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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
    FORM 10-Q þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2005 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-18006 THE IMMUNE RESPONSE CORPORATION  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    33-0255679
(I.R.S. Employer
Identification No.)
 5931 Darwin Court
Carlsbad, California
(Address of principal executive offices)
    
    92008
(Zip Code)
 Registrants telephone number, including area code: (760) 431-7080 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act) Yes o No
þ As of April 25, 2005, there were 48,839,558 shares of our common stock outstanding.




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THE IMMUNE RESPONSE CORPORATION INDEX PagePart I FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Balance Sheets   March 31, 2005 and December 31, 2004
    
    
    3Condensed Statements of Operations  Three months ended March 31, 2005 and 2004
    
    
    4Condensed Statements of Cash Flows  Three months ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    21Part II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3. Defaults Upon Senior Securities
    
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 5. Other Information
    
    
    21Item 6. Exhibits
    
    
    21SIGNATURES
    
    
    22EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 -2-




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements The Immune Response Corporation 
 Condensed Balance Sheets
 (in thousands, except for share amounts)
 March 31,
    
    
    December 31,2005
    
    
    2004(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    5,353
    
    
    $
    8,798Other current assets
    
    
    323
    
    
    
    3645,676
    
    
    
    9,162Property and equipment, net
    
    
    4,197
    
    
    
    4,431Licensed technology, net
    
    
    1,236
    
    
    
    1,413Deposits and other assets ($600 restricted as security for letter of credit)
    
    
    690
    
    
    
    690$
    11,799
    
    
    $
    15,696Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    632
    
    
    $
    494Accrued expenses
    
    
    911
    
    
    
    1,316Current portion of convertible promissory notes, related party, net of discount of $0
and $1,807 plus accrued interest of $1,295 and $1,151 at March 31, 2005 and
December 31, 2004, respectively
    
    
    1,295
    
    
    
    6,552Current portion of deferred rent and accrued excess lease costs
    
    
    226
    
    
    
    212Current portion of deferred revenue
    
    
    44
    
    
    
    443,108
    
    
    
    8,618Convertible promissory notes, related party, net of discount of $1,217 at March 31,
2005, net of
current portion
    
    
    5,991
    
    
    
    Long-term deferred rent and accrued excess lease costs, net of current portion
    
    
    2,361
    
    
    
    2,423Long-term deferred revenue, net of current portion
    
    
    150
    
    
    
    161Total long-term liabilities
    
    
    8,502
    
    
    
    2,584Stockholders Equity:Preferred stock, $.001 par value, 10,000,000 shares authorized; 688,146 Series A
convertible shares issued and outstanding at March 31, 2005 and December 31, 2004
with a liquidation preference aggregating $4,577 and $4,484, respectively
    
    
    13,952
    
    
    
    13,952Common stock, $.0025 par value, 170,000,000 shares authorized; 48,739,415 and
48,627,099 shares issued and outstanding at March 31, 2005 and December 31, 2004,
respectively
    
    
    122
    
    
    
    122Warrants
    
    
    20,795
    
    
    
    20,827Additional paid-in capital
    
    
    299,467
    
    
    
    299,408Accumulated deficit
    
    
    (334,147
    )
    
    
    (329,815
    )Total stockholders equity
    
    
    189
    
    
    
    4,494$
    $11,799
    
    
    $
    $15,696
 See accompanying notes to condensed financial statements. -3-




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The Immune Response Corporation 
 Condensed Statements of Operations
 (in thousands, except for per share amounts)
 (unaudited)
 Three months ended March 31,2005
    
    
    2004Revenues:Licensed research revenue
    
    $
    4
    
    
    $
    7Contract research revenue
    
    
    7
    
    
    
    711
    
    
    
    14Expenses:Research and development
    
    
    2,903
    
    
    
    3,120General and administrative
    
    
    741
    
    
    
    8383,644
    
    
    
    3,958Other income and (expense):Interest expense  including $590 and $589 of non-cash
accretion in 2005 and 2004, respectively
    
    
    (749
    )
    
    
    (753
    )Investment income
    
    
    50
    
    
    
    22Beneficial inducement cost
    
    
    
    
    
    
    (4,923
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (4,935
    )(699
    )
    
    
    (10,589
    )Net loss
    
    
    (4,332
    )
    
    
    (14,533
    )Less preferred stock dividends
    
    
    (93
    )
    
    
    (89
    )Net loss attributable to common stockholders
    
    $
    (4,425
    )
    
    $
    (14,622
    )Basic and diluted loss per share:Net loss
    
    $
    (0.09
    )
    
    $
    (0.35
    )Net loss attributable to common stockholders
    
    $
    (0.09
    )
    
    $
    (0.35
    )Weighted average number of shares outstanding
    
    
    48,699
    
    
    
    41,240
 See accompanying notes to condensed financial statements. -4-




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The Immune Response Corporation 
 Condensed Statements of Cash Flows
 (in thousands)
 (unaudited)
 Three months ended March 31,2005
    
    
    2004Cash Flows From Operating Activities:Net loss
    
    $
    (4,332
    )
    
    $
    (14,533
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    420
    
    
    
    407Operating expenses paid with common stock and warrants
    
    
    110
    
    
    
    68Stock option adjustments
    
    
    (101
    )
    
    
    (48
    )Deferred revenue
    
    
    (11
    )
    
    
    (14
    )Accrued excess lease costs
    
    
    (48
    )
    
    
    (77
    )Related party accrued interest
    
    
    144
    
    
    
    145Accretion of notes, related party
    
    
    590
    
    
    
    589Beneficial inducement cost
    
    
    
    
    
    
    4,923Loss on extinguishment of debt
    
    
    
    
    
    
    4,935Interest expense converted into Series A preferred stock
    
    
    
    
    
    
    219Changes in operating assets and liabilities:Other current assets
    
    
    41
    
    
    
    144Accounts payable
    
    
    138
    
    
    
    (381
    )Accrued expenses
    
    
    (405
    )
    
    
    (432
    )Net cash used in operating activities
    
    
    (3,454
    )
    
    
    (4,055
    )Cash Flows From Investing Activities:Purchase of property and equipment
    
    
    (9
    )
    
    
    (252
    )Net cash used in investing activities
    
    
    (9
    )
    
    
    (252
    )Cash Flows From Financing Activities:Net proceeds from exercises of Unit Purchase Options
    
    
    18
    
    
    
    42Net offering costs for Series A preferred stock
    
    
    
    
    
    
    (23
    )Net proceeds from common stock purchases through employee plans
    
    
    
    
    
    
    3Net cash provided by financing activities
    
    
    18
    
    
    
    22Net decrease in cash and cash equivalents
    
    
    (3,445
    )
    
    
    (4,285
    )Cash and cash equivalents  beginning of year
    
    
    8,798
    
    
    
    12,838Cash and cash equivalents  end of period
    
    $
    5,353
    
    
    $
    8,553Supplemental Disclosure of Cash Flow Information:Interest paid
    
    $
    15
    
    
    $
    14Supplemental Disclosure of Noncash Information:Promissory notes and interest converted into Series A preferred stock
    
    $
    
    
    
    $
    4,118Common stock issued for consulting services
    
    $
    42
    
    
    $
    68Common stock issued for 401(k) plan
    
    $
    68
    
    
    $
    
 See accompanying notes to condensed financial statements. -5-




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THE IMMUNE RESPONSE CORPORATION 
 Notes to Condensed Financial Statements (unaudited)
 
 Note 1 - Interim Financial Statements: The accompanying condensed balance sheet as of March 31, 2005 and the condensed statements of
operations and of cash flows for the three months ended March 31, 2005 and 2004 have been prepared
by The Immune Response Corporation (the Company) and have not been audited. Effective January 1,
2005, the Company and its wholly-owned subsidiary were merged into one company through a statutory
tax-free reorganization. There was no financial statement impact as a result of this merger.
These financial statements, in the opinion of management, include all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of the financial position, results
of operations and cash flows for all periods presented. The financial statements should be read in
conjunction with the financial statements and notes thereto included in the Companys Annual Report
on Form 10-K filed for the year ended December 31, 2004. Interim operating results are not
necessarily indicative of operating results for the full year. The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Stock-Based Compensation The Company measures its stock-based employee compensation using the intrinsic value method of
accounting in accordance with Accounting Principles Board, APB, Opinion No. 25, Accounting for
Stock Issued to Employees. Because the Company establishes the exercise price based on the fair
market value of the Companys stock at the date of grant, the options have no intrinsic value upon
grant, and therefore no expense is recorded. Equity instruments issued to non-employees for goods
or services are accounted for at fair value and are marked to market until service is complete or a
performance commitment date is reached. As required under FAS No. 123, Accounting for Stock-Based Compensation, and FAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, the pro forma effects of
stock-based compensation on net loss and net loss per common share have been estimated at the date
of grant using the Black-Scholes option-pricing model. For purposes of pro forma disclosures, the estimated fair value of the options is assumed to be
amortized to expense over the options vesting periods. The pro forma effects of recognizing
compensation expense under the fair value method on net income and net earnings per common share
were as follows: Three Months EndedMarch 31,2005
    
    
    2004Net loss attributable to common stockholders:As reported
    
    $
    (4,425,000
    )
    
    $
    (14,622,000
    )Stock-based employee compensation
benefit included in (and reducing)
net loss
    
    
    (195,000
    )
    
    
    (55,000
    )Fair value of stock-based employee
compensation
    
    
    (572,000
    )
    
    
    (967,000
    )Pro forma
    
    $
    (5,192,000
    )
    
    $
    (15,644,000
    )Net loss per share (basic and diluted):As reported
    
    $
    (0.09
    )
    
    $
    (0.35
    )Pro forma
    
    $
    (0.11
    )
    
    $
    (0.38
    )
 -6-




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THE IMMUNE RESPONSE CORPORATIONNotes to Condensed Financial Statements (unaudited) 
 Note 2 - The Company: The Immune Response Corporation, a Delaware corporation, is a biopharmaceutical company
dedicated to becoming a leading immune-based therapy (IBT) company in HIV and multiple sclerosis
(MS). The Companys HIV products are based on its patented whole-killed virus technology,
co-invented by Company founder Dr. Jonas Salk, to stimulate HIV immune responses. The Company
currently has three active IBT programs; Remune® and IR103 target HIV and
NeuroVaxTMtargets MS. Remune®, currently in Phase II clinical trials, is
being developed as a first-line treatment for people with early-stage HIV. The Company has
initiated development of a new immune-based therapy, IR103, which incorporates a second-generation
immunostimulatory oligonucleotide adjuvant and is currently in Phase I/II clinical trials in Canada
and the United Kingdom. The Company is also developing an immune-based therapy for MS, NeuroVaxTM, which is
currently in Phase II clinical trials and has shown potential therapeutic value for this
difficult-to-treat disease. Note 3 - Going Concern: The accompanying financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of
business. The Company has incurred net losses since inception, has an accumulated deficit of
$334,147,000 and has short-term debt of $1,295,000 as of March 31, 2005. See Note 5  Subsequent
Event. The Company will not generate meaningful revenues in the foreseeable future. These factors, among others, raise substantial doubt about the Companys ability to continue as a
going concern. Our independent registered public accountants, Levitz, Zacks & Ciceric, indicate in
their audit report on the 2004 consolidated financial statements that there is substantial doubt
about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern. The Company believes that its current resources are sufficient to fund its planned operations,
including necessary capital expenditures and clinical trials, through the second quarter of 2005.
The Company is attempting to raise additional capital to fund operations beyond the second quarter
of 2005; however, no assurance can be given that the Company will be able to obtain additional
financing when and as needed in the future. Note 4 - Net Loss per Share: Basic and diluted net loss per share is computed using the weighted average number of common
shares outstanding during the period. Potentially dilutive securities are excluded from the
diluted net loss per share calculation, as the effect would be antidilutive. As of March 31, 2005
potentially dilutive shares not included are 6,600,000 shares for outstanding employee stock
options, 6,600,000 shares issuable under convertible notes payable, related party, 16,000,000
shares issuable under warrants outstanding, 9,400,000 shares issuable under Class B Warrants
outstanding, 1,900,000 shares issuable under an option issued to the placement agent for the
private offering in December 2002 and 4,817,000 shares issuable under Series A convertible
preferred stock. Note 5 - Subsequent Event: On April 29, 2005, the Company entered into a Note Exchange Agreement with Cheshire Associates
LLC (Cheshire) to exchange 8% Convertible Secured Promissory Notes with outstanding principal
amounts totaling $5,741,000 (the 8% Notes), previously issued by us, for a new Secured 2007 Mortgage Note
with a principal amount of $5,741,000 (the Mortgage Note). In connection with this agreement,
Cheshire converted a separate convertible promissory note, which had a maturity date of May 3,
2005 and an outstanding principal amount of $1,467,000, into 1,007,000 shares of the Companys
common stock at a conversion price of $1.457 per share. Cheshire is an affiliate of Kevin
Kimberlin, a director and major stockholder of the Company. -7-




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THE IMMUNE RESPONSE CORPORATIONNotes to Condensed Financial Statements (unaudited) 
 Under the terms of the agreement, the Mortgage Note will have the same terms and conditions as the
8% Notes had had, except that (a) the 8% Notes would have matured at various dates in 2005, but the
Mortgage Note will have a maturity date of May 31, 2007, and (b) the Mortgage Note will have a
conversion price, subject to possible future adjustment, of $0.70 per share (the closing price of
the Companys common stock on April 29, 2005). At this conversion price, the Mortgage Note will be
convertible into 8,201,000 shares of common stock. The 8% Notes had had higher conversion prices.
The agreement also involved a reduction, to $0.70 per share, of the exercise prices of the
associated warrants that were previously issued with the 8% Notes. These warrants are currently
exercisable for 8,634,000 shares of common stock, and immediately before the agreement had had a
weighted average exercise price of $1.41. Furthermore as part of the agreement, Cheshire will
waive all anti-dilution protection under the Mortgage Note and these warrants for the next PIPES
financing that the Company obtains. In addition, pursuant to the agreement, the Company paid all accrued interest as of April 29, 2005
on the 8% Notes and on the converted note. This constituted a prepayment, as such interest had not
been due until the original maturity dates of the 8% Notes and the converted note. Aggregate
interest paid was $1,340,000. As a result of the notes exchange, which is treated as a refinancing, and note conversion in April
2005, the convertible notes balance, as of March 31, 2005 has been classified as long-term debt,
except for the accrued interest that remains classified as a current liability as of March 31,
2005. In addition, the notes exchange and the note conversion transactions will result in non-cash
charges to operations in the second quarter of 2005, which have not yet been calculated,
representing beneficial inducement costs. -8-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains forward-looking statements concerning our liquidity, capital
resources, financial condition, results of operation and timing of anticipated revenues and
expenditures. Such statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Factors that could cause or contribute to such
differences include those discussed under Risk Factors, as well as those discussed elsewhere in
this Form 10-Q. The following discussion should be read in conjunction with our financial
statements and notes thereto included elsewhere in this Form 10-Q. Except for our ongoing
obligation to disclose material information as required by federal securities laws, we undertake no
obligation to publicly release the result of any revisions to these forward-looking statements that
may be indicated in order to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events. Overview We are a biopharmaceutical company whose products are in the development stage. We have a critical
need to raise cash both in the near term and the medium term. Nonetheless, we believe our products
could prove to have substantial value as part of a therapy for patients infected with HIV or MS. Liquidity and Capital Resources As of March 31, 2005, we had an accumulated deficit of $334,147,000. We have not generated revenues
from the commercialization of any product. We expect to continue to incur substantial net operating
losses over the next several years, which would imperil our ability to continue operations. We may
not be able to generate significant product revenue to become profitable on a sustained basis, or
at all, and do not expect to generate significant product revenue before the end of 2008, if at
all. We have operating and liquidity concerns due to our significant net losses and negative cash
flows from operations. As a result of these and other factors, our independent registered public
accountants, Levitz, Zacks & Ciceric, indicated, in their report on the 2004 consolidated financial
statements, that there is substantial doubt about our ability to continue as a going concern. We
believe, in fact, that our current cash resources are sufficient only to fund our planned
operations through the second quarter of 2005. Since our inception in 1986, we have financed our activities primarily from public and private
sales of equity, funding from collaborations with corporate partners, investment income and the
issuance to Cheshire Associates LLC (Cheshire) and other entities affiliated with or related to
Kevin Kimberlin, who is one of our directors and our principal stockholder, of capital stock,
convertible notes and warrants and short-term promissory notes. As of March 31, 2005, we had outstanding approximately $7,286,000 (net of discount of $1,217,000,
plus accrued interest of $1,295,000) of convertible, related party secured debt. All of the notes
bore interest at a fixed rate of 8% per year and were secured by our intellectual property. On
April 29, 2005, we entered into a Note Exchange Agreement with Cheshire to exchange 8% Convertible
Secured Promissory Notes with outstanding principal amounts totaling $5,741,000 (the 8% Notes),
previously issued by us, for a new secured 2007 Mortgage Note with a principal amount of $5,741,000
(the Mortgage Note). In connection with this agreement, Cheshire converted a separate convertible
promissory note, which had a maturity date of May 3, 2005 and an outstanding principal amount of
$1,467,000, into 1,007,000 shares of our common stock at a conversion price of $1.457 per share. Under the terms of the agreement, the Mortgage Note will have the same terms and conditions as the
8% Notes had had, except that (a) the 8% Notes would have matured at various dates in 2005, but the
Mortgage Note will have a maturity date of May 31, 2007, and (b) the Mortgage Note will have a
conversion price, subject to possible future adjustment, of $0.70 per share (the closing price of
our common stock on April 29, 2005). At this conversion price, the Mortgage Note will be
convertible into 8,201,000 shares of common stock. The 8% Notes had had higher conversion prices.
The agreement also involved a reduction, to $0.70 per share, of the exercise prices of the
associated warrants that were previously issued with the 8% Notes. These warrants are currently
exercisable for 8,634,000 shares of common stock, and immediately before the agreement had had a
weighted average exercise price of $1.41. Furthermore as part of the agreement, Cheshire will
waive all anti-dilution protection under the Mortgage Note and these warrants for the next PIPES
financing that we obtain. In addition, pursuant to the agreement, we paid all accrued interest as of April 29, 2005 on the 8%
Notes and on the converted note. This constituted a prepayment, as such interest had not been due
until the original maturity dates of the 8% Notes and the converted note. Aggregate interest paid
was $1,340,000. -9-




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As a result of the notes exchange, which is treated as a refinancing, and note conversion in April
2005, the convertible notes balance, as of March 31, 2005 has been classified as long-term debt,
except for the accrued interest that remains classified as a current liability as of March 31,
2005. In addition, the notes exchange and the note conversion transactions will result in non-cash
charges to operations in the second quarter of 2005, which have not yet been calculated,
representing beneficial inducement costs. We believe that our current resources are sufficient to fund our planned operations, including
necessary capital expenditures and clinical trials, through the second quarter of 2005. We are
attempting to raise additional capital to fund operations beyond the second quarter of 2005;
however, no assurance can be given that we will be able to obtain additional financing when and as
needed in the future. We could raise an additional $16,700,000 if all of the Class B warrants issued as a result of Class
A warrant exercises since July 7, 2003, which are redeemable by us if the price of our common stock
is equal to or greater than $3.32, are exercised. The exercise price is $1.77 per share. Because at
that price it would be profitable for the warrant holders to exercise their warrants rather than to
allow the redemption to proceed, we assume they would choose to exercise. However, there is no
assurance that our stock price will rise to the $3.32 per share redemption trigger price. Also,
there can be no assurances that all or any portion of the warrants will be exercised by the initial
purchasers or by any subsequent holders. We could raise an additional $11,800,000 if all the warrants issued in connection with the October
2003 private placement are exercised for cash. The exercise price is $3.32 per share. The warrants
issued in the October 2003 private placement are redeemable by us if the price of our common stock
is equal to or greater than $8.00 for 20 consecutive trading days. Because at that price it would
be profitable for the warrant holders to exercise their warrants rather than to allow the
redemption to proceed, we assume they would choose to exercise. However, there is no assurance that
our stock price will rise to the $8.00 per share redemption trigger price. Also, there can be no
assurances that all or any portion of the warrants will be exercised by the initial purchasers or
by any subsequent holders. Additionally, we could raise $7,100,000 if all the warrants issued in connection with the April
2004 private placement are exercised for cash. The warrants issued in the April 2004 private
placement are exercisable by the holders at any time between October 2004 and April 2009 at $2.75
per share. However, there is no assurance that our stock price will rise to the $2.75 per share
exercise price and/or that all or any portion of the warrants will be exercised by the initial
purchasers or by any subsequent holders. As we use our current cash balances, we continue to look for alternative sources of funding which,
even if available, may be on terms substantially less favorable. If we are unable to raise
adequate capital, we may be required to delay, or reduce the scope of, our research or development
of Remune®, IR103 and NeuroVaxTM, or take other
measures to cut costs, which would have a material adverse effect on us and likely result in our
inability to continue as a going concern. We will need to raise very substantial additional funds over several years to conduct research and
development, preclinical studies and clinical trials necessary to bring potential products to
market and to establish manufacturing and marketing capabilities. We anticipate that for the
foreseeable future, the scale-up of the manufacturing process for
Remune®, IR103 and NeuroVaxTM and the cost of
producing clinical supplies for ongoing and future Remune®, IR103 and
NeuroVaxTM studies will continue to represent a significant portion of our
overall expenditures. Overall, future Remune®, IR103 and
NeuroVaxTM research and development expenditures are expected to increase from
current levels in the event additional financing is obtained. Future spending for research and
development may further increase if we enter into additional collaborations, but there can be no
assurance that we will enter into any such collaborations. We anticipate additional capital
improvements of approximately $2,000,000 to scale-up and improve the manufacturing process for
Remune® and IR103 through 2006. Other anticipated costs with respect to
Remune®, IR103 and NeuroVaxTM, including investment
in inventory, will depend on many factors including the need for additional clinical trials and
other factors, which will influence our determination of the appropriate continued investment of
our financial resources in these programs. Our future capital requirements will depend on many factors including whether the remaining
warrants will be exercised by the initial purchasers or by any subsequent holders. Other capital
requirement factors include continued scientific progress in our research and development programs,
the scope and results of preclinical studies and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent
claims, the costs involved in paying any settlements or judgments in class actions, competing
technological and market developments, the cost of manufacturing scale-up and inventories,
effective commercialization activities and arrangements and other factors not within our control.
We -10-




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intend to seek additional funding through additional research and development agreements with
suitable corporate collaborators and through public or private financing, if available. However, we
cannot provide assurance that such collaboration arrangements or any public or private financing
will be available on acceptable terms, if at all. If we raise funds through future equity
arrangements, significant further dilution to stockholders will result. Results of Operations Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004. We recorded revenues for the three months ended March 31, 2005 of $11,000 as compared to $14,000
for the corresponding period in 2004. The revenues were from the amortization of multi-year
out-licenses of technology. We expect no additional revenues earlier than the fourth quarter of
2008, if at all unless they are earned through corporate collaborations or new research and
development agreements. We have not received any revenues from the sale of products and do not
expect to derive revenue from the sale of any products earlier than the fourth quarter of 2008, if
at all. Our research and development expenditures for the three months ended March 31, 2005 were $2,903,000
as compared to $3,120,000 for the corresponding period in 2004. The decrease in research and
development expenses during the first quarter of 2005 is attributable to the absence in 2005 of
NeuroVaxTM manufacturing costs incurred in the first quarter of 2004. Expenses associated with our continued scale-up of the manufacturing process for
Remune® and IR103, the cost of producing clinical supplies for ongoing
and future Remune®, IR103 and NeuroVaxTMstudies and
additional clinical trials for NeuroVaxTMare expected to increase during the next
several quarters as we focus our financial resources on Remune®, IR103
and NeuroVaxTM. There can be no assurance that we will be able to obtain other
financing needed to continue our research and development efforts. General and administrative expenses for the three months ended March 31, 2005 were $741,000 as
compared to $838,000 for the corresponding period in 2004. These figures include $101,000 and
$48,000 of non-cash benefit in 2005 and 2004, respectively, related to the variable accounting of
employee and consultant stock options, reversing previously taken stock-based compensation expense.
The reduction in general and administrative expenses year-to-year reflect ongoing cost containment
efforts, including lower insurance and legal costs, offset slightly by increased consulting fees in
the first quarter of 2005 as compared to 2004. Interest expense remained constant at $749,000 for the three months ended March 31, 2005 as
compared to $753,000 for the corresponding period in 2004 attributable to comparable levels of
debt. In January 2004, Cheshire converted $3,899,000 of convertible promissory notes into Series A
Convertible Preferred stock, which resulted in additional beneficial inducement cost of $4,923,000
and a charge for loss on the extinguishment of debt of $4,935,000, both recognized upon the
conversion. These were one-time, non-cash charges. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions in certain circumstances that affect amounts
reported in the accompanying financial statements and related footnotes. In preparing these
financial statements, management has made its best estimates and judgments of certain amounts
included in the financial statements, giving due consideration to materiality. However,
application of these accounting policies involves the exercise of judgment and use of assumptions
as to future uncertainties and, as a result, actual results could differ from these estimates. We
do not believe there is a great likelihood that materially different amounts would be reported
related to the accounting policies described below. Pro Forma Stock-Based Compensation
We measure stock-based employee compensation using the intrinsic value method of accounting in
accordance with Accounting Principles Board, APB, Opinion No. 25, Accounting for Stock Issued to
Employees. Because we establish the exercise price based on the fair market value of our common
stock at the date of grant, the options have no intrinsic value upon grant, and therefore generally
no expense is recorded. Equity instruments issued to non-employees for goods or services are
accounted for at fair value and are marked to market until service is complete or a performance
commitment date is reached. -11-




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As required under FAS No. 123, Accounting for Stock-Based Compensation, and FAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, the pro forma effects of
stock-based compensation on net loss and net loss per common share have been estimated at the date
of grant using the Black-Scholes option-pricing model. As of March 31, 2005, no revisions to the
assumptions used in the Black Scholes option-pricing model have been made. In December 2004, the FASB issued FAS No. 123R, Share-Based Payment. This statement is a
revision to FAS No. 123, Accounting for Stock-Based Compensation, it supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees, and amends FAS No. 95, Statement of Cash Flows.
Generally the approach in FAS No. 123R is similar to the approach described in FAS No. 123.
However, FAS No. 123R will require all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure will no longer be an alternative. FAS No. 123R must be adopted no later than January 1, 2006. We expect to adopt FAS No. 123R on
January 1, 2006. FAS No. 123R permits public companies to adopt its requirements using one of two
methods, the modified prospective or the modified retrospective method. We are currently
evaluating the two different methods for the adoption of FAS No. 123R and have not determined which
of the two methods will be adopted. As permitted by FAS No. 123, we currently account for share-based payments to employees using APB
Opinion No. 25s intrinsic value method; and as such, we generally recognize no compensation cost
for employee stock options. Accordingly, the adoption of FAS No. 123Rs fair value method will
have a material impact on our results of operations, although it will have no impact on our overall
financial position. The impact of adoption of FAS No. 123R cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future. However, had we
adopted FAS No 123R in prior periods using the Black-Scholes valuation model, the impact of that
standard would have approximated the impact of FAS No. 123 as described in the disclosure of pro
forma net loss and net loss per share in Note 1 to our consolidated financial statements. Intangibles and Other Long-Lived Assets
We believe that patents and other proprietary rights are important to our business. Licensed
technology is recorded at cost and is amortized over its estimated useful life. In December 1999,
we acquired licenses to certain patent technology, which are being amortized over seven years.
Changes in our estimates of useful lives may have a material effect on our financial statements. We evaluate potential impairment of long-lived assets in accordance with FAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. FAS No. 144 requires that certain long-lived
assets be reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable based on expected undiscounted cash flows
that result from the use and eventual disposition of the asset. The amount of any impairment is
measured as the difference between the carrying value and the fair value of the impaired asset. Certain Risk Factors Our future operating results are subject to a number of factors, including: We need more cash immediately, and also on an ongoing basis We have never generated any revenue from product sales. As of March 31, 2005, we had an accumulated
deficit of approximately $334,147,000, cash and cash equivalents of only $5,353,000 and working
capital of $2,568,000. Because we do not anticipate generating any revenue from our products until
at least the fourth quarter of 2008, if at all, we will continue to have negative cash flow. We need to raise substantial additional capital to fund our operations beyond the second quarter of
2005. We will need to raise substantial funds to continue our operations and to conduct research
and development, preclinical studies and clinical trials necessary to bring our potential products
to market and to establish manufacturing and marketing capabilities. We will continue to have limited cash resources. There can be no assurance that we will be
successful in consummating any financing transaction or, if consummated, that the terms and
conditions will not be unfavorable to us. -12-




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We have the opportunity to raise an additional $16,700,000 if all of the Class B warrants that were
issued upon exercise of our Class A warrants are exercised. Our Class B warrants are redeemable by
us if the price of our common stock is equal to or greater than $3.32 for ten consecutive trading
days. However, there can be no assurances that our stock price will rise to $3.32 so as to enable
us to call the Class B warrants for redemption, nor that (even in that event) all or any portion of
the warrants will be exercised by the initial purchasers or by any subsequent holders. We have the opportunity to raise an additional $11,800,000 if all the warrants issued in connection
with the October 2003 private placement are exercised for cash. The warrants issued in the October
2003 private placement are redeemable by us if the price of our common stock is equal to or greater
than $8.00 for 20 consecutive trading days. However, there can be no assurances that our stock
price will rise to $8.00 so as to enable us to call the warrants for redemption, nor that (even in
that event) all or any portion of the warrants will be exercised by the initial purchasers or by
any subsequent holders. Additionally, we have the opportunity to raise $7,100,000 if all the warrants issued in connection
with the April 2004 private placement are exercised for cash. The warrants issued in the April 2004
private placement are exercisable by the holders at any time between October 2004 and April 2009 at
$2.75 per share. However, there is no assurance that our stock price will rise to the $2.75 per
share exercise price and/or that all or any portion of the warrants will be exercised by the
initial purchasers or by any subsequent holders. On September 9, 2002, we commenced the implementation of a cost reduction strategy to focus our
core competencies on efforts related to the research, development, commercialization and production
of Remuneâ. The cost reductions related to research, administrative and
operational costs have been offset by increased costs relating to increasing our production
capabilities at our King of Prussia, Pennsylvania facility and conducting additional clinical
trials. Since then we have also renewed our focus on NeuroVaxTM and commenced
development of IR103. The timing and amount of our future capital requirements will depend on many factors, including
(but not limited to):  
    our ability to raise additional funding and the amounts raised, if any;
    the time and costs involved in obtaining regulatory approvals;
    continued scientific progress in our research and development programs;
    the scope and results of preclinical studies and clinical trials;
    the cost of manufacturing scale-up;
    the costs involved in filing, prosecuting and enforcing patent claims;
    competing technological and market developments;
    effective commercialization activities and arrangements;
    the costs of defending against and settling lawsuits; and/or
    other factors not within our control or known to us. Our access to capital could be limited if we do not progress in:  
    obtaining regulatory approvals;
    our research and development programs;
    our preclinical and clinical trials; or
    scaling up manufacturing. Our access to capital also could be limited by:  
    overall financial market conditions;
    applicable Nasdaq rules and federal and state securities laws;
    the perfected security interest in our intellectual property in respect of the $5,741,000
principal amount of the 2007 Mortgage Note issued to Cheshire, an affiliate of Kevin
Kimberlin (who is one of our directors and our principal stockholder);
    the effect of the potential for conversion of the 2007 Mortgage Note into approximately
8,200,000 shares of common stock; -13-




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
    the effect of the potential for exercise of outstanding options and warrants exercisable
into approximately 33,828,000 shares of common stock;
    the effect of the potential for conversion of 688,000 shares of Series A Convertible
Preferred Stock issued in January 2004 to Cheshire, an affiliate of Kevin Kimberlin. The
Series A is currently convertible into 5,505,000 shares of common stock and with the passage
of time will become convertible into up to a maximum of 8,300,000 shares of common stock;
and
    the issuance of the placement agent option to Spencer Trask Ventures, Inc., (an affiliate
of Kevin Kimberlin) and its transferees that is exercisable for 1,672,000 shares of common
stock, 1,438,000 Class A warrants and 1,452,000 Class B warrants, all of which are not
redeemable by us. Our independent registered public accountants have expressed substantial doubt as to our ability to
continue as a going concern As of March 31, 2005, we had an accumulated deficit of $334,147,000. We have not generated revenues
from the commercialization of any product. We expect to continue to incur substantial net operating
losses over the next several years, which would imperil our ability to continue operations. We may
not be able to generate sufficient product revenue to become profitable on a sustained basis, or at
all, and do not expect to generate significant product revenue before the end of 2008, if at all.
We have operating and liquidity concerns due to our significant net losses and negative cash flows
from operations. We must raise additional capital before the third quarter of 2005 in order to
survive. As a result of these and other factors, our independent registered public accountants,
Levitz, Zacks & Ciceric, indicated, in their report on the 2004 consolidated financial statements,
that there is substantial doubt about our ability to continue as a going concern. Our failure to successfully develop our product candidates, Remune®,
IR103 and NeuroVaxTM,may cause us to cease operations We have not completed the development of any products. As part of our restructuring program
announced in September 2002, we halted development of most of our products other than
Remune® and NeuroVaxTM. Our other potential
therapies, which were under development prior to September 2002, would require significant
additional research and development efforts, funding and regulatory approvals if we recommence
development in the future. We are dependent upon our ability to successfully develop
Remune®, IR103 and NeuroVaxTM and our failure to do
so may cause us to cease operations. In May 1999 we discontinued a Phase III clinical endpoint trial of
Remune® because differences in clinical endpoints were not observed
between treatment groups and extending the trial would have been unlikely to provide sufficient
additional clinical endpoints. The discontinuation of the Phase III trial has had a material
adverse effect on us. We cannot assure you that any future Phase III trials of
Remune® (or related drug candidate, IR103) will be conducted.
Furthermore, we cannot guarantee that we, or our corporate collaborators, if any, will ever obtain
any regulatory approvals of Remune® (or related drug candidate, IR103). The results of our pre-clinical studies and clinical trials may not be indicative of future
clinical trial results. A commitment of substantial financial and other resources to conduct
time-consuming research, preclinical studies and clinical trials will be required if we are to
develop any products. Delays in planned patient enrollment in clinical trials may result in
increased costs, program delays or both. None of our potential products may prove to be safe or
effective in clinical trials. Approval by the Food and Drug Administration, or other regulatory
approvals, including export license permissions, may not be obtained and even if successfully
developed and approved, our products may not achieve market acceptance. Any products resulting from
our programs may not be successfully developed or commercially available for several years, if at
all. Moreover, unacceptable toxicity or side effects could occur at any time in the course of human
clinical trials or, if any products are successfully developed and approved for marketing, during
commercial use of our products. Although preliminary research and clinical evidence have shown
Remune®, IR103 and NeuroVaxTMto be safe, the
appearance of any unacceptable toxicity or side effects could interrupt, limit, delay or abort the
development of any of our products or, if previously approved, necessitate their withdrawal from
the market. -14-




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The lengthy product approval process and uncertainty of government regulatory requirements may
delay or prevent us from commercializing products. We must work to re-establish our credibility
with the FDA Clinical testing, manufacture, promotion, export and sale of our products are subject to extensive
regulation by numerous governmental authorities in the United States, principally the FDA, and
corresponding state and foreign regulatory agencies. This regulation may delay or prevent us from
commercializing products. Noncompliance with applicable requirements can result in, among other
things, fines, injunctions, seizure or recall of products, total or partial suspension of product
manufacturing and marketing, failure of the government to grant pre-market approval, withdrawal of
marketing approvals and criminal prosecution. The regulatory process for new therapeutic drug products, including the required preclinical
studies and clinical testing, is lengthy and expensive. We may not receive necessary FDA clearances
for Remune® or any of our other potential products in a timely manner, or
at all. The length of the clinical trial process and the number of patients the FDA will require to
be enrolled in the clinical trials in order to establish the safety and efficacy of our products is
uncertain. Even if additional Phase III clinical trials of Remune® or our other
products are initiated and successfully completed, the FDA may not approve
Remune® or our other products for commercial sale. We may encounter
significant delays or excessive costs in our efforts to secure necessary approvals. Regulatory
requirements are evolving and uncertain. Future United States or foreign legislative or
administrative acts could also prevent or delay regulatory approval of our products. We may not be
able to obtain the necessary approvals for clinical trials, manufacturing or marketing of any of
our products under development. Even if commercial regulatory approvals are obtained, they may
include significant limitations on the indicated uses for which a product may be marketed. In addition, a marketed product is subject to continual FDA review. Later discovery of previously
unknown problems or failure to comply with the applicable regulatory requirements may result in
restrictions on the marketing of a product or withdrawal of the product from the market, as well as
possible civil or criminal sanctions. Among the other requirements for regulatory approval is the requirement that prospective
manufacturers conform to the FDAs Good Manufacturing Practices, or GMP, requirements. In complying
with the FDAs GMP requirements, manufacturers must continue to expend time, money and effort in
production, record keeping and quality control to assure that products meet applicable
specifications and other requirements. Failure to comply and maintain compliance with the FDAs GMP
requirements subjects manufacturers to possible FDA regulatory action and as a result may have a
material adverse effect on us. We, or our contract manufacturers, if any, may not be able to
maintain compliance with the FDAs GMP requirements on a continuing basis. Failure to maintain
compliance could have a material adverse effect on us. The FDA has not designated expanded access protocols for Remune® or our
other products as treatment protocols. The FDA may not determine that
Remune® or our other products meets all of the FDAs criteria for use of
an investigational drug for treatment use. Even if Remune® or our other
products are allowed for treatment use, third party payers may not provide reimbursement for the
costs of treatment with Remune® or our other products. The FDA also may
not consider Remune® or our other products under development to be
appropriate candidates for accelerated approval, expedited review or fast track designation. The timing and substance of most FDA decisions are, as a practical matter, discretionary. Past
events have raised doubts in the minds of some persons at the FDA regarding our corporate
credibility and the viability of Remuneâ. Our efforts to re-establish our credibility may not succeed; but if they dont, the FDA approvals that are
indispensable if we are to survive and succeed may be delayed or denied despite any merit our
applications may have. Marketing any drug products outside of the United States will subject us to numerous and varying
foreign regulatory requirements governing the design and conduct of human clinical trials and
marketing approval. Additionally, our ability to export drug candidates outside the United States
on a commercial basis is subject to the receipt from the FDA of export permission, which may not be
available on a timely basis, if at all. Approval procedures vary among countries and can involve
additional testing, and the time required to obtain approval may be even longer than that required
to obtain FDA approval. Foreign regulatory approval processes include all of the risks associated
with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by
the health authorities of any other country, including those in Thailand. -15-




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Specifically, before we will be permitted to export Remune® to Thailand
for clinical use in that country, we need to meet a number of regulatory requirements. One of those
requirements is that we must ensure that we can manufacture Remune® at
our United States manufacturing facility in a manner that is in substantial compliance with
current United States GMP requirements. We must provide the FDA with credible scientific evidence
that Remune® would be safe and effective under the conditions of proposed
use in Thailand. Furthermore, the Thailand FDA must (i) formally request the FDA to approve export
of Remune® to Thailand, (ii) certify to the FDA that it is aware that
Remune® is not approved in the United States or in any of several other
countries with comprehensive drug review and approval systems and (iii) concur that the scientific
evidence presented to the FDA is credible scientific evidence that
Remune® will be reasonably safe and effective for use in Thailand. There
can be no assurance, however, that we will successfully meet any or all of these requirements for
the export of Remune®, and if we are unable to successfully meet all
regulatory requirements, we will not be permitted by the FDA to export
Remune® to Thailand for clinical use, even if the Thai government were to
approve Remune® for clinical use, which it has not yet done and might
never do. There can be no assurance that Trinity Medical Group USA, Inc. and its affiliate, Trinity
Medical Group, Co. Ltd., a Thailand company, our collaborative partner, will be successful in its
efforts to obtain regulatory approval from the Thailand FDA. Technological change and competition may render our potential products obsolete The pharmaceutical and biotechnology industries continue to undergo rapid change, and competition
is intense and we expect it to increase. Competitors may succeed in developing technologies and
products that are more effective or affordable than any that we are developing or that would render
our technology and products obsolete or noncompetitive. Many of our competitors have substantially
greater experience, financial and technical resources and production and development capabilities
than we. Accordingly, some of our competitors may succeed in obtaining regulatory approval for
products more rapidly or effectively than we, or technologies and products that are more effective
and/or affordable than any that we are developing. Our lack of commercial manufacturing and marketing experience may prevent us from successfully
commercializing products We have not manufactured any of our products in commercial quantities. We may not successfully make
the transition from manufacturing clinical trial quantities to commercial production quantities or
be able to arrange for contract manufacturing and this could prevent us from commercializing
products or limit our profitability from our products. Even if Remune® or
our other products are successfully developed and receives FDA approval, we have not demonstrated
the capability to manufacture Remune® or our other products in commercial
quantities. Except for Remuneâ (and, by extension, IR103), we have not
demonstrated the ability to manufacture any of our treatments in large-scale clinical quantities.
We rely on a third party for the final inactivation step of the Remune®
manufacturing process. If the existing manufacturing operations prove inadequate, there can be no
assurance that any arrangement with a third party can be established on a timely basis or that we
can establish other manufacturing capacity on a timely basis. We have no experience in the sales, marketing and distribution of pharmaceutical or biotechnology
products. Thus, our products may not be successfully commercialized even if they are developed and
approved for commercialization and even if we can manufacture them. In addition, our competitors
will have significantly greater marketing resources and power than we will. The manufacturing process of our products involves a number of steps and requires compliance with
stringent quality control specifications imposed by us and by the FDA. Moreover, our products can
be manufactured only in a facility that has undergone a satisfactory inspection and certification
by the FDA. For these reasons, we would not be able to quickly replace our manufacturing capacity
if we were unable to use our manufacturing facilities as a result of a fire, natural disaster
(including an earthquake), equipment failure or other difficulty, or if our manufacturing
facilities are deemed not in compliance with the GMP requirements, and the non-compliance could not
be rapidly rectified. Our inability or reduced capacity to manufacture our products would prevent
us from successfully commercializing our products. We may enter into arrangements with contract manufacturing companies to expand our own production
capacity in order to meet requirements for our products, or to attempt to improve manufacturing
efficiency. If we choose to contract for manufacturing services, we may encounter costs, delays and
/or other difficulties in producing, packaging and distributing our clinical trials and finished
product. Further, contract manufacturers must also operate in compliance with the GMP requirements;
failure to do so could result in, among other things, the disruption of our product supplies. Our
potential dependence upon third parties for the manufacture of -16-




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our products may adversely affect our profit margins and our ability to develop and deliver
products on a timely and competitive basis. Adverse determinations concerning product pricing, reimbursement and related matters could prevent
us from successfully commercializing any of our other products Our ability to earn revenue on any of our products will depend in part on the extent to which
patient reimbursement for the costs of the products and related treatments will be available from
government health administration authorities, private health coverage insurers, managed care

organizations and other organizations. Failure of patients to obtain appropriate cost reimbursement
may prevent us from successfully commercializing any of our other products. Third-party payers are
increasingly challenging the prices of medical products and services. If purchasers or users of any
of our other products are not able to obtain adequate reimbursement for the cost of using the
products, they may forego or reduce their use. Significant uncertainty exists as to the
reimbursement status of newly approved health care products and whether adequate third party
coverage will be available. In addition, many HIV patients live in poor countries, which may be
unable to afford to pay substantial sums for their citizens HIV therapies. Political pressure
exists to seek to require manufacturers of HIV therapies to supply them at below-market prices to
poor persons and/or poor countries, and this pressure may increase in the future. Our success may depend upon the acceptance of Remune® and IR103 by the
medical and HIV-activist communities Our ability to market and commercialize Remune® and IR103 would depend in
part on the acceptance and utilization of Remune® and IR103 by the
medical and HIV-activist communities. Physician inertia may be a problem for us as it is for many
emerging medical products companies. We will need to develop commercialization initiatives designed
to increase awareness about us and Remune® and IR103 among targeted
audiences, including public health and AIDS activists and community-based outreach groups in
addition to the investment community. Currently, we have not developed any commercialization
initiatives. Hazardous materials and environmental matters could expose us to significant costs We may be required to incur significant costs to comply with current or future environmental laws
and regulations. Although we do not currently manufacture commercial quantities of our product
candidates, we produce limited quantities of these products for our clinical trials. Our research
and development and manufacturing processes involve the controlled storage, use and disposal of
hazardous materials, biological hazardous materials and radioactive compounds. We are subject to
federal, state and local laws and regulations governing the use, manufacture, storage, handling and
disposal of these materials and some waste products. Although we believe that our safety procedures
for handling and disposing of these materials comply with the standards prescribed by these laws
and regulations, the risk of contamination or injury from these materials cannot be completely
eliminated. In the event of an incident, we could be held liable for any damages that result, and
any liability could exceed our resources. Current or future environmental laws or regulations may
have a material adverse effect on our operations, business and assets. Our patents and proprietary technology may not be enforceable and the patents and proprietary
technology of others may prevent us from commercializing products. Some of our patents expire
fairly soon We have a portfolio of 173 patents worldwide. Although we believe these patents to be protected and
enforceable, the failure to obtain meaningful patent protection for our potential products and
processes would greatly diminish the value of our potential products and processes. In addition, whether or not our patents are issued, or issued with limited coverage, others may
receive patents, which contain claims applicable to our products. Patents we are not aware of may
adversely affect our ability to develop and commercialize products. Also, our patents related to
HIV therapy have expiration dates that range from 2010 to 2017 and our patents related to
autoimmune diseases have expiration dates that range from 2010 to 2019. The limited duration of our
patents could diminish the value of our potential products and processes, particularly since we do
not expect to generate any revenue from our products sooner than the fourth quarter of 2008, if at
all. The patent positions of biotechnology and pharmaceutical companies are often highly uncertain and
involve complex legal and factual questions. Therefore, the breadth of claims allowed in
biotechnology and pharmaceutical patents cannot be predicted. We -17-




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also rely upon non-patented trade secrets and know how, and others may independently develop
substantially equivalent trade secrets or know how. We also rely on protecting our proprietary
technology in part through confidentiality agreements with our current and former corporate
collaborators, employees, consultants and some contractors. These agreements may be breached, and
we may not have adequate remedies for any breaches. In addition, our trade secrets may otherwise
become known or independently discovered by our competitors. Litigation may be necessary to defend
against claims of infringement, to enforce our patents and/or to protect trade secrets. Litigation
could result in substantial costs and diversion of management efforts regardless of the results of
the litigation. An adverse result in litigation could subject us to significant liabilities to
third parties, require disputed rights to be licensed or require us to cease using proprietary
technologies. Our products and processes may infringe, or be found to infringe, on patents not owned or
controlled by us. If relevant claims of third-party patents are upheld as valid and enforceable, we
could be prevented from practicing the subject matter claimed in the patents, or be required to
obtain licenses or redesign our products or processes to avoid infringement. Kevin Kimberlin beneficially owns approximately 16.9% of our outstanding common stock and 100% of
our outstanding Series A Convertible Preferred Stock and has the rights to acquire an additional
29,358,076 shares of our common stock, which could result in ownership of up to approximately 47.7%
of our outstanding shares and could allow him to control or influence stockholder votes Kevin B. Kimberlin, a member of our Board of Directors, together with his affiliates and/or related
parties, currently owns of record approximately 16.9% of our outstanding shares of common stock. He
and they also have the right to acquire, through the conversion of the 2007 Mortgage Note and
Series A Convertible Preferred Stock (Series A) and the exercise of options and warrants
beneficially owned by them, 29,358,076 additional shares. If his/their 2007 Mortgage Note, Series
A, options and warrants were to be converted and exercised in full, Mr. Kimberlin and his
affiliates and/or related parties would own approximately 47.7% of our outstanding shares of common
stock on a post-conversion/exercise basis. As a result of ownership of our common stock and Series A and the ability to acquire additional
shares, Mr. Kimberlin and his affiliates and/or related persons have the ability to influence, and
possibly control, substantially all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business combination transactions. The
Series A votes with the holders of common stock as a single class and is entitled to three votes
for each share of Series A equal to 2,064,438 votes in total. If your interests as a stockholder
are different from his interests, you may not agree with his decisions and you might be adversely
affected thereby. Mr. Kimberlin is also a secured creditor As collateral for the 2007 Mortgage Note, which has a principal amount of $5,741,000, parties
affiliated with and/or related to Kevin Kimberlin, one of our directors and our principal
stockholder, have a perfected security interest in our intellectual property. Pursuant to the
security agreement, we must comply with covenants with respect to our intellectual property. The
security interests and covenants could impair our ability to enter into collaborative and licensing
arrangements. We may be unable to enter into additional collaborations We are seeking additional collaborative arrangements to develop and commercialize our products. We
may not be able to negotiate collaborative arrangements on favorable terms in the future, or at
all, and our current or future collaborative arrangements may not be successful or continue. You could suffer substantial dilution of your investment as a result of past and future financings We will continue to have limited cash resources. Although our management recognizes the need to
secure additional financing, there can be no assurance that we will be successful in consummating
any financing transaction or, if consummated, that the terms and conditions of the financing will
not be unfavorable to us. In the last three years we have issued very large numbers of shares,
plus other securities convertible or exercisable for additional very large numbers of shares, in
order to raise cash as required for our survival. As a result, pre-existing stockholders have been
substantially diluted. -18-




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We have warrants and unit purchase options outstanding which, if exercised, will purchase
approximately 27,300,000 shares of our common stock and up to an additional 16,500,000 shares are
issuable upon conversion of our outstanding 2007 Mortgage Note and Series A Convertible Preferred
Stock, subject to adjustment. In addition, we may issue up to 1,250,000 shares of our common stock
to Trinity pursuant to our License and Collaboration Agreement. Issuance of these additional shares
could substantially dilute your interest in us. Any future near-term financings will almost certainly involve substantial dilution of outstanding
equity. Any subsequent offerings may also require the creation or issuance of a class or series of
stock that by its terms ranks senior to the common stock with respect to rights relating to
dividends, voting and/or liquidation. You could suffer substantial dilution of your investment if compensatory warrants and options to
purchase common stock are exercised for common stock As of March 31, 2005 we
had reserved approximately 7,747,000 shares of our common stock for
potential issuance upon the exercise of stock options (including options already granted under our
stock option plans, non-plan stock options already granted, and the still-available share reserve
under our stock option plans) or awards and purchases under our employee 401(k) match and employee
stock purchase plans. Issuance of these additional shares could substantially dilute your interest
in us. Our stock may become delisted and subject to penny stock rules, which may make it more difficult
for you to sell your securities. On April 29, 2005, we received notice from the Nasdaq Stock Market (Nasdaq) that we are not in
compliance with Nasdaq Marketplace Rule 4310(c)(4), which is a standard for continued listing on
the Nasdaq SmallCap Market, due to the fact that the closing price of our common stock was below
$1.00 for the last 30 consecutive trading days. In accordance with Nasdaq Marketplace Rule
4310(c)(8)(D), we have until October 26, 2005 to regain compliance by having our common stock close
at or above $1.00 for a minimum of ten consecutive trading days. Provided, however, that Nasdaq may
require that our common stock trade at or above $1.00 for up to twenty consecutive trading days
before deeming us to be in compliance with Nasdaq listing standards. If we are delisted from Nasdaq for any reason, our common stock might be considered a penny stock
under regulations of the Securities and Exchange Commission, or the SEC, and if so, would be
subject to rules that impose additional sales practice requirements on broker-dealers who buy and
sell our securities. The additional burdens imposed upon broker-dealers by these requirements
could discourage broker-dealers from effecting transactions in our common stock, which could
severely limit the market liquidity of the common stock and warrants and your ability to sell our
securities in the secondary market. We cannot assure you that we will be able to maintain our
listing on Nasdaq. Being delisted would also hurt our ability to raise additional financing. Legal proceedings could require us to pay substantial amounts of money and impair our operations Since July 2001, several complaints have been filed in the United States District Court for the
Southern District of California seeking an unspecified amount of damages on behalf of an alleged
class of persons, who purchased shares of our common stock at various times between May 17, 1999
and July 6, 2001. The complaints have been consolidated into a single action under the name In re
Immune Response Securities Litigationby order of the Court, and a consolidated, amended complaint
was filed in July 2003. The consolidated, amended complaint names us and certain of our former
officers as defendants, as well as Agouron Pharmaceuticals, Inc. and one of its officers. The
consolidated, amended complaint alleges that we, Agouron and/or such officers violated federal
securities laws by misrepresenting and failing to disclose certain information about the results of
clinical trials of Remuneâ. On October 31, 2003 the defendants filed
motions to dismiss the consolidated, amended complaint. The court has not yet ruled on the
motions, and the timing of the final resolution of these proceedings is uncertain. The range of
possible resolutions of these proceedings could include judgments against us or our former officers
or settlements that could require substantial payments by us, which could have a material adverse
impact on our financial position, results of operations and cash flows. These proceedings also
might require substantial attention of our management team and therefore, regardless of whether we

win or lose the litigation, divert their time and attention from our business and operations. -19-




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Our certificate of incorporation and bylaws include provisions that could make attempts by
stockholders to change management more difficult The approval of 662/3% of our voting stock is required to approve specified
transactions and to take specified stockholder actions, including the calling of special meetings
of stockholders and the amendment of any of the anti-takeover provisions, including those providing
for a classified board of directors, contained in our certificate of incorporation. Further,
pursuant to the terms of our stockholder rights plan, we have distributed a dividend of one
preferred stock purchase right for each outstanding share of common stock. These rights will cause
substantial dilution to the ownership of a person or group that attempts to acquire us on terms not
approved by our Board of Directors and may have the effect of deterring hostile takeover attempts.
The substantial aggregate equity positions of Mr. Kimberlin and his affiliates and/or related
parties would make a hostile takeover attempts very unlikely. The practical effect of these
provisions is to require a party seeking control of us to negotiate with our Board of Directors,
which could delay or prevent a change in control. These provisions could limit the price that
investors might be willing to pay in the future for our securities and make attempts by
stockholders to change management more difficult. We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation
Law, which prohibits us from engaging in a business combination with an interested stockholder
for a period of three years after the date of the transaction in which the person first becomes an
interested stockholder, unless the business combination is approved in a prescribed manner. The
application of Section 203 also could have the effect of delaying or preventing a change of
control. We have a new management team. If we lose our key personnel or are unable to attract and retain
additional personnel, we may be unable to successfully develop our technology Since 2002, we have replaced most of the key members of our executive management. There can be no
assurances that we will not lose additional members of our executive management team or, if so,
whether we would be able to hire adequate replacements. Additionally, our ability to conduct business, raise additional financing and commercialize
Remune® or our other products may be hindered if we lose additional
executive officers or experienced personnel with historical knowledge of our business,
transactions, science and technology. In addition, recruiting and retaining qualified scientific personnel to assist in scaling up our
manufacturing facilities and performing future research and development work will be critical to
our success. It has been particularly difficult for us to retain personnel in light of the
performance of our common stock and the incurrence of substantial net operating losses. We do not
have sufficient personnel to fully execute our business plan, and there is currently a shortage of
skilled executives and scientists, which is likely to continue. As a result, competition for
experienced executives and scientists from numerous companies and academic and other research
institutions may limit our ability to hire or retain new executives and other qualified personnel
on acceptable terms. If we fail to attract and retain sufficient qualified personnel, we may not be
able to develop or implement our technology. Product liability exposure may expose us to significant liability We face an inherent business risk of exposure to product liability and other claims and lawsuits in
the event that the development or use of our technology or prospective products is alleged to have
resulted in adverse effects. We may not be able to avoid significant liability exposure. We may not
have sufficient insurance coverage, and we may not be able to obtain sufficient coverage at a
reasonable cost. An inability to obtain product liability insurance at acceptable cost or to
otherwise protect against potential product liability claims could prevent or inhibit the
commercialization of our products. A product liability claim could hurt our financial performance.
Even if we avoid liability exposure, significant costs could be incurred that could hurt our
financial performance and condition. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk We invest our excess cash primarily in U.S. government securities and money market accounts.
These instruments have maturities of two years or less when acquired. We do not utilize derivative
financial instruments, derivative commodity instruments or other market risk sensitive instruments,
positions or transactions. Furthermore, our debt is at fixed rates. Accordingly, we believe that,
while the instruments we hold are subject to changes in the financial standing of the issuer of
such -20-




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securities, we are not subject to any material risks arising from changes in interest rates,
foreign currency exchange rates, commodity prices, equity prices or other market changes that
affect market risk sensitive instruments. 
 Item 4. Controls and Procedures Dr. John N. Bonfiglio, our principal executive officer and Michael K. Green, our principal
financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as
defined in Securities Exchange Act Rule 13a-15(e)) have concluded that, as of March 31, 2005, our
disclosure controls and procedures are effective. 
 PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings There is no new information since our most recent Form 10-K report. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On February 9, 2005, as part of the inducement for him to join us as Chairman of the Board, we
granted to Robert E. Knowling, Jr. stock options to puchase 750,000 shares of common stock at an
exercise price of $1.21 per share. 200,000 options vested immediately and the remaining 550,000
options vest in equal daily installments over three years, subject to his continuing service as
Chairman. The options were exempt from Securities Act registration by virtue of Section 4(2) of
the Securities Act, although we intend later to register the options and underlying shares on Form
S-8. These 750,000 options were not granted under any stockholder-approved option plan. Mr.
Knowling will not receive cash compensation for his Chairman services, nor will he receive the
standard new director stock option grant. 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information On February 9, 2005, the Board of Directors appointed Robert E. Knowling, Jr. to our Board of
Directors as Chairman of the Board to replace James Glavin, who is retiring in June 2005. 
 Item 6. Exhibits ExhibitNumber
    
    Description of Document10.167 (1)**
    
    Letter Agreement dated February 3, 2005 between us and Robert E. Knowling,
Jr. (date of last signature was February 8, 2005).10.168 (1)**
    
    Inducement Stock Option Grant Notice and Inducement Stock Option Agreement
dated February 9, 2005 between us and Robert E. Knowling, Jr.31.1
    
    Certification of the Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).
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ExhibitNumber
    
    Description of Document31.2
    
    Certification of the Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).32.1
    
    Certification pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(b).32.2
    
    Certification pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(b).
   (1)
    
    Incorporated by reference to the Exhibit of the same number filed with the
Companys December 31, 2004 Form 10-K.**
    
    Indicates management contract or compensatory plan or arrangement. 
 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized. THE IMMUNE RESPONSE CORPORATIONDate: May 13, 2005
    
    By:
    
    /s/ Michael K. GreenMichael K. Green,Chief Financial Officer
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Exhibit Index ExhibitNumber
    
    Description of Document31.1
    
    Certification of the Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).31.2
    
    Certification of the Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).32.1
    
    Certification pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(b).32.2
    
    Certification pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(b).