IMMUNE RESPONSE CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2003

o 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 0-18006

THE IMMUNE RESPONSE CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Delaware		33-0255679
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification Number)

5931 Darwin Court, Carlsbad, CA 92008
(Address of Principal Executive Offices) (Zip Code)

Telephone (760) 431-7080
(Registrant’s Telephone Number, Including Area Code)

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

Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

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

As of April 30, 2003, 19,670,729 shares of common stock were outstanding.

THE IMMUNE RESPONSE CORPORATION

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Operations	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		35

Item 4.	Controls and Procedures		35

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings		36

Item 2.	Changes in Securities		36

Item 5.	Other Information		36

Item 6.	Exhibits and Reports on Form 8-K		36

Signature			37

Certifications			38

THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

	March 31, 2003			December 31, 2002
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,188		$	3,939
Marketable securities - available-for-sale	2			2
Other current assets	549			420
Total current assets	2,739			4,361

Property and equipment, net	6,145			6,483
Licensed technology, net	2,649			2,825
Deposits and other assets ($600 restricted as security for letter of credit)	882			896

Total assets	$	12,415		$	14,565

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,384		$	1,326
Accrued expenses	874			1,014
Short-term convertible note payable, related party	2,000			—
Current portion of equipment notes payable	661			724
Capital lease liability	145			217
Current portion of deferred revenue	56			56
Total current liabilities	5,120			3,337

Convertible notes payable, related party, net of discount of $9,746 and $10,848 and plus accrued interest of $869 and $594 at 2003 and 2002, respectively	4,864			3,487
Equipment notes payable, net of current portion	9			141
Accrued excess lease costs	546			637
Long-term deferred revenue, net of current portion	365			378

Total liabilities	10,904			7,980

Commitments and contingencies

Stockholders’ equity:
Preferred stock, 5,000,000 shares authorized; 0 shares issued and outstanding	—			—
Common stock, $.0025 par value, 170,000,000 shares authorized; 19,670,729 shares issued and outstanding at March 31, 2003 and December 31, 2002	49			49
Warrants	13,684			13,684
Additional paid-in capital	250,771			250,656
Accumulated other comprehensive income	2			2
Accumulated deficit	(262,995		)	(257,806		)
Total stockholders’ equity	1,511			6,585

Total liabilities and stockholders’ equity	$	12,415		$	14,565

See accompanying notes.

THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

	Three months ended March 31,
	2003			2002
Revenues:
Contract research revenue	$	7		$	7
Licensed research revenue	17			2

	24			9

Expenses:
Research and development	2,477			3,808
General and administrative	1,035			1,147
Exit and disposal related costs	285			—

	3,797			4,955

Other income and (expense):
Investment income	8			14
Interest expense - including $1,102 and $232 of non-cash accretion in 2003 and 2002, respectively	(1,424		)	(352		)

	(1,416		)	(338		)

Net loss	$	(5,189	)	$	(5,284	)

Loss per share - basic and diluted	$	(0.26	)	$	(0.59	)

Weighted average number of shares outstanding	19,671			8,893

See accompanying notes.

THE IMMUNE RESPONSE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	Three months ended March 31,
	2003			2002
Operating activities:
Net loss	$	(5,189	)	$	(5,284	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	514			558
Operating expenses paid with previously issued common stock	42			—
Stock option adjustments	115			—
Deferred revenue	(13		)	191
Accrued excess lease costs	(91		)	—
Long-term accrued interest	275			60
Accretion of convertible notes payable	1,102			232
Changes in operating assets and liabilities:
Other current assets	(171		)	309
Accounts payable	58			(223		)
Accrued expenses	(140		)	(64		)
Net cash used in operating activities	(3,498		)	(4,221		)

Investing activities:
Sale of marketable securities, net	—			176
Other assets	14			(38		)
Net cash provided by investing activities	14			138

Financing activities:
Principal payments under equipment notes and capital leases payable	(267		)	(169		)
Proceeds from issuances of convertible notes payable and warrants	—			2,000
Proceeds from issuance of short-term convertible note payable	2,000			—
Proceeds from issuance of short-term secured promissory note	—			2,000
Net cash provided by financing activities	1,733			3,831

Net decrease in cash and cash equivalents	(1,751		)	(252		)
Cash and cash equivalents at beginning of year	3,939			2,430
Cash and cash equivalents at end of period	$	2,188		$	2,178

Supplemental disclosure of cash flow information:
Interest paid	$	322		$	56

Supplemental disclosure of noncash investing and financing activities:
Unrealized loss on marketable securities	$	—		$	(13	)

See accompanying notes.

THE IMMUNE RESPONSE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)

1. Basis of Presentation

The condensed consolidated financial statements of The Immune Response Corporation and its wholly-owned subsidiary (“the Company”) for the three months ended March 31, 2003 and 2002 are unaudited. All significant intercompany accounts and transactions have been eliminated in consolidation. These financial statements reflect all adjustments, consisting of only normal recurring adjustments which, in the opinion of management, are necessary to fairly present the consolidated financial position of the Company as of March 31, 2003, and the consolidated results of operations of the Company for the three months ended March 31, 2003 and 2002. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the year ended December 31, 2003. For more complete financial information, these consolidated financial statements and the notes thereto should be read in conjunction with the consolidated audited financial statements for the year ended December 31, 2002 included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

In October 2002, the Company’s Board of Directors formally declared a one-for-four reverse stock split of issued and outstanding shares of common stock. The Company’s stockholders authorized the reverse split at their annual meeting held in June 2002. All common share balances and net loss per share amounts presented in these financial statements have been retroactively adjusted to reflect the reverse stock split.

Certain reclassifications have been made to conform prior period financial information to the current presentation. These reclassifications had no effect on reported income or losses.

2. Organization, liquidity and going concern

Organization

The Immune Response Corporation (the “Company”), a Delaware corporation, is a biopharmaceutical company developing a therapeutic vaccine for the treatment of HIV infection. We have developed REMUNE®, an immune-based therapy, to induce specific immune responses for the treatment of HIV. We also have created six distinct therapeutic vaccines in various stages of development for autoimmune diseases and cancer and have established an extensive patent portfolio spanning four different technologies with a total of 173 patents issued to us worldwide.

As part of our restructuring program announced in September 2002, we have ceased development of all therapeutic vaccines other than REMUNE®. Subsequent to March 31, 2003, we have disposed of excess assets and are negotiating an early lease termination for a vacated headquarters facility resulting in exit and disposal related costs of $285,000 recognized as of March 31, 2003, and we are estimating approximately $700,000 of additional costs for the second quarter of 2003. See Note 13.

Liquidity and going concern

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has operating and liquidity concerns due to historically reporting significant net losses and negative cash flows from operations. As of March 31, 2003 and December 31, 2002, the Company had a working capital deficiency of $2.4 million and working capital of $1.0 million, respectivley, and an accumulated deficit of $263.0 million and $257.8 million, respectively.

On March 28, 2003, we issued to Cheshire Associates, an affiliate of one of our directors and principal stockholder, Mr. Kevin Kimberlin, a short-term convertible promissory note in the amount of $2.0 million, bearing interest at the rate of 8% per annum (the “March Note”). We anticipate that the proceeds from the issuance of the March Note will be sufficient to fund our planned operations, excluding capital improvements and new clinical trial costs, only through May 2003. The March Note is convertible into either 1,626,016 shares of our common stock at a price of $1.23 per share (which was the closing price of our common stock on March 27, 2003) or an equal amount of such other securities that the Company may offer in the future by means of a private placement to “accredited investors.”

On May 15, 2003, we issued to Cheshire Associates, an affiliate of one of our directors and principal stockholder, Mr. Kevin Kimberlin, a short-term convertible promissory note in the amount of $1.0 million, bearing interest at the rate of 8% per annum (the “May Note”). We anticipate that the proceeds from the issuance of the May Note will be sufficient to fund our planned operations, excluding capital improvements and new clinical trial costs, only into early June 2003. The May Note has a convertible feature still to be determined in good faith negotiation prior to the 120 day maturity. See Note 13.

Notwithstanding the issuances of the March and May Notes, we will continue to have limited cash resources. Although our management recognizes the imminent need to secure additional financing and currently is negotiating with certain third parties the terms and conditions of potential financing transactions, including the private placement transaction described in the immediately preceding paragraph, there can be no assurance that we will be successful in consummating any such transaction or, if we do consummate such a transaction, that the terms and conditions of such financing will not be unfavorable to us. The failure by us to obtain additional financing before early June 2003, will have a material adverse effect on us and likely result in our inability to continue as a going concern. As a result, our independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty regarding our 2002 annual consolidated financial statements.

These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

3. Net loss per share

Basic and diluted net loss per share is computed using the weighted average number of common shares outstanding during the period. Potentially dilutive securities are excluded from the diluted net loss per share calculation, as the effect would be antidilutive. Potentially dilutive shares not included are 1.7 million shares for outstanding employee stock options, 11.1 million shares issuable under convertible notes payable, related party, 9.8 million shares issuable under warrants outstanding, 9.5 million shares issuable under A Warrants outstanding and 1.5 million shares issuable under an option issued to the placement agent for the private offering in December 2002.

4. Comprehensive loss

The Company accounts for comprehensive income in accordance with FAS No. 130, “Reporting Comprehensive Income.” The components of comprehensive loss are as follows:

	Three Months Ended March 31,
(in thousands)	2003			2002

Net loss	$	(5,189	)	$	(5,284	)
Net unrealized loss on marketable securities	—			(13		)
Comprehensive loss	$	(5,189	)	$	(5,297	)

5. Recent accounting pronouncements

In August 2001, the Financial Accounting Standards Board, FASB, issued FAS No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to all entities and legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of long-lived assets, except for certain obligations of lessees. This statement amends FAS No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies,” and was effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of FAS No. 143 did not have a material impact on the Company’s consolidated financial position or results of operations.

In June 2002, the FASB issued FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” FAS No. 146 addresses accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” FAS No. 146 requires that a

liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value when the liability is incurred. FAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. See Note 13 for current and estimated costs from the exit and disposal of our vacated headquarters facility in progress and expected to be completed by the end of the second quarter of 2003.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which disclosures are effective for financial statements issued after December 15, 2002. While the Company has various guarantees included in contracts in the normal course of business, primarily in the form of indemnities, these guarantees would only result in immaterial increases in future costs, but do not represent significant commitments or contingent liabilities of the indebtedness of others. The adoption of this statement did not have a material impact on the Company’s financial position or results of operations.

6. Licensed technology

In December 1999, the Company entered into a technology licensing agreement with Connetics Corporation (“Connetics”) and XOMA, (US) LLC (“XOMA”). The agreement assigned exclusive rights to T cell receptor (“TCR”), intellectual property (issued patents and know-how) to the Company in exchange for approximate value of $4.9 million comprised of $500,000 in cash, 62,500 shares of common stock, $945,000 of short-term license contract payable and $2,664,000 of a potential contingent stock liability. The agreement also requires the Company to make royalty payments on future sales of products, if any, related to the TCR intellectual property to Connetics, XOMA and Dr. Arthur Vandenbark, one of the inventors of the assigned technology. The purchased technology did not include any FDA approved products. The agreement terminates when the patent expires in 2014. The Company owns additional TCR-related intellectual property and intends to carry forward development of pharmaceutical products for the treatment of multiple sclerosis and other autoimmune diseases using the technology.

In accordance with FAS No. 144, the Company had identified licensed technology totaling $2.8 million at December 31, 2002 as long-lived assets subject to annual impairment review. Given the current financial status of the Company, its historical losses and the indeterminable outcome of the development and approval of its products, there is substantial uncertainty as to the Company’s ability to recover its investment in these long-lived assets through the generation of net future cash flows. In light of this uncertainty, the Company obtained an independent third-party appraisal of these long-lived assets in the first quarter of 2003. As a result of such appraisal, licensed technology did not require an impairment charge for the year ended December 31, 2002.

The Company capitalized the purchase cost to licensed technology. The license contract was paid in full in October 2000 by four quarterly installments of $250,000 beginning in January 2000. The contingent stock liability was settled in March 2000. No additional shares of common stock were required to be issued pursuant to the valuation contingency terms of the agreement.

7. Equipment notes payable

In June 2002, the Company restructured its equipment loans with Transamerica Technology Finance Corporation (“Transamerica”). As a result of the restructuring, the Company cured the existing default under those loans and limited the circumstances which could serve as the basis for any future default by the Company. Pursuant to the agreements signed with Transamerica, the Company is obligated to pay Transamerica three $200,000 milestone payments upon receipt of proceeds from each of the following transactions: (i) closing of the December 2002 private placement, (ii) exercise of the Class A Warrants and (iii) exercise of the Class B Warrants. The first payment of $200,000 was paid as part of the December 2002 private placement. These payments have and will reduce the Company’s existing Transamerica debt. Additionally, Transamerica was granted a security interest in the Company’s assets, including a subordinated interest in the Company’s intellectual property. The Company also remains obligated to make its scheduled debt payments to Transamerica until the debt and interest has been paid in full. The total amount owed to Transamerica as of March 31, 2003 and December 31, 2002 was approximately $670,000 and $865,000, respectively.

8. Convertible notes payable, related party

In November 2001, the Company, entered into the Note Purchase Agreement and Intellectual Property Security Agreement with an accredited investor. The investor, Kevin Kimberlin Partners, L.P. (“KKP”), is an affiliate of Kevin Kimberlin, a director and major stockholder of the Company. Subsequently, the Note Purchase Agreement has been amended to add other affiliates and/or related parties of Kevin Kimberlin as investors. These affiliated investors include Oshkim Limited Partnership (“Oshkim”), The Kimberlin Family 1998 Irrevocable Trust (“KFIT”) and Cheshire Associates LLC (“Cheshire”). Since November 2001 through December 31, 2002, the Company has

privately placed a total of $15.7 million in convertible notes and warrants. In December 2002, $2.0 million of the notes were converted into the Company’s private placement of common stock and warrants, which leaves a remaining balance of $13.7 million of convertible notes and warrants at March 31, 2003 and December 31, 2002.

The Company used substantially all of the net proceeds from these transactions for product development, working capital and other general corporate purposes. The Company filed a Registration Statement on Form S-3 with the SEC to cover the resale of the underlying shares of common stock.

All the notes bear interest at a fixed rate of 8% per year and are secured by the intellectual property of the Company. The notes have a three-year maturity from the date of original issuance. The notes are convertible into shares of the Company’s common stock at any time, at the option of the investors. The conversion prices are based on a percentage of the average closing bid prices of the Company’s common stock for either a ten-day or five-day trading period ended on the day preceding each closing.

Each note provides 100% warrant coverage. The warrants are for a term of ten years. The warrants are exercisable into shares of the Company’s common stock at any time, at the option of the investors. The exercise prices are based on the average closing bid prices of the Company’s common stock for either a ten-day or five-day trading period ended on the day preceding each closing. Both the conversion prices of the notes and the exercise prices of the warrants provide anti-dilution protection for the investors.

Following is a summary of the various terms and conversion features of the outstanding convertible notes payable, related party at March 31, 2003 and December 31, 2002:

				At Issuance					# of Days	After Dilution Adjustments
Issuance Date	Maturity Date	Convertible Notes Principal		# of Shares	Conversion Price		% to Market		Average Closing Bid	# of Shares	Conversion Price
09-Nov-01	09-Nov-04	$	2,000,000	433,426	$	4.6144	80	%	10	559,706	$	3.5733
14-Feb-02	14-Feb-05	2,000,000		429,000	4.6620		112.5	%	5	554,292	3.6082
03-May-02	03-May-05	4,000,000		2,319,109	1.7248		80	%	10	2,745,367	1.4570
12-Nov-02	12-Nov-05	4,847,608		4,243,354	1.1424		80	%	10	4,704,131	1.0305
15-Nov-02	15-Nov-05	200,000		174,581	1.1456		80	%	10	193,648	1.0328
20-Nov-02	20-Nov-05	200,000		184,638	1.0832		80	%	10	202,613	0.9871
27-Nov-02	27-Nov-05	215,000		264,518	0.8128		80	%	10	272,462	0.7891
10-Dec-02	30-Jul-05	278,320		187,851	1.4816		80	%	10	217,624	1.2789
		$	13,740,928	8,236,477						9,449,843

Following is a summary of the various terms and exercise features of the warrants issued in conjunction with the convertible notes payable, related party at March 31, 2003 and December 31, 2002:

		Fair Value		At Issuance					After Dilution Adjustments
Issuance Date	Expiration Date	Allocated to Warrants		# of Shares	Exercise Price		% to Market		# of Shares	Exercise Price
09-Nov-01	09-Nov-11	$	1,076,000	433,426	$	5.7680	100	%	565,841	$	4.4182
14-Feb-02	14-Feb-12	906,000		429,000	4.1440		100	%	550,599	3.2288
03-May-02	03-May-12	2,038,000		2,319,109	2.1560		100	%	2,820,396	1.7728
12-Nov-02	12-Nov-12	2,697,000		4,243,354	1.4280		100	%	4,887,883	1.2397
15-Nov-02	15-Nov-12	107,000		174,581	1.4320		100	%	201,191	1.2426
20-Nov-02	20-Nov-12	72,000		184,638	1.3540		100	%	210,881	1.1855
27-Nov-02	27-Nov-12	103,000		264,518	1.0160		100	%	286,544	0.9379
10-Dec-02	30-Jul-12	154,000		187,851	1.8520		100	%	224,422	1.5502
		$	7,153,000	8,236,477					9,747,757

The cash proceeds of the notes were allocated prorata between the relative fair values of the notes and warrants at issuance using the Black Scholes valuation model for valuing the warrants. After allocating the proceeds between the note and warrant, an effective conversion price was calculated for the convertible note to determine the beneficial conversion discount for each note. The value of the beneficial conversion discount is recorded as additional discount to the note. The resultant combined discount to the note is accreted back to the note principal balance over the three-year term of the note and recorded as interest expense. The following is a summary of the allocation of the cash proceeds to the relative fair values of the notes and warrants and the components of the discount recorded upon issuance of each note:

(in thousands)			Fair Value Allocation at Issuance				Components of Note Discount						Original Note
Issuance Date	Convertible Notes Principal		Warrants		Notes		Warrants		Beneficial Conversion Cost		Total Discount		Balance Net of Discount
09-Nov-01	$	2,000	$	1,076	$	924	$	1,076	$	924	$	2,000	$	—
14-Feb-02	2,000		906		1,094		906		639		1,545		455
03-May-02	4,000		2,038		1,962		2,038		1,962		4,000		¾
12-Nov-02	4,848		2,697		2,151		2,697		2,151		4,848		¾
15-Nov-02	200		107		93		107		93		200		¾
20-Nov-02	200		72		128		72		72		144		56
27-Nov-02	215		103		112		103		103		206		9
10-Dec-02	278		154		124		154		124		278		¾
	$	13,741	$	7,153	$	6,588	$	7,153	$	6,068	$	13,221	$	520

Convertible notes payable, related party - net as it is presented on the balance sheet consists of the following:

(in thousands)	March 31, 2003			December 31, 2002

Convertible notes payable, related party – face amount	$	13,741		$	13,741

Discount for warrants and beneficial conversion	(13,221		)	(13,221		)
Discount accreted on notes converted into private placement	(276		)	(276		)
Accretion of discount recorded as interest expense	3,751			2,649
Discount balance, net	(9,746		)	(10,848		)

Long-term accrued interest	869			594
Convertible notes payable, related party - net	$	4,864		$	3,487

December Conversion

In December 2002, as part of the Private Placement, the Company converted $2.0 million of related party convertible promissory notes previously issued in June and July 2002. The Company recorded a $3.2 million beneficial inducement cost as a result of the conversion. The partially unpaid principal balance of $278,320 from the third note dated July 30, 2002 was reissued to Cheshire on December 10, 2002 but with all the original terms of the July 30, 2002 convertible note and warrant pursuant to the amended Note Purchase Agreement and Intellectual Property Security Agreement. In addition, approximately $74,000 of accrued interest for the three notes was repaid with conversion proceeds.

The following is a summary of the previous notes, warrants and their terms, less the amounts converted into the Private Placement:

	Convertible Notes			Convertible Notes				Warrants
Issuance Date	Principal & Interest			# of Shares		Conversion Price		# of Shares		Exercise Price
24-Jun-02	$	1,000,000		523,451		$	1.9104	523,451		$	2.3880
11-Jul-02	566,638			354,858		1.5968		354,858		1.9960
30-Jul-02	637,189			430,068		1.4816		430,068		1.8520
Accrued Interest	74,493
10-Dec-02	(2,000,000		)	(1,121,000	)			(1,121,000	)
10-Dec-02	$	278,320		187,377		$	1.4816	187,377		$	1.8520

Private Placement

In December 2002 (the “Private Placement”), the Company completed the Private Placement of common stock and warrants, which raised approximately $8.4 million in gross proceeds, including $6.4 million in new investment

proceeds and $2.0 million of non-cash proceeds converted from previously issued related party convertible promissory notes. We used the net cash proceeds of approximately $4.9 million (net of approximately $1.5 million in issuance costs) of the offering for general corporate purposes such as research, development, operations, personnel and regulatory expertise and to repay a portion of our outstanding indebtedness to Transamerica Finance Corporation. We could raise an additional $29.5 million if all of the Class A warrants and Class B warrants issued in the offering, which are redeemable by us at $2.49 and $3.32, respectively, are exercised. Alternatively, we could raise an additional $12.7 million if only the Class A warrants are exercised. If all of the Class A and Class B warrants are exercised, we estimate that the $29.5 million in proceeds would provide us with sufficient funds to fund our planned operations, excluding capital improvements and new clinical trial costs, for an additional 22 months. If only the Class A warrants are exercised, we estimate that the additional $12.7 million would provide us with sufficient funds to fund our planned operations, excluding capital improvements and new clinical trial costs, for an additional twelve months. However, there can be no assurances that all or any portion of the warrants will be exercised by the initial purchasers or by any subsequent holders. We also issued to Spencer Trask Ventures, Inc., the placement agent for the private offering, an option to purchase 1,452,419 shares of common stock and 1,452,419 Class A warrants. We have not included the exercise of this option and Class A warrants in the estimated proceeds discussed above. As of March 31, 2003, no Class A Warrants had been exercised.

Short-Term Secured Promissory Notes, Related Party

In March 2002, the Company issued a short-term secured promissory note to Oshkim for $2.0 million. The note earned interest at 8%, with a maturity date of May 5, 2002 and was secured by the intellectual property of the Company. As part of the May 2002 Closing, the short-term secured promissory note was repaid in full with interest of approximately $19,000.

In August, September and October 2002, the Company issued short-term secured promissory notes to the KFIT, Oshkim and Cheshire for approximately $4.6 million. The notes earned interest at 8% per year, with a maturity date of November 30, 2002 and were secured by the intellectual property of the Company. The proceeds were used for working capital and other general corporate purposes. KFIT and Oshkim have transferred all short-term secured promissory notes to Cheshire. As part of the first November Closing, the short-term secured promissory notes were repaid in full with interest of approximately $61,000.

9. Short-term convertible promissory note, related party

10. Contingencies

From time to time, the Company is subject to various claims and litigation incidental to our business activities. Since July 2001, several complaints have been filed in the United States District Court for the Southern District of

California seeking an unspecified amount of damages on behalf of an alleged class of persons, who purchased shares of the Company’s common stock at various times between May 17, 1999 and July 6, 2001. The various complaints name the Company and certain of its officers as defendants, as well as Agouron Pharmaceuticals, Inc. and one of its officers. The complaints allege that the Company, Agouron and/or such officers violated federal securities laws by misrepresenting and failing to disclose certain information about the results of clinical trials of REMUNE^â. The complaints have been consolidated into a single action under the name In re Immune Response Securities Litigation by order of the Court. The Company has not yet formally responded to the complaints. Although the Company intends to vigorously defend the actions, the Company can not now predict or determine the outcome or resolution of these proceedings, or to estimate the amounts of, or potential range of, loss with respect to these proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against us or our officers or settlements that could require substantial payments by the Company, which could have a material adverse impact on our consolidated financial position, results of operations and cash flows. These proceedings also might require substantial attention of our management team and therefore divert their time and attention from our business and operations.

11. Stockholders’ equity

Stock transactions

In December 2002, the Company completed the Private Placement of common stock and warrants, which raised approximately $8.4 million in gross proceeds, including $6.4 million in new investment proceeds and $2.0 million of non-cash proceeds converted from previously issued related party convertible promissory notes. See Note 8. The net proceeds totaled $4.9 million after issuance costs of approximately $1.5 million. The Company also issued to Spencer Trask Ventures, Inc., the placement agent for the Private Placement, an option to purchase 1,452,419 shares of common stock and 1,452,419 Class A Warrants. As per the June 2002 agreement with Transamerica, $200,000 of the offering proceeds were used to pay down the Long-term Equipment Notes Payable. Exercise of all warrants, including those Class A and Class B Warrants in the placement agent option, would result in total proceeds of $37.8 million. Each unit had a purchase price of $100,000 and consists of (a) 112,995 shares of common stock and (b) 112,995 Class A Warrants. The Class A Warrants are exercisable for one share of common stock and a Class B Warrant at $1.33, a 50 percent premium to the $0.885 discounted Unit Price. The Class B Warrants are exercisable for one share of common stock at $1.77, a 100 percent premium to the $0.885 discounted Unit Price.

The common stock included in the units sold in the December Private Placement are subject to resale restrictions. Notwithstanding the effectiveness of a registration statement on Form S-3, which the Company filed on December 13, 2002 and has subsequently amended, until the date which is the earlier of (i) 210 days following the close of the offering of units or (ii) 90 days following the effectiveness of the registration statement for Form S-1, each investor in the units is prohibited from directly or indirectly offering, selling, transferring, assigning or otherwise disposing of any shares of common stock acquired by them in the December offering, other than shares of common stock acquired upon exercise of the warrants.

The Class A and Class B warrants may not be exercised by anyone other than the initial investor in the units until the registration statement on Form S-1 becomes effective.

The Company received authorization for quotation on the Nasdaq SmallCap Market for the shares of common stock included in the units, as well as the shares of common stock underlying the warrants. Additionally, the Company received conditional approval for the quotation of the Class A warrants and Class B warrants on the Nasdaq SmallCap Market. Representatives of Nasdaq have informed the Company that the Class A and Class B warrants may not be listed on the Nasdaq SmallCap Market until 100,000 Class A warrants have been exercised. There can be no assurance that the criteria for authorization for the warrants or our common stock will be satisfied by the Company on an ongoing basis or that 100,000 Class A warrants will be exercised.

Stock-based compensation

The Company accounts for stock-based compensation in accordance with Accounting Principles Board, APB, No. 25, “Accounting for Stock Issued to Employees.” The Company has adopted the disclosure-only provisions of FAS No. 123 “Accounting for Stock-Based Compensation.” Under APB No. 25, compensation expense relating to

employee stock options is determined based on the excess of the market price of the Company’s stock over the exercise price on the date of grant, the intrinsic value method, versus the fair value method as provided under FAS No. 123.

At March 31, 2003, the Company had two stock-based employee compensation plans. The Company accounts for these plans under the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no stock-based employee compensation cost is reflected in net loss, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant date for awards for three months ended March 31, 2003 and 2002, consistent with the provisions of FAS No. 123, the Company’s net loss and loss per share would have increased.

The following table provides information as of March 31, 2003 regarding compensation plans (including individual compensation arrangements) under which equity securities of The Immune Response Corporation are authorized for issuance (in thousands, except per share data):

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights* (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	991	$	13.18	678
Equity compensation plans not approved by security holders	750	1.20		3,250
Total	1,741	$	8.02	3,928

*As adjusted for reverse stock split.

Stock options

The Company has an approved stock option plan to grant options to purchase common stock to employees and non-employee directors of the Company and certain other individuals. The plan authorizes the Company to issue or grant qualified and non-qualified options to purchase up to 2,475,000 shares of its common stock. As of March 31, 2003, there were approximately 678,000 shares available for grant.

Under the terms of the 1989 Stock Plan, options may be granted at not less than 100% and 85% of fair market value as of the date of grant for qualified and non-qualified options, respectively. To date, all options have been issued at 100% of fair market value. Except for the non-employee directors, these options primarily become exercisable over a four-year period from the date of grant.

Under the terms of the plan, non-qualified options will be granted to non-employee directors at the fair market value as of the date of grant. These options become exercisable in four equal annual installments on each of the first four anniversaries of the date of grant. Additionally, the plan provides that upon each date of the Company’s Annual Meeting of the Stockholders, non-employee directors are eligible to receive a grant of 1,562 shares at the fair market value on date of grant with a one-ear vesting schedule.

In February 2003, a new stock option plan to grant options to purchase common stock to employees and non-employee directors of the Company and certain other individuals was estblished for 3,250,000 shares, subject to stockholder approval at the Company’s Annual Meeting to be held May 20, 2003.

In addition, the Company granted options to purchase 750,000 shares of common stock to John Bonfiglio, the new Chief Executive Officer hired in January 2003, per an employement agreement, not subject to any equity compensation plans. For purposes of financial disclosure, this agreement is treated as a third employee stock option plan.

Activity with respect to the various stock plans is summarized as follows (in thousands):

	Stock Options Outstanding		Weighted Average Price
Balance at December 31, 2001	1,399		$	23.12
Granted	625		2.59
Exercised	¾		¾
Cancelled	(887	)	21.70
Balance at December 31, 2002	1,137		12.95
Granted	750		1.20
Exercised	¾		¾
Cancelled	(146	)	11.35
Balance at March 31, 2003	1,741		$	8.02

Following is a summary of the options outstanding as of March 31, 2003:

Range of Exercise Prices	Options Outstanding	Weighted Average Remaining Life In Years	Weighted Average Exercise Price		Options Exercisable	Weighted Average Exercise Price of Options Exercisable
$ 1.20 - $ 1.20	750,000	9.79	$	1.20	85,128	$	1.20
$ 1.60 - $ 2.36	380,706	7.28	2.28		196,867	2.25
$ 3.68 - $20.50	371,898	6.68	11.71		301,320	12.93
$ 20.52 - $54.76	234,079	5.32	32.06		210,379	32.78
$ 73.00 - $73.00	4,687	2.28	73.00		4,687	73.00
	1,741,370	7.96	$	8.02	798,381	$	14.63

At March 31, 2003, the Company had three stock-based employee compensation plans, which are described more fully above. The Company accounts for these plans under the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company has adopted the disclosure-only provisions of FAS No. 123. Accordingly, no stock-based employee compensation cost is reflected in net loss, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant date for awards for three months ended March 31, 2003 and 2002, consistent with the provisions of FAS No. 123, the Company’s net loss and loss per share would have been increased to the pro forma amounts indicated below (in thousands, except per share data):

	Three Months Ended March 31,
	2003		2002
Net loss (attributable to common stockholders) ¾ as reported	$	5,189	$	5,284
Less fair value of stock-based employee compensation expense	124		73
Net loss (attributable to common stockholders) ¾ pro forma	$	5,313	$	5,357
Net loss per share (basic and diluted) ¾ as reported	$	.26	$	.59
Net loss per share (basic and diluted) ¾ pro forma	$	.27	$	.60

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2003 and 2002: risk-free interest rates of 2.78% and 2.628%, respectively, expected option lives of 5 years and a dividend rate of zero. The volatility factor assumptions of the expected market price of the Company’s common stock were and 162% and 141%, for 2003 and 2002, respectively.

Because FAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The weighted average fair value of options granted for the three months ended March 31, 2003 and the year ended December 31, 2002 was $1.16 and $2.20, respectively.

Warrants

Following is a summary of warrants outstanding as of March 31, 2003 and December 31, 2002:

Types of Warrants	Amount		Warrants Outstanding	Range of Exercise Prices	Warrant Call Price
Related party warrants	$	7,153,000	9,747,757	$ 1.016 - $5.768	none
Class A warrants	2,664,000		9,522,071	$ 1.33	$ 2.49
Class B warrants	2,664,000		9,522,071	$ 1.77	$ 3.32
20% Placement agent option	1,148,000		1,452,419	$ 0.885	none
Other	55,000		12,500	$ 5.36	none
	$	13,684,000	30,256,818

At March 31, 2003, 50.7 million shares of common stock were reserved for the exercise of stock options, employee stock purchase plan, exercise of warrants, conversion of convertible notes payable, contingent warrants and contingent shares subject to milestones per the amendments to the Company’s License and Collaboration Agreement.

12. Remune® Collaboration

In late June 2002, the Company amended its REMUNE^â license and collaboration contract with Trinity Medical Group USA, Inc (“Trinity”). The amended contract provides for manufacturing costs and mark-up plus $50 per unit to be paid to the Company. The $50 per unit mark-up would expire upon the earlier of the first one million doses of REMUNE^â purchased by Trinity or December 31, 2007. As consideration for the increased per unit, purchase price to be paid to the Company, Trinity was issued 1,000,000 shares of restricted common stock valued at $2,360,000 and up to an additional 750,000 shares upon the occurrence of certain sales milestones. All of the restricted shares issued to Trinity are subject to registration rights. In addition, the Company waived the final $5.0 million common stock purchase obligation set forth in the original agreement, which would have applied in the event of the optional technology transfer of REMUNE^â manufacturing rights in Trinity’s licensed territories. Also, the Company provided an increase in the amount of shares that Trinity will receive in exchange for a $5.0 million payment upon Thai government approval of REMUNE^â to 500,000 shares from 83,333 shares.

13. Subsequent events

Notwithstanding the issuance of the May Note, we will continue to have limited cash resources. Although our management recognizes the imminent need to secure additional financing and currently is negotiating with certain third parties the terms and conditions of potential financing transactions, there can be no assurance that we will be successful in consummating any such transaction or, if we do consummate such a transaction, that the terms and conditions of such financing will not be unfavorable to us. The failure by us to obtain additional financing before early June 2003, will have a material adverse effect on us and likely result in our inability to continue as a going concern.

During May 2003, the Company held an auction to sell excess assets associated with our vacated headquarters facility located in Carlsbad, California. The proceeds from the auction will be used to pay down equipment debt. In addition, the Company is negotiating an early lease termination for the vacated Carlsbad facility. Additional exit and disposal related costs are estimated to be approximately $700,000, and will be incurred and recognized over the next quarter.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains forward-looking statements concerning our liquidity, capital resources, financial condition, results of operation and timing of anticipated revenues and expenditures. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include, among others, those discussed under “Risk Factors.” The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-Q. These forward-looking statements speak only as of the date hereof. Except for our ongoing obligation to disclose material information as required by federal securities laws, we undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

We are a biopharmaceutical company developing immune-based therapies to induce specific immune responses for the treatment of HIV. Until the implementation of a restructuring program in September 2002, we also had been developing immune-based therapies to induce specific immune responses for the treatment of autoimmune diseases and cancer, as well as targeted, non-viral delivery technology for gene therapy which are designed to enable the delivery of genes directly to the liver via intravenous injection. As a result of our restructuring program, we have refocused our efforts entirely on REMUNE® and halted development of all of our other products.

Going Concern

On March 28, 2003, we issued to Cheshire Associates, an affiliate of one of our directors and principal stockholders, Mr. Kevin Kimberlin, a short-term convertible promissory note in the amount of $2.0 million, bearing interest at the rate of 8% per annum. We anticipate that the proceeds from such issuance will be sufficient to fund our planned operations, excluding capital improvements and new clinical trial costs, only through May 2003. The note issued in March 2003 is convertible into either 1,626,016 shares of our common stock at a price of $1.23 per share (which was the closing price of our common stock on March 27, 2003) or an equal amount of such other securities that we may offer in the future by means of a private placement to “accredited investors.”

Notwithstanding the issuances of the March and May Notes, we will continue to have limited cash resources. Although our management recognizes the imminent need to secure additional financing and currently is negotiating with certain third parties the terms and conditions of potential financing transactions, including the private placement transaction described in the immediately preceding paragraph, there can be no assurance that we will be successful in consummating any such transaction or, if we do consummate such a transaction, that the terms and conditions of such financing will not be unfavorable to us. The failure by us to obtain additional financing before early June 2003, will have a material adverse effect on us and likely result in our inability to continue as a going concern. Our independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have, therefore, modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty.

As of March 31, 2003, we had a consolidated accumulated deficit of $263.0 million. We have not generated revenues from the commercialization of any product. We expect to continue to incur substantial net operating losses over the next several years, which would imperil our ability to continue operations. We expect to experience quarter-to-quarter fluctuations, as well, some of which could be significant, due to research, development, manufacturing scale-up and clinical trial activities. We may not be able to generate sufficient product revenue to become profitable on a sustained basis, or at all, and do not expect to generate product revenue before the first quarter of 2004, if at all. We have operating and liquidity concerns due to our significant net losses, negative cash flows from operations and substantial working capital deficit. As a result of these and other factors, our independent auditors, BDO Seidman, LLP, indicated that there is substantial doubt about our ability to continue as a going concern.

Management currently is evaluating equity financing alternatives to meet our future capital requirements. In addition, we are seeking collaborative partners for all of our technologies. In any event, we will need to raise substantial additional capital to fund our operations. If we were unable to raise adequate capital, it would have a

material adverse effect on us and would cause us to cease operations, at which time we will not be able to satisfy our obligations. Our ability to find collaborative partners could be materially and adversely affected by the security interest held by Mr. Kimberlin and his related parties in substantially all of our intellectual property. See “Risk Factors—We May Be Unable To Enter Into Additional Collaborations Or Maintain Existing Ones.”

In December 2002, we completed a private offering of common stock and warrants resulting in $8.4 million in gross proceeds, which includes $4.9 million (net of approximately $1.5 million in issuance costs) of new investment proceeds and $2.0 million of non-cash proceeds converted from previously issued related party convertible promissory notes. We recorded a $3.2 million beneficial inducement cost as a result of the conversion of these promissory notes. We used the net proceeds of the offering for general corporate purposes such as research, development, operations, personnel and regulatory expertise and to repay a portion of our outstanding indebtedness to Transamerica Finance Corporation. We could raise an additional $29.5 million if all of the Class A warrants and Class B warrants issued in the offering, which are redeemable by us if the price of our common stock is equal to or greater than $2.49 and $3.32, respectively, are exercised. Alternatively, we could raise an additional $12.7 million if only the Class A warrants are exercised. The net cash proceeds from the private offering funded our planned operations through March 31, 2003.

If all of the Class A and Class B warrants are exercised, we estimate that the $29.5 million in proceeds would provide us with sufficient funds to fund our planned operations, excluding capital improvements, for approximately 22 months. If only the Class A warrants are exercised, we estimate that the additional $12.7 million would provide us with sufficient funds to fund our planned operations, excluding capital improvements, for approximately twelve months. However, there can be no assurances that all or any portion of the warrants will be exercised by the initial purchasers or by any subsequent holders. We also issued to Spencer Trask Ventures, Inc., the placement agent for the private offering, an option to purchase 1,452,419 shares of common stock and 1,452,419 Class A warrants. We have not included the exercise of this option and Class A warrants in the estimated proceeds discussed above. As of March 2002, none of the Class A warrants have been exercised.

On October 9, 2002, our Board of Directors formally declared a one-for-four reverse stock split of issued and outstanding shares of common stock. On October 24, 2002, Nasdaq granted us an additional 180 calendar day grace period to demonstrate compliance with the Nasdaq minimum $1.00 bid price per share requirement for continued listing. Subsequently, because the closing bid price of our common stock was at $1.00 or greater for at least ten consecutive trading days, effective on October 31, 2002, Nasdaq informed us that we were in compliance with its listing requirements. As of the quarter ended March 31, 2003, we have failed to maintain the minimum stockholders’ equity requirment of at least $2.5 million. See “Risk Factors—Our Stock May Become Delisted And Subject To Penny Stock Rules, Which May Make It More Difficult For You To Sell Your Securities.”

Operations

In September 2002, we implemented a restructuring program and management changes aimed at reducing costs and refocusing our efforts on REMUNE® . The restructuring program reduced staff and cut spending at our headquarters while maintaining limited manufacturing capacity at our production facility in King of Prussia, Pennsylvania. When fully implemented, the reductions are expected to contribute an estimated $7.2 million in savings annually at approximately $600,000 in cost savings per month. Such projected cost savings assume the sublease of certain of our facilities in King of Prussia, PA and Carlsbad, CA. We have engaged the services of a national real estate firm to sublease our vacant buildings in both California and Pennsylvania. Not all of these subleases have been effected, and we cannot predict if or when these cost savings, if any, will be achieved or the actual amount of such savings until we enter into definitive subleases covering the properties.

As of March 31, 2003, we were in the process of negotiating an early lease termination for our vacated headquarters facility located in Carlsbad, California. Additional exit and disposal related costs are estimated to be approximately $700,000, and will be incurred and recognized during the second quarter of 2003. This early lease termination is expected to achieve an estimated savings of $3.4 million over the next two and one half years until the end of the lease term, at December 31, 2005. During May 2003, we held an auction to sell excess assets associated with our vacated facility located in Carlsbad, California. The proceeds from the auction will be used to pay down equipment debt.

Other Significant Events

failing to disclose certain information about the results of clinical trials of REMUNE ®. The complaints have been consolidated into a single action under the name In re Immune Response Securities Litigation by order of the Court. Although we intend to vigorously defend the actions, we do not believe it is feasible to predict or determine the outcome or resolution of these proceedings or to estimate the amounts of, or potential range of, loss with respect to these proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against us or our officers or settlements that could require substantial payments by us, which could have a material adverse impact on our financial position, results of operations and cash flows. These proceedings also might require substantial attention of our management team and therefore divert their time and attention from our business and operations.

Results of Operations

Three Months Ended March 31, 2003 and 2002

We recorded revenues of $24,000 for the three months ended March 31, 2003, as compared to $9,000 for the corresponding period in 2002. The increase in revenues in 2003 is due to the amortization of additional multi-year out-licensing contracts of various intellectual property and/or patents that we own. We expect no additional revenues unless it is earned through corporate collaborations or new research and development agreements. We have not received any revenues from the sale of products and do not expect to derive revenue from the sale of any products for the foreseeable future.

Our research and development expenditures were $2.5 million for the three months ended March 31, 2003, as compared to $3.8 million for the corresponding period in 2002. This decrease in research and development spending of $1.3 million is attributable to significant reductions in salaries, benefits and operating supplies, adjustments to our operational timelines and delaying expenditures, hiring and manufacturing scale-up activities of REMUNE ® which reduced expenses by $.4 million, reduced spending for clinical trials and related regulatory activities in 2003 due to completion or termination of clinical studies in our immune-based therapy programs which contributed $.4 million in savings and decreasing activities on our other non-HIV development programs which resulted in reduced spending of $.5 million.

Our REMUNE ® clinical spending should continue to decrease consistent with the prior quarters, but could increase if we entered into any new research and development collaborations. However, spending associated with our scale-up of the manufacturing process for REMUNE ® and the cost of producing clinical supplies for ongoing and future REMUNE ® studies is expected to increase during fiscal year 2003 as we focus our financial resources entirely on REMUNE ®. Clinical study spending for our other development programs has decreased beginning in the second quarter of 2002 as we completed our Phase I/II clinical trial relating to multiple sclerosis during the first quarter of 2002. We expect research and development expenditures for our other development programs to also continue to decrease due to our restructuring in September 2002 which, among other things, was intended to focus our resources entirely on REMUNE ®. Overall, we expect future research and development expenditures for REMUNE ® to increase but quarter to quarter fluctuations may occur due to the timing of expenditures. If we enter into additional collaborations, research and development expenditures for our other development programs would likely increase over their current levels. There can be no assurance that we will enter into any collaborations, that existing collaborations will not be terminated, or that we will be able to obtain other financing needed to continue our research and development efforts.

General and administrative expenses were $1.0 million for the three months ended March 31, 2003, as compared to $1.1 million for the corresponding period in 2002. This decrease was primarily attributable to lower consulting and professional fees and lower insurance premiums. We expect quarterly general and administrative expenses to remain consistent with prior quarters with savings attributed to the September 2002 restructuring being offset by possible increased consulting fees.

Investment income was $8,000 for the three months ended March 31, 2003 as compared to $14,000 during the corresponding period in 2002. Interest expense increased to $1.4 million for the three months ended March 31, 2003, as compared to $352,000 for the corresponding period in 2002. This increase is attributable to the issuance by us to related parties of approximately $15.7 million of 8% convertible notes and short-term promissory notes between January 2002 and March 2003.

Accretion of convertible notes payable was $1.1 million for the three months ended March 31, 2003, as compared to $232,000 for the corresponding period in 2002. The increase is attributable to the outstanding balance of the notes increasing from $4.0 million at March 2002 versus $13.7 million at March 2003. Accretion represents the amortization to interest expense, over a three-year period, of the value of the notes allocated to the value of warrants issued in connection with the convertible notes and beneficial conversion feature.

In December 2002, the FASB issued FAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” which amended FAS No. 123 “Accounting for Stock-Based Compensation.” The new standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the statement amends the disclosure requirements of FAS No. 123 to require prominent disclosures in the annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for financial statements for fiscal years ending after December 15, 2002. In compliance with FAS No. 148, we have elected to continue to follow the intrinsic value method in accounting for our stock-based employee compensation plan as defined by APB No. 25, “Accounting for Stock Issued to Employees,” and have made the applicable disclosures in Note 11 to the Condensed Consolidated Financial Statements.

Liquidity and Capital Resources

On March 28, 2003, we issued to Cheshire Associates, a short-term convertible promissory note in the amount of $2.0 million, bearing interest at the rate of 8% per annum. We anticipate that the proceeds from such issuance will be sufficient to fund our planned operations, excluding capital improvements and new clinical trial costs, only through May 2003. The note issued in March 2003 is convertible into either 1,626,016 shares of our common stock at a price of $1.23 per share (which was the closing price of our common stock on March 27, 2003) or an equal amount of such other securities that we may offer in the future by means of a private placement to “accredited investors.”

Notwithstanding the issuances of the March and May Notes, we will continue to have limited cash resources. Although our management recognizes the imminent need to secure additional financing and currently is negotiating with certain third parties the terms and conditions of potential financing transactions, including the private placement transaction described in the immediately preceding paragraph, there can be no assurance that we will be successful in consummating any such transaction or, if we do consummate such a transaction, that the terms and conditions of such financing will not be unfavorable to us. The failure by us to obtain additional financing before early June 2003, will have a material adverse effect on us and likely result in our inability to continue as a going concern. Our independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have, therefore, modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty.

Since our inception in 1986 through December 31, 2002, we have financed our activities primarily from public and private sales of equity, funding from collaborations with corporate partners, investment income and the issuance to entities affiliated with or related to Mr. Kimberlin, who is one of our directors and our principal stockholder, of convertible notes and warrants and short-term promissory notes. At March 31, 2003, we had a working capital deficiency of $2.4 million, including $2.2 million of cash, cash equivalents and marketable securities. This compares with working capital of $1.0 million and $3.9 million of cash, cash equivalents and marketable securities as of December 31, 2002. Working capital decreased during this period as a result of $3.5 million of cash used in operations and $267,000 of equipment notes and lease payments. In March 2003, we issued a $2.0 million short-term convertible note payable, which provided cash, but correspondingly increased current liabilities.

We could raise an additional $29.5 million in gross proceeds if the warrants from the December 2002 private offering are exercised in full. Alternatively, we could receive an additional $12.7 million if only the Class A warrants are exercised. We estimate that the additional $29.5 million from exercise of the warrants in full would be sufficient to fund our planned operations, excluding capital improvements, for approximately 22 months. If only the Class A warrants are exercised, the additional $12.7 million would be sufficient to fund our planned operations for approximately twelve months. There can be no assurances that all or any portion of the warrants will be exercised by the initial purchasers or by any subsequent holders or, if so, when such exercise might occur.

Once we have used our current cash balances, we will be forced to look for alternative sources of funding which, even if available, may be on terms substantially less favorable. If we are unable to raise adequate capital, we may be required to delay, or reduce the scope of, our research or development of REMUNE ®, or take other measures to cut costs, which would have a material adverse effect on us and likely result in our inability to continue as a going concern. In any event, we will need to raise substantial additional capital to fund our operations beyond early June 2003. We cannot provide any assurance, however, that changes in our research and development plans or other changes affecting our operating expenses will not result in the expenditure of such resources before such time. See “Risk Factors—Our Current Cash Position, Additional Financing Requirements And Limited Access To Financing Will Adversely Affect Our Ability To Develop Products And Continue As A Going Concern.”

We will need to raise substantial additional funds to conduct research and development, preclinical studies and clinical trials necessary to bring potential products to market and to establish manufacturing and marketing capabilities. We anticipate that for the foreseeable future, the scale-up of the manufacturing process for REMUNE ® and the cost of producing clinical supplies for ongoing and future REMUNE ® studies will continue to represent a significant portion of our overall expenditures. Overall, future REMUNE ® research and development expenditures are expected to increase from current levels in the event additional financing is obtained. Future spending for research and development may further increase if we enter into additional collaborations, but there can be no assurance that we will enter into any such collaborations. We have delayed additional capital improvements of approximately $1.0 million from 2002 related to the scale-up of the manufacturing process, but anticipate that those costs would need to be incurred in 2003 to continue the scale-up of the manufacturing process for REMUNE ®. Other anticipated costs with respect to REMUNE ®, including investment in inventory, will depend on many factors including the need for additional clinical trials and other factors, which will influence our determination of the appropriate continued investment of our financial resources in this program.

Our future capital requirements will depend on many factors including whether all or any portion of the warrants from the December 2002 private offering will be exercised by the initial purchasers or by any subsequent holders. Other capital requirement factors include continued scientific progress in our research and development programs, the scope and results of preclinical studies and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, the costs involved in defending claims in class actions, competing technological and market developments, the cost of manufacturing scale-up and inventories, effective commercialization activities and arrangements and other factors not within our control. We intend to seek additional funding through additional research and development agreements with suitable corporate collaborators and through public or private financings, if available. However, we cannot provide assurance that such collaboration arrangements or any public or private financings will be available on acceptable terms, if at all. If we raise funds through future equity arrangements, further dilution to stockholders will result.

In June 2002, we restructured our equipment loans with Transamerica. As a result of the restructuring, we cured the existing default under those loans and limited the circumstances which could serve as the basis for any future default by us. Pursuant to the agreements signed with Transamerica, we paid Transamerica $200,000 upon the closing of our private placement on December 10, 2002, and we are obligated to pay Transamerica $200,000 milestone payments upon receipt of proceeds from each of the following transactions: (i) exercise of the Class A warrants and (ii) exercise of the Class B warrants. These payments have and will reduce our existing Transamerica debt. We also remain obligated to make our scheduled debt payments to Transamerica until the debt and interest has been paid in full. The total amount owed to Transamerica was approximately $670,000 and $865,000 as of March 31, 2003 and December 31, 2002, respectively. Additionally, Transamerica was granted a security interest in our assets, including a subordinated security interest in our intellectual property. There can be no assurance, however, that we will not in the future be in default under our equipment loans with Transamerica and that Transamerica would not exercise its right to accelerate our debt and foreclose on some of our office and laboratory equipment and intellectual property.

Critical Accounting Policies

Risks and uncertainties

The consolidated financial statements have been prepared assuming that we will continue as a going concern. We have operating and liquidity concerns due to historically reporting significant net losses and negative cash flows from operations. As if March 31, 2003, we had a working capital deficiency of $2.4 million and an accumulated deficit of $263.0 million. As of December 31, 2002, we had working capital of $1.0 million and an accumulated deficit of $257.8 million.

On March 28, 2003, we issued to Cheshire Associates a short-term convertible promissory note in the amount of $2.0 million, bearing interest at the rate of 8% per annum. We anticipate that the proceeds from the issuance of the March Note will be sufficient to fund our planned operations, excluding capital improvements and new clinical trial

costs, only through May 2003. The note issued in March is convertible into either 1,626,016 shares of our common stock at a price of $1.23 per share (which was the closing price of our common stock on March 27, 2003) or an equal amount of such other securities that the Company may offer in the future by means of a private placement to “accredited investors.”

Notwithstanding the issuances of the March and May Notes, we will continue to have limited cash resources. Although our management recognizes the imminent need to secure additional financing and currently is negotiating with certain third parties the terms and conditions of potential financing transactions, including the private placement transaction described in the immediately preceding paragraph, there can be no assurance that we will be successful in consummating any such transaction or, if we do consummate such a transaction, that the terms and conditions of such financing will not be unfavorable to us. The failure by us to obtain additional financing before early June 2003, will have a material adverse effect on us and likely result in our inability to continue as a going concern. Our independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have, therefore, modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty.

These factors, among others, raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.

Our products are in various stages of development. Prior to generating product revenues, we must complete the development of our products, including several years of human clinical testing, and receive regulatory approvals prior to selling these products in the human health care market. Our products may not be successfully developed, regulatory approvals may not be granted, or patient and physician acceptance of any of these products may not be achieved.

We face additional risks associated with biopharmaceutical companies whose products are in various stages of development. These risks include, among others, our need for additional financing to complete our research and development programs and commercialize our technologies. Financing may not be available to us when required or, if available, may not be available under favorable terms.

We believe that patents and other proprietary rights are important to our business. Our policy is to file patent applications to protect technology, inventions and improvements to our inventions that we consider important to the development of our business. The patent positions of pharmaceutical and biotechnology firms, including our company, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved. Changes in our estimates in the realizability of our intellectual property may have a material effect on our financial statements.

Critical Accounting Estimates

Licensed technology

Intangible assets are recorded at cost and amortized over their estimated useful lives. In December 1999, we acquired licenses to certain patent technology, which are being amortized over seven years. Changes in our estimates of useful lives may have a material effect on our financial statements.

Impairment of long-lived assets

We evaluate potential impairment of long-lived assets in accordance with FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” FAS No. 144 requires that certain long-lived assets, excluding investments under the equity method of accounting, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable based on expected undiscounted cash flows that result from the use and eventual disposition of the asset. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

In accordance with FAS No. 144, the Company has identified our property and equipment as long-lived assets subject to annual impairment review. Given our current financial status, our historical losses and the indeterminable outcome of the development and approval of our products, there is substantial uncertainty as to our ability to recover our investment in these long-lived assets through the generation of net future cash flows. In light of this uncertainty, we obtained an independent third-party appraisal of these long-lived assets in the first quarter of 2003. As a result of such appraisal, we recognized substantial impairment charges for the year ended December 31, 2002.

Risk Factors

You should carefully consider the risks and uncertainties described below before making an investment decision. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business and condition. If any of the following risks actually occur, our business and condition could be adversely affected. In those cases, the trading price of our common stock could decline, and you may lose all or part of your investment.

Our Current Cash Position, Additional Financing Requirements And Limited Access To Financing Will Adversely Affect Our Ability To Develop Products And Continue Operations

In addition to the funds we received from our private placement of units in December 2002, we will need to raise substantial additional funds to continue our operations and to conduct research and development, preclinical studies and clinical trials necessary to bring our potential products to market and to establish manufacturing and marketing capabilities.

On March 28, 2003, we issued to Cheshire Associates, LLC, or Cheshire Associates, an affiliate of one of our directors and principal stockholders, Mr. Kevin Kimberlin, a short-term convertible promissory note in the amount of $2.0 million, bearing interest at the rate of 8% per annum. We anticipate that the proceeds from such issuance will be sufficient to fund our planned operations, excluding capital improvements and new clinical trial costs, only through May 2003. The note issued in March 2003 is convertible into either 1,626,016 shares of our common stock at a price of $1.23 per share (which was the closing price of our common stock on March 27, 2003) or an equal amount of such other securities that we may offer in the future by means of a private placement to “accredited investors.”

Notwithstanding the issuances of the March and May Notes, we will continue to have limited cash resources. Although our management recognizes the imminent need to secure additional financing and currently is negotiating with certain third parties the terms and conditions of potential financing transactions, including the private placement transaction described in the immediately preceding paragraph, there can be no assurance that we will be successful in consummating any such transaction or, if we do consummate such a transaction, that the terms and conditions of such financing will not be unfavorable to us. The failure by us to obtain additional financing before early June 2003, will have a material adverse effect on us and likely result in our inability to continue as a going concern. Our independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have, therefore, modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty.

As of March 31, 2003, we had net accumulated operating losses of approximately $263.0 million, cash and cash equivalents of only $2.2 million and a working capital deficiency of approximately $2.4 million. Because we do not anticipate generating any revenue from our products until at least the first quarter of 2004, if at all, we will continue to have negative cash flow and will need to raise substantial additional capital to fund our operations beyond such time. We may receive up to $29.5 million in gross proceeds upon exercise in full of the Class A and Class B warrants, which we expect will be sufficient to fund our planned operations, excluding capital improvements and new clinical trial costs, for an additional 22 months. Also, if our placement agent exercises the placement agent options and all 1,452,419 Class A and 1,452,419 Class B warrants underlying the option, we may receive approximately $4.5 million in gross proceeds, which could fund our planned operations for approximately an additional 3 months. However, there can be no assurance that any of the warrants will be exercised, or if exercised, when such exercise might occur or that our placement agent will exercise the placement agent option or any of the

Class A or Class B warrants included therein. As of March 31, 2003, no Class A or Class B warrants have been exercised.

Although we anticipate that development of REMUNE® will continue to represent a significant portion of our overall expenditures, costs related to the development of REMUNE® decreased in 2002. We expect our costs related to the development of REMUNE® to either increase in 2003 and 2004 in the event we are able to raise additional capital enabling us to pursue additional research and development projects, or to remain relatively the same if our financing efforts prove unsuccessful. Other anticipated costs relating to the development of REMUNE® will depend on many factors — in particular, a potential decrease in such costs associated with our ability to establish a new collaborative, strategic or marketing partner to replace Pfizer Inc., or Pfizer. See “— Pfizer Has Terminated Its Collaboration With Us And We Have Had To Delay Or Abandon The Continued Development And Commercialization Of REMUNE®,” “We May Be Unable To Enter Into Additional Collaborations Or Maintain Existing Ones” And “Our Failure To Develop And Commercialize Products Successfully May Cause Us To Cease Operations.”

On September 9, 2002, we commenced the implementation of a cost reduction strategy to focus our core competencies on efforts related to the research, development, commercialization and production of REMUNE®. We anticipate that the cost reductions will impact our cash expenditures related to research, administrative and operational costs. In the process of implementing these cost reductions, we will incur one-time expenses related to severance, relocation of certain facilities and consulting payments. Excluding these one-time payments and any expansion of our research or manufacturing efforts, if all of our cost reductions are realized, we expect that these cost reductions will decrease our expenses significantly. However, we intend to increase our production capabilities at our King of Prussia, Pennsylvania, facility which may necessitate additional cash and capital requirements for such activities. In addition, there can be no assurances that we will be successful in implementing all or any portion of these cost reduction measures or that we will recognize all or any portion of the anticipated savings.

The timing and amount of our future capital requirements will depend on many factors, including:

• our ability to raise additional funding and the amounts raised, if any;

• the cost of manufacturing scale-up;

• the time and costs involved in obtaining regulatory approvals;

• continued scientific progress in our research and development programs;

• the scope and results of preclinical studies and clinical trials;

• the costs involved in filing, prosecuting and enforcing patent claims;

• competing technological and market developments;

• effective commercialization activities and arrangements;

• the costs of defending against and settling lawsuits; and

• other factors not within our control or known to us.

Our access to capital could be limited if we do not progress in:

• scaling up manufacturing;

• obtaining regulatory approvals;

• our research and development programs; or

• our preclinical and clinical trials.

Such access also could be limited by (i) overall financial market conditions, (ii) applicable National Association of Securities Dealers, or NASD, rules and federal and state securities laws, (iii) the perfected security interest in our intellectual property in respect of the aggregate $15.7 million in convertible notes issued in November 2001, February 2002, May 2002, November 2002, December 2002 and March 2003 to affiliates and/or related parties of Mr. Kimberlin, one of our directors and our principal stockholder, (iv) our obligations to Transamerica Technology Finance Corporation, successor in interest to Transamerica Business Credit Corporation, or Transamerica, of approximately $670,000, (v) the effect of the exercise of certain outstanding options and warrants exercisable into 12,350,008 shares of common stock, (vi) the effect of the conversion of the November 2001 and February, May, November and December 2002 convertible notes into 9,449,843 shares of common stock, (vii) the issuance of 9,522,072 shares of common stock and 9,522,072 Class A warrants to the selling security holders in our private placement of units, and (viii) the issuance of the placement agent option to Spencer Track Ventures, Inc. which is exercisable for 1,452,419 shares of common stock and 1,452,419 Class A warrants.

In June 2002, we restructured our equipment loans with Transamerica. As a result of the restructuring, we cured our then existing default under those loans and limited the circumstances which could serve as the basis for any future

default by us. Pursuant to the agreements signed with Transamerica, upon the closing of the private placement, we paid to Transamerica $200,000 and are obligated to pay Transamerica the following additional payments:

(i) $200,000 when the aggregate net proceeds of any exercises of the Class A warrants equals or is greater than $300,000; and

(ii) $200,000 when the aggregate net proceeds of any exercises of the Class B warrants equals or is greater than $300,000.

Although these payments have and will reduce our existing Transamerica debt, we also remain obligated to make our scheduled debt payments to Transamerica of $72,801 per month until the total aggregate amount of the debt and interest has been paid in full. Additionally, we granted to Transamerica a security interest in certain of our assets, including a subordinated interest in our intellectual property.

There can be no assurance, however, that we will not in the future be in default under our equipment loans with Transamerica and that Transamerica would not exercise its right to accelerate our debt and foreclose on some of our office and laboratory equipment and intellectual property. If this were to occur, it could result in a default under certain of our other debt instruments and would have a material adverse effect on us and would result in us having to cease operations and being unable to satisfy our obligations.

You Could Suffer Substantial Dilution Of Your Investment As A Result Of Proposed Subsequent Financings

Although we have completed the private placement of units, we currently are actively considering raising additional funds. On March 28, 2003, we issued to Cheshire Associates, an affiliate of one of our directors and principal stockholders, Mr. Kimberlin, a short-term convertible promissory note in the amount of $2.0 million, bearing interest at the rate of 8% per annum. We anticipate that the proceeds from such issuance will be sufficient to fund our planned operations, excluding capital improvements and new clinical trial costs, only through May 2003. The note issued in March 2003 is convertible into either 1,626,016 shares of our common stock at a price of $1.23 per share (which was the closing price of our common stock on March 27, 2003) or an equal amount of such other securities that we may offer in the future by means of a private placement to “accredited investors.”

Notwithstanding the issuances of the March and May Notes, we will continue to have limited cash resources. Although our management recognizes the imminent need to secure additional financing and currently is negotiating with certain third parties the terms and conditions of potential financing transactions, including the private placement transaction described in the immediately preceding paragraph, there can be no assurance that we will be successful in consummating any such transaction or, if we do consummate such a transaction, that the terms and conditions of such financing will not be unfavorable to us. The failure by us to obtain additional financing before early June 2003, will have a material adverse effect on us and likely result in our inability to continue as a going concern. Our independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have, therefore, modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty.

Any subsequent offerings may require the creation or issuance of a class or series of stock that by its terms ranks senior to the common stock with respect to rights relating to dividends and/or liquidation. If we are unable to raise funds on terms favorable to our then existing shareholders, your ownership interest and the value of your investment may be significantly diluted.

We do not expect to receive proceeds from product revenues sooner than the first quarter of 2004, if at all. Notwithstanding our current financing efforts, we will continue to have negative cash flow and will need to raise substantial additional capital to fund our operations beyond such time. We may be able to secure financing only on terms substantially less favorable to our current investors and to us, if at all. If we raise funds through equity arrangements, further dilution to stockholders will result. If we are unable to obtain financing before we generate enough revenue from our products to become cash flow break-even, we will be unable to pay our debts and will be forced to cease operations and potentially enter into bankruptcy.

You Could Suffer Substantial Dilution Of Your Investment As The Result Of Adjustments To The Convertible Notes, Warrants And Other Securities Issued In November 2001, February 2002, May 2002, July 2002, November 2002, December 2002, March 2003 and May 2003

In November 2001, we issued to Kevin Kimberlin Partners LLP, or KKP, a $2.0 million convertible note and a warrant, each of which were initially convertible and exercisable, respectively, for 433,426 shares of common stock. In February 2002, we issued to Oshkim Limited Partnership, or Oshkim, a $2.0 million convertible note and a warrant, each of which were initially convertible and exercisable, respectively, for 429,000 shares of common stock, pursuant to the note purchase agreement. In May 2002, we issued to Oshkim a $4.0 million convertible note and a warrant, each of which were initially convertible and exercisable, respectively, for 2,319,109 shares of common stock. Such notes were issued pursuant to a note purchase agreement, dated November 11, 2001. The number of shares, as well as the applicable conversion or exercise price, as the case may be, are subject to weighted average antidilution adjustment in the event that we issue certain securities below the applicable conversion or exercise price and in certain other events which would dilute your interest in us.

In June 2002, we issued to Oshkim a $1.0 million convertible note and a warrant, each of which was initially convertible and exercisable, respectively, for 523,451 shares of common stock or $1.0 million in units offered in the private placement. Additionally, on July 11, 2002, we issued to The Kimberlin Family 1998 Irrevocable Trust, or the Kimberlin Family Trust, a $566,638 convertible note and a warrant, each of which was initially convertible and exercisable, respectively, for 354,858 shares of common stock. On July 30, 2002, we issued to the Kimberlin Trust a $637,189 convertible note and a warrant, each of which was initially convertible and exercisable, respectively, for 430,068 shares of common stock. Up to $1.0 million of the notes issued in July was convertible into units offered in the private placement. Each of the notes and warrants issued in November 2001 and February, May, June and July 2002 was subsequently contributed by the initial holder to Cheshire Associates. On November 12, 2002, we issued to Cheshire Associates a $4,847,607.84 convertible note and a warrant, each of which is initially convertible and exercisable, respectively, for 4,243,354 shares of common stock. On November 15, 2002, we issued to Cheshire Associates a $200,000 convertible note and a warrant, each of which is initially convertible and exercisable, respectively, for 174,581 shares of common stock. On November 20, 2002, we issued to Cheshire Associates a $200,000 convertible note and a warrant, each of which is initially convertible and exercisable, respectively, for 184,638 shares of common stock. On November 27, 2002, we issued to Cheshire Associates a $215,000 convertible note and a warrant, each of which is initially convertible and exercisable, respectively, for 264,518 shares of common stock.

In conjunction with our private placement of units, $2.0 million of principal and interest on the June and July notes and related warrants were converted by Cheshire Associates into 20 units. The convertible note and warrant issued to the Kimberlin Family Trust on July 30, 2002 and contributed to Cheshire Associates has been reduced to $278,320 as a result of the $2.0 million conversion and has been transferred to a new promissory note and warrant dated December 10, 2002 which was initially convertible and exercisable, respectively, for 187,851 shares of common stock. Following the close of the unit offering, the number of shares and applicable conversion and exercise price of the convertible notes and warrants issued to Oshkim, KKP, the Kimberlin Family Trust and Cheshire Associates, respectively, were adjusted pursuant to their weighted average anti-dilution provisions for the unit offering as well as for the conversion of the equity underlying the converted notes and warrants. Consequently, the number of shares of common stock issuable upon conversion of the outstanding convertible notes has decreased to 9,449,843 and the number of shares of common stock issuable upon the exercise of the related warrants has decreased to 9,747,757 shares. Such number of shares, as well as the applicable conversion or exercise price, as the case may be, are subject to adjustment in the event that we issue certain securities below the applicable conversion or exercise price and in certain other events. This also may dilute your interest in us.

We also issued an option to our placement agent to purchase 1,452,419 shares of common stock and 1,452,419 Class A warrants which, if exercised, may dilute your interest in us.

On June 26, 2002, we entered into an agreement with Trinity Medical Group USA, Inc. and its affiliate, Trinity Medical Group, Co. Ltd., a Thailand company, collectively Trinity, to amend certain of our existing agreements with Trinity. In consideration for entering into these amendments, Trinity has received 1.0 million shares of our common stock valued at approximately $2.4 million at the date of the amendments and also will receive as additional consideration, 250,000 shares of our common stock (up to 750,000 shares in the aggregate) as of the date of the satisfaction by Trinity of each of the following obligations: (i) the purchase by Trinity from us of an aggregate of 300,000 doses of REMUNE®, (ii) the purchase by Trinity from us of an aggregate of 600,000 doses of REMUNE® and (iii) the purchase by Trinity from us of an aggregate of 1.0 million doses of REMUNE®. Under the current agreement, Trinity also is obligated to purchase 500,000 shares of common stock at a purchase price of $10 per share on the date that is 30 days after the date on which Trinity receives the required marketing approval from the Food and Drug Administration of the Ministry of the Public Health of Thailand, or the Thai FDA. The issuance by us to Trinity of these 2,250,000 shares of common stock, and the granting by us to Trinity of certain registration rights relating to such shares, will dilute your interest in us. On August 13, 2002, we informed Trinity that it was our intent to register 500,000 restricted shares of common stock, held in the name of Trinity, through the filing of the registration statement of which this prospectus forms a part.

We may in the future issue additional convertible notes, warrants or other securities. We are anticipating a subsequent offering which we plan to commence in the near future if the Class A warrants are not exercised. The number of underlying shares of common stock and the terms of the securities are not determinable at this time, but would dilute your interest in us.

You Could Suffer Substantial Dilution Of Your Investment If Certain Warrants And Options To Purchase Common Stock Are Exercised Or Our Convertible Notes Are Converted Into Common Stock

As of March 31, 2003, we had reserved approximately 5.7 million shares of our common stock for potential issuance upon the exercise of stock options or purchases under the employee stock purchase plan. Issuance of any of these additional shares could substantially dilute your interest in us. Furthermore, we have warrants outstanding which, if exercised, will purchase approximately 28,804,000 shares of our common stock and approximately 9,450,000 shares which are issuable upon conversion of our outstanding convertible notes. Additionally, we issued an option to our placement agent to purchase 1,452,419 shares of common stock and 1,452,419 Class A warrants. The Class A warrants are exercisable for additional shares of common stock and Class B warrants. In addition, we may issue up to 750,000 shares of our common stock to Trinity pursuant to our License and Collaboration Agreement. See also “— You Could Suffer Substantial Dilution of Your Investment As The Result Of Adjustments To The Convertible Notes, Warrants And Other Securities Issued In November 2001, February 2002, May 2002, July 2002, November 2002, December 2002, March 2003 and May 2003.”

Our Independent Auditors Have Expressed Substantial Doubt As To Our Ability To Continue As A Going Concern

As of March 31, 2003, we had a consolidated accumulated deficit of $263.0 million. We have not generated revenues from the commercialization of any product. We expect to continue to incur substantial net operating losses over the next several years, which would imperil our ability to continue operations. We may not be able to generate sufficient product revenue to become profitable on a sustained basis, or at all, and do not expect to generate product revenue before the first quarter of 2004, if at all. We have operating and liquidity concerns due to our significant net losses, negative cash flows from operations and substantial working capital deficit. Additionally, it may take a significant length of time before we can raise capital from any subsequent financing. As a result of these and other factors, our independent auditors, BDO Seidman, LLP, indicated that there is substantial doubt about our ability to continue as a going concern.

Our Stock May Become Delisted And Subject To Penny Stock Rules, Which May Make It More Difficult For You To Sell Your Securities

On March 12, 2002, our common stock commenced trading below $1.00 per share on The Nasdaq National Market. The National Association of Securities Dealers Automated Quotation System, or Nasdaq, listing rules provide that if the closing bid price of a company’s stock is below $1.00 for more than 30 consecutive trading days, the company faces possible delisting from Nasdaq. Additionally, Nasdaq listing rules require that a company’s stockholder equity be at least $4.0 million, and after October 2002, be at least $10.0 million. Due to our common stock trading below $1.00 per share for more than 30 consecutive days, as of April 23, 2002, we received notification from Nasdaq that our common stock would be delisted from the Nasdaq National Market if we could not demonstrate compliance with NASD rules by July 24, 2002.

On September 4, 2002, the NASD approved our application to transfer our common stock to The Nasdaq SmallCap Market and consequently extended, until October 22, 2002, the period for us to comply with the minimum $1.00 bid per share requirement. Our common stock was moved to The Nasdaq SmallCap Market, effective September 9, 2002. On September 29, 2002, we submitted to Nasdaq a request to grant us an additional 180 calendar-day grace period to demonstrate compliance with Nasdaq continued listing requirements. On October 24, 2002, Nasdaq granted us the 180 day extension or until April 21, 2003. Subsequently, Nasdaq informed us that we met the listing requirements. However as of March 31, 2003, we have fallen below the mininum stock holders’ equity requirement of $2.5 million for the Nasdaq SmallCap Market’s continued listing requirement. See “— We Implemented A 1-For-4 Reverse Stock Split. The Effect Of A Reverse Split On The Trading Price Of Our Common Stock Is Unpredictable.”

The transfer of our common stock to The Nasdaq SmallCap Market may adversely affect the liquidity and trading volume of our common stock and reduce the number of market makers willing to trade in our common stock, making it more likely that wider fluctuations in the quoted price of our common stock will occur. As a result, there is a risk that holders of our common stock will not be able to obtain accurate price quotes or be able to correctly assess the market price of our common stock. Increases in volatility also could make it more difficult to pledge shares of our common stock as collateral, if holders sought to do so, because a lender also might be unable to accurately value our common stock.

If we are delisted from the Nasdaq for any reason, our common stock will be considered a penny stock under regulations of the Securities and Exchange Commission, or the SEC, and therefore would be subject to rules that impose additional sales practice requirements on broker-dealers who buy and sell our securities. The additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of the common stock and warrants and your ability to sell our securities in the secondary market. We cannot assure you that we will be able to maintain our listing on the Nasdaq. Being delisted would limit our ability to raise additional financing.

If An Active Trading Market Does Not Develop For The Warrants, Holders Of Warrants May Not Be Able To Resell Their Class A Or Class B Warrants

We are unable to predict whether an active trading market will develop or be sustained for the Class A and Class B warrants. If no active trading market develops, holders of the warrants may not be able to resell their warrants at their fair market value or at all.

The Class A and Class B warrants are issuances of new securities with no established trading market. The Class A and Class B warrants have been conditionally approved to list on the Nasdaq SmallCap Market. Representatives from Nasdaq have informed us that, pursuant to certain Nasdaq rules, the Class A and Class B warrants cannot be listed until at least 100,000 Class A warrants have been exercised. We cannot assure you when, or if, we will meet the 100,000 threshold. If we do not meet the 100,000 threshold, the liquidity of the Class A and Class B warrants may be affected.

We are not aware of any securities firm that intends to make a market in the warrants and any securities firm that does act as a market-maker could cease its market-making at any time. In addition, the liquidity of the trading market in the warrants, and the market prices quoted for the warrants, may be adversely affected by changes in the overall market conditions and by changes in our financial performance or prospects in the prospects for companies in our industry generally. See “—There Are Limits On Your Ability To Exercise The Warrants And Adverse Effects May Result From The Possible Redemption Of The Warrants.”

We Implemented A 1-For-4 Reverse Stock Split. The Effect Of A Reverse Split On The Trading Price Of Our Common Stock Is Unpredictable

At our Annual Meeting of Stockholders held on June 17, 2002, our stockholders granted to our Board of Directors the discretion to effect a 1-for-4 reverse stock split. On October 9, 2002, we announced that our Board of Directors had formally declared a 1-for-4 reverse stock split of issued and outstanding shares of our common stock effective as of the open of trading on October 9, 2002. Although the theoretical effect of a reverse stock split is to increase the per share price of common stock, the actual price effect of a reverse stock split is difficult to predict. There is historical evidence and academic research relating to reverse stock splits which indicates that shares of listed companies do not perform well subsequent to a reverse stock split. It is possible that the post-split trading price of our stock could fall below the level one would expect based on the proportional effect of the split alone.

An Existing Stockholder Directly Owns Approximately 14.1% Of Our Common Stock And Has The Rights To Acquire An Additional 27,568,516 Shares, Of Our Common Stock Which Could Result In Ownership Of Up To Approximately 64.2% Of Our Outstanding Shares And Could Allow Him To Influence Stockholder Votes

Kevin B. Kimberlin, a member of our Board of Directors, together his affiliates and/or related parties currently own of record approximately 14.1% of our outstanding shares of common stock and have the right to acquire through the conversion of notes and exercise of options and warrants beneficially owned by them 27,568,516 additional shares. If the notes, options and warrants were to be converted and exercised in full, Mr. Kimberlin and his affiliates and/or related parties would own approximately 64.2% of our outstanding shares of common stock on a post-conversion/exercised basis. As a result of his ownership of our common stock and the ability to acquire additional shares, Mr. Kimberlin and his affiliates and/or related persons could have the ability to control or influence substantially all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. If your interests as a stockholder are different from his interests, you may not agree with his decisions and you might be adversely affected thereby.

Mr. Kimberlin, in addition to being one of our directors and our principal stockholder, is the controlling stockholder of Spencer Trask & Co., which is the parent company of Spencer Trask Ventures, Inc., which acted as exclusive placement agent for, and was paid fees by us in connection with, the private placement of units completed in December 2002.

The Warrant Terms Were Arbitrarily Determined

The exercise and redemption prices and other terms of the Class A and Class B warrants sold as part of our private offering completed on December 10, 2002, were determined through negotiations between us and our placement agent and do not necessarily bear any relationship to our assets, book value, revenues or financial condition, or to any other recognized criterion of value. Such prices and other terms of the warrants should not be construed to indicate or predict future trading prices of our warrants or common stock in the public markets.

Limits On Ability To Exercise The Warrants; Adverse Effects May Result From The Possible Redemption Of The Warrants

Purchasers of our Class A and Class B warrants will be able to exercise the warrants only if a current prospectus relating to the securities underlying the warrants is then in effect under the Securities Act of 1933, or the Securities Act, and the warrants are qualified for sale or exempt from qualification under the applicable securities or “blue sky” laws of the states in which the various holders of the warrants then reside. Although we have agreed to make certain efforts to maintain the effectiveness of a current prospectus covering the securities underlying the warrants, there can be no assurance that we will be able to do so. The value of the warrants may be greatly reduced if a current prospectus covering the securities to be issued upon the exercise of the warrants is not kept effective under the Securities Act or if such securities are not qualified or exempt from qualification in the states in which the holders of the warrants then reside.

Subsequent purchasers of the Class A and Class B warrants may not exercise the warrants until the Registration Statement on Form S-1 filed with the SEC on February 14, 2003 and subsequently amended is declared effective by the SEC. We cannot assure you when or if the SEC will declare the Form S-1 effective and, if it is not declared effective, the warrants may never be exercisable.

Nasdaq has advised us that it will not quote the Class A or Class B warrants on the Nasdaq SmallCap Market until not less than 100,000 Class A warrants have been exercised. Although we have received conditional approval from Nasdaq to quote both the Class A and Class B warrants on Nasdaq once we reach the 100,000 threshold, holders of warrants may be subject to a lengthy delay before the Class A and Class B warrants are quoted on the Nasdaq SmallCap Market. We cannot assure you if or when Class A warrants will be exercised, or if they are exercised, when the 100,000 threshold will be attained.

In addition, the warrants are subject to redemption by us, at a price of $0.01 per warrant, following the effectiveness of the Form S-1 and upon at least 30 days prior written notice to the holders of the warrants if the average of the closing bid prices of common stock for any 10 consecutive trading days ending within 30 days prior to the date of the notice of redemption is greater than or equal to $2.49, in the case of the redemption of the Class A warrants, and $3.32, in the case of the redemption of the Class B warrants. If the warrants are redeemed, holders of warrants will lose their right to exercise the warrants, except during such 30-day notice of redemption period. Upon the receipt of a notice of redemption of the warrants, the holders will be required to: exercise the warrants and pay the exercise price at a time when it may be disadvantageous or difficult for them to do so; sell the warrants at the then market price when they might otherwise wish to hold the warrants; or accept the redemption price, which is equal to $0.01 per warrant.

Legal Proceedings Could Require Us To Spend Substantial Amounts Of Money And Impair Our Operations

of our directors, one of our officers, Agouron Pharmaceuticals, Inc., or Agouron, and one of its officers, as defendants. The complaints allege that we, Agouron and/or such officers violated federal securities laws by misrepresenting and failing to disclose certain information about the results of clinical trials of REMUNE®. The complaints have been consolidated into a single action under the name In re Immune Response Securities Litigation by order of the Court. We have not yet formally responded to the complaints. Although we intend to vigorously defend the actions, we can not now predict or determine the outcome or resolution of these proceedings, or to estimate the amounts of, or potential range of, loss with respect to these proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against us or our officers or settlements that could require substantial payments by us, which could have a material adverse impact on our financial position, results of operations and cash flows. These proceedings also might require substantial attention of our management team and therefore divert their time and attention from our business and operations.

The Annual Use Of Our Net Operating Losses Has Likely Been Limited As A Result Of Changes In Our Ownership

We have had numerous equity transactions that have more likely than not resulted in several changes in ownership of us as defined by Section 382 of the Internal Revenue Code of 1986, as amended, or the Code. Pursuant to Sections 382 and 383 of the Code, the annual use of our net operating losses, or NOLs would be limited if there is a cumulative change of ownership (as that term is defined in Section 382(g)of the Code) of greater than 50% in the past three years. If such Section 382 ownership change occurs, there would be a substantial limitation on our ability to utilize our NOLs to offset future taxable income. As reported in Note 15 to our Consolidated Financial Statements, we had approximately $218.0 million of NOL carryforwards at such time. We have not completed our analysis if and when change(s) of ownership have occured, thus, there is uncertainty as to the realizability of our NOL’s. Furthermore, we cannot assure you, however, that we will generate taxable income in the future against which the NOLs could be applied.

On September 11, 2002, the State of California enacted one of the budget trailer bills implementing the State’s 2002-2003 Budget Bill (A425). The new law suspends the NOL carryover deduction for tax years 2002 and 2003. To compensate for the deduction suspension, the period of availability for these NOL deductions has been extended for two years.

Pfizer Has Terminated Its Collaboration With Us And We Have Had To Delay Or Abandon The Continued Development And Commercialization Of REMUNE®

We received in July, 2001, a letter from Pfizer which indicated that Pfizer had elected to immediately terminate, in their entirety, all of its rights and obligations under our agreement with them. Our agreement with Pfizer permitted this termination and the letter we received from Pfizer provided no explanation as to why Pfizer had elected to exercise its termination right. In addition, no explanation has been provided to us by Pfizer at any time after the July, 2001 termination letter. Although we retained all rights relating to REMUNE® upon Pfizer’s termination, we lost a significant source of funding. Following the termination of our agreement with Pfizer, we decided not to proceed with one of our clinical trials of REMUNE® developed by Agouron (subsequently acquired by Pfizer). The termination of this agreement has had, and may continue to have, a material adverse effect on our stock price and, consequently, our ability to successfully raise additional capital.

We May Be Unable To Enter Into Additional Collaborations Or Maintain Existing Ones

We are seeking additional collaborative arrangements to develop and commercialize our products. We may not be able to negotiate collaborative arrangements on favorable terms in the future, or at all, and our current or future collaborative arrangements may not be successful or continue. We also are contemplating a renegotiation of our License and Collaboration Agreement with Trinity. However, we have not yet entered into any significant discussions with Trinity regarding such renegotiation.

Cheshire Associates (an affiliate and/or related person of Mr. Kimberlin) has a perfected security interest in our intellectual property as collateral for the November 2001, February 2002, May 2002, November 2002, December 2002, March 2003 and May 2003 convertible notes. Pursuant to an agreement with Cheshire Associates, we must comply with certain covenants with respect to our intellectual property. Additionally, Transamerica has a subordinated security interest in our intellectual property. The security interests and covenants could impair our ability to enter into collaborative and licensing arrangements.

Our Failure To Develop And Commercialize Products Successfully May Cause Us To Cease Operations

We have not completed the development of any product and, as part of our restructuring program announced in September 2002, have ceased development of all products other than REMUNE®. Our failure to develop and commercialize products successfully may cause us to cease operations. Our potential therapies which were under development prior to September 2002 will require significant additional research and development efforts and

regulatory approvals prior to potential commercialization should these development efforts be continued in the future.

The discontinuation in May 1999 of a previous Phase III trial of REMUNE® due to the inability to meet certain primary clinical endpoints has had a material adverse effect on us. The most recent pivotal trial of REMUNE® conducted by our former collaborative partner, Pfizer, was discontinued by us. See “—Pfizer Has Terminated Its Collaboration With Us And We Have Had To Delay The Continued Development And Commercialization Of REMUNE®.” We cannot assure you that any future trials of REMUNE® will be conducted. Furthermore, we cannot guarantee that we, or our corporate collaborators, if any, will ever obtain any regulatory approvals of REMUNE®. We currently are focusing our core competencies on REMUNE® although there can be no assurance that we will be successful in so doing.

Prior to the cessation of the development efforts in September 2002, our other therapies and technologies are at earlier stages of development than REMUNE® and may not be shown to be safe or effective and may never receive regulatory approval. Some of our technologies have not yet been tested in humans. Regulatory authorities may not permit human testing of potential products based on these technologies. Even if human testing is permitted, the products based on these technologies may not be successfully developed or shown to be safe or effective.

The results of our preclinical studies and clinical trials may not be indicative of future clinical trial results. A commitment of substantial resources to conduct time-consuming research, preclinical studies and clinical trials will be required if we are to develop any products. Delays in planned patient enrollment in our clinical trials may result in increased costs, program delays or both. None of our potential products may prove to be safe or effective in clinical trials. Approval of the Food and Drug Administration, the FDA, or other regulatory approvals, including export license permissions, may not be obtained and even if successfully developed and approved, our products may not achieve market acceptance. Any products resulting from our programs may not be successfully developed or commercially available for a number of years, if at all.

Moreover, unacceptable toxicity or side effects could occur at any time in the course of human clinical trials or, if any products are successfully developed and approved for marketing, during commercial use of our products. Although preliminary research and clinical evidence has shown REMUNE® to be safe, the appearance of any unacceptable toxicity or side effects could interrupt, limit, delay or abort the development of any of our products or, if previously approved, necessitate their withdrawal from the market.

Our Patents And Proprietary Technology May Not Be Enforceable And The Patents And Proprietary Technology Of Others May Prevent Us From Commercializing Products

We have a portfolio of 173 patents worldwide. Although we believe these patents to be protected and enforceable, the failure to obtain meaningful patent protection for our potential products and processes would greatly diminish the value of our potential products and processes.

Cheshire Associates, an entity related to Mr. Kimberlin, has a perfected security interest in our intellectual property as collateral for the November 2001, February 2002, May 2002, November 2002, December 2002 and March 2003 convertible notes. Furthermore, Transamerica has a perfected subordinated security interest in substantially all of our intellectual property as collateral for our equipment loans with Transamerica.

In addition, whether or not our patents are issued, or issued with limited coverage, others may receive patents, which contain claims applicable to our products. Patents we are not aware of may adversely affect our ability to develop and commercialize products. Also, our patents related to HIV therapy have expiration dates that range from 2010 to 2015 and our patents related to autoimmune diseases have expiration dates that range from 2010 to 2018. The limited duration of our patents could diminish the value of our potential products and processes.

The patent positions of biotechnology and pharmaceutical companies are often highly uncertain and involve complex legal and factual questions. Therefore, the breadth of claims allowed in biotechnology and pharmaceutical patents cannot be predicted. We also rely upon non-patented trade secrets and know how, and others may independently develop substantially equivalent trade secrets or know how. We also rely on protecting our proprietary technology in part through confidentiality agreements with our current and former corporate collaborators, employees, consultants and certain contractors. These agreements may be breached, and we may not have adequate remedies for any such breaches. In addition, our trade secrets may otherwise become known or independently discovered by our competitors. Litigation may be necessary to defend against claims of infringement, to enforce our patents or to protect trade secrets. Litigation could result in substantial costs and diversion of management efforts regardless of the results of the litigation. An adverse result in litigation could subject us to significant liabilities to third parties, require disputed rights to be licensed or require us to cease using certain technologies.

Our products and processes may infringe, or be found to infringe, on patents not owned or controlled by us. If relevant claims of third-party patents are upheld as valid and enforceable, we could be prevented from practicing the subject matter claimed in the patents, or would be required to obtain licenses or redesign our products or processes to avoid infringement.

The Lengthy Product Approval Process And Uncertainty Of Government Regulatory Requirements May Delay Or Prevent Us From Commercializing Products

Clinical testing, manufacture, promotion, export and sale of our products are subject to extensive regulation by numerous governmental authorities in the United States, principally the FDA, and corresponding state and foreign regulatory agencies. This regulation may delay or prevent us from commercializing products. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, seizure or recall of products, total or partial suspension of product manufacturing and marketing, failure of the government to grant premarket approval, withdrawal of marketing approvals and criminal prosecution.

The regulatory process for new therapeutic drug products, including the required preclinical studies and clinical testing, is lengthy and expensive. We may not receive necessary FDA clearances for any of our potential products in a timely manner, or at all. The length of the clinical trial process and the number of patients the FDA will require to be enrolled in the clinical trials in order to establish the safety and efficacy of our products is uncertain.

Even if additional clinical trials of REMUNE® are initiated and successfully completed, the FDA may not approve REMUNE® for commercial sale. We may encounter significant delays or excessive costs in our efforts to secure necessary approvals. Regulatory requirements are evolving and uncertain. Future United States or foreign legislative or administrative acts could also prevent or delay regulatory approval of our products. We may not be able to obtain the necessary approvals for clinical trials, manufacturing or marketing of any of our products under development. Even if commercial regulatory approvals are obtained, they may include significant limitations on the indicated uses for which a product may be marketed.

In addition, a marketed product is subject to continual FDA review. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market, as well as possible civil or criminal sanctions.

Among the other requirements for regulatory approval is the requirement that prospective manufacturers conform to the FDA’s Good Manufacturing Practices, or GMP, requirements. In complying with the FDA’s GMP requirements, manufacturers must continue to expend time, money and effort in production, record keeping and quality control to assure that products meet applicable specifications and other requirements. Failure to comply and maintain compliance with the FDA’s GMP requirements subjects manufacturers to possible FDA regulatory action and as a result, may have a material adverse effect on us. We, or our contract manufacturers, if any, may not be able to maintain compliance with the FDA’s GMP requirements on a continuing basis. Failure to maintain compliance could have a material adverse effect on us.

The FDA has not designated expanded access protocols for REMUNE® as “treatment” protocols. The FDA may not determine that REMUNE® meets all of the FDA’s criteria for use of an investigational drug for treatment use. Even if REMUNE® is allowed for treatment use, third party payers may not provide reimbursement for the costs of treatment with REMUNE®. The FDA also may not consider REMUNE® or any other of our products under development to be appropriate candidates for accelerated approval, expedited review or fast track designation.

Marketing any drug products outside of the United States will subject us to numerous and varying foreign regulatory requirements governing the design and conduct of human clinical trials and marketing approval. Additionally, our ability to export drug candidates outside the United States on a commercial basis is subject to the receipt from the FDA of export permission, which may not be available on a timely basis, if at all. Approval procedures vary among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Foreign regulatory approval processes include all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the health authorities of any other country, including those in Thailand.

Specifically, in order for us to export REMUNE® to Thailand for clinical use in that country, we need to meet a number of regulatory requirements. One of those requirements is that we must ensure that we can manufacture REMUNE® at our United States manufacturing facility in a manner that is in “substantial compliance” with current United States GMP requirements. We must provide the FDA with “credible scientific evidence” that REMUNE® would be safe and effective under the conditions of proposed use in Thailand. Furthermore, the Thai FDA must (i) formally request the FDA to approve export of REMUNE® to Thailand, (ii) certify to the FDA that it is aware that

REMUNE® is not approved in the United States or in any of several other countries with comprehensive drug review and approval systems and (iii) concur that the scientific evidence presented to the FDA is “credible scientific evidence that REMUNE® will be reasonably safe and effective” for use in Thailand. There can be no assurance, however, that we will successfully meet any or all of these requirements for the export of REMUNE®, and if we are unable to successfully meet all regulatory requirements, we will not be permitted by the FDA to export REMUNE® to Thailand for clinical use, even if the Thai government were to approve REMUNE® for such use. There can be no assurance that Trinity, our collaborative partner, will be successful in its capacity or efforts to obtain regulatory approval from the Thai FDA.

Technological Change And Competition May Render Our Potential Products Obsolete

The pharmaceutical and biotechnology industries continue to undergo rapid change, and competition is intense and is expected to increase. Competitors may succeed in developing technologies and products that are more effective or affordable than any that we are developing or that would render our technology and products obsolete or noncompetitive. Many of our competitors have substantially greater experience, financial and technical resources and production, marketing and development capabilities than us. Accordingly, some of our competitors may succeed in obtaining regulatory approval for products more rapidly or effectively than us, or technologies and products that are more effective and affordable than any that we are developing.

Our Lack Of Commercial Manufacturing And Marketing Experience May Prevent Us From Successfully Commercializing Products

We have not manufactured any of our products in commercial quantities. We may not successfully make the transition from manufacturing clinical trial quantities to commercial production quantities or be able to arrange for contract manufacturing and this could prevent us from commercializing products or limit our profitability from our products. Even if REMUNE® is successfully developed and receives FDA approval, we have not demonstrated the capability to manufacture REMUNE® in commercial quantities. Except for REMUNE®, we have not demonstrated the ability to manufacture in large-scale clinical quantities any of our treatments. We rely on a third party for the final inactivation step of the REMUNE® manufacturing process. If the existing manufacturing operations prove inadequate, there can be no assurance that any arrangement with a third party can be established on a timely basis or that we can establish other manufacturing capacity on a timely basis.

We have no experience in the sales, marketing and distribution of pharmaceutical or biotechnology products. Thus, our products may not be successfully commercialized even if they are developed and approved for commercialization.

The manufacturing process of our products involves a number of steps and requires compliance with stringent quality control specifications imposed by us and by the FDA. Moreover, our products can be manufactured only in a facility that has undergone a satisfactory inspection and certification by the FDA. For these reasons, we would not be able to quickly replace our manufacturing capacity if we were unable to use our manufacturing facilities as a result of a fire, natural disaster (including an earthquake), equipment failure or other difficulty, or if such facilities are deemed not in compliance with the GMP requirements, and the noncompliance could not be rapidly rectified. Our inability or reduced capacity to manufacture our products would prevent us from successfully commercializing our products.

We may enter into arrangements with contract manufacturing companies to expand our own production capacity in order to meet requirements for our products, or to attempt to improve manufacturing efficiency. If we choose to contract for manufacturing services, we may encounter costs, delays and/or other difficulties in producing, packaging and distributing our clinical trials and finished product. Further, contract manufacturers must also operate in compliance with the GMP requirements; failure to do so could result in, among other things, the disruption of our product supplies. Our potential dependence upon third parties for the manufacture of our products may adversely affect our profit margins and our ability to develop and deliver products on a timely and competitive basis.

Our Other Therapies And Technologies Have Been Halted At Early Stages Of Development, Thus We Are Dependent Upon The Success Of REMUNE®

In September 2002, we announced a restructuring program which includes focusing our core competencies and financial resources on REMUNE®. As part of the restructuring, the development of our other therapies and technologies, which were at earlier stages of development than REMUNE® and have not yet been shown to be safe or effective, has been halted. Our other therapies and technologies might never be fully developed and if they are they might never receive regulatory approval. Thus, we are completely dependent upon the success of REMUNE® and there can be no assurance that we will be successful in developing or commercializing this product.

Adverse Determinations Concerning Product Pricing, Reimbursement and Related Matters Could Prevent Us From Successfully Commercializing REMUNE® Or Any Of Our Other Products

Our ability to earn sufficient revenue on REMUNE® or any other of our products will depend in part on the extent to which reimbursement for the costs of the products and related treatments will be available from government health administration authorities, private health coverage insurers, managed care organizations and other organizations. Failure to obtain appropriate reimbursement may prevent us from successfully commercializing REMUNE® or any of our other products. Third-party payers are increasingly challenging the prices of medical products and services. If purchasers or users of REMUNE® or any of our other products are not able to obtain adequate reimbursement for the cost of using the products, they may forego or reduce their use. Significant uncertainty exists as to the reimbursement status of newly approved health care products and whether adequate third party coverage will be available.

Our Success May Depend Upon The Acceptance Of REMUNE® By The Medical And HIV-Activist Communities

Our ability to market and commercialize REMUNE® depends on the acceptance and utilization of REMUNE® by the medical and HIV-activist communities. We will need to develop commercialization initiatives designed to increase awareness about us and REMUNE® among targeted audiences, including public health and AIDS activists and community-based outreach groups in additional to the investment community. Currently, we have not developed any such initiatives. Without such acceptance of REMUNE®, the product upon which we are completely dependent, we may not be able to successfully commercialize REMUNE® or generate revenue.

Product Liability Exposure May Expose Us To Significant Liability

We face an inherent business risk of exposure to product liability and other claims and lawsuits in the event that the development or use of our technology or prospective products is alleged to have resulted in adverse effects. We may not be able to avoid significant liability exposure. We may not have sufficient insurance coverage, and we may not be able to obtain sufficient coverage at a reasonable cost. An inability to obtain product liability insurance at acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of our products. A product liability claim could hurt our financial performance. Even if we avoid liability exposure, significant costs could be incurred that could hurt our financial performance.

If We Lose Our Key Personnel Or Are Unable To Attract And Retain Additional Personnel, We May Be Unable To Successfully Develop Our Technology

On May 21, 2002, we announced that Howard Sampson resigned as our Vice President of Finance, Chief Financial Officer, Secretary and Treasurer. Subsequently, on June 21, 2002, we announced the appointment of Michael L. Jeub as Vice President of Finance, Chief Financial Officer, Secretary and Treasurer. In September 2002, Dr. Carlo resigned as our Chief Executive Officer and President. On January 7, 2003, after a four month search, we appointed John N. Bonfiglio, Ph.D., as our Chief Executive Officer. On January 13, 2003, we announced that Ronald B. Moss resigned as our President. There can be no assurances that we will not lose additional members of our executive management team or, if so, whether we would be able to hire adequate replacements for any such individuals.

Additionally, our ability to conduct business, raise additional financing and commercialize REMUNE® or our other products may be hindered if we lose additional executive officers or experienced personnel with historical knowledge of our business, transactions, science and technology. Currently, our most experienced executive officer has been with us for less than one year.

In addition, recruiting and retaining qualified scientific personnel to assist in scaling up our manufacturing facilities and perform future research and development work will be critical to our success. It has been particularly difficult for us to retain personnel in light of the performance of our common stock and the incurrence of substantial net operating losses. We do not have sufficient personnel to fully execute our business plan, and there is currently a shortage of skilled executives and scientists, which is likely to continue. As a result, competition for experienced executives and scientists from numerous companies and academic and other research institutions may limit our ability to hire or retain new executives and other qualified personnel on acceptable terms. If we fail to attract and retain sufficient qualified personnel, we may not be able to develop or implement our technology.

Hazardous Materials And Environmental Matters Could Expose Us To Significant Costs

We may be required to incur significant costs to comply with current or future environmental laws and regulations. Although we do not currently manufacture commercial quantities of our product candidates, we produce limited quantities of these products for our clinical trials. Our research and development and manufacturing processes involve the controlled storage, use and disposal of hazardous materials, biological hazardous materials and radioactive compounds. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and some waste products. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, the risk of contamination or injury from these materials cannot be completely eliminated. In the event of an incident, we could be held liable for any damages that result, and any liability could exceed our

resources. Current or future environmental laws or regulations may have a material adverse effect on our operations, business and assets.

Volatility Of Our Stock Price And Absence Of Dividends May Hurt Our Security Holders

The market price of our common stock has been and is likely to continue to be highly volatile. Factors such as the following could have a significant adverse impact on the market price of our common stock:

• our ability to obtain additional financing and, if available, the terms and conditions of the financing;

• our financial position and results of operations;

• the results of preclinical studies and clinical trials by us, our collaborators or our competitors;

• concern as to, or other evidence of, the safety or efficacy of our products or our competitors’ products;

• announcements of technological innovations or new products by us or our competitors;

• U.S. and foreign governmental regulatory actions;

• actual or anticipated changes in drug reimbursement policies;

• developments with our collaborators;

• developments concerning patent or other proprietary rights of ours or our competitors (including litigation);

• status of litigation;

• period-to-period fluctuations in our operating results;

• changes in estimates of our performance by any securities analysts;

• new regulatory requirements and changes in the existing regulatory environment;

• market conditions for biopharmaceutical stocks in general; and

• other factors not within our control.

We have never paid cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future.

Changes To Financial Accounting Standards May Affect Our Reported Results Of Operations

We prepare our financial statements in conformity with accounting principles generally accepted in the United States, or GAAP. GAAP are subject to interpretation by the American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. Accounting policies affecting many other aspects of our business, including rules relating to the carrying value of long-lived assets, employee stock option grants and revenue recognition have recently been revised or are under review. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. In addition, our preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the recorded amounts of assets and liabilities, disclosure of those assets and liabilities at the date of the financial statements and the recorded amounts of expenses during the reporting period. A change in the facts and circumstances surrounding those estimates could result in a change to our estimates and could impact our future operating results. Additionally, certain provisions of the Sarbanes-Oxley Act of 2002 will impact our business. In particular, the creation by the SEC of an independent accounting oversight board to oversee and regulate audits will affect us and all public companies.

Our Certificate of Incorporation And Bylaws Include Provisions That Could Make Attempts By Stockholders To Change Management More Difficult

The approval of 66²/₃ percent of our voting stock is required to approve certain transactions and to take certain stockholder actions, including the calling of special meetings of stockholders and the amendment of any of the anti-takeover provisions, such as those providing for a classified board of directors, contained in our certificate of incorporation. Further, pursuant to the terms of our stockholder rights plan, we have distributed a dividend of one right for each outstanding share of common stock. These rights will cause substantial dilution to the ownership of a person or group that attempts to acquire us on terms not approved by our Board of Directors and may have the effect of deterring hostile takeover attempts. The substantial aggregate equity positions of Mr. Kimberlin and his affiliates and/or related parties would make such hostile takeover attempts very unlikely. The practical effect of these provisions is to require a party seeking control of us to negotiate with our Board of Directors, which could delay or prevent a change in control. These provisions could limit the price that investors might be willing to pay in the future for our securities and make attempts by stockholders to change management more difficult.

We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person first becomes an “interested stockholder,” unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change of control.

There May Be Risks Related To Our Previous Use Of Arthur Andersen LLP As Our Independent Auditors

On March 14, 2002, Arthur Andersen LLP, our independent public auditor, was indicted on federal obstruction of justice charges arising from the federal government’s investigation of Enron Corporation. On June 15, 2002, Arthur Andersen was convicted of these charges. Although we have engaged BDO Seidman, LLP, effective as of August 5, 2002, to replace Arthur Andersen as our independent public auditors, there are certain risks related to our consolidated financial statements for the fiscal year ended December 31, 2000, which was audited by Arthur Andersen. The SEC has said that it will continue accepting financial statements audited by Arthur Andersen as long as a reasonable effort is made to have Arthur Andersen reissue its reports and to obtain a manually signed accountant’s report from Arthur Andersen. Former representatives of Arthur Andersen have notified us that Arthur Andersen is no longer able to reissue its reports because the firm is no longer in existence.

Our current independent auditor, BDO Seidman, LLP, informed us that it discovered certain misclassifications of certain convertible notes issued to us by a related party in the financial statements included in our Annual Report on Form 10-K, as amended by Amendment No. 1 to Form 10-K, for the fiscal year ended December 31, 2001. As a result of this misclassification, BDO Seidman, LLP re-audited our financial statements and we have restated certain financial information contained in our Form 10-K/A for the fiscal year ended 2001. We also have restated certain financial information contained in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002 by filing Amendment No. 1 to the Quarterly Report. Certain amounts were incorrectly classified as debt rather than equity.

Certain investors, including significant funds and institutional investors, may choose not to hold or invest in securities of a company that does not have current financial reports available. Our access to the capital markets and our ability to make timely filings with the SEC could be impaired if the SEC ceases accepting financial statements from a prior period audited by Arthur Andersen for which Arthur Andersen will not reissue an audit report. In that case, we would not be able to access the public capital markets unless another independent accounting firm is able to audit the financial statements originally audited by Arthur Andersen. Any delay or inability to access the public capital markets caused by these circumstances would be disruptive and adversely affect the price and liquidity of our securities and would have a material adverse effect on our business and financial condition.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We invest our excess cash primarily in U.S. government securities and money market accounts. These instruments have maturities of two years or less when acquired. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions. Accordingly, we believe that, while the instruments we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation was performed of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14 (c) under the Exchange Act of 1934) as of a date within 90 days prior to the filing of this quarterly report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the date of the evaluation, our disclosure controls and procedures were effective in timely alerting management to material information relating to us required to be disclosed in our periodic SEC filings. There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect these internal controls subsequent to the date of evaluation.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Since July 2001, several complaints have been filed in the United States District Court for the Southern District of California seeking an unspecified amount of damages on behalf of an alleged class of persons, who purchased shares of our common stock at various times between May 17, 1999 and July 6, 2001. The various complaints name us and certain of our officers as defendants, as well as Agouron Pharmaceuticals, Inc. and one of its officers. The complaints allege that we, Agouron and/or such officers violated federal securities laws by misrepresenting and failing to disclose certain information about the results of clinical trials of REMUNE^®. The complaints have been consolidated by order of the Court into a single action under the name In re Immune Response Securities Litigation. We have not yet formally responded to the complaints. Although we intend to vigorously defend the actions, we do not believe it is feasible to predict or determine the outcome or resolution of these proceedings, or to estimate the amounts of, or potential range of, loss with respect to these proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against us or our officers or settlements that could require substantial payments by us, which could have a material adverse impact on our financial position, results of operations and cash flows. These proceedings also might require substantial attention of our management team and therefore divert their time and attention from our business and operations.

Item 2. Changes in Securities

On March 28, 2003, we issued to Cheshire Associates LLC, an affiliate of one of our directors and principal stockholder, Mr. Kevin Kimberlin, a short-term convertible promissory note in the amount of $2.0 million, bearing interest at the rate of 8% per annum. The note is convertible into either 1,626,016 shares of our common stock at a price of $1.23 per share (which was the closing price of our common stock on March 27, 2003) or an equal amount of such other securities that we may offer in the future by means of a private placement to "accredited investors."

Item 5. Other Information

The Chief Executive Officer and Chief Financial Officer of the Company have certified that the Quarterly Report of the Company and Form 10-Q for the quarterly period ended March 31, 2003 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. (ss) 78m or (ss) 78o(d)) and that information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

10.136 8% Convertible Secured Promissory Note dated as of March 28, 2003.

99.1 Certification for Section 906 of Sarbanes-Oxley Act of 2002.

b) Reports on Form 8-K

None

SIGNATURE

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

		THE IMMUNE RESPONSE CORPORATION


Date: May 20, 2003		/s/ Michael L. Jeub
		Michael L. Jeub
		Vice President of Finance and Chief Financial Officer

CERTIFICATIONS

I, John N. Bonfiglio, Ph.D., certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Immune Response Corporation;

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

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

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

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

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

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

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

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

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

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

Date: May 20, 2003


	/s/ John N. Bonfiglio
	John N. Bonfiglio, Ph.D.
	Chief Executive Officer

I, Michael L. Jeub, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Immune Response Corporation;

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

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

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

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

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

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

Date: May 20, 2003


	/s/ Michael L. Jeub
	Michael L. Jeub
	Vice President of Finance and
	Chief Financial Officer