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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004
 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-18006 THE IMMUNE RESPONSE CORPORATION  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    33-0255679
(I.R.S. Employer
Identification No.)
 5931 Darwin Court
Carlsbad, California
(Address of principal executive offices)
    
    92008
(Zip Code)
 Registrants telephone number, including area code: (760) 431-7080 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   Yes x     No 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 x As of October 31, 2004, there were 48,601,103 shares of our common stock
outstanding.




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THE IMMUNE RESPONSE CORPORATION INDEX PagePart I            FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Consolidated Balance Sheets  September 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations  Three and Nine months ended September 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows  Nine months ended September 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    22Part II            OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits and Reports on Form 8-K
    
    
    22SIGNATURES
    
    
    23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  -2-




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements The Immune Response Corporation 
 Condensed Consolidated Balance Sheets
 (in thousands, except for share amounts)
 September 30,
    
    December 31,2004
    
    2003(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    12,291
    
    
    $
    12,838Marketable securities  available-for-sale
    
    
    
    
    
    
    4Other current assets
    
    
    284
    
    
    
    37212,575
    
    
    
    13,214Property and equipment, net
    
    
    4,588
    
    
    
    4,949Licensed technology, net
    
    
    1,590
    
    
    
    2,119Deposits and other assets ($600 restricted as security for letter of credit)
    
    
    690
    
    
    
    690$
    19,443
    
    
    $
    20,972Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    675
    
    
    $
    1,151Accrued expenses
    
    
    689
    
    
    
    1,112Short-term convertible notes, related party
    
    
    
    
    
    
    3,899Current portion of convertible promissory notes, related party, net of discount of $389 plus
accrued interest of $185 at September 30, 2004
    
    
    1,541
    
    
    
    Current portion of deferred rent and accrued excess lease costs
    
    
    221
    
    
    
    452Current portion of deferred revenue
    
    
    45
    
    
    
    563,171
    
    
    
    6,670Convertible promissory notes, related party, net of discount of $2,008 and $4,167 plus
accrued interest of $822 and $575 at September 30, 2004 and December 31, 2003,
respectively, net of current portion
    
    
    4,277
    
    
    
    3,616Long-term deferred rent and accrued excess lease costs, net of current portion
    
    
    2,283
    
    
    
    1,990Long-term deferred revenue, net of current portion
    
    
    172
    
    
    
    3239,903
    
    
    
    12,599Stockholders Equity:Preferred stock, $.001 par value, 10,000,000 shares authorized; 688,146 Series A shares
issued and outstanding at September 30, 2004 with a liquidation preference aggregating
$4,392
    
    
    13,952
    
    
    
    Common stock, $.0025 par value, 170,000,000 shares authorized; 48,515,670 and 41,201,187
shares issued and outstanding at September 30, 2004 and December 31,
2003, respectively
    
    
    121
    
    
    
    102Warrants
    
    
    20,875
    
    
    
    17,777Additional paid-in capital
    
    
    298,086
    
    
    
    290,346Accumulated other comprehensive income
    
    
    
    
    
    
    4Accumulated deficit
    
    
    (323,494
    )
    
    
    (299,856
    )Total stockholders equity
    
    
    9,540
    
    
    
    8,373$
    $19,443
    
    
    $
    $20,972
 See accompanying notes to condensed consolidated financial statements. -3-




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The Immune Response Corporation 
 Condensed Consolidated Statements of Operations
 (in thousands, except for per share amounts)
 (unaudited)
 Three months ended September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    2004
    
    2003Revenues:Licensed research revenue
    
    $
    277
    
    
    $
    7
    
    
    $
    291
    
    
    $
    30Contract research revenue
    
    
    7
    
    
    
    7
    
    
    
    21
    
    
    
    22284
    
    
    
    14
    
    
    
    312
    
    
    
    52Expenses:Research and development
    
    
    3,086
    
    
    
    3,131
    
    
    
    9,441
    
    
    
    8,135General and administrative
    
    
    781
    
    
    
    1,024
    
    
    
    2,504
    
    
    
    4,361Exit and disposal related costs
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    1,3743,867
    
    
    
    4,193
    
    
    
    11,945
    
    
    
    13,870Other income and (expense):Investment income
    
    
    39
    
    
    
    6
    
    
    
    82
    
    
    
    17Interest expense  including non-cash accretion
of $590 and $2,345 for three months and
$1,770 and $6,475 for nine months, respectively
    
    
    (739
    )
    
    
    (2,672
    )
    
    
    (2,229
    )
    
    
    (7,494
    )Beneficial inducement cost
    
    
    
    
    
    
    
    
    
    
    (4,923
    )
    
    
    Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (4,935
    )
    
    
    (700
    )
    
    
    (2,666
    )
    
    
    (12,005
    )
    
    
    (7,477
    )Net loss
    
    
    (4,283
    )
    
    
    (6,845
    )
    
    
    (23,638
    )
    
    
    (21,295
    )Deemed stock dividend
    
    
    
    
    
    
    (13,251
    )
    
    
    
    
    
    
    (13,251
    )Less preferred stock dividends
    
    
    (93
    )
    
    
    
    
    
    
    (274
    )
    
    
    Net loss attributable to common stockholders
    
    $
    (4,376
    )
    
    $
    (20,096
    )
    
    $
    (23,912
    )
    
    $
    (34,546
    )Basic and diluted loss per share:Net loss
    
    $
    (0.09
    )
    
    $
    (0.21
    )
    
    $
    (0.52
    )
    
    $
    (0.88
    )Net loss attributable to common stockholders
    
    $
    (0.09
    )
    
    $
    (0.62
    )
    
    $
    (0.53
    )
    
    $
    (1.43
    )Weighted average number of shares outstanding
    
    
    48,458
    
    
    
    32,277
    
    
    
    45,268
    
    
    
    24,097
 See accompanying notes to condensed consolidated financial statements. -4-




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The Immune Response Corporation 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
 (unaudited)
 Nine months ended September 30,2004
    
    2003Cash Flows From Operating Activities:Net loss
    
    $
    (23,638
    )
    
    $
    (21,295
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,224
    
    
    
    1,455Operating expenses paid with common stock and warrants
    
    
    276
    
    
    
    541Stock option adjustments
    
    
    (385
    )
    
    
    917Deferred revenue
    
    
    (162
    )
    
    
    (41
    )Deferred rent
    
    
    187
    
    
    
    Accrued excess lease costs
    
    
    (125
    )
    
    
    (252
    )Long-term accrued interest
    
    
    432
    
    
    
    665Accretion of notes
    
    
    1,770
    
    
    
    6,475Impairment of long-term asset
    
    
    
    
    
    
    438Beneficial inducement cost
    
    
    4,923
    
    
    
    Loss on extinguishment of debt
    
    
    4,935
    
    
    
    Interest expense converted into Series A preferred stock
    
    
    219
    
    
    
    (Gain) loss on sale or disposal of fixed assets
    
    
    14
    
    
    
    (46
    )Changes in operating assets and liabilities:Other current assets
    
    
    88
    
    
    
    (153
    )Accounts payable
    
    
    (476
    )
    
    
    (827
    )Accrued expenses
    
    
    (423
    )
    
    
    57Net cash used in operating activities
    
    
    (11,141
    )
    
    
    (12,066
    )Cash Flows From Investing Activities:Purchase of property and equipment
    
    
    (351
    )
    
    
    Proceeds from sale of equipment, net
    
    
    4
    
    
    
    112Other
    
    
    
    
    
    
    197Net cash provided by (used in) investing activities
    
    
    (347
    )
    
    
    309Cash Flows From Financing Activities:Payments of equipment notes and capital leases
    
    
    
    
    
    
    (1,082
    )Net proceeds from private placement of common stock
    
    
    10,709
    
    
    
    Net proceeds from exercises of Unit Purchase Options
    
    
    110
    
    
    
    Proceeds from issuance of short-term convertible notes, related party
    
    
    
    
    
    
    3,899Proceeds from exercises of stock warrants
    
    
    
    
    
    
    10,138Net offering costs for Series A preferred stock
    
    
    (23
    )
    
    
    Net proceeds from common stock purchases through employee plans
    
    
    145
    
    
    
    190Net cash provided by financing activities
    
    
    10,941
    
    
    
    13,145Net increase (decrease) in cash and cash equivalents
    
    
    (547
    )
    
    
    1,388Cash and cash equivalents - beginning of year
    
    
    12,838
    
    
    
    3,941Cash and cash equivalents - end of period
    
    $
    12,291
    
    
    $
    5,329Supplemental Disclosure of Cash Flow Information:Interest paid
    
    $
    23
    
    
    $
    275Supplemental Disclosure of Noncash Information:Promissory notes and interest converted into Series A preferred stock
    
    $
    4,118
    
    
    $
    Convertible notes and interest converted into common stock
    
    $
    
    
    
    $
    7,361Value allocated to common stock as debt discount
    
    $
    
    
    
    $
    385Common stock and warrants issued for consulting services, 401K match and offering costs
    
    $
    1,082
    
    
    $
    1,149Unrealized gain on marketable securities
    
    $
    
    
    
    $
    2
 See accompanying notes to condensed consolidated financial statements. -5-




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THE IMMUNE RESPONSE CORPORATION 
 Notes to Condensed Consolidated Financial Statements (unaudited)
 Note 1  Interim Financial Statements: The accompanying condensed consolidated balance sheet as of September 30, 2004
and the condensed consolidated statements of operations for the three and nine
months ended September 30, 2004 and 2003 and of cash flows for the nine months
ended September 30, 2004 and 2003 have been prepared by The Immune Response
Corporation (the Company) and have not been audited. The condensed
consolidated financial statements of the Company include the accounts of its
wholly owned subsidiary I.R.C. Inc. All significant intercompany transactions
and accounts have been eliminated in consolidation. These consolidated
financial statements, in the opinion of management, include all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of the consolidated financial position, results of operations and
cash flows for all periods presented. The consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Companys Annual Report on Form 10-K filed for
the year ended December 31, 2003. Interim operating results are not
necessarily indicative of operating results for the full year. The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ materially from those estimates. Stock-Based Compensation During April 2003, the Company repriced and accelerated the vesting of stock
options to purchase 664,007 shares previously granted to employees and outside
directors. The weighted average share price was reduced from $10.04 per share
to $1.12 per share. This repricing was expensed using the intrinsic valuation
method required under APB No. 25. The Company recorded additional employee
compensation (benefit) expense of $(139,000) and $(287,000) for the repriced
options during the three and nine months ended September 30, 2004, respectively
and $(371,000) and $736,000 for the three and nine months ended September 30,
2003, respectively. The Company measures its stock-based employee compensation using the intrinsic
value method. The following disclosures utilizing the intrinsic value method,
and pro forma amounts, after applying the fair value method, related to
stock-based awards made to employees that were outstanding as of September 30,
2004 and 2003: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss attributable to common stockholders:As reported
    
    $
    (4,376,000
    )
    
    $
    (20,096,000
    )
    
    $
    (23,912,000
    )
    
    $
    (34,546,000
    )Stock-based employee compensation
expense (benefit) included in net
loss
    
    
    (139,000
    )
    
    
    (371,000
    )
    
    
    (287,000
    )
    
    
    736,000Fair value of stock-based employee
compensation
    
    
    (380,000
    )
    
    
    (904,000
    )
    
    
    (1,851,000
    )
    
    
    (2,462,000
    )Pro forma
    
    $
    (4,895,000
    )
    
    $
    (21,371,000
    )
    
    $
    (26,050,000
    )
    
    $
    (36,272,000
    )Net loss per share (basic and diluted):As reported
    
    $
    (0.09
    )
    
    $
    (0.62
    )
    
    $
    (0.53
    )
    
    $
    (1.43
    )Pro forma
    
    $
    (0.10
    )
    
    $
    (0.66
    )
    
    $
    (0.58
    )
    
    $
    (1.51
    )
 -6-




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THE IMMUNE RESPONSE CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited) Note 2  The Company: The Immune Response Corporation (Nasdaq: IMNR) is a biopharmaceutical company
dedicated to becoming a leading immune-based therapy (IBT) company in HIV and
multiple sclerosis (MS). The Companys HIV products are based on its patented
whole-killed virus technology, co-invented by Company founder Dr. Jonas Salk,
to stimulate HIV immune responses. We currently have three active IBT
programs; Remune® and IR103 target HIV and NeuroVaxTM targets MS. Remune®,
currently in Phase II clinical trials, is being developed as a first-line
treatment for people with early-stage HIV. We have initiated development of a
new immune-based therapy, IR103, which incorporates a second-generation
immunostimulatory oligonucleotide adjuvant and is currently in Phase I clinical
trials in Canada and the United Kingdom. We are also developing an
immune-based therapy for MS, NeuroVaxTM, which is
currently in Phase II clinical trials and has shown potential therapeutic value
for this difficult-to-treat disease. Note 3  Going Concern: The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses since inception and has an accumulated deficit of
$323,494,000 as of September 30, 2004. The Company will not generate meaningful
revenues in the foreseeable future. These factors, among others, raised substantial doubt about the Companys
ability to continue as a going concern. Our former registered public
accounting firm, BDO Seidman, LLP, indicated in their audit report on the 2003
consolidated financial statements that there is substantial doubt about our
ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. On January 7, 2004, $3,899,000 of previously issued, related party convertible
promissory notes plus accrued interest of approximately $219,000 were converted
into 688,146 shares of Series A convertible preferred stock (see Note 5). On
April 30, 2004, the Company raised approximately $11,850,000 in gross proceeds
through a private placement (see Note 8). The Company believes that its current
resources are sufficient to fund its planned operations, including necessary
capital expenditures and new clinical trials, for at least the next eight
months. Note 4  Short-Term Convertible Notes, Related Party: The short-term convertible notes totaling $3,899,000, described below, plus
approximately $219,000 of accrued interest were converted into 688,146 shares
of Series A convertible preferred stock on January 7, 2004 (see Note 5). On March 28, 2003, the Company issued to Cheshire Associates, LLC, a related
party, a short-term convertible note in the amount of $2,000,000, bearing
interest at the rate of 8% per annum, due March 28, 2004 (the March Note).
The March Note was convertible into 1,626,016 shares of common stock at a price
of $1.23 per share. In May 2003, the Company issued to Cheshire two short-term convertible notes in
the aggregate amount of $1,080,000, bearing interest at the rate of 8% per
annum, due May 2004 and January 2004, respectively (the May Notes). One of
the May Notes, with a principal balance of $1,000,000, was convertible into
shares of common stock on terms to be negotiated in good faith prior to its
maturity date. The $80,000 May Note was convertible into 59,259 shares of
common stock at a price of $1.35 per share. In June 2003, the Company issued to Cheshire a short-term convertible note in
the amount of $819,000, bearing interest at the rate of 8% per annum, due
January 2004 (the June Note). The June Note was convertible into shares of
common stock on terms to be negotiated in good faith prior to its maturity
date. -7-




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THE IMMUNE RESPONSE CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited) Note 5  Series A Preferred Stock: On January 7, 2004, Cheshire Associates, LLC, a related party, converted
$3,899,000 of previously issued, short-term convertible notes plus accrued
interest of approximately $219,000 into 688,146 shares of Series A convertible
preferred stock (Series A) at $5.984 per share. The holders of shares of Series
A have the right to further convert each share of Series A into anywhere from
five to twelve shares of common stock, depending on the date of conversion. The
Series A votes with the holders of common stock as a single class. The Series
A is only entitled to three votes for each share of Series A. The Series A has dividend and liquidation preferences over common stock
holders. The holders of the Series A are entitled to receive cumulative
dividends on each share of Series A at the rate of 9% per annum until the
earliest of (i) July 7, 2006, (ii) the date the Series A is redeemed and (iii)
the date the Series A is converted into common stock. At September 30, 2004
accumulated but undeclared dividends on the Series A amounted to $274,000. The
liquidation preference at September 30, 2004 aggregated $4,392,000. In addition, the holders of Series A are entitled to protective provisions that
require 66 2/3% of the outstanding Series A to approve, among other things,
creating a new class of security with dividend or liquidation rights equal or
senior to the Series A convertible preferred stock, a liquidation or
recapitalization or increasing the number of shares reserved for issuance under
the Companys stock option plans to greater than 10% of the Companys
outstanding capital stock (on an as if converted, fully-diluted basis). The
Series A also contains anti-dilution provisions. The conversion of $2,080,000 of short-term convertible notes into Series A
resulted in a non-cash charge to operations of approximately $4,923,000 in the
first quarter of 2004 as a beneficial inducement cost, representing the
difference between the fair value of the common stock into which the Series A
is convertible (at the most preferential rate) compared to the fair value of
the common stock into which the related debt was convertible in accordance with
FAS No. 84, Induced Conversions of Convertible Debt. Conversion of the remaining $1,819,000 of the short-term convertible notes
resulted in a non-cash charge to operations of approximately $4,935,000 in the
first quarter of 2004 as a loss on the extinguishment of debt, representing the
difference between the carrying value of the related debt and the fair value of
the Series A issued. Note 6  Revenues Under Collaborative Agreements: The Company earns revenue from licensing its proprietary technology and
performing services under research and development contracts. Any initial fees
under license and option agreements, under which the Company also provides
research and development services, are recognized over the term of the research
and development or other relevant period. Payments for options to a license
for the Companys technology are recognized over the option period. Revenues
from the achievement of milestones are recognized over the remaining
development period. Revenues under research and development contracts are
recognized as the services are performed. Advance payments received in excess
of amounts earned are classified as deferred revenue. In September 2004, the Company transferred to NovaRx Corporation (NovaRx) its
in-license rights to certain cancer-related technology and received an initial
payment of $150,000. The Company recognized this payment as revenue and fully
recognized the remaining deferred revenue of $121,000 for previous sublicense
agreements with NovaRx. The Company had previously in-licensed this technology
from The Sidney Kimmel Cancer Center and Dr. Masayoshi Namba. The Company will
have no future contractual obligations under either the in-licensing or
out-licensing agreements. NovaRx also agreed to pay the Company an additional
$900,000 due on or before August 2007. The Company will recognize this revenue
upon collection, due to the uncertainty of NovaRxs ability to pay the fee at
this time. All other revenues recognized were from the amortization of other
multi-year out-licensing contracts covering various intellectual property that
we own. -8-




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THE IMMUNE RESPONSE CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited) Note 7  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
3,400,000 common shares for the Series A convertible preferred stock, 5,500,000
shares for outstanding employee stock options, 6,600,000 shares issuable under
convertible promissory notes, related party, 16,100,000 shares issuable under
warrants outstanding, 9,400,000 shares issuable under Class B warrants
outstanding and 1,700,000 shares issuable under an option issued to the
placement agent for the private offering in December 2002. Note 8  Private Placement: On April 30, 2004 the Company raised $10,709,000, net of $1,141,000 of offering
costs, in connection with a private placement of approximately 6,800,000 shares
of common stock at $1.75 per share to a number of institutional investors.
Investors also received five-year warrants to purchase an aggregate of
approximately 2,031,000 shares of common stock at $2.75 per share with an
allocated value of $2,569,000. The investors were not affiliated with the
Company, except for one investor that is an affiliate of Cheshire; that
investor purchased 342,857 shares and 102,857 warrants for $600,000. In
connection with this private placement, the Company issued additional warrants
to purchase 541,714 shares of common stock to Rodman & Renshaw, Inc., the
placement agent for this offering, with a value of $805,000, representing
non-cash offering costs. The Company has an effective registration statement
with the Securities and Exchange Commission covering the resale of the common
shares and the underlying shares of common stock. Proceeds from the financing
will be used to fund the Companys ongoing clinical activities and for general
corporate purposes. Note 9  Exit and Disposal Related Costs: During May 2003, the Company disposed of excess assets, and in August 2003 the
Company negotiated an early lease termination for the Companys former, vacated
Carlsbad, California headquarters facility resulting in exit and disposal
related costs of $1,374,000 recognized as of September 30, 2003. -9-




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THE IMMUNE RESPONSE CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited) 
 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 those discussed under Certain Risk Factors, as well as
those discussed elsewhere in this Form 10-Q. The following discussion should
be read in conjunction with our consolidated financial statements and notes
thereto included elsewhere in this Form 10-Q. 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 indicated in order to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Overview We are a biopharmaceutical company whose products are in the development stage.
We have a critical need to raise cash both in the near term and the medium
term. Nonetheless, we believe our products could prove to have substantial
value as part of a therapy for patients infected with HIV or MS. Liquidity and Capital Resources As of September 30, 2004, we had a consolidated accumulated deficit of
$323,494,000. 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 significant
product revenue before the third quarter of 2008, if at all. We have operating
and liquidity concerns due to our significant net losses and negative cash
flows from operations. As a result of these and other factors, our former
registered public accounting firm, BDO Seidman, LLP, indicated in their audit
report on the 2003 consolidated financial statements that there is substantial
doubt about our ability to continue as a going concern. Since our inception in 1986, 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 Cheshire Associates, LLC and
other entities affiliated with or related to Mr. Kevin Kimberlin, who is one of
our directors and our principal stockholder, of capital stock, convertible
notes and warrants and short-term promissory notes. As of September 30, 2004, we had outstanding approximately $5,818,000 (net of
discount of $2,397,000, plus accrued interest of $1,007,000) of convertible,
related party debt. All of the notes bear interest at a fixed rate of 8% per
year and are secured by our intellectual property. The notes mature at various
dates through November 2005. The notes are convertible into shares of the
Companys common stock at any time, at the option of the investors. The
conversion prices range from $1.7248 to $0.8128. In January 2004, in a transaction with a company related to Mr. Kimberlin, we
converted $4,100,000 of previously issued promissory notes and accrued interest
into 688,000 shares of Series A Convertible Preferred Stock. On April 30,
2004, we raised approximately $11,850,000 in gross proceeds through a private
placement of common stock and warrants, primarily to unaffiliated investors. We
believe that our current resources are sufficient to fund our planned
operations, including necessary capital expenditures and new clinical trials,
for at least the next eight months. We could raise an additional $16,700,000 if all of the Class B warrants issued
as a result of Class A warrant exercises since July 7, 2003, which are
redeemable by us if the price of our common stock is equal to or greater than
$3.32, are exercised. The exercise price is $1.77 per share. Because at that
price it would be profitable for the warrant holders to exercise their warrants
rather than to allow the redemption to proceed, we assume they would choose to
exercise. However, there is no assurance that our stock price will rise to the
$3.32 per share redemption trigger price. Also, 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 could raise an additional $11,800,000 if all the warrants issued in
connection with the October 2003 private placement are exercised for cash. The
warrants issued in the October 2003 private placement are redeemable by us if
the price of our common -10-




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stock is equal to or greater than $8.00 for 20 consecutive trading days.
Because at that price it would be profitable for the warrant holders to
exercise their warrants rather than to allow the redemption to proceed, we
assume they would choose to exercise. However, there is no assurance that our
stock price will rise to the $8.00 per share redemption trigger price. Also,
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. Additionally, we could raise $7,100,000 if all the warrants issued in
connection with the April 2004 private placement are exercised for cash. The
warrants issued in the April 2004 private placement are exercisable by the
holders at any time between October 2004 and April 2009 at $2.75 per share.
However, there is no assurance that our stock price will rise to the $2.75 per
share exercise price and/or that all or any portion of the warrants will be
exercised by the initial purchasers or by any subsequent holders. As we use our current cash balances, we continue 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®, IR103
and NeuroVaxTM 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. We will need to raise very substantial additional funds over several years 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®,
IR103 and NeuroVaxTM and the
cost of producing clinical supplies for ongoing and future Remune®, IR103 and
NeuroVaxTM studies will continue to represent a significant portion of our
overall expenditures. Overall, future Remune®, IR103
and NeuroVaxTM 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 anticipate additional capital improvements of approximately $750,000 to
scale-up the manufacturing process for Remune® and IR103 through 2006. Other
anticipated costs with respect to Remune®, IR103 and
NeuroVaxTM, 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 these programs. Our future capital requirements will depend on many factors including whether
the remaining warrants 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 financing, if
available. However, we cannot provide assurance that such collaboration
arrangements or any public or private financing will be available on acceptable
terms, if at all. If we raise funds through future equity arrangements,
significant further dilution to stockholders will result. Results of Operations Three and Nine Months Ended September 30, 2004 Compared to Three and Nine
Months Ended September 30, 2003. We recorded revenues for the three and nine months ended September 30, 2004 of
$284,000 and $312,000, respectively, as compared to $14,000 and $52,000 for the
corresponding period in 2003. In September 2004, we transferred to NovaRx
Corporation (NovaRx) our in-license rights to certain cancer-related
technology and received an initial payment of $150,000. We recognized this
payment as revenue and fully recognized the remaining deferred revenue of
$121,000 for previous sublicense agreements with NovaRx. We have no future
contractual obligations under either the in-licensing or out-licensing
agreements. NovaRx also agreed to pay us an additional $900,000 due on or
before August 2007. We will recognize this amount as revenue only upon
collection, due to the uncertainty of NovaRxs ability to pay the fee at this
time. All other revenues were from the amortization of other multi-year
out-licenses of technology. 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. -11-




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Our research and development expenditures for the three and nine months ended
September 30, 2004 were $3,086,000 and $9,441,000, respectively, as compared to
$3,131,000 and $8,135,000 for the corresponding periods in 2003. The increase
in research and development expenses during the first nine months of 2004 is
attributable to our increased HIV clinical development activity, manufacturing
scale-up activities for Remune® and IR103 and the cost of producing clinical
supplies of NeuroVaxTM. Expenses associated with our scale-up of the manufacturing process for Remune®
and IR103, the cost of producing clinical supplies for ongoing and future
Remune®, IR103 and NeuroVaxTM studies and additional clinical trials for
NeuroVaxTM are expected to increase during the next several quarters as we
focus our financial resources on Remune®, IR103 and NeuroVaxTM. Clinical study
spending for our other development programs has decreased sharply beginning in
the second quarter of 2002. 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 for the three and nine months ended
September 30, 2004 were $781,000 and $2,504,000, respectively, as compared to
$1,024,000 and $4,361,000 for the corresponding periods in 2003. These figures
include $736,000 of non-cash expense in the first nine months of 2003 related
to the repricing of employee stock options in 2003, and non-cash benefit of
$287,000 in the first nine months of 2004, $139,000 in the third quarter of
2004 and $371,000 in the third quarter of 2003, all representing variable
accounting for the repriced options. The reductions in general and
administrative expenses year-to-year reflect ongoing cost containment efforts.
In future quarters those efforts may be somewhat offset by possible increased
consulting fees. During May 2003, we disposed of excess assets, and in August 2003 we negotiated
an early lease termination for our Carlsbad, California headquarters facility
resulting in exit and disposal related costs of $1,374,000 recognized as of
September 30, 2003. Interest expense decreased to $739,000 and $2,229,000, respectively, for the
three and nine months ended September 30, 2004 as compared to $2,672,000 and
$7,494,000 for the corresponding period in 2003. The decrease during the first
nine months of 2004 is attributable to an overall reduction in levels of debt. Our net loss per share decreased during 2004 as a result of the decreased net
loss and by the increase in our weighted average number of shares outstanding,
due to several securities issuance transactions, as compared to 2003. Critical Accounting Policies and Estimates We believe that patents and other proprietary rights are important to our
business. Licensed technology is recorded at cost and is amortized over its
estimated useful life. 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. 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 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, we have identified our property and equipment
and licensed technology 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 related to property and equipment
for the year ended December 31, 2002. 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 one of our production facilities in King of Prussia,
Pennsylvania. Since then we have also renewed our -12-




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focus on NeuroVax and
commenced development of IR103. During May 2003, we disposed of excess assets,
and during August 2003, we negotiated an early lease termination for our former
Carlsbad, California headquarters facility resulting in exit and disposal
related costs of approximately $1,400,000. During 2003, we recorded an
additional charge of $2,000,000 related to the estimated net rental expense of
our vacant manufacturing facility in Pennsylvania. These costs have been
accounted for in accordance with Emerging Issues Task Force 94-3. Certain Risk Factors Our future operating results are subject to a number of factors, including: Our failure to successfully develop our product candidates, Remune®, IR103 and
NeuroVaxTM may cause us to cease operations We have not completed the development of any products. As part of our
restructuring program announced in September 2002, we halted development of
most of our products other than Remune® and NeuroVaxTM . Our other potential
therapies, which were under development prior to September 2002, would require
significant additional research and development efforts, funding and regulatory
approvals if we recommence development in the future. We are dependent upon our
ability to successfully develop Remune®, IR103 and NeuroVaxTM and our failure
to do so may cause us to cease operations. In May 1999 we discontinued a Phase III clinical endpoint trial of Remune®
because differences in clinical endpoints were not observed between treatment
groups and extending the trial would have been unlikely to provide sufficient
additional clinical endpoints. The discontinuation of the Phase III trial has
had a material adverse effect on us. Additionally, 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,
which has hindered the continued development and commercialization of Remune®.
We cannot assure you that any future Phase III trials of Remune® (or related
drug candidate, IR103) will be conducted. Furthermore, we cannot guarantee that
we, or our corporate collaborators, if any, will ever obtain any regulatory
approvals of Remune®(or related drug candidate, IR103). Before the cessation of the development efforts of our products other than
Remune® and NeuroVaxTM in September 2002, our technologies and other potential
therapies were at earlier stages of development than Remune® and had not been
shown to be safe or effective. Some of our technologies have not been tested on
humans. Even if we do continue development of our other potential products,
regulatory authorities may not permit human testing of the potential products
based on these technologies. Even if human testing were permitted, the products
based on these technologies may not be successfully developed or shown to be
safe or effective. The results of our pre-clinical studies and clinical trials may not be
indicative of future clinical trial results. A commitment of substantial
financial and other 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 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 by the Food and Drug
Administration, 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 several 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 have shown Remune®, IR103 and
NeuroVaxTM 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. -13-




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Our current cash position, significant financing requirements and limited
access to financing may adversely affect our ability to develop products and
continue operations We have never generated any revenue from product sales. As of September 30,
2004, we had an accumulated deficit of approximately $323,494,000, cash and
cash equivalents of only approximately $12,291,000 and working capital of only
approximately $9,404,000. Because we do not anticipate generating any revenue
from our products until at least the third quarter of 2008, if at all, we will
continue to have negative cash flow and will need to raise substantial
additional capital to fund our operations beyond the spring of 2005. We will
need to raise substantial 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. We will continue to have limited cash resources. There can be no assurance that
we will be successful in consummating any financing transaction or, if
consummated, that the terms and conditions will not be unfavorable to us. We could raise an additional $16,700,000 if all of the Class B warrants that
were issued upon exercise of our Class A warrants are exercised. Our Class B
warrants are redeemable by us if the price of our common stock is equal to or
greater than $3.32 for ten consecutive trading days. However, there can be no
assurances that our stock price will rise to $3.32 so as to enable us to call
the Class B warrants for redemption, nor that (even in that event) all or any
portion of the warrants will be exercised by the initial purchasers or by any
subsequent holders. We could raise an additional $11,800,000 if all the warrants issued in
connection with the October 2003 private placement are exercised for cash. The
warrants issued in the October 2003 private placement are redeemable by us if
the price of our common stock is equal to or greater than $8.00 for 20
consecutive trading days. However, there can be no assurances that our stock
price will rise to $8.00 so as to enable us to call the warrants for
redemption, nor that (even in that event) all or any portion of the warrants
will be exercised by the initial purchasers or by any subsequent holders. Additionally, we could raise $7,100,000 if all the warrants issued in
connection with the April 2004 private placement are exercised for cash. The
warrants issued in the April 2004 private placement are exercisable by the
holders at any time between October 2004 and April 2009 at $2.75 per share.
However, there is no assurance that our stock price will rise to the $2.75 per
share exercise price and/or that all or any portion of the warrants will be
exercised by the initial purchasers or by any subsequent holders. 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®. The cost reductions
related to research, administrative and operational costs have been offset by
increased costs relating to increasing our production capabilities at our King
of Prussia, Pennsylvania facility and conducting additional clinical trials.
Since then we have also renewed our focus on NeuroVaxTM and commenced
development of IR103. The timing and amount of our future capital requirements will depend on many
factors, including (but not limited to):  
    
    our ability to raise additional funding and the amounts raised, if any;
    
    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 cost of manufacturing scale-up;
    
    the costs involved in filing, prosecuting and enforcing patent claims;
    
    competing technological and market developments; -14-




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
    
    effective commercialization activities and arrangements;
    
    the costs of defending against and settling lawsuits; and/or
    
    other factors not within our control or known to us. Our access to capital could be limited if we do not progress in:  
    
    obtaining regulatory approvals;
    
    our research and development programs;
    
    our preclinical and clinical trials; or
    
    scaling up manufacturing. Our access to capital also could be limited by:  
    
    overall financial market conditions;
    
    applicable Nasdaq rules and federal and state securities laws;
    
    the perfected security interest in our intellectual property in respect of the aggregate
$7,208,000 principal amount in convertible promissory notes issued to affiliates and/or
related parties of Kevin Kimberlin, (who is one of our directors and our principal stockholder
(See An existing stockholder owns approximately 14.5% of our outstanding common stock and has
the rights to acquire an additional 23,554,671 shares of our common stock, which could result
in ownership of up to approximately 43.0% of our outstanding shares and could allow him to
control or influence stockholder votes);
    
    the effect of the potential for exercise of outstanding options and warrants exercisable into
approximately 22,600,000 shares of common stock;
    
    the effect of the potential for conversion of 688,000 shares of Series A Convertible Preferred
Stock issued in January 2004. The Series A is currently convertible into 4,128,000 shares of
common stock up to a maximum of 8,300,000 shares of common stock; and
    
    the issuance of the placement agent option to Spencer Trask Ventures, Inc., (an affiliate of
Kevin Kimberlin) and its transferees that is exercisable for 1,700,000 shares of common stock
and 1,438,000 Class A warrants, which are not redeemable by us. An existing stockholder owns approximately 14.5% of our outstanding common
stock and has the rights to acquire an additional 23,554,671 shares of our
common stock, which could result in ownership of up to approximately 43.0% of
our outstanding shares and could allow him to control or influence stockholder
votes Kevin B. Kimberlin, a member of our Board of Directors, together with his
affiliates and/or related parties, currently owns of record approximately 14.5%
of our outstanding shares of common stock. He and they also have the right to
acquire, through the conversion of notes and exercise of options and warrants
beneficially owned by them, 23,554,671 additional shares. If his/their notes,
options and warrants were to be converted and exercised in full, Mr. Kimberlin
and his affiliates and/or related parties would own approximately 43.0% of our
outstanding shares of common stock on a post-conversion/exercise basis. As a
result of ownership of our common stock and the ability to acquire additional
shares, Mr. Kimberlin and his affiliates and/or related persons have the
ability to influence, and possibly control, 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. -15-




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The lengthy product approval process and uncertainty of government regulatory
requirements may delay or prevent us from commercializing products. We must
work to re-establish our credibility with the FDA 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 pre-market 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 Remune® or any of our other
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 Phase III clinical trials of Remune® or our other products
are initiated and successfully completed, the FDA may not approve Remune® or
our other products 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® or our other
products as treatment protocols. The FDA may not determine that Remune® or
our other products meets all of the FDAs criteria for use of an
investigational drug for treatment use. Even if Remune® or our other products
are allowed for treatment use, third party payers may not provide reimbursement
for the costs of treatment with Remune® or our other products. The FDA also may
not consider Remune® or our other products under development to be appropriate
candidates for accelerated approval, expedited review or fast track
designation. The timing and substance of most FDA decisions are, as a practical matter,
discretionary. Past events have raised doubts in the minds of some persons at
the FDA regarding our corporate credibility and the viability of Remune®. Our
efforts to re-establish our credibility may not succeed; but if they dont, the
FDA approvals that are indispensable if we are to survive and succeed may be
delayed or denied despite any merit our applications may have. 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 be even longer than 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. -16-




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Specifically, before we will be permitted 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 Thailand 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 clinical use, which it has not
yet done and might never do. There can be no assurance that Trinity Medical
Group USA, Inc. and its affiliate, Trinity Medical Group, Co. Ltd., a Thailand
company, our collaborative partner, will be successful in its efforts to obtain
regulatory approval from the Thailand 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 we expect it 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 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/or 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® or our other
products are successfully developed and receives FDA approval, we have not
demonstrated the capability to manufacture Remune® or our other products in
commercial quantities. Except for Remune® (and, by extension, IR103), we have
not demonstrated the ability to manufacture any of our treatments in
large-scale clinical quantities. 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 and even if we can manufacture them. In addition, our
competitors will have significantly greater marketing resources and power than
we will. 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 our manufacturing facilities are deemed not in compliance
with the GMP requirements, and the non-compliance 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 -17-




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our products may adversely
affect our profit margins and our ability to develop and deliver products on a
timely and competitive basis. 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 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. In addition, many HIV
patients live in poor countries, which may be unable to afford to pay
substantial sums for their citizens HIV therapies. Political pressure exists
to seek to require manufacturers of HIV therapies to supply them at
below-market prices to poor persons and/or poor countries, and this pressure
may increase in the future. Our success may depend upon the acceptance of Remune® and IR103 by the medical
and HIV-activist communities Our ability to market and commercialize Remune® and IR103 depends on the
acceptance and utilization of Remune® and IR103 by the medical and HIV-activist
communities. Physician inertia may be a problem for us as it is for many
emerging medical products companies. We will need to develop commercialization
initiatives designed to increase awareness about us and Remune® and IR103 among
targeted audiences, including public health and AIDS activists and
community-based outreach groups in addition to the investment community.
Currently, we have not developed any commercialization initiatives. 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. Pfizer terminated its collaboration with us, which has hindered 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. 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 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. -18-




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As collateral for the notes with a current principal balance of $7,208,000 and
accrued interest of $1,007,000 outstanding to parties affiliated with and/or
related to Kevin Kimberlin, one of our directors and principal stockholders,
such parties have a perfected security interest in our intellectual property.
Pursuant to the security agreement, we must comply with covenants with respect
to our intellectual property. The security interests and covenants could impair
our ability to enter into collaborative and licensing arrangements. Our patents and proprietary technology may not be enforceable and the patents
and proprietary technology of others may prevent us from commercializing
products. Some of our patents expire fairly soon 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. 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 2017 and our patents related to
autoimmune diseases have expiration dates that range from 2010 to 2019. The
limited duration of our patents could diminish the value of our potential
products and processes, particularly since we do not expect to generate any
revenue from our products sooner than the third quarter of 2008, if at all. 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 some contractors. These agreements may be breached,
and we may not have adequate remedies for any 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 and/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 proprietary
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 be required to obtain licenses or
redesign our products or processes to avoid infringement. You could suffer substantial dilution of your investment as a result of past
and future financings We will continue to have limited cash resources. Although our management
recognizes the need to secure additional financing, there can be no assurance
that we will be successful in consummating any financing transaction or, if
consummated, that the terms and conditions of the financing will not be
unfavorable to us. In the last three years we have issued very large numbers of shares, plus other
securities convertible or exercisable for additional very large numbers of
shares, in order to raise cash as required for our survival. Indeed, in 2003
alone, our outstanding number of common shares increased from 19,671,000 to
41,201,000. As a result, pre-existing stockholders have been substantially
diluted. Any further near- term financings will almost certainly involve
substantial dilution of outstanding equity. Our recent financings have been primarily with related parties (affiliates of
Mr. Kimberlin). Any further near-term financings may also be primarily with
related parties. Any subsequent offerings may also 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, voting and/or liquidation. -19-




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You could suffer substantial dilution of your investment if warrants and
options to purchase common stock are exercised for common stock As of September 30, 2004 we had reserved approximately 7,200,000 shares of our
common stock for potential issuance upon the exercise of stock options or
awards and purchases under our employee 401K match and stock purchase plans.
Issuance of these additional shares could substantially dilute your interest
in us. Furthermore, we have warrants outstanding which, if exercised, will
purchase approximately 25,500,000 shares of our common stock and approximately
6,600,000 shares are issuable upon conversion of our outstanding convertible
notes, subject to adjustment. Additionally, our placement agent in the December
2002 private placement, and its transferees, hold unit options to purchase
approximately 1,702,000 shares of common stock and 1,438,000 Class A warrants,
which are not redeemable by us, subject to adjustment. The Class A warrants are
exercisable for additional shares of common stock and Class B warrants, subject
to adjustment. In addition, we may issue up to 1,250,000 shares of our common
stock to Trinity pursuant to our License and Collaboration Agreement. In
addition, we will require substantial additional financings, which even if
successful will probably require the issuance of very substantial amounts of
potentially dilutive securities. See also You could suffer substantial
dilution of your investment as a result of past and future financings. Our stock may become delisted and subject to penny stock rules, which may make
it more difficult for you to sell your securities On September 3, 2004, we received notice from the Nasdaq Stock Market
(Nasdaq) that we were not in compliance with Nasdaq Marketplace Rule
4310(c)(4) due to the fact that the closing price of our common stock was below
$1.00 for the last 30 consecutive trading days. In accordance with Nasdaq
Marketplace Rule 4310(c)(8)(D), we have until March 2, 2005 to regain
compliance by having our common stock close at or above $1.00 for a minimum of
10 consecutive trading days. Provided, however, that Nasdaq may require that
our common stock trade at or above $1.00 for up to 20 consecutive trading days
before deeming us to be in compliance with Nasdaq listing standards. If we are delisted from the Nasdaq for any reason, our common stock might be
considered a penny stock under regulations of the Securities and Exchange
Commission, and if so 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
SmallCap Market. Being delisted would also hurt our ability to raise additional
financing. Legal proceedings could require us to spend substantial amounts of money and
impair our operations 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 complaints have been consolidated into a single action under the
name In re Immune Response Securities Litigationby order of the Court and a
consolidated, amended complaint was filed in July 2003. The consolidated,
amended complaint names us and certain of our former officers as defendants, as
well as Agouron Pharmaceuticals, Inc. and one of its officers. The
consolidated, amended complaint alleges 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®. On
October 31, 2003 the defendants filed motions to dismiss the consolidated,
amended complaint. The court has not yet ruled on the motions. Although we
intend to vigorously defend the actions, we cannot 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 former officers or settlements that could require substantial payments by
us, 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, regardless
of whether we win or lose the litigation, divert their time and attention from
our business and operations. -20-




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Our certificate of incorporation and bylaws include provisions that could make
attempts by stockholders to change management more difficult The approval of 66 2/3% of our voting stock is required to approve specified
transactions and to take specified stockholder actions, including the calling
of special meetings of stockholders and the amendment of any of the
anti-takeover provisions, including 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
preferred stock purchase 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 a 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. We have a new management team. If we lose our key personnel or are unable to
attract and retain additional personnel, we may be unable to successfully
develop our technology Since 2001, we have replaced most of the key members of our executive
management. 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. 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. In addition, recruiting and retaining qualified scientific personnel to assist
in scaling up our manufacturing facilities and performing 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. 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 and 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. Furthermore, our debt is at fixed rates. Accordingly, we
believe that, while the instruments we hold are subject to changes in the
financial standing of the issuer of such -21-




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securities, these instruments 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 Dr. John N. Bonfiglio, our principal executive officer, and Michael K. Green,
our principal financial officer, after evaluating the effectiveness of our
disclosure controls and procedures (as defined in Securities Exchange Act Rule
13a-15(e)) have concluded that, as of September 30, 2004, our disclosure
controls and procedures are effective. 
 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 complaints have been consolidated into a single action under the
name In re Immune Response Securities Litigationby order of the Court and a
consolidated, amended complaint was filed in July 2003. The consolidated,
amended complaint names us and certain of our former officers as defendants, as
well as Agouron Pharmaceuticals, Inc. and one of its officers. The
consolidated, amended complaint alleges 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®. There
have been no material developments in the case since our last Form 10-Q. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 
 Item 6. Exhibits and Reports on Form 8-K a) Exhibits ExhibitNumber
    
    Description of Document31.1
    
    
    Certification of the Principal Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule
13a-14(a).31.2
    
    
    Certification of the Principal Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule
13a-14(a).
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ExhibitNumber
    
    Description of Document32.1
    
    
    Certification pursuant to Section 1350 of Chapter 63 of
18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.32.2
    
    
    Certification pursuant to Section 1350 of Chapter 63 of
18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
 b) Reports on Form 8-K We filed on September 8, 2004 a Form 8-K (Items 1.01, 3.01 and 9.01) for an
event of September 2, 2004. On September 2, 2004, we sold to NovaRx
Corporation (NovaRx) our in-license rights to certain cancer-related
technology we had previously in-licensed from the Sidney Kimmel Cancer Center
(SKCC) and Masayoshi Namba, M.D. (Namba) and sublicensed the same
technology to NovaRx. Under novation agreements signed on September 2, 2004,
we assigned our rights and were relieved of our obligations under the earlier
license agreements. In exchange, NovaRx agreed to pay us $1,050,000, of which
$150,000 was paid at signing and the balance will be due no later than August
16, 2007. That same Form 8-K also reported that on September 3, 2004, we received notice
from the Nasdaq Stock Market (Nasdaq) that we were not in compliance with
Nasdaq Marketplace Rule 4310(c)(4) due to the fact that the closing price of
our common stock was below $1.00 for 30 consecutive trading days. In
accordance with Nasdaq Marketplace Rule 4310(c)(8)(D), we have until March 2,
2005 to regain compliance by having our common stock close at or above $1.00
for a minimum of 10 consecutive trading days. Provided, however, that Nasdaq
may in its discretion require that our common stock trade at or above $1.00
for up to 20 consecutive trading days before deeming us to be in compliance
with Nasdaq listing standards. We filed on September 21, 2004 a Form 8-K (Item 4.01) for an event of September
15, 2004. On September 15, 2004, our Audit Committee dismissed BDO Seidman,
LLP as our registered public accounting firm and appointed Levitz,
Zacks & Ciceric as our new registered public accounting firm for the
fiscal year ending December 31, 2004. 
 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized. THE IMMUNE RESPONSE CORPORATIONDate: November 12, 2004
    
    By:/s/ Michael K. GreenMichael K. Green,Chief Financial Officer
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Exhibit Index ExhibitNumber
    
    Description of Document31.1
    
    
    Certification of the Principal Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule
13a-14(a).31.2
    
    
    Certification of the Principal Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule
13a-14(a).32.1
    
    
    Certification pursuant to Section 1350 of Chapter 63 of 18
U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.32.2
    
    
    Certification pursuant to Section 1350 of Chapter 63 of 18
U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
 -24-