** **

**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM10-Q**

 

----

 

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

 

**For the quarterly period ended June 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**

 

**THEIMMUNE RESPONSE CORPORATION**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                     | ** ** | **33-0255679**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of   incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 
| **5931 Darwin Court  Carlsbad, California** | ** ** | **92008**  |
|---------------------------------------------|------------|------------|
| (Address of principal executive offices)    |       | (Zip Code) |

 

Registrant’s telephone number, including areacode:  **(760) 431-7080**

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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 whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

Yes o    No  ý

 

As of July 30, 2004, therewere  48,450,670 shares of our commonstock outstanding.

 

 

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**THE IMMUNE RESPONSE CORPORATION**

 

**INDEX**

 
| **Part I**     | **FINANCIAL INFORMATION** |                                                                                                       |
|----------------|---------------------------|------------------------------------------------------------------------------------------------------------|
|           |                      |                                                                                                       |   |
|           | Item 1.                   | Financial  Statements (unaudited):                                                                         |   |
|           |                      |                                                                                                       |   |
|           |                      | Condensed  Consolidated Balance Sheets - June 30, 2004 and December 31, 2003                               |   |
|           |                      |                                                                                                       |   |
|           |                      | Condensed Consolidated Statements of  Operations – Three and Six months ended  June 30, 2004 and 2003 |   |
|           |                      |                                                                                                       |   |
|           |                      | Condensed Consolidated Statements of Cash  Flows – Six months ended  June 30, 2004 and 2003           |   |
|           |                      |                                                                                                       |   |
|           |                      | Notes to Condensed Consolidated Financial  Statements                                                      |   |
|           |                      |                                                                                                       |   |
|           | Item 2.                   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                |   |
|           |                      |                                                                                                       |   |
|           | Item  3.                  | Quantitative  and Qualitative Disclosures About Market Risk                                                |   |
|           |                      |                                                                                                       |   |
|           | Item 4.                   | Controls and Procedures                                                                                    |   |
|           |                      |                                                                                                       |   |
| **Part II**    | **OTHER INFORMATION**     |                                                                                                       |
|           |                      |                                                                                                       |   |
|           | Item  1.                  | Legal  Proceedings                                                                                         |   |
|           |                      |                                                                                                       |   |
|           | Item 2.                   | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity  Securities                          |   |
|           |                      |                                                                                                       |   |
|           | Item  3.                  | Defaults  Upon Senior Securities                                                                           |   |
|           |                      |                                                                                                       |   |
|           | Item  4.                  | Submission  of Matters to a Vote of Security Holders                                                       |   |
|           |                      |                                                                                                       |   |
|           | Item 5.                   | Other Information                                                                                          |   |
|           |                      |                                                                                                       |   |
|           | Item  6.                  | Exhibits  and Reports on Form 8-K                                                                          |   |
|           |                      |                                                                                                       |   |
| **SIGNATURES** |                      |

 

2

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**PART I****– FINANCIAL INFORMATION**

 

**Item 1****.****    FinancialStatements**

 

###### **The Immune Response Corporation**

**Condensed Consolidated BalanceSheets**

*(in thousands, except for share amounts)*

 
| ** **                                                                                                                                                                                                   | ** **   | **June 30,  2004** | ** **   | **December 31,  2003** | ** **   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------------|--------------|------------------------|--------------|
| *** ***                                                                                                                                                                                                 | *** *** | **(unaudited)**    | *** *** | *** ***           | *** *** |
| **Assets**                                                                                                                                                                                                   |         |               |         |                   |         |
|                                                                                                                                                                                                         |         |               |         |                   |         |
| Current Assets:                                                                                                                                                                                              |         |               |         |                   |         |
| Cash and cash equivalents                                                                                                                                                                                    |         | $                  | 15,720       |                   | $            | 12,838 |   |
| Marketable securities - available-for-sale                                                                                                                                                                   |         | 5                  |         | 4                      |         |
| Other current assets                                                                                                                                                                                         |         | 205                |         | 372                    |         |
|                                                                                                                                                                                                         |         | 15,930             |         | 13,214                 |         |
|                                                                                                                                                                                                         |         |               |         |                   |         |
| Property and equipment, net                                                                                                                                                                                  |         | 4,770              |         | 4,949                  |         |
| Licensed technology, net                                                                                                                                                                                     |         | 1,766              |         | 2,119                  |         |
| Deposits and other assets ($600 restricted  as security for letter of credit)                                                                                                                                |         | 690                |         | 690                    |         |
|                                                                                                                                                                                                         |         |               |         |                   |         |
|                                                                                                                                                                                                         |         | $                  | 23,156       |                   | $            | 20,972 |   |
|                                                                                                                                                                                                         |         |               |         |                   |         |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                |         |               |         |                   |         |
|                                                                                                                                                                                                         |         |               |         |                   |         |
| Current Liabilities:                                                                                                                                                                                         |         |               |         |                   |         |
| Accounts payable                                                                                                                                                                                             |         | $                  | 887          |                   | $            | 1,151 |   |
| Accrued expenses                                                                                                                                                                                             |         | 722                |         | 1,112                  |         |
| Short-term convertible notes, related party                                                                                                                                                                  |         | —             |         | 3,899                  |         |
| Current portion of convertible promissory  notes, related party, net of discount of $428 plus accrued interest of $116  at June 30, 2004                                                                     |         | 1,155              |         | —                 |         |
| Current portion of accrued excess lease  costs                                                                                                                                                               |         | 452                |         | 452                    |         |
| Current portion of deferred revenue                                                                                                                                                                          |         | 56                 |         | 56                     |         |
|                                                                                                                                                                                                         |         |               |         |                   |         |
|                                                                                                                                                                                                         |         | 3,272              |         | 6,670                  |         |
|                                                                                                                                                                                                         |         |               |         |                   |         |
| Convertible promissory notes, related  party, net of discount of $2,559 and $4,167 and plus accrued interest of $747  and $575 at June 30, 2004 and December 31, 2003, respectively, net of current  portion |         | 3,929              |         | 3,616                  |         |
| Accrued excess lease costs                                                                                                                                                                                   |         | 1,780              |         | 1,990                  |         |
| Long-term deferred revenue, net of current  portion                                                                                                                                                          |         | 295                |         | 323                    |         |
|                                                                                                                                                                                                         |         |               |         |                   |         |
|                                                                                                                                                                                                         |         | 9,276              |         | 12,599                 |         |
|                                                                                                                                                                                                         |         |               |         |                   |         |
| Stockholders’ Equity:                                                                                                                                                                                   |         |               |         |                   |         |
| Preferred stock, 10,000,000 shares  authorized; 688,146 Series A shares issued and outstanding at June 30, 2004  with a liquidation preference aggregating $4,299                                            |         | 13,952             |         | —                 |         |
| Common stock, $.0025 par value, 170,000,000  shares authorized; 48,370,060 and 41,201,187 shares issued and outstanding at  June 30, 2004 and December 31, 2003, respectively                                |         | 121                |         | 102                    |         |
| Warrants                                                                                                                                                                                                     |         | 20,888             |         | 17,777                 |         |
| Additional paid-in capital                                                                                                                                                                                   |         | 298,125            |         | 290,346                |         |
| Accumulated other comprehensive income                                                                                                                                                                       |         | 5                  |         | 4                      |         |
| Accumulated deficit                                                                                                                                                                                          |         | (319,211           | )            | (299,856               | )            |
|                                                                                                                                                                                                         |         |               |         |                   |         |
| Total stockholders’ equity                                                                                                                                                                              |         | 13,880             |         | 8,373                  |         |
|                                                                                                                                                                                                         |         |               |         |                   |         |
|                                                                                                                                                                                                         |         | $                  | 23,156       |                   | $            | 20,972 |   |

 

*Seeaccompanying 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 June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                               | ** ** | **2004**                        | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Contract research revenue                                                                                                                |       | $                               | 7          |                          | $          | 7 |   | $ | 14 |   | $ | 14 |   |
| Licensed research revenue                                                                                                                |       | 7                               |       | 7                             |       | 14 |   | 24 |   |
|                                                                                                                                     |       |                            |       |                          |       |   |   |   |   |
|                                                                                                                                     |       | 14                              |       | 14                            |       | 28 |   | 38 |   |
|                                                                                                                                     |       |                            |       |                          |       |   |   |   |   |
| Expenses:                                                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Research and development                                                                                                                 |       | 3,235                           |       | 2,527                         |       | 6,355 |   | 5,004 |   |
| General and administrative                                                                                                               |       | 885                             |       | 2,348                         |       | 1,723 |   | 3,383 |   |
| Exit and disposal related costs                                                                                                          |       | —                          |       | 1,005                         |       | — |   | 1,290 |   |
|                                                                                                                                     |       |                            |       |                          |       |   |   |   |   |
|                                                                                                                                     |       | 4,120                           |       | 5,880                         |       | 8,078 |   | 9,677 |   |
|                                                                                                                                     |       |                            |       |                          |       |   |   |   |   |
| Other income and (expense):                                                                                                              |       |                            |       |                          |       |   |   |   |   |
| Investment income                                                                                                                        |       | 21                              |       | 3                             |       | 43 |   | 11 |   |
| Interest expense - including non-cash  accretion of $591 and $3,028 for three months and $1,180 and $4,130 for six  months, respectively |       | (737                            | )          | (3,398                        | )          | (1,490 | ) | (4,822 | ) |
| Beneficial inducement cost                                                                                                               |       | —                          |       | —                        |       | (4,923 | ) | — |   |
| Loss on extinguishment of debt                                                                                                           |       | —                          |       | —                        |       | (4,935 | ) | — |   |
|                                                                                                                                     |       |                            |       |                          |       |   |   |   |   |
|                                                                                                                                     |       | (716                            | )          | (3,395                        | )          | (11,305 | ) | (4,811 | ) |
|                                                                                                                                     |       |                            |       |                          |       |   |   |   |   |
| Net loss                                                                                                                                 |       | (4,822                          | )          | (9,261                        | )          | (19,355 | ) | (14,450 | ) |
| Less preferred stock dividends                                                                                                           |       | (92                             | )          | —                        |       | (181 | ) | — |   |
| Net loss attributable to common  stockholders                                                                                            |       | $                               | (4,914     | )                             | $          | (9,261 | ) | $ | (19,536 | ) | $ | (14,450 | ) |
|                                                                                                                                     |       |                            |       |                          |       |   |   |   |   |
| Basic and diluted loss per share:                                                                                                        |       |                            |       |                          |       |   |   |   |   |
| Net loss                                                                                                                                 |       | $                               | (0.10      | )                             | $          | (0.46 | ) | $ | (0.44 | ) | $ | (0.72 | ) |
| Net loss attributable to common  stockholders                                                                                            |       | $                               | (0.11      | )                             | $          | (0.46 | ) | $ | (0.45 | ) | $ | (0.72 | ) |
|                                                                                                                                     |       |                            |       |                          |       |   |   |   |   |
| Weighted average number of shares outstanding                                                                                            |       | 46,071                          |       | 20,204                        |       | 43,655 |   | 19,939 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

4

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###### **The Immune Response Corporation**

**CondensedConsolidated Statements of Cash Flows**

*(in thousands)*

*(unaudited)*

* *
| ** **                                                                               | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                               | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| Cash Flows From Operating Activities:                                                    |       |                          |       |   |   |
| Net loss                                                                                 |       | $                             | (19,355    | ) | $ | (14,450 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:             |       |                          |       |   |   |
| Depreciation and amortization                                                            |       | 819                           |       | 1,001 |   |
| Operating expenses paid with common stock  and warrants                                  |       | 137                           |       | 156 |   |
| Stock option adjustments                                                                 |       | (196                          | )          | 1,323 |   |
| Deferred revenue                                                                         |       | (28                           | )          | (27 | ) |
| Accrued excess lease costs                                                               |       | (210                          | )          | 541 |   |
| Long-term accrued interest                                                               |       | 288                           |       | 523 |   |
| Accretion of notes                                                                       |       | 1,180                         |       | 4,130 |   |
| Beneficial inducement cost                                                               |       | 4,923                         |       | — |   |
| Loss on extinguishment of debt                                                           |       | 4,935                         |       | — |   |
| Interest expense converted into Series A  preferred stock                                |       | 219                           |       | — |   |
| Gain on sale of assets                                                                   |       | (4                            | )          | (46 | ) |
| Changes in operating assets and liabilities:                                             |       |                          |       |   |   |
| Other current assets                                                                     |       | 167                           |       | (209 | ) |
| Accounts payable                                                                         |       | (264                          | )          | 32 |   |
| Accrued expenses                                                                         |       | (390                          | )          | (28 | ) |
| Net cash used in operating activities                                                    |       | (7,779                        | )          | (7,054 | ) |
|                                                                                     |       |                          |       |   |   |
| Cash Flows From Investing Activities:                                                    |       |                          |       |   |   |
| Purchase of property and equipment                                                       |       | (287                          | )          | (26 | ) |
| Proceeds from sale of equipment                                                          |       | 4                             |       | 196 |   |
| Other                                                                                    |       | —                        |       | 38 |   |
| Net cash provided by (used in) investing  activities                                     |       | (283                          | )          | 208 |   |
|                                                                                     |       |                          |       |   |   |
| Cash Flows From Financing Activities:                                                    |       |                          |       |   |   |
| Payments of equipment notes and capital  leases                                          |       | —                        |       | (766 | ) |
| Net proceeds from private placement of  common stock                                     |       | 10,712                        |       | — |   |
| Net proceeds from exercises of Unit  Purchase Options                                    |       | 110                           |       | — |   |
| Proceeds from issuance of short-term  convertible notes, related party                   |       | —                        |       | 3,899 |   |
| Proceeds from issuance of short-term  unsecured promissory notes                         |       | —                        |       | 1,000 |   |
| Net offering costs for Series A preferred  stock                                         |       | (23                           | )          | — |   |
| Net proceeds from common stock purchases  through employee plans                         |       | 145                           |       | 76 |   |
| Net cash provided by financing activities                                                |       | 10,944                        |       | 4,209 |   |
|                                                                                     |       |                          |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                    |       | 2,882                         |       | (2,637 | ) |
| Cash and cash equivalents - beginning of  year                                           |       | 12,838                        |       | 3,939 |   |
| Cash and cash equivalents - end of period                                                |       | $                             | 15,720     |   | $ | 1,302 |   |
|                                                                                     |       |                          |       |   |   |
| Supplemental Disclosure of Cash Flow  Information:                                       |       |                          |       |   |   |
| Interest paid                                                                            |       | $                             | 19         |   | $ | 105 |   |
|                                                                                     |       |                          |       |   |   |
| Supplemental Disclosure of Noncash  Information:                                         |       |                          |       |   |   |
| Promissory notes and interest converted  into Series A preferred stock                   |       | $                             | 4,118      |   | $ | — |   |
| Convertible notes and interest converted  into common stock                              |       | $                             | —     |   | $ | 5,000 |   |
| Value allocated to common stock as debt  discount                                        |       | $                             | —     |   | $ | 385 |   |
| Common stock and warrants issued for  consulting services, 401K match and offering costs |       | $                             | 942        |   | $ | 152 |   |
| Unrealized gain on marketable securities                                                 |       | $                             | 1          |   | $ | — |   |

 

*See accompanying notes to condensedconsolidated financial statements*.

 

5

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**THEIMMUNE RESPONSE CORPORATION**

**Notes****to Condensed Consolidated Financial Statements(unaudited)**

 

**Note 1 -Interim Financial Statements:**

 

The accompanying condensed consolidated balance sheetas of June 30, 2004 and the condensed consolidated statements of operations forthe three and six months ended June 30, 2004 and 2003 and of cash flows for thesix months ended June 30, 2004 and 2003 have been prepared by The ImmuneResponse Corporation (the “Company”) and have not been audited.  The condensed consolidated financialstatements of the Company include the accounts of its wholly-owned subsidiaryI.R.C. Inc.  All significant intercompanytransactions and accounts have been eliminated in consolidation.  These consolidated financial statements, inthe opinion of management, include all adjustments (consisting only of normalrecurring accruals) necessary for a fair presentation of the consolidated financialposition, results of operations and cash flows for all periods presented.  The consolidated financial statements shouldbe read in conjunction with the consolidated financial statements and notesthereto included in the Company’s Annual Report on Form 10-K filed for the yearended December 31, 2003.  Interimoperating results are not necessarily indicative of operating results for thefull year.

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ materially from those estimates.

 

Certainreclassifications have been made to conform prior period financial informationto the current presentation.  Thesereclassifications had no effect on reported income or losses.

 

*Stock-BasedCompensation*

 

During April 2003, the Companyrepriced and accelerated the vesting of stock options to purchase 664,007shares previously granted to employees and outside directors.  The weighted average share price was reducedfrom $10.04 per share to $1.12 per share. This repricing was expensed using the intrinsic valuation methodrequired under APB No. 25.  The Companyrecorded additional employee compensation (benefit) expense of $(93,000) and$(148,000) for the repriced options during the three and six months ended June30, 2004, respectively and $1,107,000 for the three and six months ended June30, 2003.

 

The Company measures itsstock-based employee compensation using the intrinsic value method.  The following disclosures utilizing theintrinsic value method, and pro forma amounts, after applying the fair valuemethod, related to stock-based awards made to employees that were outstandingas of June 30, 2004 and 2003:

 
| ** **                                                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss attributable to common  stockholders:                            |       |                             |       |                           |       |   |   |   |   |
| As reported                                                               |       | $                                | (4,914,000 | )                              | $          | (9,261,000 | ) | $ | (19,536,000 | ) | $ | (14,450,000 | ) |
| Stock-based employee compensation expense  (benefit) included in net loss |       | (93,000                          | )          | 1,107,000                      |       | (148,000 | ) | 1,107,000 |   |
| Fair value of stock-based employee  compensation                          |       | (505,000                         | )          | (1,704,000                     | )          | (1,471,000 | ) | (1,828,000 | ) |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Pro forma                                                                 |       | $                                | (5,512,000 | )                              | $          | (9,858,000 | ) | $ | (21,155,000 | ) | $ | (15,171,000 | ) |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Net loss per share (basic and diluted):                                   |       |                             |       |                           |       |   |   |   |   |
| As reported                                                               |       | $                                | (0.11      | )                              | $          | (0.46 | ) | $ | (0.45 | ) | $ | (0.72 | ) |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Pro forma                                                                 |       | $                                | (0.12      | )                              | $          | (0.49 | ) | $ | (0.48 | ) | $ | (0.76 | ) |

 

6

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**Note 2 -The Company:**

 

The Immune Response Corporation(Nasdaq: IMNR) is a biopharmaceutical company dedicated to becoming a leadingimmune-based therapy company in HIV and multiple sclerosis (MS). The Company’sHIV products are based on its patented whole-killed virus technology,co-invented by Company founder Dr. Jonas Salk, to stimulate HIV immuneresponses.  We currently have threeactive IBT programs; REMUNEâand IR103 target HIV and NeuroVaxTMtargets MS.  Remune®,currently in Phase II clinical trials, is being developed as a first-linetreatment for people with early-stage HIV. We have initiated development of a new immune-based therapy, IR103,which incorporates a second-generation immunostimulatory oligonucleotideadjuvant.

 

We are also developing animmune-based therapy for MS, NeuroVaxTM, which is currently in PhaseII and has shown potential therapeutic value for this difficult-to-treatdisease.

 

***Note3 - Going Concern:***

* *

Theaccompanying consolidated financial statements have been prepared on a goingconcern basis, which contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business.  The Company has incurred net losses sinceinception and has an accumulated deficit of $319,211,000 as of June 30, 2004.The Company will not generate meaningful revenues in the foreseeable future.

 

Thesefactors, among others, raised substantial doubt about the Company’s ability tocontinue as a going concern.  Ourindependent certified public accountants, BDO Seidman, LLP, indicated in theirreport on the 2003 consolidated financial statements that there is substantialdoubt about our ability to continue as a going concern.

 

Theconsolidated financial statements do not include any adjustments relating tothe recoverability and classification of recorded asset amounts or the amountsand classification of liabilities that might be necessary should the Company beunable to continue as a going concern.

 

On January7, 2004, $3,899,000 of previously issued, related party convertible promissorynotes plus accrued interest of approximately $219,000 were converted into688,146 shares of Series A convertible preferred stock (see Note 5). On April30, 2004, the Company raised approximately $11,850,000 in grossproceeds through a private placement (see Note 7). The Company believes thatits current resources are sufficient to fund its planned operations, includingnecessary capital expenditures and new clinical trials, for at least the nexttwelve months.

 

**Note 4 - Short-Term Convertible Notes, Related Party:**

** **

The short-term convertible notestotaling $3,899,000, described below, plusapproximately $219,000 of accrued interest were converted into688,146 shares of Series A convertible preferred stock on January 7,  2004 (see Note 5).

 

On March 28, 2003, the Company issuedto Cheshire Associates, LLC, a related party, a short-term convertible note inthe amount of $2,000,000, bearing interest at the rate of 8% per annum, dueMarch 28, 2004 (the “March Note”). The March Note was convertible into1,626,016 shares of common stock at a price of $1.23 per share.

 

In May 2003, the Company issued toCheshire 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 andJanuary 2004, respectively (the “May Notes”). One of the May Notes, with a principal balance of $1,000,000, wasconvertible into shares of common stock on terms to be negotiated in good faithprior to its maturity date.  The $80,000May Note was convertible into 59,259 shares of common stock at a price of $1.35per share.

 

In June 2003, the Company issued toCheshire a short-term convertible note in the amount of $819,000, bearinginterest at the rate of 8% per annum, due January 2004 (the “June Note”).  The June Note was convertible into shares ofcommon stock on terms to be negotiated in good faith prior to its maturitydate.

 

7

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**Note 5 - Series A Preferred Stock:**

 

On January7, 2004, $3,899,000 of previously issued, related party short-term convertiblenotes plus accrued interest of approximately $219,000 were converted into688,146 shares of Series A convertible preferred stock (Series A) at $5.984 pershare. The holders of shares of Series A have the right to further converteach share of Series A into anywhere from four to twelve shares of commonstock, depending on the date of conversion. The Series A votes with the holdersof common stock as a single class.  TheSeries A is only entitled to three votes for each initial share of Series Areceived.

 

The Series Ahas dividend and liquidation preferences over common stock holders.  The holders of the Series A are entitled toreceive cumulative dividends on each share of Series A at the rate of 9% perannum until the earliest of (i) July 7, 2006, (ii) the date the Series A isredeemed and (iii) the date the Series A is converted into common stock.  At June 30, 2004 accrued but undeclareddividends on the Series A amounted to $181,000. The liquidation preference atJune 30, 2004 aggregated $4,299,000.

 

Inaddition, the holders of Series A are entitled to protective provisionsthat require 66 2/3 % of the outstanding Series A toapprove, among other things, creating a new class of security with dividend orliquidation rights equal or senior to the Series A convertible preferredstock, a liquidation or recapitalization or increasing the number of sharesreserved for issuance under our stock option plans to greater than 10% of ouroutstanding capital stock (on an as if converted, fully-diluted basis).  The Series A also contains anti-dilutionprovisions.

 

Theconversion of $2,080,000 of short-term convertible notes into Series A resultedin a non-cash charge to operations of approximately $4,923,000 in the firstquarter of 2004 as a beneficial inducement cost, representing the differencebetween the fair value of the common stock into which the Series A isconvertible (at the most preferential rate) compared to the fair value of thecommon stock into which the related debt was convertible in accordance with FASNo. 84, “Induced Conversions of Convertible Debt.”

 

Conversionof the remaining $1,819,000 of the short-term convertible notes resulted in anon-cash charge to operations of approximately $4,935,000 in the first quarterof 2004 as a loss on the extinguishment of debt, representing the differencebetween the carrying value of the related debt and the fair value of the SeriesA issued.

 

**Note 6 -Net Loss per Share:**

 

Basic anddiluted net loss per share is computed using the weighted average number ofcommon shares outstanding during the period. Potentially dilutive securities are excluded from the diluted net lossper share calculation, as the effect would be antidilutive.  Potentially dilutive shares not included are4,900,000 shares for outstanding employee stock options, 6,600,000 sharesissuable under convertible promissory notes, related party, 16,200,000 sharesissuable under warrants outstanding, 9,400,000 shares issuable under B warrantsoutstanding and 1,700,000 shares issuable under an option issued to the placementagent for the private offering in December 2002.

 

**Note 7 - Private Placement:**

 

On April 30, 2004 the Company raised$10,712,000, net of $1,138,000 of offering costs, in connection with a privateplacement of approximately 6,800,000 shares of common stock at $1.75 pershare to a number of institutional investors. Investors also received five-year warrants to purchase an aggregate ofapproximately 2,031,000 shares of common stock at $2.75 per share with an allocatedvalue of $2,569,000.  The investors werenot affiliated with the Company, except for one investor which is an affiliateof Cheshire; that investor purchased 342,857 shares and 102,857 warrants for$600,000. In connection with this private placement, we issued additionalwarrants to purchase 541,714 shares of common stock to Rodman & Renshaw,Inc., our 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 Securitiesand Exchange Commission covering the resale of the common shares and theunderlying shares of common stock. Proceeds from the financing will be used to fund the Company’s ongoingclinical activities and for general corporate purposes.

 

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**Note 8 - Exit and Disposal Related Costs:**

 

During May 2003, the Company disposed of excessassets, and was negotiating an early lease termination for the Company’sCarlsbad, California headquarters facility resulting in exit and disposalrelated costs of $1,290,000 as of June 30, 2003, including an estimate ofapproximately $700,000 of additional costs accrued to cover a potentialsettlement of a claim filed by the landlord for breach of contract under thelease.

 

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**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The following discussioncontains forward-looking statements concerning our liquidity, capitalresources, financial condition, results of operation and timing of anticipatedrevenues and expenditures.  Suchstatements are subject to risks and uncertainties that could cause actualresults to differ materially from those projected.  Factors that could cause or contribute tosuch differences include those discussed under “Risk Factors,” as well as thosediscussed elsewhere in this Form 10-Q. The following discussion should be read in conjunction with ourconsolidated financial statements and notes thereto included elsewhere in thisForm 10-Q.  Except for our ongoingobligation to disclose material information as required by federal securitieslaws, we undertake no obligation to publicly release the result of anyrevisions to these forward-looking statements that may be indicated in order toreflect events or circumstances after the date hereof or to reflect theoccurrence of unanticipated events.

 

**Overview**

 

We are abiopharmaceutical company whose products are in the development stage.  We have a critical need to raise cash both inthe near term and the medium term. Nonetheless, we believe our products could prove to have substantial value as part ofa therapy for patients infected with HIV or MS.

 

**Liquidity and Capital Resources**

 

As of June 30, 2004, we had aconsolidated accumulated deficit of $319,211,000. We have not generatedrevenues from the commercialization of any product. We expect to continue toincur substantial net operating losses over the next several years, which wouldimperil our ability to continue operations. We may not be able to generatesufficient product revenue to become profitable on a sustained basis, or atall, and do not expect to generate sufficient product revenue before the thirdquarter of 2008, if at all. We have operating and liquidity concerns due to oursignificant net losses and negative cash flows from operations.  As a result of these and other factors, ourindependent certified public accountants, BDO Seidman, LLP, indicated, in theirreport on the 2003 consolidated financial statements that there is substantialdoubt about our ability to continue as a going concern.

 

Since ourinception in 1986, we have financed our activities primarily from public andprivate sales of equity, funding from collaborations with corporate partners,investment income and the issuance to Cheshire Associates LLC and otherentities affiliated with or related to Mr. Kevin Kimberlin, who is one of ourdirectors and our principal stockholder, of capital stock, convertible notesand warrants and short-term promissory notes.

 

As of June 30, 2004, the Company hadoutstanding approximately $5,084,000 (net of discount of $2,987,000, plusaccrued interest of $863,000) of convertible, related party debt. All of thenotes bear interest at a fixed rate of 8% per year and are secured by theintellectual property of the Company.  The notes mature at various datesthrough November 2005.  The notes are convertible into shares of theCompany’s common stock at any time, at the option of the investors.  Theconversion prices are based on a percentage of the average closing bid pricesof the Company’s common stock for a ten-day trading period ended on the daypreceding each closing.

 

In January 2004, in a transactionwith a company related to Mr. Kimberlin, we converted $4,100,000 of previouslyissued promissory notes and accrued interest into 688,000 shares ofSeries A Convertible Preferred Stock. On April 30, 2004, we raisedapproximately $11,850,000 in gross proceeds through a private placement ofcommon stock and warrants, primarily to unaffiliated investors. We believe thatour current resources are sufficient to fund our planned operations, includingnecessary capital expenditures and new clinical trials, for at least the nexttwelve months.

 

We could raise an additional $16,700,000 if all of the Class B warrantsissued as a result of Class A warrant exercises since July 7, 2003, which areredeemable 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 thatprice it would be profitable for the warrant holders to exercise their warrantsrather than to allow the redemption to proceed, we assume they would choose toexercise. 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 thatall or any portion of the warrants will be exercised by the initial purchasersor by any subsequent holders.

 

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**In addition, we could raise an additional $11,800,000 ifall the warrants issued in connection with the October 2003 private placementare exercised for cash. The warrants issued in the October 2003 privateplacement are redeemable by us if the price of our common stock is equal to orgreater than $8.00 for 20 consecutive trading days. Because at that price itwould be profitable for the warrant holders to exercise their warrants ratherthan to allow the redemption to proceed, we assume they would choose toexercise. 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 thatall or any portion of the warrants will be exercised by the initial purchasersor by any subsequent holders.**

** **

**Additionally, we could raise an additional $7,100,000 ifall the warrants issued in connection with the April 2004 private placement areexercised for cash. The warrants issued in the April 2004 private placement areexercisable 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 riseto the $2.75 per share exercise price and/or that all or any portion of thewarrants will be exercised by the initial purchasers or by any subsequentholders.**

** **

Once we haveused our current cash balances, we will be forced to look for alternativesources of funding which, even if available, may be on terms substantially lessfavorable.  If we are unable to raiseadequate capital, we may be required to delay, or reduce the scope of, ourresearch or development of REMUNEâ, IR103 and NeuroVaxTM or take othermeasures to cut costs, which would have a material adverse effect on us andlikely result in our inability to continue as a going concern.

 

We willneed to raise very substantial additional funds over several years to conductresearch and development, preclinical studies and clinical trials necessary tobring potential products to market and to establish manufacturing and marketingcapabilities. We anticipate that for the foreseeable future, the scale-up ofthe manufacturing process for REMUNEâ, IR103 and NeuroVaxTM and the cost ofproducing clinical supplies for ongoing and future REMUNEâ, IR103 and NeuroVaxTM studies willcontinue to represent a significant portion of our overall expenditures.Overall, future REMUNEâ, IR103 and NeuroVaxTM research anddevelopment expenditures are expected to increase from current levels in theevent additional financing is obtained. Future spending for research anddevelopment 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 toscale-up the manufacturing process for REMUNEâ and IR103 through 2006. Other anticipated costswith respect to REMUNEâ, IR103 and NeuroVaxTM, includinginvestment in inventory, will depend on many factors including the need foradditional clinical trials and other factors, which will influence our determinationof the appropriate continued investment of our financial resources in theseprograms.

 

Ourfuture capital requirements will depend on many factors including whether theremaining warrants will be exercised by the initial purchasers or by any subsequentholders. Other capital requirement factors include continued scientificprogress in our research and development programs, the scope and results ofpreclinical studies and clinical trials, the time and costs involved inobtaining regulatory approvals, the costs involved in filing, prosecuting andenforcing patent claims, the costs involved in defending claims in classactions, competing technological and market developments, the cost ofmanufacturing scale-up and inventories, effective commercialization activitiesand arrangements and other factors not within our control. We intend to seekadditional funding through additional research and development agreements withsuitable corporate collaborators and through public or private financing, ifavailable. However, we cannot provide assurance that such collaborationarrangements or any public or private financing will be available on acceptableterms, if at all.  If we raise fundsthrough future equity arrangements, significant further dilution to stockholderswill result.

 

**Results of Operations**

 

***Threeand Six Months Ended June 30, 2004 Compared to Three and Six Months Ended June30, 2003.***

 

Werecorded revenues for the three and six months ended June 30, 2004 of $14,000and $28,000, respectively, as compared to $14,000 and $38,000 for thecorresponding period in 2003. The revenues were from the amortization ofadditional multi-year out-licensing contracts of various intellectual propertyand/or patents that we own.  We expect noadditional revenues unless it is earned through corporate collaborations or newresearch and development agreements.  Wehave not received any revenues from the sale of products and do not expect toderive revenue from the sale of any products for the foreseeable future.

 

Ourresearch and development expenditures for the three and six months ended June30, 2004 were $3,235,000 and $6,355,000, respectively, as compared to$2,527,000 and $5,004,000 for the corresponding period in 2003. The increase inresearch and development expenses during the first six months of 2004 isattributable to our increased HIV clinical development activity andmanufacturing scale-up activities for REMUNEâand IR103.

 

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Expensesassociated with our scale-up of the manufacturing process for REMUNEâ and IR103, the cost of producing clinicalsupplies for ongoing and future REMUNEâ, IR103 and NeuroVaxTM studiesand additional clinical trials for NeuroVaxTM are expected to increase during the next several quarters as we focus ourfinancial resources on REMUNEâ, IR103 and NeuroVaxTM.Clinical study spending for our other development programs has decreasedbeginning in the second quarter of 2002. If we enter into additionalcollaborations, research and development expenditures for our other developmentprograms would likely increase over their current levels. There can be noassurance that we will enter into any collaborations, that existingcollaborations will not be terminated, or that we will be able to obtain other financingneeded to continue our research and development efforts.

 

Generaland administrative expenses for the three and six months ended June 30, 2004were $885,000 and $1,723,000, respectively, as compared to $2,348,000 and$3,383,000 for the corresponding period in 2003.  During the second quarter of 2003 there was aone-time adjustment of $1,100,000 related to the repricing of employee stockoptions. We expect general and administrative expenses to remain consistentwith prior years with savings attributed to the September 2002 restructuringbeing offset by possible increased consulting fees.

 

DuringMay 2003, we disposed of excess assets, and were negotiating an early leasetermination for our Carlsbad, California headquarters facility resulting in exitand disposal related costs of $1,290,000 as of June 30, 2003, including anestimate of approximately $700,000 of additional costs accrued to cover apotential settlement of a claim filed by the landlord for breach of contractunder the lease.

 

Interestexpense increased to $737,000 and $1,490,000, respectively, for the three andsix months ended June 30, 2004 as compared to $3,398,000 and $4,822,000 for thecorresponding period in 2003. The decrease during the first six months of 2004is attributable to an overall reduction in levels of debt.

 

Our netloss per share increased during the first quarter of 2004 as a result of theincreased net loss offset by the increase in our weighted average number ofshares outstanding, due to several securities issuance transactions.

 

**Critical Accounting Policies and Estimates**

 

Webelieve that patents and other proprietary rights are important to ourbusiness. Licensed technology is recorded at cost and is amortized over itsestimated useful life. In December 1999, we acquired licenses to certain patenttechnology, which are being amortized over seven years. Changes in ourestimates of useful lives may have a material effect on our financialstatements.

 

Weevaluate 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 wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be fully recoverable based on expected undiscounted cash flowsthat result from the use and eventual disposition of the asset. The amount ofany impairment is measured as the difference between the carrying value and thefair value of the impaired asset.

 

Inaccordance with FAS No. 144, we have identified our property and equipment andlicensed technology as long-lived assets subject to annual impairment review.Given our current financial status, our historical losses and theindeterminable outcome of the development and approval of our products, thereis substantial uncertainty as to our ability to recover our investment in theselong-lived assets through the generation of net future cash flows. In light ofthis uncertainty, we obtained an independent third-party appraisal of theselong-lived assets in the first quarter of 2003. As a result of such appraisal,we recognized substantial impairment charges related to property and equipmentfor the year ended December 31, 2002.

 

In September 2002, we implementeda restructuring program and management changes aimed at reducing costs andrefocusing our efforts on REMUNEâ.  The restructuring program reduced staff andcut spending at our headquarters while maintaining limited manufacturingcapacity at one of our production facilities in King of Prussia,Pennsylvania.  During May 2003, wedisposed of excess assets, and during August 2003, we negotiated an early leasetermination for our former Carlsbad, California headquarters facility resultingin exit and disposal related costs of approximately $1,400,000.  During 2003, we recorded an additional chargeof $2,000,000 related to the estimated net rental expense of our vacantmanufacturing facility in Pennsylvania. These costs have been accounted for in accordance with Emerging IssuesTask Force 94-3.

 

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**Certain Risk Factors**

 

Our future operating results are subject to a number of factors,including:

 

**Our failure to successfully develop ourproduct candidates,****REMUNE****â, IR103 and NeuroVaxTM****maycause us to cease operations**

 

We have not completed the development of any products. As part of ourrestructuring program announced in September 2002, we halted developmentof most of our products other than REMUNEâ and NeuroVaxTM.Our other potential therapies, which were under development prior toSeptember 2002, would require significant additional research anddevelopment efforts, funding and regulatory approvals if we recommencedevelopment in the future. We are dependent upon our ability to successfullydevelop REMUNEâ, IR103 and NeuroVaxTM  and ourfailure to do so may cause us to cease operations.

 

In May 1999 we discontinued a Phase III clinical endpoint trial ofREMUNEâ becausedifferences in clinical endpoints were not observed between treatment groupsand extending the trial would have been unlikely to provide sufficientadditional clinical endpoints. The discontinuation of the Phase III trial hashad a material adverse effect on us. Additionally, the most recent pivotaltrial of REMUNEâ conducted byour former collaborative partner, Pfizer, was discontinued by us. See “—Pfizerhas terminated its collaboration with us, which has hindered the continueddevelopment and commercialization of REMUNEâ.”We cannot assure you that any future Phase III trials of REMUNEâwill be conducted. Furthermore, we cannot guarantee that we, or our corporatecollaborators, if any, will ever obtain any regulatory approvals of REMUNEâ.

 

Before the cessation of the development efforts of our products otherthan REMUNEâand NeuroVaxTMinSeptember 2002, our technologies and other potential therapies were atearlier stages of development than REMUNEâand had not been shown to be safe or effective. Some of our technologies havenot been tested on humans. Even if we do continue development of our otherpotential products, regulatory authorities may not permit human testing of thepotential products based on these technologies. Even if human testing werepermitted, the products based on these technologies may not be successfullydeveloped or shown to be safe or effective.

 

The results of our pre-clinical studies and clinical trials may not beindicative of future clinical trial results. A commitment of substantialfinancial and other resources to conduct time-consuming research, preclinicalstudies and clinical trials will be required if we are to develop any products.Delays in planned patient enrollment in clinical trials may result in increasedcosts, program delays or both. None of our potential products may prove to besafe or effective in clinical trials. Approval by the Food and DrugAdministration, or other regulatory approvals, including export licensepermissions, may not be obtained and even if successfully developed andapproved, our products may not achieve market acceptance. Any productsresulting from our programs may not be successfully developed or commerciallyavailable for several years, if at all.

 

Moreover, unacceptable toxicity or side effects could occur at any timein the course of human clinical trials or, if any products are successfullydeveloped and approved for marketing, during commercial use of our products.Although preliminary research and clinical evidence have shown REMUNEâ,IR103 and NeuroVaxTM tobe safe, the appearance of any unacceptable toxicity or side effects couldinterrupt, limit, delay or abort the development of any of our products or, ifpreviously approved, necessitate their withdrawal from the market.

 

**Our current cash position, significantfinancing requirements and limited access to financing may adversely affect ourability to develop products and continue operations**

 

We have never generated any revenue from product sales. As of June 30,2004, we had an accumulated deficit of approximately $319,211,000, cash andcash equivalents of only approximately $15,720,000 and working capital of onlyapproximately $12,658,000.  Because we donot anticipate generating any revenue from our products until at least thethird quarter of 2008, if at all, we will continue to have negative cash flowand will need to raise substantial additional capital to fund our operationsbeyond this time. We will need to raise substantial funds to continue ouroperations and to conduct research and development, preclinical studies and clinicaltrials necessary to bring our potential products to market and to establishmanufacturing and marketing capabilities.

 

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We will continue to have limited cash resources. There can be noassurance that we will be successful in consummating any financing transactionor, if consummated, that the terms and conditions will not be unfavorable tous.

 

We could raise an additional $16,700,000 if all of the Class Bwarrants that were issued upon exercise of our Class A warrants areexercised. Our Class B warrants are redeemable by us if the price of ourcommon stock is equal to or greater than $3.32 for ten consecutive tradingdays. 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 bythe initial purchasers or by any subsequent holders.

 

In addition, we could raise an additional $11,800,000 if all thewarrants issued in connection with the October 2003 private placement areexercised for cash. The warrants issued in the October 2003 private placementare redeemable by us if the price of our common stock is equal to or greaterthan $8.00 for 20 consecutive trading days. However, there can be no assurancesthat our stock price will rise to $8.00 so as to enable us to call the warrantsfor redemption, nor that (even in that event) all or any portion of thewarrants will be exercised by the initial purchasers or by any subsequentholders.

 

**Additionally, we could raise an additional $7,100,000 ifall the warrants issued in connection with the April 2004 private placement areexercised for cash. The warrants issued in the April 2004 private placement areexercisable 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 riseto the $2.75 per share exercise price and/or that all or any portion of thewarrants will be exercised by the initial purchasers or by any subsequentholders.**

** **

On September 9, 2002, we commenced the implementation of a costreduction strategy to focus our core competencies on efforts related to theresearch, development, commercialization and production of REMUNEâ.The cost reductions related to research, administrative and operational costshave been offset by increased costs relating to increasing our productioncapabilities at our King of Prussia, Pennsylvania facility and conductingadditional 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 onmany factors, including (but not limited to):

 

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

 

•              the time and costsinvolved in obtaining regulatory approvals;

 

•              continued scientificprogress in our research and development programs;

 

•              the scope andresults of preclinical studies and clinical trials;

 

•              the cost ofmanufacturing scale-up;

 

•              the costs involvedin filing, prosecuting and enforcing patent claims;

 

•              competingtechnological and market developments;

 

•              effectivecommercialization activities and arrangements;

 

•              the costs ofdefending against and settling lawsuits; and/or

 

•              other factors notwithin our control or known to us.

 

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

 

•              obtaining regulatoryapprovals;

 

•              our research anddevelopment programs;

 

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•              our preclinical andclinical trials; or

 

•              scaling upmanufacturing.

 

Our access to capital also could be limited by:

 

•              overall financialmarket conditions;

 

•              applicable Nasdaqrules and federal and state securities laws;

 

•              the perfectedsecurity interest in our intellectual property in respect of the aggregate$7,208,000 in convertible promissory notes issued to affiliates and/or relatedparties of Kevin Kimberlin, (who is one of our directors and our principalstockholder (See “An existing stockholder owns approximately 14.6% of ouroutstanding common stock and has the rights to acquire an additional 23,192,308shares of our common stock, which could result in ownership of up toapproximately 42.5% of our outstanding shares and could allow him to control orinfluence stockholder votes”);

 

•              the effect of thepotential for exercise of outstanding options and warrants exercisable intoapproximately 20,500,000 shares of common stock;

 

•              the effect of thepotential for conversion of 688,000 shares of Series A ConvertiblePreferred Stock issued in January 2004. The Series A is initially convertible into 2,800,000 shares of commonstock up to a maximum of 8,300,000 shares of common stock; and

 

•              the issuance of theplacement agent option to Spencer Trask Ventures, Inc., (an affiliate ofKevin Kimberlin) and its transferees that is exercisable for 1,714,909shares of common stock and 1,437,658 Class A warrants, which are notredeemable by us.

 

**An existing stockholder owns approximately14.6% of our outstanding common stock and has the rights to acquire anadditional 23,192,308 shares of our common stock, which could result inownership of up to approximately 42.5% of our outstanding shares and couldallow him to control or influence stockholder votes**

 

Kevin B. Kimberlin, a member of our Board of Directors, together withhis affiliates and/or related parties, currently own of record approximately14.6% of our outstanding shares of common stock. He and they also have theright to acquire, through the conversions of notes and exercise of options andwarrants beneficially owned by them, 23,192,308****additional shares. If the notes, options and warrants were tobe converted and exercised in full, Mr. Kimberlin and his affiliatesand/or related parties would own approximately 42.5% of our outstanding sharesof common stock on a post-conversion/exercised basis. As a result of ownershipof our common stock and the ability to acquire additional shares,Mr. Kimberlin and his affiliates and/or related persons have the abilityto influence, and possibly control, substantially all matters requiringapproval by our stockholders, including the election of directors and theapproval of mergers or other business combination transactions. If your interestsas a stockholder are different from his interests, you may not agree with hisdecisions and you might be adversely affected thereby.

 

**The lengthy product approval process anduncertainty of government regulatory requirements may delay or prevent us fromcommercializing products. We must work to re-establish our credibility with theFDA**

 

Clinical testing, manufacture, promotion, export and sale of ourproducts are subject to extensive regulation by numerous governmentalauthorities in the United States, principally the FDA, and corresponding stateand foreign regulatory agencies. This regulation may delay or prevent us fromcommercializing products. Noncompliance with applicable requirements can resultin, among other things, fines, injunctions, seizure or recall of products,total or partial suspension of product manufacturing and marketing, failure ofthe government to grant pre-market approval, withdrawal of marketing approvalsand criminal prosecution.

 

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The regulatory process for new therapeutic drug products, including therequired preclinical studies and clinical testing, is lengthy and expensive. Wemay not receive necessary FDA clearances for REMUNEâor any of our other potential products in a timely manner, or at all. Thelength of the clinical trial process and the number of patients the FDA willrequire to be enrolled in the clinical trials in order to establish the safetyand efficacy of our products is uncertain.

 

Even if additional Phase III clinical trials of REMUNEâor our other products are initiated and successfully completed, the FDA may notapprove REMUNEâ or our otherproducts for commercial sale. We may encounter significant delays or excessivecosts in our efforts to secure necessary approvals. Regulatory requirements areevolving and uncertain. Future United States or foreign legislative oradministrative acts could also prevent or delay regulatory approval of ourproducts. We may not be able to obtain the necessary approvals for clinicaltrials, manufacturing or marketing of any of our products under development.Even if commercial regulatory approvals are obtained, they may includesignificant limitations on the indicated uses for which a product may bemarketed.

 

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

 

Among the other requirements for regulatory approval is the requirementthat prospective manufacturers conform to the FDA’s Good ManufacturingPractices, 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 applicablespecifications and other requirements. Failure to comply and maintaincompliance with the FDA’s GMP requirements subjects manufacturers to possibleFDA 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 maintaincompliance with the FDA’s GMP requirements on a continuing basis. Failure tomaintain compliance could have a material adverse effect on us.

 

The FDA has not designated expanded access protocols for REMUNEâor our other products as “treatment” protocols. The FDA may not determine thatREMUNEâ or our other products meets all of theFDA’s criteria for use of an investigational drug for treatment use. Even ifREMUNEâ or our other products are allowed fortreatment use, third party payers may not provide reimbursement for the costsof treatment with REMUNEâor our otherproducts. The FDA also may not consider REMUNEâor our other products under development to be appropriate candidates foraccelerated approval, expedited review or fast track designation.

 

The timing and substance of most FDA decisions are, as a practicalmatter, discretionary.  Past events haveraised doubts in the minds of some persons at the FDA regarding our corporatecredibility and the viability of REMUNEâ. Our efforts to re-establish ourcredibility may not succeed; but if they don’t, the FDA approvals that areindispensable if we are to survive and succeed may be delayed or denied despiteany merit our applications may have.

 

Marketing any drug products outside of the United States will subjectus to numerous and varying foreign regulatory requirements governing the designand conduct of human clinical trials and marketing approval. Additionally, ourability to export drug candidates outside the United States on a commercialbasis is subject to the receipt from the FDA of export permission, which maynot be available on a timely basis, if at all. Approval procedures vary amongcountries and can involve additional testing, and the time required to obtainapproval may be even longer than that required to obtain FDA approval. Foreignregulatory approval processes include all of the risks associated withobtaining FDA approval set forth above, and approval by the FDA does not ensureapproval by the health authorities of any other country, including those inThailand.

 

Specifically, before we will be permitted to export REMUNEâto Thailand for clinical use in that country, we need to meet a number ofregulatory requirements. One of those requirements is that we must ensure thatwe can manufacture REMUNEâ at ourUnited States manufacturing facility in a manner that is in “substantialcompliance” with current United States GMP requirements. We must provide theFDA with “credible scientific evidence” that REMUNEâwould be safe and effective under the conditions of proposed use in Thailand.Furthermore, the Thailand FDA must (i) formally request the FDA to approveexport of REMUNEâ to Thailand,(ii) certify to the FDA that it is aware that REMUNEâis not approved in the United States or in any of several other countries withcomprehensive drug review and approval systems and (iii) concur that thescientific evidence presented to the FDA is “credible scientific evidence thatREMUNEâ will be reasonably safe and effective” foruse in Thailand. There can be no assurance, however, that we will successfullymeet any or all of these requirements for the export of REMUNEâ,and if we are unable to successfully meet all

 

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regulatory requirements, we will not be permitted by the FDA to exportREMUNEâ to Thailandfor clinical use, even if the Thai government were to approve REMUNEâfor clinical use, which it has not yet done and might never do. There can be noassurance that Trinity Medical Group USA, Inc. and its affiliate, TrinityMedical Group, Co. Ltd., a Thailand company, collectively, Trinity, ourcollaborative partner, will be successful in its efforts to obtain regulatoryapproval from the Thailand FDA.

 

**Technological change and competition mayrender our potential products obsolete**

 

The pharmaceutical and biotechnology industries continue to undergorapid change, and competition is intense and we expect it to increase.Competitors may succeed in developing technologies and products that are moreeffective or affordable than any that we are developing or that would renderour technology and products obsolete or noncompetitive. Many of our competitorshave substantially greater experience, financial and technical resources andproduction and development capabilities than us. Accordingly, some of our competitorsmay succeed in obtaining regulatory approval for products more rapidly oreffectively than us, or technologies and products that are more effectiveand/or affordable than any that we are developing.

 

**Our lack of commercial manufacturing andmarketing 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 trialquantities to commercial production quantities or be able to arrange forcontract manufacturing and this could prevent us from commercializing productsor limit our profitability from our products. Even if REMUNEâor our other products are successfully developed and receives FDA approval, wehave not demonstrated the capability to manufacture REMUNEâor our other products in commercial quantities. Except for REMUNEâ,we have not demonstrated the ability to manufacture any of our treatments inlarge-scale clinical quantities. We rely on a third party for the finalinactivation step of the REMUNEâmanufacturing process. If the existing manufacturing operations proveinadequate, there can be no assurance that any arrangement with a third partycan be established on a timely basis or that we can establish othermanufacturing capacity on a timely basis.

 

We have no experience in the sales, marketing and distribution ofpharmaceutical or biotechnology products. Thus, our products may not besuccessfully commercialized even if they are developed and approved forcommercialization and even if we can manufacture them.  In addition, our competitors will havesignificantly greater marketing resources and power than we will.

 

The manufacturing process of our products involves a number of stepsand requires compliance with stringent quality control specifications imposedby us and by the FDA. Moreover, our products can be manufactured only in afacility that has undergone a satisfactory inspection and certification by theFDA. For these reasons, we would not be able to quickly replace ourmanufacturing capacity if we were unable to use our manufacturing facilities asa result of a fire, natural disaster (including an earthquake), equipmentfailure or other difficulty, or if our manufacturing facilities are deemed notin compliance with the GMP requirements, and the non-compliance could not berapidly rectified. Our inability or reduced capacity to manufacture ourproducts would prevent us from successfully commercializing our products.

 

We may enter into arrangements with contract manufacturing companies toexpand our own production capacity in order to meet requirements for ourproducts, or to attempt to improve manufacturing efficiency. If we choose tocontract for manufacturing services, we may encounter costs, delays and /orother difficulties in producing, packaging and distributing our clinical trialsand finished product. Further, contract manufacturers must also operate incompliance with the GMP requirements; failure to do so could result in, amongother things, the disruption of our product supplies. Our potential dependenceupon third parties for the manufacture of our products may adversely affect ourprofit margins and our ability to develop and deliver products on a timely andcompetitive basis.

 

**Adverse determinations concerning productpricing, reimbursement and related matters could prevent us from successfullycommercializing****REMUNE****âor any of our other products**

 

Our ability to earn revenue on REMUNEâor any other of our products will depend in part on the extent to whichreimbursement for the costs of the products and related treatments will beavailable from government health administration authorities, private healthcoverage insurers, managed care organizations and other organizations. Failureto obtain appropriate reimbursement may prevent us from successfullycommercializing REMUNEâ or any ofour other products. Third-party payers are increasingly challenging the 

 

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prices of medical products and services. If purchasers or users ofREMUNEâ or any ofour other products are not able to obtain adequate reimbursement for the costof using the products, they may forego or reduce their use. Significantuncertainty exists as to the reimbursement status of newly approved health careproducts and whether adequate third party coverage will be available.  In addition, many HIV patients live in poorcountries, which may be unable to afford to pay substantial sums for theircitizens’ HIV therapies.  Politicalpressure exists to seek to require manufacturers of HIV therapies to supplythem at below-market prices to poor persons and/or poor countries, and thispressure may increase in the future.

 

**Our success may depend upon the acceptance of****REMUNE****â  and IR103****by the medical and HIV-activist communities**

 

Our ability to market and commercialize REMUNEâand IR103 depends on the acceptance and utilization of REMUNEâand IR103 by the medical and HIV-activist communities. Physician inertia may bea problem for us as it is for many emerging medical products companies. We willneed to develop commercialization initiatives designed to increase awarenessabout us and REMUNEâ and IR103 among targeted audiences, includingpublic health and AIDS activists and community-based outreach groups inaddition to the investment community. Currently, we have not developed anycommercialization initiatives.

 

**Hazardous materials and environmental matterscould expose us to significant costs**

 

We may be required to incur significant costs to comply with current orfuture environmental laws and regulations. Although we do not currentlymanufacture commercial quantities of our product candidates, we produce limitedquantities of these products for our clinical trials. Our research and developmentand manufacturing processes involve the controlled storage, use and disposal ofhazardous materials, biological hazardous materials and radioactive compounds.We are subject to federal, state and local laws and regulations governing theuse, manufacture, storage, handling and disposal of these materials and somewaste products. Although we believe that our safety procedures for handling anddisposing of these materials comply with the standards prescribed by these lawsand regulations, the risk of contamination or injury from these materialscannot be completely eliminated. In the event of an incident, we could be heldliable for any damages that result, and any liability could exceed ourresources. Current or future environmental laws or regulations may have amaterial adverse effect on our operations, business and assets.

 

**Pfizer terminated its collaboration with us,which has hindered the continued development and commercialization of****REMUNE****â**

 

We received in July 2001, a letter from Pfizer which indicatedthat Pfizer had elected to immediately terminate, in their entirety, all of itsrights and obligations under our agreement with them. Our agreement with Pfizerpermitted this termination. Although we retained all rights relating to REMUNEâupon Pfizer’s termination, we lost a significant source of funding. Followingthe termination of our agreement with Pfizer, we decided not to proceed withone of our clinical trials of REMUNEâdeveloped by Agouron (subsequently acquired by Pfizer). The termination of thisagreement has had, and may continue to have, a material adverse effect on ourstock price and, consequently, our ability to successfully raise additionalcapital.

 

**We may be unable to enter into additionalcollaborations**

 

We are seeking additional collaborative arrangements to develop andcommercialize our products. We may not be able to negotiate collaborativearrangements on favorable terms in the future, or at all, and our current orfuture collaborative arrangements may not be successful or continue.

 

**As collateral for the notes with a current principalbalance of $7,208,000 and accrued interest of $863,000 outstanding to partiesaffiliated with and/or related to Kevin Kimberlin, one of our directorsand principal stockholders, such parties have a perfected security interest inour intellectual property. Pursuant to the security agreement, we must complywith covenants with respect to our intellectual property. The securityinterests and covenants could impair our ability to enter into collaborativeand licensing arrangements.**

 

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**Our patents and proprietary technology maynot be enforceable and the patents and proprietary technology of others mayprevent us from commercializing products**

 

We have a portfolio of 173 patents worldwide. Although we believe thesepatents to be protected and enforceable, the failure to obtain meaningfulpatent protection for our potential products and processes would greatlydiminish the value of our potential products and processes.

 

In addition, whether or not our patents are issued, or issuedwith limited coverage, others may receive patents, which contain claimsapplicable to our products. Patents we are not aware of may adversely affectour ability to develop and commercialize products. Also, our patents related toHIV therapy have expiration dates that range from 2010 to 2017 and our patentsrelated to autoimmune diseases have expiration dates that range from 2010 to2019. The limited duration of our patents could diminish the value of ourpotential products and processes, particularly since we do not expect togenerate any revenue from our products sooner than the third quarter of 2008,if at all.

 

The patent positions of biotechnology and pharmaceutical companies areoften highly uncertain and involve complex legal and factual questions.Therefore, the breadth of claims allowed in biotechnology and pharmaceuticalpatents cannot be predicted. We also rely upon non-patented trade secrets andknow how, and others may independently develop substantially equivalent tradesecrets or know how. We also rely on protecting our proprietary technology inpart through confidentiality agreements with our current and former corporatecollaborators, employees, consultants and some contractors. These agreementsmay be breached, and we may not have adequate remedies for any breaches. Inaddition, our trade secrets may otherwise become known or independentlydiscovered by our competitors. Litigation may be necessary to defend against claimsof infringement, to enforce our patents and/or to protect trade secrets.Litigation could result in substantial costs and diversion of managementefforts regardless of the results of the litigation. An adverse result inlitigation could subject us to significant liabilities to third parties,require disputed rights to be licensed or require us to cease using proprietarytechnologies.

 

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

 

**You could suffer substantial dilution of yourinvestment as a result of past and future financings**

 

We will continue to have limited cash resources. Although ourmanagement recognizes the need to secure additional financing, there can be noassurance that we will be successful in consummating any financing transactionor, if consummated, that the terms and conditions of the financing will not beunfavorable to us.

 

In the last three years we have issued very large numbers of shares,plus other securities convertible or exercisable for additional very largenumbers of shares, in order to raise cash as required for our survival. Indeed,in 2003 alone, our weighted average number of shares outstanding nearlytripled. As a result, pre-existing stockholders have been substantiallydiluted.  Any further near- termfinancings will almost certainly involve substantial dilution of outstandingequity.

 

Our recent financings have been primarily with related parties(affiliates of Mr. Kimberlin).  Anyfurther near-term financings may also be primarily with related parties.

 

Any subsequent offerings may also require the creation or issuance of aclass or series of stock that by its terms ranks senior to the common stockwith respect to rights relating to dividends, voting and/or liquidation.

 

**You could suffer substantial dilution of yourinvestment if warrants and options to purchase common stock are exercised forcommon stock**

 

As of July 30, 2004 we had reserved approximately 7,300,000 shares ofour common stock for potential issuance upon the exercise of stock options orawards and purchases under our employee 401K match and stock purchase plans.Issuance of any of these additional shares could substantially dilute yourinterest in us. Furthermore, we have warrants outstanding which, if exercised,will purchase approximately 26,100,000 shares of our common stock andapproximately 6,600,000 shares are issuable upon conversion of our outstandingconvertible notes, subject to adjustment. Additionally, our placement agent inthe December 2002 private

 

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placement, and its transferees, hold unit options to purchase up to1,714,909 shares of common stock and 1,437,658 Class A warrants, which arenot redeemable by us, subject to adjustment. The Class A warrants areexercisable 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 ourcommon stock to Trinity pursuant to our License and Collaboration Agreement. Inaddition, we will require substantial additional financings, which even ifsuccessful will probably require the issuance of very substantial amounts ofpotentially dilutive securities. See also “—You could suffer substantialdilution of your investment as a result of past and future financings.”

 

**Our stock may become delisted and subject topenny stock rules, which may make it more difficult for you to sell yoursecurities**

 

If we are delisted from the Nasdaq for any reason, our common stockmight be considered a penny stock under regulations of the Securities andExchange Commission, or the SEC, and if so would be subject to rules thatimpose additional sales practice requirements on broker-dealers who buy andsell our securities. The additional burdens imposed upon broker-dealers bythese requirements could discourage broker-dealers from effecting transactionsin our common stock, which could severely limit the market liquidity of thecommon stock and warrants and your ability to sell our securities in the secondarymarket. We cannot assure you that we will be able to maintain our listing onthe Nasdaq. Being delisted would also hurt our ability to raise additionalfinancing.

 

**Legal proceedings could require us to spendsubstantial amounts of money and impair our operations**

 

Since July 2001, several complaintshave been filed in the United States District Court for the Southern Districtof California seeking an unspecified amount of damages on behalf of an allegedclass of persons, who purchased shares of our common stock at various timesbetween May 17, 1999 and July 6, 2001.  The complaints have been consolidated into asingle action under the name *In re Immune ResponseSecurities Litigation* by order of the Court and a consolidated,amended complaint was filed in July 2003. The consolidated, amended complaint names us and certain of our formerofficers as defendants, as well as Agouron Pharmaceuticals, Inc. and one of itsofficers.  The consolidated, amendedcomplaint alleges that we, Agouron and/or such officers violated federalsecurities laws by misrepresenting and failing to disclose certain informationabout the results of clinical trials of REMUNEâ.  On October 31, 2003 the defendants filedmotions to dismiss the consolidated, amended complaint.  The court has not yet ruled on themotions.  Although we intend tovigorously defend the actions, we cannot now predict or determine the outcomeor resolution of these proceedings, or to estimate the amounts of, or potentialrange of, loss with respect to these proceedings.  In addition, the timing of the finalresolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could includejudgments against us or our former officers or settlements that could requiresubstantial payments by us, which could have a material adverse impact on ourconsolidated financial position, results of operations and cash flows.  These proceedings also might requiresubstantial attention of our management team and therefore, regardless ofwhether we win or lose the litigation, divert their time and attention from ourbusiness and operations.

 

**Our certificate of incorporation and bylawsinclude provisions that could make attempts by stockholders to changemanagement more difficult**

 

The approval of 66 2/3% of our voting stock isrequired to approve specified transactions and to take specified stockholderactions, including the calling of special meetings of stockholders and theamendment of any of the anti-takeover provisions, including those providing fora classified board of directors, contained in our certificate of incorporation.Further, pursuant to the terms of our stockholder rights plan, we havedistributed a dividend of one preferred stock purchase right for eachoutstanding share of common stock. These rights will cause substantial dilutionto the ownership of a person or group that attempts to acquire us on terms notapproved by our Board of Directors and may have the effect of deterring hostiletakeover attempts. The substantial aggregate equity positions ofMr. Kimberlin and his affiliates and/or related parties would make ahostile takeover attempts very unlikely. The practical effect of theseprovisions is to require a party seeking control of us to negotiate with ourBoard of Directors, which could delay or prevent a change in control. Theseprovisions could limit the price that investors might be willing to pay in thefuture for our securities and make attempts by stockholders to changemanagement more difficult.

 

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

 

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**We have a new management team. If we lose ourkey personnel or are unable to attract and retain additional personnel, we maybe unable to successfully develop our technology**

 

Since 2001, we have replaced most of the key members of our executivemanagement. There can be no assurances that we will not lose additional membersof our executive management team or, if so, whether we would be able to hireadequate replacements.

 

Additionally, our ability to conduct business, raise additionalfinancing and commercialize REMUNEâor our other products may be hindered if we lose additional executive officersor experienced personnel with historical knowledge of our business,transactions, science and technology. Currently, our most experienced executiveofficer has been with us for less than two years.

 

In addition, recruiting and retaining qualified scientific personnel toassist in scaling up our manufacturing facilities and performing futureresearch and development work will be critical to our success. It has beenparticularly difficult for us to retain personnel in light of the performanceof our common stock and the incurrence of substantial net operating losses. Wedo not have sufficient personnel to fully execute our business plan, and thereis currently a shortage of skilled executives and scientists, which is likelyto continue. As a result, competition for experienced executives and scientistsfrom numerous companies and academic and other research institutions may limitour ability to hire or retain new executives and other qualified personnel onacceptable terms. If we fail to attract and retain sufficient qualifiedpersonnel, we may not be able to develop or implement our technology.

 

**Product liability exposure may expose us tosignificant liability**

 

We face an inherent business risk of exposure to product liability andother claims and lawsuits in the event that the development or use of ourtechnology or prospective products is alleged to have resulted in adverseeffects. We may not be able to avoid significant liability exposure. We may nothave sufficient insurance coverage, and we may not be able to obtain sufficientcoverage at a reasonable cost. An inability to obtain product liabilityinsurance at acceptable cost or to otherwise protect against potential productliability claims could prevent or inhibit the commercialization of ourproducts. A product liability claim could hurt our financial performance. Evenif we avoid liability exposure, significant costs could be incurred that couldhurt our financial performance and condition.

 

## **Item 3.****   ****Quantitative****and Qualitative Disclosuresabout Market Risk**

 

We invest our excess cash primarilyin U.S. government securities and money market accounts.  These instruments have maturities of twoyears or less when acquired.  We do notutilize derivative financial instruments, derivative commodity instruments orother market risk sensitive instruments, positions or transactions.  Furthermore, our debt is at fixed rates.  Accordingly, we believe that, while theinstruments we hold are subject to changes in the financial standing of theissuer of such securities, we are not subject to any material risks arisingfrom changes in interest rates, foreign currency exchange rates, commodityprices, equity prices or other market changes that affect market risk sensitiveinstruments.

 

**Item 4.****   ****Controls****and Procedures**

 

Dr. John N. Bonfiglio, ourprincipal executive officer and Mr. Michael K. Green, our principal financialofficer, after evaluating the effectiveness of our disclosure controls andprocedures (as defined in Securities Exchange Act Rule 13a-15(e)) haveconcluded that, as of June 30, 2004, our disclosure controls and procedures areeffective.

 

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**PART II****– OTHER INFORMATION**

 

**Item 1.****   ****Legal Proceedings**

 

Since July 2001, several complaintshave been filed in the United States District Court for the Southern Districtof California seeking an unspecified amount of damages on behalf of an allegedclass of persons, who purchased shares of our common stock at various timesbetween May 17, 1999 and July 6, 2001.  The complaints have been consolidated into asingle action under the name *In re Immune ResponseSecurities Litigation* by order of the Court and a consolidated, amendedcomplaint was filed in July 2003.  Theconsolidated, amended complaint names us and certain of our former officers asdefendants, as well as Agouron Pharmaceuticals, Inc. and one of its officers.  The consolidated, amended complaint allegesthat we, Agouron and/or such officers violated federal securities laws bymisrepresenting and failing to disclose certain information about the resultsof clinical trials of REMUNEâ.  There have been no material developments inthe case since our last Form 10-Q.

 

**Item 2.****   ****Changes in Securitie****s, Use of Proceeds and Issuer Purchases ofEquity Securities**

 

On April 30, 2004, we raised$11,850,000 in gross proceeds in connection with a private placement of6,771,429 shares of common stock at $1.75 per share to a number ofinstitutional investors.  The investorsalso received five-year warrants to purchase 2,031,429 shares of common stockat $2.75 per share.  In connection withthis private placement, we paid $1,081,500 of commission and fees and issuedadditional warrants to purchase 541,714 shares of common stock at $2.75 pershare to Rodman & Renshaw, Inc., the placement agent.  The warrants issued to the placement agentwere accounted for as non-cash offering costs of $805,000, allocated towarrants outstanding.  Proceeds from thefinancing will be used to fund our ongoing clinical activities and for generalcorporate purposes.

 

Theissuances of these securities were completed in reliance upon Section 4(2) ofthe Securities Act of 1933.

 

**Item 3.****   ****DefaultsUpon****SeniorSecurities**

 

None

 

## **Item 4.****   ****Submission****of Matters to a Vote of Security Holders**

##  

On June 15, 2004, the Companyheld its Annual Meeting of Stockholders. There were issued and outstanding on April 20, 2004, the record date,41,312,960 shares of common stock and 688,146 shares of preferred Series Astock.  There were present at the meetingin person or by proxy, stockholders of the Company who were the holders of28,189,736 shares of common stock and 688,146 shares of Series A stock entitledto vote, constituting a quorum.  Thefollowing actions were taken at the meeting:

 

1.             The following Class III directors were elected:

Kevin B.Kimberlin, 27,765,198 common shares were voted in favor of the nominee, 424,538common shares withheld their vote; and 688,146 preferred Series A shares werevoted in favor.

Kevin L.Reilly, 27,736,839 common shares were voted in favor of the nominee, 452,897common shares withheld their vote; and 688,146 preferred Series A shares werevoted in favor.

 

2.             Anamendment to the Company’s 2003 Stock Plan to increase the authorized number ofshares issuable   under the plan by3,542,680 (including incorporating 1,542,680 shares from the 1989 Stock Plan)was approved.  Common shares voted forthe proposal were 14,672,562, with 812,432 common shares voted against, 126,139common shares abstained and 12,578,603 common shares were broker non-votes; and688,146 preferred Series A shares were voted in favor.

 

## **Item 5.****   ****Other Infor****mation**

##  

None

 

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**Item 6.****    Exhibits andReports on Form 8-K**

 

a)     Exhibits

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                            |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                   |
| 31.1                |       | Certification of the Principal Executive  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                           |
|                |       |                                                                                                                                   |
| 31.2                |       | Certification of the Principal Financial  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                           |
|                |       |                                                                                                                                   |
| 32.1                |       | Certification pursuant to Section 1350 of  Chapter 63 of 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 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |

 

b)    Reportson Form 8-K

 

On May 3,2004, we filed a Form 8-K to report (under Items 5 and 7) an event of April 30,2004: our issuance of a press release regarding the private sale of commonstock and warrants for approximately $11,850,000 of gross proceeds.

 

 

**SIGNATURES**

** **

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
|                       | THE  IMMUNE RESPONSE CORPORATION |
|----------------------------|----------------------------------|
|                       |                             |   |
|                       |                             |   |
| Date:  August 5, 2004 | By:                              | /s/  Michael K. Green |
|                       |                             | Michael  K. Green, |
|                       |                             | Chief  Financial Officer |

 

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**EXHIBITSTO FORM 10-Q**

** **

** **

**THE IMMUNE RESPONSE CORPORATION**

 

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**Exhibit Index**

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                            |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                   |
| 31.1                |       | Certification of the Principal Executive  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                           |
|                |       |                                                                                                                                   |
| 31.2                |       | Certification of the Principal Financial  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                           |
|                |       |                                                                                                                                   |
| 32.1                |       | Certification pursuant to Section 1350 of  Chapter 63 of 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 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |

 

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