital using the variable plan calculation method described above.

(C)  Under the terms of our collaboration signed with Roche in July 1999, all
     research and development expenses related to T-20 and T-1249 are shared
     equally by Roche and us, including the cost of clinical trial drug
     inventory on hand at July 1, 1999.  This reimbursement from Roche was
     originally deferred in the 1999 financial statements and recognized as a
     reduction of research and development expense as the inventory was used.
     Since this inventory had been expensed as purchased in periods prior to
     July 1, 1999 (under SFAS 2 as research and development expense), we
     subsequently determined that this reimbursement should have been recognized
     when received in 1999, consistent with the accounting for our cost-sharing
     arrangement with Roche for all T-20 and T-1249 research and development
     expenses.


     Statement of Operations.  Reflects the change in research and development
     expense based on the accounting discussed above.

     Balance Sheet.  Reflects the decrease in deferred revenue based on the
     accounting discussed above.

(D)  Reflects the net effect on net income and accumulated deficit as a result
     of adjustments (A) through (C) discussed above.

(E)  Recalculated under SFAS 128.

                                      F-14
<PAGE>

                                TRIMERIS, INC.
                         (A Development Stage Company)

                   NOTES TO FINANCIAL STATEMENTS -Continued

2.  Leases

     The Company is obligated under various capital leases for furniture and
equipment that expire at various dates during the next four 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, 1999 and 2000 (in thousands):

<TABLE>
<CAPTION>
                                                                  1999                                 2000
                                                       ----------------------------         ----------------------------
<S>                                                    <C>                                  <C>
Furniture and equipment..............................                       $ 2,556                              $ 4,026
Less accumulated amortization........................                        (1,053)                              (1,591)
                                                       ----------------------------         ----------------------------
                                                                            $ 1,503                              $ 2,435
                                                       ============================         ============================
</TABLE>

     The Company also has several non-cancelable operating leases, primarily for
office space and office equipment, that extend through September 2002. Rental
expense, including maintenance charges, for operating leases during 1998, 1999
and 2000 was $638,000, $782,000, and $929,000 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, 2000 (in thousands) are:

<TABLE>
<CAPTION>
                                                                            CAPITAL                      OPERATING
                                                                            LEASES                        LEASES
                                                                      ------------------         ------------------------
<S>                                                                     <C>                      <C>
Year ending December 31:
   2001.............................................................            $1,374                          $  856
   2002.............................................................             1,021                             448
   2003.............................................................               782                              92
   2004.............................................................               252                              --
                                                                      ------------------         ------------------------
Total minimum lease payments........................................             3,429                          $1,396
                                                                                                 ========================

Less amount representing interest...................................               394
                                                                      ------------------

Present value of net minimum capital lease payments.................             3,035
Less current installments of obligations under capital leases.......             1,174
                                                                      ------------------

Obligations under capital leases,  excluding current
    Installments....................................................            $1,861
                                                                      ==================
</TABLE>

     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-15
<PAGE>

                                 TRIMERIS, INC.
                         (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS -Continued

3.  Property, Furniture and Equipment

     Property, furniture and equipment consists of the following at December 31,
1999 and 2000 (in thousands):

<TABLE>
<CAPTION>
                                                                1999                                 2000
                                                     ----------------------------         ----------------------------
<S>                                                    <C>                                  <C>
Furniture and equipment...........................                        $ 3,290                              $ 4,208
Leasehold improvements............................                            303                                  681
Furniture and equipment under capital lease.......                          2,556                                4,026
                                                     ----------------------------         ----------------------------
                                                                            6,149                                8,915
Less accumulated depreciation and amortization....                         (3,564)                              (4,932)
                                                     ----------------------------         ----------------------------

                                                                          $ 2,585                              $ 3,983
                                                     ============================         ============================
</TABLE>

4. 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, 1999 and 2000, loans with an interest rate of 8% totaling
$105,000 and $9,000, respectively, were outstanding to employees 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.

                                      F-16
<PAGE>

                                 TRIMERIS, INC.
                         (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS -Continued

  Derivative Transactions

     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, "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."  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.  Under this transaction, the
Company may elect to settle by issuing up to 125,000 shares of its common stock
to the financial institution at prescribed prices significantly higher than the
market price of the Company's stock at the date of the transaction and receive a
net cash payment from the financial institution.  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. In December 2000 these contracts were amended to
allow settlement in unregistered shares of our common stock.  All of these
derivative transactions expire or mature in 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.

5.  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 3,352,941 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, 2000,
there were approximately 660,000 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.

                                      F-17
<PAGE>

                                TRIMERIS, INC.
                         (A Development Stage Company)

                   NOTES TO FINANCIAL STATEMENTS -Continued

Stock option transactions for the years ended December 31, 1998, 1999 and 2000
are as follows:

<TABLE>
<CAPTION>
                                          Weighted               Weighted                 Weighted
                                          Average                Average                  Average
                                          Exercise               Exercise                 Exercise
                              1998          Price       1999       Price       2000        Price
                          -----------     --------   ----------  --------    ---------    --------
<S>                       <C>            <C>        <C>         <C>         <C>          <C>
Options outstanding
  at January 1..........     267,000      $  0.75    1,035,000   $   6.31    1,712,000    $   9.93
 Granted................     820,000         7.91      961,000      12.88      441,000       60.13
 Exercised..............     (28,000)        0.35     (189,000)      6.12     (302,000)       8.31
 Cancelled..............     (24,000)        6.16      (95,000)      7.84      (34,000)      20.62
                          -----------     --------   ----------  --------    ---------    --------
Options outstanding
  at end of period......   1,035,000      $  6.31    1,712,000   $   9.93    1,817,000    $  22.19
                          ==========      ========   ==========  ========    =========    ========
</TABLE>

The following summarizes information about stock options outstanding as of
December 31, 2000:

<TABLE>
<CAPTION>
                                    Options Outstanding                                Options Exercisable
                         ----------------------------------------------------   --------------------------------
                                              Weighted
                                               Average
                             Number           Remaining         Weighted                            Weighted
Range of Exercise          Outstanding       Contractual    Average Exercise      Number            Average
     Price               as of 12/31/00         Life            Price           Exercisable      Exercise Price
------------------       ----------------   ------------    -----------------   ------------    ----------------
<S>                     <C>                 <C>              <C>                <C>             <C>
$       0.34-1.00              132,000              5.79      $       0.46           124,000         $      0.45
$       5.88-8.00              396,000              7.32      $       7.86           237,000         $      7.91
$     8.01-11.625              637,000              8.30      $      11.60           234,000         $     11.60
$    11.626-20.88              217,000              8.64      $      16.73            69,000         $     16.54
$    20.89-61.875              299,000              9.37      $      56.91            25,000         $     51.08
$    61.876-78.50              136,000              9.75      $      67.00             1,000         $     63.77
$      0.34-78.50        ----------------   ------------    -----------------   ------------    ----------------
                             1,817,000              8.23      $      22.19           690,000         $     10.32
                         ================   ============    =================   ============    ================
</TABLE>

     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.
Compensation expense for employee stock options was $553,000, $894,000 and $1.1
million for 1998, 1999 and 2000, 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. 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
$870,000, $3.8 million and $11.3 million for the years ended December 31, 1998,
1999 and 2000, respectively, was recorded as an increase to additional paid-in
capital.

                                      F-18
<PAGE>

                                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:

                                      1998             1999            2000
                                   -----------     -----------     -----------
 Net loss:
 As reported.....................  $  (19,718)     $  (22,187)     $  (50,856)
 Compensation cost recorded
  under APB 25...................         553             894           1,059
 Compensation cost
  resulting from common
  stock options, restricted
  stock and employee stock
  purchase plan..................      (1,231)         (2,553)         (8,334)
                                   -----------     -----------     -----------
 Pro forma.......................  $  (20,396)     $  (23,846)     $  (58,131)
                                   ===========     ===========     ===========
 Basic and diluted loss per
  share:
  As reported....................  $    (1.87)     $    (1.79)     $    (3.27)
  Pro forma......................  $    (1.93)     $    (1.92)     $    (3.74)


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

                                       1998         1999        2000
                                    ---------------------------------
Estimated dividend yield               0.00%        0.00%       0.00%
Expected stock price volatility        72.0%        86.0%       91.4%
Risk-free interest rate                5.20%        5.20%       6.30%
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
1998, 1999 and 2000 and does not consider compensation cost for stock options
granted prior to January 1, 1995.

6. Income Taxes

     At December 31, 2000, the Company has net operating loss carryforwards
(NOL's) for federal and state income tax purposes of approximately $106.3
million which expire in varying amounts between 2008 and 2020. The Company has
research and development credits of $2.2 million which expire in varying amounts
between 2008 and 2020. The reason for the difference between the Company's
expected tax benefit at its statutory rate of 34% and actual tax expense is
primarily related to differences in book and tax expense for stock option
compensation and increases in the valuation allowance of deferred tax assets.


                                      F-19
<PAGE>

                                TRIMERIS, INC.
                         (A Development Stage Company)

                   NOTES TO FINANCIAL STATEMENTS -Continued

     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, 1999 and 2000 are as follows:

                                                1999           2000
                                            ----------    ----------
                                                   (in thousands)
        Deferred tax assets:
        Tax loss carryforwards              $   24,283    $   40,967
        Tax credits                              1,927         2,203
        Reserves and accruals                    2,033         5,038
                                            ----------    ----------
                                                28,243        48,208

        Valuation allowance                    (28,243)      (48,208)
                                            ----------    ----------
        Net deferred asset                          --            --

        Deferred tax liabilities:
        Deferred tax liability                      --            --
                                            ----------    ----------
        Net deferred tax assets and         $       --    $       --
        (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 $8.1 million, $8.5 million
and $20.0 million for the years ended December 31, 1998, 1999 and 2000,
respectively.

7. 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 1998, 20,000 shares were issued, and compensation expense of
$236,000 was recognized. 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. These shares vest ratably based
on a participant's years of service and are fully vested after four years of
service.


                                      F-20
<PAGE>

                                TRIMERIS, INC.
                         (A Development Stage Company)

                    NOTES TO FINANCIAL STATEMENTS-Continued

     The normal retirement age shall be the later of a participant's 65/th/
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 40,000, 22,000, and 28,000 shares were issued under this
plan in 1998, 1999, and 2000, respectively.

8. 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.

     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, 2000. The fair value of the warrant of $5.4 million
was credited to additional paid-in capital in 1999, and recorded 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.

     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.

9.  Supplementary Cash Flow Information

     Capital lease obligations of $1,236,000, $1,119,000 and $2,050,000 were
incurred in 1998, 1999 and 2000, respectively, for leases of new furniture and
equipment.

10. 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 of operations for that period.

                                      F-21
</TEXT>
</DOCUMENT>
