|UNITED STATES 
      SECURITIES AND EXCHANGE COMMISSION 
      WASHINGTON, DC 20549
|-----------------------------------------------------------------------------------



|FORM 10-Q
|---------



|(Mark One)
|----------



|[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
      OF THE SECURITIES EXCHANGE ACT OF 1934.
|--- | ----------------------------------------------------------------------------------------------



|For the quarterly period ended March
      31, 2002
|---------------------------------------------------



|[_] | TRANSITION REPORT PURSUANT TO SECTION 13 OR
      15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|--- | -----------------------------------------------------------------------------------------------



|For the transition period from ________________
      to ______________
|-----------------------------------------------------------------------



|Commission file number0-18006
|-----------------------------



|THE IMMUNE RESPONSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
|--------------------------------------------------------------------------------------

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



|5935 Darwin Court, Carlsbad, CA 92008
      (Address of Principal Executive Offices)
      (Zip Code)
|-----------------------------------------------------------------------------------------------------



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



|Indicate by check mark whether the Registrant (1) has filed
      all reports required to be filed by Section 13 or 15(d) of the Securities
      Exchange Act of 1934 during the preceding 12 months (or for such shorter
      period that the Registrant was required to file such reports), and (2) has
      been subject to such filing requirements for the past 90 days.     Yes  X      No ___
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|As of April 30, 2002, 35,591,549 shares of
common stock were outstanding.
|-------------------------------------------------------------------------



---





|THE IMMUNE RESPONSE CORPORATION
|-------------------------------



|FORM 10-Q
|---------



|QUARTERLY REPORT
|----------------



|TABLE OF CONTENTS
|-----------------

|                                                                                                                            |     
|--------------------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                            | Page
|PART I - FINANCIAL INFORMATION                                                                                              |     
|                                                                                                                            |     
|Item 1.   Financial Statements                                                                                              |     
|                                                                                                                            |     
|                                                                                                                            |     
|                                                                                                                            |     
|                                                                                                                            |     
|                                                                                                                            |     
|                                                                                                                            |     
|Item 2.Managements
      Discussion and Analysis of Financial Condition
                   and
      Results of Operations | 12  
|                                                                                                                            |     
|Item 3.   Quantitative
      and Qualitative Disclosures about Market Risks                                                 | 23  
|                                                                                                                           
|PART II - OTHER INFORMATION                                                                                                
|                                                                                                                            |     
|Item 1.    Legal
      Proceedings                                                                                          | 23  
|                                                                                                                            |     
|Item 4.    Submission
      of Matters to a Vote of Security Holders                                                        | 24  
|                                                                                                                            |     
|Item 6.    Exhibits
      and Reports on Form 8-K                                                                           | 24  
|                                                                                                                            |     
|Signature                                                                                                                   | 25  



| | 2 | 
| | - | 

---





|Part I. Financial Information
|-----------------------------

|Item 1. Financial Statements
|----------------------------



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

|                                                                     |                      |                        
|-------------------------------------------------------------------- | -------------------- | -----------------------
|                                                                     | March 31,
      2002 | December 31,
      2001
|                                                                     | (unaudited)          |                        
|Assets                                                               |                      |                        
|Current assets:                                                     
|Cash
      and cash equivalents                                      | $       2,178        |                        
|Marketable
      securities - available-for-sale                     | 82                   |                        
|Other
      current assets                                           | 552                  |                        
|                                                                     |                      |                        
|Total
      current assets                                           | 2,812                |                        
|Property and equipment,
      net                                    | 8,645                |                        
|Licensed technology                                                  | 3,355                |                        
|Investment in MicroGenomics,
      Inc.                              | 562                  |                        
|Deposits and other assets                                            | 854                  |                        
|                                                                     |                      |                        
|Total
      assets                                                   | $      16,228        |                        
|                                                                     |                      |                        
|                                                                    
|Liabilities and Stockholders
      Equity                          
|Current liabilities:                                                
|Accounts
      payable                                               | $           892      |                        
|Accrued
      expenses                                               | 1,210                |                        
|Short-term
      secured promissory note, related party              | 2,000                |                        
|Current
      portion of equipment notes payable                     | 662                  |                        
|Current
      portion of deferred revenue                            | 43                   |                        
|                                                                     |                      |                        
|Total
      current liabilities                                      | 4,807                |                        
|Convertible notes
      payable, net, related party                  | 2,281                |                        
|Equipment notes payable                                              | 940                  |                        
|Long-term deferred revenue                                           | 279                  |                        
|                                                                     |                      |                        
|Total
      liabilities                                              | 8,307                |                        
|                                                                     |                      |                        
|                                                                    
|Stockholders equity:                                               
|Preferred
      stock, 5,000,000 shares authorized; no shares issued
|and
      outstanding                                                |                     |                        
|Common
      stock, $.0025 par value, 65,000,000 shares authorized, 
|35,572,149
      and 35,572,099 shares issued and outstanding at    
|March
      31, 2002 and December 31, 2001, respectively             | 89                   |                        
|Warrants                                                             | 2,037                |                        
|Additional
      paid-in capital                                     | 238,339              |                        
|Accumulated
      other comprehensive income                         | 7                    |                        
|Accumulated
      deficit                                            | (232,551             | )                      
|                                                                     |                      |                        
|Total
      stockholders equity                                     | 7,921                |                        
|                                                                     |                      |                        
|Total
      liabilities and stockholders equity                     | $     16,228         |                        
|                                                                     |                      |                        



|See accompanying notes.
|-----------------------



| | 3 | 
| | - | 

---





|THE IMMUNE RESPONSE CORPORATION
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 
      (in thousands, except share data)
      (unaudited)
|------------------------------------------------------------------------------------------------------------------------------------------------

|                                                    |                                    |     
|--------------------------------------------------- | ---------------------------------- | ----
|                                                    | Three months ended March
      31,
|                                                    | 2002                               | 2001
|Revenues:                                           |                                    |     
|Contract
      research revenue                     | $               7                  |     
|Licensed
      research revenue                     | 2                                  |     
|                                                    |                                    |     
|                                                    | 9                                  |     
|                                                    |                                    |     
|                                                   
|Expenses:                                          
|Research
      and development                      | 3,808                              |     
|General
      and administrative                    | 1,147                              |     
|                                                    |                                    |     
|                                                    | 4,955                              |     
|                                                    |                                    |     
|                                                   
|Other revenue and expense:                         
|Investment
      income                             | 14                                 |     
|Interest
      expense                              | (120                               | )   
|Accretion
      of convertible notes payable        | (128                               | )   
|                                                    |                                    |     
|Net loss                                            | (5,180                             | )   
|Accretion of preferred
      stock                  |                                   |     
|Preferred dividends                                 |                                   |     
|                                                    |                                    |     
|Net loss applicable to common
      stockholders    | $       (5,180                     | )   
|                                                    |                                    |     
|                                                   
|Loss per common share - basic
      and diluted:   
|Net loss                                            | $         (0.15                    | )   
|                                                    |                                    |     
|Net loss
      applicable to common stockholders    | $         (0.15                    | )   
|                                                    |                                    |     
|Weighted average number of shares
      outstanding
|used
      in per share calculations                | 35,572,106                         |     
|                                                    |                                    |     
|                                                   



|See accompanying notes.
|-----------------------



| | 4 | 
| | - | 

---





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

|                                                                                  |                                    |     
|--------------------------------------------------------------------------------- | ---------------------------------- | ----
|                                                                                  | Three months ended March
      31,
|                                                                                  | 2002                               | 2001
|Operating activities:                                                             |                                    |     
|Net loss                                                                          | $     (5,180                       | )   
|Adjustments
      to reconcile net loss to net cash used in operating activities:
|Depreciation
      and amortization                                               | 558                                |     
|Deferred
      revenue                                                            | 191                                |     
|Recognition
      of deferred revenue from prior periods                          |                                   |     
|Accretion
      of convertible note payable and long-term accrued interest        | 188                                |     
|Deferred
      rent expense                                                       |                                   |     
|Changes
      in operating assets and liabilities:                               
|Other
      current assets                                                        | 309                                |     
|Accounts
      payable                                                            | (223                               | )   
|Accrued
      expenses                                                            | (64                                | )   
|                                                                                  |                                    |     
|Net
      cash used in operating activities                                       | (4,221                             | )   
|                                                                                  |                                    |     
|                                                                                 
|                                                                                 
|Investing activities:                                                            
|Sale
      of marketable securities, net                                          | 176                                |     
|Purchase
      of property and equipment                                          |                                   |     
|Other
      assets                                                                | (38                                | )   
|                                                                                  |                                    |     
|Net
      cash provided by investing activities                                   | 138                                |     
|                                                                                  |                                    |     
|                                                                                 
|Financing activities:                                                            
|Principal
      payments under equipment notes payable                            | (169                               | )   
|Proceeds
      from issuance of convertible note payable and warrant              | 2,000                              |     
|Proceeds
      from issuance of short-term secured promissory note                | 2,000                              |     
|Net proceeds
      from common stock purchases through employee plans             |                                   |     
|                                                                                  |                                    |     
|Net
      cash provided by (used in) financing activities                         | 3,831                              |     
|                                                                                  |                                    |     
|Net decrease in cash
      and cash equivalents                                   | (252                               | )   
|Cash and cash equivalents at
      beginning of year                              | 2,430                              |     
|                                                                                  |                                    |     
|Cash and cash equivalents
      at end of period                                  | $      2,178                       |     
|                                                                                  |                                    |     
|Supplemental disclosure
      of cash flow information:                          
|Interest
      paid                                                               | $           56                     |     
|                                                                                  |                                    |     
|                                                                                 
|Supplemental disclosure of noncash
      investing and financing activities:     
|Unrealized
      loss on marketable securities                                    | $          (13                     | )   
|                                                                                  |                                    |     
|Accretion
      of convertible preferred stock                                    | $      
                          |     
|                                                                                  |                                    |     
|Payment
      of convertible preferred stock dividends with common stock          | $                                 |     
|                                                                                  |                                    |     



|See accompanying notes.
|-----------------------



| | 5 | 
| | - | 

---





|THE IMMUNE RESPONSE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002
|---------------------------------------------------------------------------------------------------



|1. | Basis of Presentation
|-- | ---------------------



| | The condensed consolidated financial
      statements of The Immune Response Corporation and its wholly-owned subsidiary
      (the Company) for the three months ended March 31, 2002 and
      2001 are unaudited. All significant intercompany accounts and transactions
      have been eliminated in consolidation. These financial statements reflect
      all adjustments, consisting of only normal recurring adjustments which,
      in the opinion of management, are necessary to fairly present the consolidated
      financial position as of March 31, 2002, and the consolidated results of
      operations for the three months ended March 31, 2002 and 2001. The results
      of operations for the three months ended March 31, 2002 are not necessarily
      indicative of the results to be expected for the year ended December 31,
      2002. For more complete financial information, these financial statements
      and the notes thereto should be read in conjunction with the consolidated
      audited financial statements for the year ended December 31, 2001 included
      in the Companys Form 10-K filed with the Securities and Exchange Commission.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|2. | Organization, Liquidity and
      Going Concern
|-- | -----------------------------------------------



| | Organization 
      The Immune Response Corporation, a Delaware corporation, is a biopharmaceutical
      company developing immune-based therapies to induce T-cell responses for
      the treatment of HIV, autoimmune diseases and cancer. In addition, the Company
      has developed and patented a novel technology to be applied to any gene
      in order to increase expression of that gene.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Liquidity and going concern
      
      The consolidated financial statements have been prepared assuming that the
      Company will continue as a going concern. The Company has operating and
      liquidity concerns due to historically reporting significant net losses
      and negative cash flows from operations. As of March 31, 2002, the Company
      had an accumulated deficit of $232.6 million and current liabilities exceeded
      current assets by approximately $2.0 million. In May 2002 (May Closing),
      the $2.0 million short-term secured promissory note issued in March 2002
      was repaid with proceeds from the issuance of a $4.0 million convertible
      note and warrant. See Notes 9, 10 and 13.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | In July 2001, the Company received notification
      of termination by Agouron Pharmaceuticals, Inc., a Pfizer company (Pfizer),
      of the development and commercial collaboration for REMUNE®.
      As a result, we expect no additional revenue unless it is earned through
      new research and development agreements. Due to this termination and delays
      in manufacturing scale-up operations, we have adjusted our operational timelines
      and delayed expenditures and activities, where prudent, to conserve resources.
      Management continues to review the valuation of its assets related to this
      collaboration, and we are seeking a collaborator to fund continued development.
      See Note 12.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Management is currently evaluating equity
      financing alternatives to meet our future capital requirements. In addition,
      we are seeking collaborators for all of our technologies. We estimate that
      our available cash resources, along with the net proceeds of approximately
      $2.0 million from $4.0 million received at the May Closing, will be sufficient
      to fund our planned operations into June 2002. In any event, we will need
      to raise substantial additional capital to fund our operations beyond such
      time. At the time of the May Closing, the Company did not have reserved
      and available a sufficient number of authorized but unissued shares of common
      stock for the purpose of issuing common stock upon the exercise in full
      of the May Closing warrant. The Company has agreed to promptly take all
      corporate action, as may be necessary, to increase its authorized but unissued
      shares of common stock to provide for a sufficient number of shares to cover
      the exercise in full of the May Closing warrant. A proposal to increase
      the Companys authorized shares of common stock is to be considered
      for approval by our stockholders at the upcoming Annual Meeting of stockholders
      scheduled for June 17, 2002. We also are seeking approval for a 1-for-4
      reverse stock split. Approval of either of these proposals would provide
      us with the flexibility to raise additional funds through equity arrangements.
      If
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6 | 
| | - | 

---





| | we are unable to raise adequate capital,
      it would have a material adverse effect on us and would cause us to cease
      operations, at which time we will not be able to satisfy our obligations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | OnMay 20,
      2002, Transamerica Technology Finance Corporation (Transamerica)
      delivered to us a notice indicating that in their view our financial condition
      constitutes a material adverse event, which in turn constituted an event
      of default, under the Master Loan and Security Agreement (the Loan
      Agreement). Under the terms of the Loan Agreement, upon the occurrence
      of an event of default, Transamerica may, in its sole discretion, declare
      all of our debt owed to them under the Loan Agreement (at present approximately
      $1.5 million) immediately due and payable and take possession of our office
      and laboratory equipment which collateralizes such debt. Of the approximately
      $1.5 million currently outstanding under the Loan Agreement, $662,000 is
      recorded as a current liability on our financial statements included in
      this Form 10-Q, and the balance of $940,000 is recorded as long-term debt
      as of March 31, 2002.
      In connection with and as a result of the notice delivered to us by Transamerica
      (as described above), we will seek to negotiate with Transamerica in an
      effort to restructure the Loan Agreement and to avoid Transamerica accelerating
      our outstanding debt and possessing our office and laboratory equipment.
      There can be no assurance, however, that we will be able to reach an agreement
      with Transamerica or, if such agreement is reached, that the terms of such
      agreement will not be less favorable to us than the current terms of the
      Loan Agreement. If any such current negotiations prove unsuccessful and
      Transamerica exercises its right to accelerate our debt and possess our
      office and laboratory equipment, and we are unable to refinance the amounts
      which would then be due and owing under the Loan Agreement, it would have
      a material adverse effect on the Company and would result in us having to
      cease operations and being unable to satisfy our obligations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|3. | Contingencies
|-- | -------------



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



|4. | Long-Lived Assets
|-- | -----------------



| | In August 2001, the Financial Accounting
      Standards Board (FASB) issued Statement of Financial Accounting
      Standards (FAS) No. 144, Accounting for the Impairment
      or Disposal of Long-Lived Assets. FAS No. 144 supersedes FAS No. 121,
      Accounting for the Impairment of Long-Lived Assets, and the
      accounting and reporting provisions of Accounting Principles Board Opinion
      No. 30, Reporting the Results of Operations - Reporting the Effects
      of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
      Occurring Events and Transactions, for the disposal of a segment of
      a business. The provisions of FAS No. 144 are effective for financial statements
      issued for fiscal years beginning after December 15, 2001. The Company adopted
      FAS No. 144 as of January 1, 2002. FAS No. 144 requires that certain long-lived
      assets, excluding investments under the equity method of accounting, be
      reviewed for impairment whenever events or changes in circumstances indicate
      that the carrying amount of an asset may not be fully recoverable based
      on expected undiscounted cash flows that result from the use and eventual
      disposition of the asset. The amount of any impairment is measured as the
      difference between the carrying value and the fair value of the impaired
      asset. As of March 31, 2002, the Company believes that there has not been
      any impairment of the Companys long-lived assets under the scope of
      FAS No. 144.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 7 | 
| | - | 

---





|5. | Recent Accounting Pronouncement
|-- | -------------------------------



| | In August 2001, the FASB issued FAS
      No. 143, Accounting for Asset Retirement Obligations. This statement
      addresses financial accounting and reporting for obligations associated
      with the retirement of tangible long-lived assets and the associated asset
      retirement costs. It applies to all entities and legal obligations associated
      with the retirement of long-lived assets that result from the acquisition,
      construction, development and/or normal operation of long-lived assets,
      except for certain obligations of lessees. This statement amends FAS No.
      19, Financial Accounting and Reporting by Oil and Gas Producing Companies,
      and is effective for financial statements issued for fiscal years beginning
      after June 15, 2002. Management has not yet determined the impact of the
      adoption of FAS No. 143 on the Companys financial position or results
      of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|6. | Investment in MicroGenomics,
      Inc.
|-- | ---------------------------------------



| | In December 2000, the Company acquired
      a 25% ownership interest in MicroGenomics, Inc., (MGI), a privately
      held microbial genomics company, of which Dr. Dennis J. Carlo, President
      and CEO of the Company, is a 6.4% stockholder and the chairman of the board
      of directors of MGI. As part of the agreement, the Company issued 540,540
      unregistered shares of its common stock valued at $2.0 million in exchange
      for MGIs preferred stock equal, on an as converted basis, to 25% of
      the equity capitalization of MGI on a diluted basis. Additionally, as part
      of the agreement, the Company agreed that should the common stock issued
      to MGI be worth less than $3.0 million on the one-year anniversary of the
      closing, the Company would issue additional stock up to that value. The
      Company originally recorded its investment in MGI at cost, including the
      $1.0 million stock valuation guarantee. The Company has accounted for this
      investment under the equity method of accounting.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | In December 2001, the Company and MGI
      agreed to settle the $1.0 million stock valuation guarantee by reducing
      our ownership interest in MGI to 6.25% of MGIs equity capitalization
      on a fully diluted basis. No additional shares of common stock were required
      to be issued pursuant to the revised agreement. In conjunction with the
      revised agreement and the reduced ownership percentage, the Company decreased
      the carrying value of our investment by the $1.0 million stock liability
      and an additional adjustment for impairment of $1.2 million.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|7. | Net Loss Per Share
|-- | ------------------



| | Net loss per share for the three months
      ended March 31, 2002 and 2001 is computed using the weighted average number
      of shares of common stock outstanding during the period. Outstanding stock
      options, warrants and convertible notes payable are not included in the
      calculation of earnings per share because their effect would be anti-dilutive.
      Therefore, there is no difference between basic and diluted net loss per
      share.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|8. | Comprehensive Income
|-- | --------------------



| | The Company accounts for comprehensive
      income in accordance with FAS No. 130, Reporting Comprehensive Income.
      The components of comprehensive income are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                    |                                     |     
| | -------------------------------------------------- | ----------------------------------- | ----
| |                                                    | Three Months Ended 
      March 31,
| | (in
      thousands)                               | 2002                                | 2001
| | Net loss                                           | $(5,180                             | )   
| | Net unrealized loss
      on marketable securities | (13                                 | )   
| |                                                    |                                     |     
| | Comprehensive loss                                 | $(5,193                             | )   
| |                                                    |                                     |     



|9. | Convertible Notes Payable, Related
      Party
|-- | ----------------------------------------------



| | In November 2001 (November Closing),
      the Company privately placed a $2.0 million convertible note and warrant
      to an accredited investor. Furthermore, the investor and the Company have
      agreed that, upon the achievement of certain commercial and technical milestones,
      the Company may sell and the investor may buy additional notes and warrants,
      under certain conditions. The investor, Kevin Kimberlin Partners, L.P. (KKP),
      is an affiliate of Kevin Kimberlin, a director and major stockholder of
      the Company. The Company plans to use substantially all of the net proceeds
      from the transaction for product development, working capital and other
      general corporate purposes. The
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 8 | 
| | - | 

---





| | Company has agreed to file a registration
      statement on Form S-3 with the Securities and Exchange Commission to cover
      the resale of the underlying shares of common stock on or after six months
      from the date of the closing or sooner if the Company files to register
      securities for its own account or the account of any others.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The note bears interest at a rate of
      8% per year and is secured by the intellectual property of the Company.
      The note matures on November 9, 2004, but is convertible into shares of
      the Companys common stock at any time, at the option of the investor,
      initially at a conversion price of $1.15 per share. The conversion price
      is based on a 20% discount to the average closing bid price of the Companys
      common stock for the ten-day trading period ended November 8, 2001. The
      value of the conversion discount for the convertible note is approximately
      $444,000, all of which was recognized as interest expense in the fourth
      quarter of 2001. The warrant is initially exercisable for up to 1,733,703
      shares of the Companys common stock with an exercise price of $1.44
      per share. The exercise price is based on the average closing bid price
      of the Companys common stock for the ten-day trading period ended
      November 8, 2001. The value of the warrant is approximately $2.3 million
      and has been allocated between the relative fair values of the note and
      the warrant. The resultant fair value is being amortized over the three-year
      term of the note. Both the conversion price of the note and exercise price
      of the warrant provide anti-dilution protection for the investor.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | In February 2002 (February Closing),
      the Company privately placed an additional $2.0 million convertible note
      and warrant to Oshkim Limited Partnership (Oshkim) by amending
      the Note Purchase Agreement and Intellectual Property Security Agreement
      with KKP from the November Closing. Oshkim is an affiliate of Kevin Kimberlin.
      The amendments added Oshkim as a party to the agreements and allowed us
      to issue the note and warrant in the February Closing to Oshkim on different
      terms than the note and warrant issued in the November Closing.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The February Closing note bears interest
      at a rate of 8% per year and is secured by the intellectual property of
      the Company. The note matures on February 14, 2005, but is convertible into
      shares of the Companys common stock at any time, at the option of
      the investor, initially at a conversion price of $1.1655 per share. The
      conversion price was based on a 112.5% premium to the average closing bid
      price of the Companys common stock for the five-day trading period
      ended February 13, 2002. The warrant is initially exercisable for up to
      1,716,001 shares of the Companys common stock with an exercise price
      of $1.036 per share. The exercise price is based on the average closing
      bid price of the Companys common stock for the five-day trading period
      ended February 13, 2002. The value of the warrant is approximately $1.7
      million and has been allocated between the relative fair values of the note
      and the warrant. The resultant fair value is being amortized over the three-year
      term of the note. Exercise of the warrant was subject to limitations under
      the NASD Rules for insider transactions, 20% ownership and change in control.
      As part of the February Closing, pursuant to a letter agreement, KKP had
      agreed to not convert or exercise the note or warrant received in the November
      Closing unless stockholder approval was obtained. All of these limitations
      were released upon stockholder approval obtained at a special meeting of
      the stockholders held in April 2002. Both the conversion price of the note
      and exercise price of the warrant now provide anti-dilution protection for
      the investor following the stockholder approval that occurred in April.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | At the May Closing, the Company privately
      placed a $4.0 million convertible note and warrant to Oshkim pursuant to
      the amended Note Purchase Agreement and Intellectual Property Security Agreement
      with similar terms to the November Closing. Proceeds of approximately $2.0
      million were used to repay the short-term secured promissory note issued
      in March 2002 plus interest which was due May 5, 2002. The remaining proceeds
      will be used for product development, working capital and other general
      corporate purposes. See Notes 10 and 13.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | At the time of the May Closing, the
      Company did not have reserved and available a sufficient number of authorized
      but unissued shares of common stock for the purpose of issuing common stock
      upon the exercise in full of the May Closing warrant. The Company has agreed
      to promptly take all corporate action, as may be necessary, to increase
      its authorized but unissued shares of common stock to provide for a sufficient
      number of shares to cover the exercise in full of the May Closing warrant.
      A proposal to increase the Companys authorized shares of common stock
      is to be considered for approval by our stockholders at the upcoming Annual
      Meeting in June. We also are seeking approval for a 1-for-4 reverse stock
      split. Approval of either of these proposals would provide us with the flexibility
      to raise additional funds through equity arrangements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | If we are unable to obtain stockholder
      approval of either proposal at the Annual Meeting, we will be unable to
      complete any subsequent equity or convertible debt closings. If we cannot
      raise additional funds by completing subsequent equity or convertible debt
      closings, we will be forced to look for sources of alternative funding which,
      even if available, may be on substantially less favorable terms. If we are
      unable to raise adequate capital, it would have a
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 9 | 
| | - | 

---





| | material adverse effect on us and would
      cause us to cease operations, at which time we will not be able to satisfy
      our obligations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------



|10. | Short-Term Secured Promissory
      Note, Related Party
|--- | -------------------------------------------------------



| | In March 2002, the Company issued a
      short-term secured promissory note to Oshkim for $2.0 million. The note
      bears interest at 8%, with a maturity date of May 5, 2002 and is secured
      by the intellectual property of the Company. As part of the May Closing,
      the short-term secured promissory note was repaid with interest of approximately
      $19,000. See Notes 9 and 13.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|11. | Redeemable, Convertible Preferred
      Stock
|--- | ---------------------------------------------



| | As required by the terms of the Companys
      Series F Redeemable, Convertible Preferred Stock (Series F Stock),
      in April 2001, the Company converted 160.7 shares of the 200 shares outstanding
      of its Series F Stock into 4,208,924 shares of common stock of the Company;
      and in May 2001, the Company redeemed the remaining 39.3 shares of Series
      F Stock for cash of $2,783,045. As of May 2001, the Company had no issued
      and outstanding shares of Series F Stock.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The Series F Stock paid a dividend of
      7.5% per annum. In general, the dividend was payable in shares of common
      stock or cash at the Companys option. For the three months ended March
      31, 2001 67,480 shares of the Companys common stock were issued as
      dividends to the Series F stockholders. The Company has an effective registration
      statement with the Securities and Exchange Commission covering the resale
      of up to 2,430,471 shares of the common stock issued on the conversion of
      the Series F Stock.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|12. | REMUNE®Collaboration with Pfizer Inc.
|--- | -------------------------------------



| | During June 1998, the Company and Pfizer
      entered into a binding agreement under which the Company agreed to exclusively
      license to Pfizer certain rights relating to REMUNE®,
      its immune-based therapy under development for the treatment of HIV infection.
      In July 2001, the Company received notification of the termination by Pfizer
      of the continued development and commercialization of REMUNE®.
      The Company regained full rights to REMUNE®
      as a result of Pfizers decision to end the collaboration. In addition,
      the Company recognized approximately $7.7 million of the remaining deferred
      revenue from the collaboration in the third quarter of 2001. License revenue
      of $968,000 was recognized for the three months ended March 31, 2001 prior
      to the termination.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|13. | Subsequent Events
|--- | -----------------



| | In April 2002, the Company obtained,
      for purposes of NASD Rules, stockholder approval at a special meeting of
      the stockholders for the private placement transactions completed in November
      2001 and February 2002 and future private placements, pursuant to the Note
      Purchase Agreement with KKP and Oshkim.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | OnMay 20,
      2002, Transamerica Technology Finance Corporation (Transamerica)
      delivered to us a notice indicating that in their view our financial condition
      constitutes a material adverse event, which in turn constituted an event
      of default, under the Master Loan and Security Agreement (the Loan
      Agreement). Under the terms of the Loan Agreement, upon the occurrence
      of an event of default, Transamerica may, in its sole discretion, declare
      all of our debt owed to them under the Loan Agreement (at present approximately
      $1.5 million) immediately due and payable and take possession of our office
      and laboratory equipment which collateralizes such debt. Of the approximately
      $1.5 million currently outstanding under the Loan Agreement, $662,000 is
      recorded as a current liability on our financial statements included in
      this Form 10-Q, and the balance of $940,000 is recorded as long-term debt
      as of March 31, 2002.
      In connection with and as a result of the notice delivered to us by Transamerica
      (as described above), we will seek to negotiate with Transamerica in an
      effort to restructure the Loan Agreement and to avoid Transamerica accelerating
      our outstanding debt and possessing our office and laboratory equipment.
      There can be no assurance, however, that we will be able to reach an agreement
      with Transamerica or, if such agreement is reached, that the terms of such
      agreement will not be less favorable to us than the current terms of the
      Loan Agreement. If any such current negotiations prove unsuccessful and
      Transamerica exercises its right to accelerate our debt and possess our
      office and laboratory equipment, and we are unable to refinance the amounts
      which would then be due and owing under the Loan Agreement, it would have
      a material adverse effect on the Company and would result in us having to
      cease operations and being unable to satisfy our obligations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | At the May Closing, the Company privately
      placed a $4.0 million convertible note and warrant to Oshkim pursuant to
      the amended Note Purchase Agreement and Intellectual Property Security Agreement
      with similar terms to the November Closing. Proceeds of approximately $2.0
      million were used to repay the short-term secured promissory note
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10 | 
| | -- | 

---





| | issued in March 2002 plus interest which
      was due May 5, 2002. The remaining proceeds will be used for product development,
      working capital and other general corporate purposes. See Notes 9 and 10.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The May Closing note bears interest
      at a rate of 8% per year and is secured by the intellectual property of
      the Company. The note matures on May 3, 2005, but is convertible into shares
      of the Companys common stock at any time, at the option of the investor,
      initially at a conversion price of $.4312 per share. The conversion price
      is based on a 20% discount to the average closing bid price of the Companys
      common stock for the ten-day trading period ended May 2, 2002. The value
      of the conversion discount for the convertible note is approximately $360,000,
      all of which will be recognized as interest expense in the second quarter
      of 2002. The warrant is initially exercisable for up to 9,276,437 shares
      of the Companys common stock with an exercise price of $.54 per share.
      The exercise price is based on the average closing bid price of the Companys
      common stock for the ten-day trading period ended May 2, 2002. The value
      of the warrant is approximately $4.2 million and will be allocated between
      the relative fair values of the note and the warrant. The resultant fair
      value will be amortized over the three-year term of the note. Both the conversion
      price of the note and exercise price of the warrant provide anti-dilution
      protection for the investor.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | At the time of the May Closing, the
      Company did not have reserved and available a sufficient number of authorized
      but unissued shares of common stock for the purpose of issuing common stock
      upon the exercise in full of the May Closing warrant. The Company has agreed
      to promptly take all corporate action, as may be necessary, to increase
      its authorized but unissued shares of common stock to provide for a sufficient
      number of shares to cover the exercise in full of the May Closing warrant.
      A proposal to increase the Companys authorized shares of common stock
      is to be considered for approval by our stockholders at the upcoming Annual
      Meeting in June. We also are seeking approval for a 1-for-4 reverse stock
      split. Approval of either of these proposals would provide us with the flexibility
      to raise additional funds through equity arrangements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | If we are unable to obtain stockholder
      approval of either proposal at the Annual Meeting, we will be unable to
      complete any subsequent equity or convertible debt closings. If we cannot
      raise additional funds by completing subsequent equity or convertible debt
      closings, we will be forced to look for sources of alternative funding which,
      even if available, may be on substantially less favorable terms. If we are
      unable to raise adequate capital, it would have a material adverse effect
      on us and would cause us to cease operations, at which time we will not
      be able to satisfy our obligations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 11 | 
| | -- | 

---





|Item 2.      Managements
      Discussion and Analysis of Financial Condition and Results of Operations
|--------------------------------------------------------------------------------------------------------



|This discussion contains forward-looking
statements concerning our operating results 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. The
following should be read in conjunction with the Condensed Consolidated Financial
Statements and Notes thereto included elsewhere in this Form 10-Q. These forward-looking
statements speak only as of the date hereof. Except for our ongoing obligation to
disclose material information as required by federal securities laws, we undertake no
obligation to publicly release the result of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Summary
      We are a biopharmaceutical company developing immune-based therapies to
      induce specific T-cell responses for the treatment of HIV, autoimmune diseases
      and cancer. In addition, we have developed and patented a novel technology
      to be applied to any gene in order to increase expression of that gene.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|We have not been profitable since inception and
had an accumulated deficit of $232.6 million as of March 31, 2002. To date, we have not
recorded any revenues from the sale of products. Revenues recorded through March 31, 2002
were primarily received from contract research, licensing of technology, milestone
achievement payments and investment income. We expect our operating losses to continue,
as well as to have quarter-to-quarter fluctuations, some of which could be significant,
due to research, development, manufacturing scale-up and clinical trial activities. We
cannot provide assurance that we will be able to generate sufficient product revenue to
become profitable at all or on a sustained basis.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Management is currently evaluating equity
financing alternatives to meet our future capital requirements. In addition, we are
seeking collaborators for all of our technologies. We estimate that our available cash
resources as of March 31, 2002, along with approximately $2.0 million of net proceeds
(after repayment of the $2.0 million short-term secured promissory note issued in March
2002 with interest) from the issuance of a $4.0 million convertible note and warrant in
May 2002 (May Closing), will be sufficient to fund our planned operations into June
2002. In any event, we will need to raise substantial additional capital to fund our
operations beyond such time. If we are unable to raise adequate capital, it would have a
material adverse effect on us and would cause us to cease operations, at which time we
will not be able to satisfy our obligations. See Notes 2, 9, 10 and 13 to the Condensed
Consolidated Financial Statements.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|In February 2002 (February Closing), we
privately placed a $2.0 million convertible note and warrant to Oshkim Limited
Partnership (Oshkim) by amending the Note Purchase Agreement and Intellectual Property
Security Agreement previously entered into with Kevin Kimberlin Partners, L.P. (KKP) in
November 2001 (November Closing). Oshkim is an affiliate of Kevin Kimberlin, a member
of our Board of Directors. The amendments added Oshkim as a party to the agreements and
allowed us to issue the note and warrant in the February Closing to Oshkim on different
terms than the note and warrant issued to KKP at the November Closing. The February
Closing note bears interest at a rate of 8% per year and is secured by our intellectual
property. The note matures on February 14, 2005, but is convertible into shares of our
common stock at any time, at the option of the investor, initially at a conversion price
of $1.1655 per share. The warrant is initially exercisable for up to 1,716,001 shares of
our common stock with an exercise price of $1.036 per share. The conversion price was
based on a 112.5% premium to the average closing bid price of our common stock for the
five-day trading period ended February 13, 2002. Both the conversion price of the note
and exercise price of the warrant provide anti-dilution protection for the investor.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|In March 2002, we issued a short-term secured
promissory note to Oshkim for $2.0 million. The note bears interest at 8%, with a
maturity date of May 5, 2002 and is secured by our intellectual property. As part of the
May Closing discussed below, the short-term secured promissory note was repaid with
interest of approximately $19,000.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|In April 2002, the Company obtained, for
purposes of NASD Rules, stockholder approval at a special meeting of the stockholders for
the private placement transactions completed in November 2001 and February 2002 and
future private placements, pursuant to the Note Purchase Agreement with KKP and Oshkim.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|OnMay 20,
      2002, Transamerica Technology Finance Corporation (Transamerica)
      delivered to us a notice indicating that in their view our financial condition
      constitutes a material adverse event, which in turn constituted an event
      of default, under the Master Loan and Security Agreement (the Loan
      Agreement). Under the terms of the Loan Agreement, upon the occurrence
      of an event of default, Transamerica may, in its sole discretion, declare
      all of our debt owed to them under the Loan Agreement (at present approximately
      $1.5 million) immediately due and payable and take possession of our office
      and laboratory equipment which collateralizes such debt. Of the approximately
      $1.5 million currently outstanding under the Loan Agreement, $662,000 is
      recorded as a current liability on our financial statements included in
      this Form 10-Q, and the balance of $940,000 is recorded as long-term debt
      as of March 31, 2002.
      In connection with and as a result of the notice delivered to us by Transamerica
      (as described above), we will seek to negotiate with Transamerica in an
      effort to restructure the Loan Agreement and to avoid Transamerica accelerating
      our outstanding debt and possessing our office and laboratory equipment.
      There can be no assurance, however, that we will be able to reach an agreement
      with Transamerica or, if such agreement is reached, that the terms of such
      agreement will not be less favorable to us than the current terms of the
      Loan Agreement. If any such current negotiations prove unsuccessful and
      Transamerica exercises its right to accelerate our debt and possess our
      office and laboratory equipment, and we are unable to refinance the amounts
      which would then be due and owing under the Loan Agreement, it would have
      a material adverse effect on the Company and would result in us having to
      cease operations and being unable to satisfy our obligations.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | 12 | 
| | -- | 

---







|At the May Closing, the Company privately placed
a $4.0 million convertible note and warrant to Oshkim pursuant to the amended Note
Purchase Agreement and Intellectual Property Security Agreement with similar terms to the
November Closing. Proceeds of approximately $2.0 million were used to repay the March
2002 short-term secured promissory note with interest due May 5, 2002. The remaining
proceeds will be used for product development, working capital and other general
corporate purposes. The May Closing note bears interest at a rate of 8% per year and is
secured by the intellectual property of the Company. The note matures on May 3, 2005, but
is convertible into shares of the Companys common stock at any time, at the option of
the investor, initially at a conversion price of $.4312 per share. The conversion price
is based on a 20% discount to the average closing bid price of the Companys common stock
for the ten-day trading period ended May 2, 2002. The warrant is initially exercisable
for up to 9,276,437 shares of the Companys common stock with an exercise price of $.54
per share. The exercise price is based on the average closing bid price of the Companys
common stock for the ten-day trading period ended May 2, 2002. Both the conversion price
of the note and exercise price of the warrant provide anti-dilution protection for the
investor.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|At the time of the May Closing, the Company did
not have reserved and available a sufficient number of authorized but unissued shares of
common stock for the purpose of issuing common stock upon the exercise in full of the May
Closing warrant. The Company has agreed to promptly take all corporate action, as may be
necessary, to increase its authorized but unissued shares of common stock to provide for
a sufficient number of shares to cover the exercise in full of the May Closing warrant. A
proposal to increase the Companys authorized shares of common stock is to be considered
for approval by our stockholders at the upcoming Annual Meeting of stockholders scheduled
for June 17, 2002.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|Results of Operations We recorded revenues for
the quarter ended March 2002 of $9,000 as compared to $1.0 million for the same period in
2001. Revenues for 2001 were primarily attributed to deferred revenues recognized under
the agreement with Pfizer. The decrease in revenues in 2002 is due to the termination by
Pfizer of our development and commercialization collaboration for REMUNE® in July 2001.
As a result, we expect no additional revenues, unless it is earned through existing
corporate collaborations or new research and development agreements, if any. We have not
received any revenues from the commercial sale of products and do not expect to derive
revenue from the sale of products for the foreseeable future.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Our research and development expenditures of $3.8 million
      during the first quarter of 2002 decreased from $5.3 million during the
      same period in 2001. The decrease in research and development spending of
      $1.5 million from 2001 to 2002 was due primarily to adjusting our operational
      timelines and delaying expenditures and activities of the manufacturing
      scale-up of REMUNE®. Our REMUNE®
      clinical spending should remain somewhat consistent with the prior quarters,
      but could increase if we entered into any new research and development collaborations.
      However, spending associated with our scale-up of the manufacturing process
      for REMUNE® and the cost of producing clinical
      supplies for ongoing and future REMUNE® studies
      more than likely will decrease in the foreseeable future or until we raise
      additional capital or enter into a new research and development collaboration.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 13 | 
| | -- | 

---





|We expect future clinical study spending for our
other development programs to remain consistent with the first quarter of 2002 unless we
initiate new clinical studies. We expect the next quarters research and development
expenditures to remain constant or decrease from the current quarter. Overall, we expect
future research and development expenditures to remain constant or decrease, but quarter
to quarter fluctuations may occur due to the timing of expenditures. If we enter into
additional collaborations, research and development expenditures would increase over the
current level; but we cannot provide assurance that we will enter into any
collaborations, that existing collaborations will not end, or that we will be able to
obtain other financing needed to continue our research and development efforts.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|General and administrative expenses for the
first quarter of 2002 were $1.1 million as compared to $1.2 million for the same period
in 2001. This decrease in spending was primarily attributed to higher professional fees
in the prior year as compared to the current quarter. We expect quarterly general and
administrative expenses for the remainder of 2002 to remain consistent with first quarter
levels with possible increases due to higher professional fees.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Investment income decreased by $720,000 to
$14,000 for the quarter ended March 31, 2002 from $734,000 during the same period in
2001. The decrease in investment income in 2002 from 2001 was primarily due to overall
lower cash balances in interest bearing investments. Also contributing to the decrease
was the sale of approximately $156,000 of an equity security in 2001. Interest expense
increased by $30,000 for the quarter ended March 31, 2002 compared to the same period in
2001 because of the convertible notes issued in November 2001 and February 2002 and the
short-term unsecured promissory note issued in March 2002.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Liquidity and Capital Resources Since our
inception through March 31, 2002, we have financed our activities primarily from public
and private sales of equity, funding from collaborations with corporate partners,
investment income and convertible notes. At March 31, 2002, we had a working capital
deficit of $2.0 million, including $2.3 million of cash, cash equivalents and marketable
securities. This compares with working capital as of December 31, 2001 of $500,000,
including $2.7 million of cash, cash equivalents and marketable securities. Working
capital decreased as a result of the cost of operations of $4.2 million. This decrease in
working capital was offset by the sale of a $2.0 million convertible note and warrant at
the February Closing and the issuance of the $2.0 million short-term secured promissory
note in March 2002.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|We will need to raise additional funds to conduct research
      and development, preclinical studies and clinical trials necessary to bring
      potential products to market and to establish manufacturing and marketing
      capabilities. We anticipate that for the foreseeable future, the scale-up
      of the manufacturing process for REMUNE®
      and the cost of producing clinical supplies for ongoing and futurE REMUNE®
      studies will continue to represent a significant portion of our overall
      expenditures. Overall, future research and development expenditures are
      expected to remain constant or decrease from current levels. Future spending
      for research and development may see an 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
      $1.0 million for 2002 related to the scale-up of the manufacturing process.
      Other anticipated costs with respect to REMUNE®,
      including investment in inventory, will depend on many factors including
      the need for additional clinical trials and other factors which will influence
      our determination of the appropriate continued investment of our financial
      resources in this program.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Our future capital requirements will depend on
many factors including, whether or not we receive stockholder approval at the Annual
Meeting of stockholders to be held in June. We are seeking approval of an increase to the
number of shares of our authorized common stock and also approval to provide our Board
the discretion to effect a 1-for-4 reverse stock split. Approval of either of these
proposals would provide us with the flexibility to raise funds through equity
arrangements. Other capital requirement factors include continued scientific progress in
our research and development programs, the scope and results of preclinical studies and
clinical trials, the time and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting and enforcing patent claims, the costs involved in
defending claims in class actions, competing technological and market developments, the
cost of manufacturing scale-up and inventories, effective commercialization activities
and arrangements and other factors not within our control. We intend to seek additional
funding through additional research and development agreements with suitable corporate
collaborators, extension of an existing corporate collaboration and through public or
private financings, if available. However, we cannot provide assurance that such
collaboration arrangements or any public or private financings will be available on
acceptable terms, if at all. If stockholder approval is obtained at the Annual Meeting of
stockholders and if we raise funds through future equity arrangements, further dilution
to stockholders will result.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 14 | 
| | -- | 

---





|As of May 3, 2002, we did not have reserved and
available any authorized but unissued shares of common stock for any future equity or
convertible debt offerings. If we are unable to obtain stockholder approval of either
proposal at the Annual Meeting, we will be unable to complete any subsequent equity or
convertible debt closings. If we cannot raise additional funds by completing subsequent
equity or convertible debt closings, we will be forced to look for sources of alternative
funding which, even if available, may be on substantially less favorable terms. If we are
unable to raise adequate capital, we may be required to delay, reduce the scope of, or
eliminate one or more of our research or development programs, or take other measures to
cut costs, would have a material adverse effect on us and would cause us to cease
operations, at which time we will not be able to satisfy our obligations. We estimate
that our available cash resources as of March 31, 2002, along with approximately $2.0
million of net proceeds (after repayment of the $2.0 million short-term secured
promissory note issued in March 2002 with interest) from the issuance of a $4.0 million
convertible note and warrant at the May Closing, will be sufficient to fund our planned
operations into June 2002. In any event, we will need to raise substantial additional
capital to fund our operations beyond such time. We cannot provide assurance, however,
that changes in our research and development plans or other changes affecting our
operating expenses will not result in the expenditure of such resources before such time.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|OnMay 20,
      2002, Transamerica Technology Finance Corporation (Transamerica)
      delivered to us a notice indicating that in their view our financial condition
      constitutes a material adverse event, which in turn constituted an event
      of default, under the Master Loan and Security Agreement (the Loan
      Agreement). Under the terms of the Loan Agreement, upon the occurrence
      of an event of default, Transamerica may, in its sole discretion, declare
      all of our debt owed to them under the Loan Agreement (at present approximately
      $1.5 million) immediately due and payable and take possession of our office
      and laboratory equipment which collateralizes such debt. Of the approximately
      $1.5 million currently outstanding under the Loan Agreement, $662,000 is
      recorded as a current liability on our financial statements included in
      this Form 10-Q, and the balance of $940,000 is recorded as long-term debt
      as of March 31, 2002.
      In connection with and as a result of the notice delivered to us by Transamerica
      (as described above), we will seek to negotiate with Transamerica in an
      effort to restructure the Loan Agreement and to avoid Transamerica accelerating
      our outstanding debt and possessing our office and laboratory equipment.
      There can be no assurance, however, that we will be able to reach an agreement
      with Transamerica or, if such agreement is reached, that the terms of such
      agreement will not be less favorable to us than the current terms of the
      Loan Agreement. If any such current negotiations prove unsuccessful and
      Transamerica exercises its right to accelerate our debt and possess our
      office and laboratory equipment, and we are unable to refinance the amounts
      which would then be due and owing under the Loan Agreement, it would have
      a material adverse effect on the Company and would result in us having to
      cease operations and being unable to satisfy our obligations.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Critical Accounting Policies Principles of
consolidation The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and transactions
have been eliminated.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Investments in other entities The Company uses
the equity method to account for investments in corporate entities in which it has a
voting interest of 20% to 50%, or in which it otherwise has the ability to exercise
significant influence. Under the equity method, the investment is originally recorded at
cost and adjusted to recognize the Companys share of net earnings or losses of the
investee, limited to the extent of the Companys investment in the investee. Changes in
these estimates may have a material effect on our financial statements.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Risks and uncertainties Substantially all of the
Companys revenues were previously derived from a collaborative arrangement with Pfizer.
However, in July 2001, the Company received notification of termination of the
development and commercial collaboration with Pfizer.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|The Company faces additional risks associated
with biopharmaceutical companies whose products are in various stages of development.
These risks include, among others, the Companys need for additional financing to
complete its research and development programs and commercialize its technologies.
Financing may not be available to the Company when required or under favorable terms.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | 15 | 
| | -- | 

---





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



|Impairment of long-lived assets The Company
evaluates potential impairment of long-lived assets in accordance with FAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. FAS No. 144 requires
that certain long-lived assets, excluding investments under the equity method of
accounting, be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable based on
expected undiscounted cash flows that result from the use and eventual disposition of the
asset. The amount of any impairment is measured as the difference between the carrying
value and the fair value of the impaired asset. As of March 31, 2002, the Company
believes that there has not been any impairment of the Companys long-lived assets under
the scope of FAS No. 144. Changes in our estimates in the realizability of our long-lived
assets may have a material effect on our financial statements.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Risk Factors
      You should carefully consider the
risks described below before making an investment decision. The risks and uncertainties
described below are not the only ones facing us. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair our business.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|If any of the following risks actually occur,
our business could be adversely affected. In those cases, the trading price of our common
stock could decline, and you may lose all or part of your investment.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Our Current Cash Position, Additional Financing
Requirements and Limited Access to Financing Will Adversely Affect Our Ability to Develop
Products and Continue Operations We will need to raise additional funds to continue day
to day 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. A failure to raise additional funds, would
require us to scale back or eliminate some or all of our research and development
programs or license to third parties products or technologies that we would otherwise
seek to develop ourselves and would cause us to cease operations, at which time we will
not be able to satisfy our obligations. We estimate that our existing capital resources,
along with net proceeds of approximately $2.0 million from the issuance of a $4.0 million
convertible note and warrant in May 2002 (after repayment of the $2.0 million short-term
secured promissory note issued in March 2002 with interest), will be sufficient to fund
our planned operations into June 2002. In any event, we will need to raise substantial
additional capital to fund our operations beyond such time. If we raise funds through
equity arrangements, further dilution to stockholders will result. If we are unable to
raise money before such time, we will be unable to pay our debts and will be forced to
cease operations and potentially enter into bankruptcy.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|As of May 3, 2002, the Company did not have
reserved and available a sufficient number of authorized but unissued shares of common
stock for the purpose of issuing common stock upon the exercise in full of the May
Closing warrant or for any potential future equity or convertible debt offerings. The
Company has agreed to promptly take all corporate action, as may be necessary, to
increase its authorized but unissued shares of common stock to provide for a sufficient
number of shares to cover the exercise in full of the May Closing warrant. A proposal to
increase the Companys authorized shares of common stock is to be considered for approval
by our stockholders at the upcoming Annual Meeting of stockholders scheduled for June 17,
2002.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Although we anticipate that development of REMUNE®
      will continue to represent a significant portion of our overall expenditures,
      costs related to the development of REMUNE®
      decreased in 2001. Other anticipated costs relating to the development of
      REMUNE® will depend on many factors, in particular
      our ability to establish a new collaborative partner to replace Pfizer.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

| |  | 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;
|- |  | ----------------------------------------------------------------------------

| |  | competing technological and market developments;
|- |  | ------------------------------------------------



| | 16 | 
| | -- | 

---





| |  | the cost of manufacturing scale-up;
|- |  | -----------------------------------

| |  | effective commercialization activities and arrangements;
|- |  | --------------------------------------------------------

| |  | the costs of defending against lawsuits; and
|- |  | --------------------------------------------

| |  | other factors not within our control.
|- |  | -------------------------------------



|Our access to capital could be limited if we are
not capable of continued progress in:
|--------------------------------------------------------------------------------------

| |  | our research and development programs;
|- |  | --------------------------------------

| |  | our preclinical and clinical trials;
|- |  | ------------------------------------

| |  | obtaining regulatory approvals; or
|- |  | ----------------------------------

| |  | scaling up manufacturing.
|- |  | -------------------------



|It could also be limited by overall financial
market conditions, applicable NASD rules and federal and state securities laws, the
collateralization by a perfected security interest in our intellectual property for the
convertible notes issued in November 2001, February 2002 and May 2002 and the effect of
potential anti-dilutive adjustments to the November 2001, February 2002 and May 2002
convertible notes and warrants.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|OnMay 20,
      2002, Transamerica Technology Finance Corporation (Transamerica)
      delivered to us a notice indicating that in their view our financial condition
      constitutes a material adverse event, which in turn constituted an event
      of default, under the Master Loan and Security Agreement (the Loan
      Agreement). Under the terms of the Loan Agreement, upon the occurrence
      of an event of default, Transamerica may, in its sole discretion, declare
      all of our debt owed to them under the Loan Agreement (at present approximately
      $1.5 million) immediately due and payable and take possession of our office
      and laboratory equipment which collateralizes such debt. Of the approximately
      $1.5 million currently outstanding under the Loan Agreement, $662,000 is
      recorded as a current liability on our financial statements included in
      this Form 10-Q, and the balance of $940,000 is recorded as long-term debt
      as of March 31, 2002.
      In connection with and as a result of the notice delivered to us by Transamerica
      (as described above), we will seek to negotiate with Transamerica in an
      effort to restructure the Loan Agreement and to avoid Transamerica accelerating
      our outstanding debt and possessing our office and laboratory equipment.
      There can be no assurance, however, that we will be able to reach an agreement
      with Transamerica or, if such agreement is reached, that the terms of such
      agreement will not be less favorable to us than the current terms of the
      Loan Agreement. If any such current negotiations prove unsuccessful and
      Transamerica exercises its right to accelerate our debt and possess our
      office and laboratory equipment, and we are unable to refinance the amounts
      which would then be due and owing under the Loan Agreement, it would have
      a material adverse effect on the Company and would result in us having to
      cease operations and being unable to satisfy our obligations.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|You Could Suffer Substantial Dilution of Your
Investment as the Result of Adjustments to the Convertible Notes and Warrants Issued in
November 2001, February 2002 and May 2002 or if We Issue Additional Securities in the
Future In November 2001, we issued a convertible note and warrant, which are initially
convertible and exercisable, respectively, for 1,733,703 shares of Common Stock each. The
numbers of shares, as well as the applicable conversion or exercise price, as the case
may be, are subject to adjustment in the event that we issue securities below the
applicable conversion or exercise price. This would dilute your interest in our company.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|In February 2002, we issued a convertible note
and warrant, which are initially convertible and exercisable, respectively, for 1,716,001
shares of Common Stock each. The numbers of shares, as well as the applicable conversion
or exercise price, as the case may be, are subject to adjustment in the event that we
issue securities below the applicable conversion or exercise price. This would dilute
your interest in our company.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|In May 2002, we issued a convertible note and
warrant, which are initially convertible and exercisable, respectively, for 9,276,438
shares of Common Stock each. The numbers of shares, as well as the applicable conversion
or exercise price, as the case may be, are subject to adjustment in the event that we
issue securities below the applicable conversion or exercise price. This would dilute
your interest in our company.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|We may issue additional convertible notes,
warrants or other securities in the future. The number of underlying shares of Common
Stock and the terms of the securities are not determinable at this time, but would dilute
your interest in our company.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|An Existing Stockholder Beneficially Owns
Approximately 6.2% of our Common Stock and has the Rights to Acquire an Additional
25,452,284 Shares of our Common Stock Which Could Allow him to Influence Stockholder
Votes Kevin Kimberlin, a member of our Board of Directors, and his affiliates currently
beneficially own approximately 6.2% of our outstanding shares of Common Stock and have
the right to acquire 25,452,284 additional shares of our Common Stock through the
conversion of notes and exercise of warrants beneficially owned by them. If the notes and
warrants were to be converted and exercised, Mr. Kimberlin and his affiliates would own
approximately 45% of our outstanding shares of
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 17 | 
| | -- | 

---





|Common Stock on a post-conversion/exercised
basis. As a result of his ownership of our Common Stock and ability to acquire additional
shares, Mr. Kimberlin and his affiliates would be able to control substantially all
matters requiring approval by our stockholders, including the election of directors and
the approval of mergers or other business combination transactions. If your interests as
a stockholder are different from his interests as both a director and a stockholder, you
may not agree with his decisions and therefore you might be adversely affected thereby.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Our Stock May Become Subject to Penny Stock
Rules, Which may make it More Difficult for You to Sell Your Shares due to the
Notification from Nasdaq Regarding Noncompliance with Nasdaq Listing Qualifications Since
March 12, 2002 our common stock has traded below $1.00 per share on The Nasdaq National
Market. Nasdaq listing rules provide that if the closing bid price of a companys stock
is below $1.00 for more than thirty consecutive trading days, the company faces possible
delisting from Nasdaq. Additionally, Nasdaq listing rules require that a companys
stockholder equity be at least $4.0 million, and after October 2002, be at least $10.0
million. Due to our common stock trading below $1.00 per share for more than 30
consecutive days as of April 23, 2002, we received notification from Nasdaq that we may
be delisted from The Nasdaq National Market if we cannot demonstrate compliance with the
NASD rule by July 24, 2002. In order to regain compliance, the closing bid price per
share for the Companys common stock must be $1.00 or more for a minimum of ten
consecutive trading days during any period through July 24, 2002. Alternatively, before
July 24, 2002, we could apply to transfer our securities to The Nasdaq SmallCap Market,
which could extend the period to comply with the minimum $1.00 bid per share requirement
until October 22, 2002. If we are delisted from Nasdaq, our common stock will be
considered a penny stock under regulations of the Securities and Exchange Commission and
would therefore be subject to rules that impose additional sales practice requirements on
broker-dealers who 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 your ability to sell our securities in the secondary market. We cannot
assure you that we will be able to maintain our listing on the Nasdaq. This would have
the effect of limiting our ability to raise additional financing.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|We May Implement a 1-for-4 Reverse Stock Split.
The Effect of a Reverse Split on the Trading Price of our Common Stock is Unpredictable
Our Board of Directors has requested that the stockholders grant it discretion to effect
a 1-for-4 reverse stock split. This proposal is to be considered for approval by our
stockholders at the upcoming Annual Meeting of stockholders scheduled for June 17, 2002.
Although the theoretical effect of a reverse stock split is to increase the per share
price of Common Stock, the actual price effect of a reverse stock split is difficult to
predict. It is possible that the post-split trading price of our stock could be below the
level one would expect based on the proportional effect of the split alone.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|Pfizer has Terminated Its Collaboration with Us
and We May Have To Delay or Abandon REMUNE® 
      According to its terms, our agreement with Pfizer was terminated in July
      2001. Because our agreement with Pfizer has been terminated, it might require
      us to delay or abandon REMUNE®. The termination
      of our agreement with Pfizer resulted in the discontinuation of a clinical
      trial and has had a material adverse effect on our stock price, and therefore
      our ability to successfully raise additional capital has been affected.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|We May Be Unable to Enter Into Additional
Collaborations or Maintain Existing Ones We are seeking additional collaborative
arrangements to develop and commercialize our products. We may not be able to negotiate
collaborative arrangements on favorable terms, or at all, in the future and our current
or future collaborative arrangements may not be successful or continue. Investors, which
are affiliated with a board member, have a perfected security interest in our
intellectual property as collateral for the November 2001, February 2002 and May 2002
convertible
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 18 | 
| | -- | 

---





|notes. Pursuant to an Intellectual Property
Security Agreement with the investors, we must comply with certain covenants with respect
to our intellectual property. The security interest and covenants could impair our
ability to enter into collaborative and licensing arrangements. Under the 1998 Schering
collaboration for gene delivery technology, Scherings obligation to fund expired on
December 31, 1999. Without funding arrangements, we may have to abandon some of our
products under development.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Our Failure to Develop and Commercialize
Products Successfully May Cause Us to Cease Operations We have not completed the
development of any products. Our failure to develop and commercialize products
successfully may cause us to cease operations. Our potential therapies under development
will require significant additional research and development efforts and regulatory
approvals prior to potential commercialization.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The discontinuation of a previous Phase 3 trial of REMUNE®
      in May 1999 due to lack of efficacy has had a material adverse effect on
      us. The most recent pivotal trial of REMUNE®
      conducted by our former collaborative partner, Pfizer, was discontinued,
      and has had a material adverse effect on us. We cannot assure you that any
      future trials of REMUNE® will be conducted.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Our other therapies and technologies are at earlier stages
      of development than REMUNE® and may not be
      shown to be safe or efficacious or ever receive regulatory approval. Some
      of our technologies have not yet been tested in humans. Regulatory authorities
      may not permit human testing of potential products based on these technologies.
      Even if human testing is permitted, the products based on these technologies
      may not be successfully developed or be shown to be safe and effective.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|Unacceptable toxicity or side effects may 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. The
appearance of any unacceptable toxicity or side effects could interrupt, limit, delay or
abort the development of any of our products or, if previously approved, necessitate
their withdrawal from the market.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Our Patents and Proprietary Technology May Not
Provide Us with Any Benefit and the Patents and Proprietary Technology of Others May
Prevent Us from Commercializing Products A failure to obtain meaningful patent protection
for our potential products and processes would greatly diminish the value of our
potential products and processes.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Investors, which are affiliated with a board
member, have a perfected security interest in substantially all of our intellectual
property as collateral for the November 2001, February 2002 and May 2002 convertible
notes.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The patent positions of biotechnology and
pharmaceutical companies can be highly uncertain and involve complex legal and factual
questions. Therefore, the breadth of claims allowed in biotechnology and pharmaceutical
patents cannot be predicted. We also rely upon non-patented trade secrets and know how,
and others may independently develop substantially equivalent trade secrets or know how.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|We also rely on protecting our proprietary
technology in part through confidentiality agreements with our current and former
corporate collaborators, employees, consultants and certain contractors. These agreements
may be breached, and we may not have adequate remedies for any breach. In addition, our
trade secrets may otherwise become known or independently discovered by our competitors.
Our products and processes may infringe, or be found to infringe, on patents not owned or
controlled by us. If relevant claims of third-party patents are upheld as valid and
enforceable, we could be prevented from practicing the subject matter claimed in the
patents, or would be required to obtain licenses or redesign our products or processes to
avoid infringement. Licenses may not be available at all or on commercially reasonable
terms, and we may not
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 19 | 
| | -- | 

---





|be able to redesign our products or processes to
avoid infringement. Litigation may be necessary to defend against claims of infringement,
to enforce our patents or to protect trade secrets. Litigation could result in
substantial costs and diversion of management efforts regardless of the results of the
litigation. An adverse result in litigation could subject us to significant liabilities
to third parties, require disputed rights to be licensed or require us to cease using
certain technologies.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Our History of Operating Losses and Our
Expectations of Continuing Losses May Hurt Our Ability to Continue Operations As of March
31, 2002 we had a consolidated accumulated deficit of $232.6 million. We have not
generated revenues from the commercialization of any product. We expect to incur
substantial net operating losses over the next several years, which may 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.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The Lengthy Product Approval Process and
Uncertainty of Government Regulatory Requirements May Delay or Prevent Us From
Commercializing Products Clinical testing, manufacture, promotion, export and sale of our
products are subject to extensive regulation by numerous governmental authorities in the
United States, principally the FDA, and corresponding state and foreign regulatory
agencies, including those in Thailand. This regulation may delay or prevent us from
commercializing products. Non-compliance with applicable requirements can result in,
among other things, fines, injunctions, seizure of products, total or partial suspension
of product marketing, failure of the government to grant premarket approval, withdrawal
of marketing approvals and criminal prosecution.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



|Among the other requirements for regulatory
approval is the requirement that prospective manufacturers conform to the FDAs Good
Manufacturing Practices, or GMP. 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 with the FDAs GMP requirements subjects
manufacturers to possible FDA regulatory action. We or our contract manufacturers, if
any, may not be able to maintain compliance with the FDAs GMP requirements on a
continuing basis. Failure to maintain compliance could have a material adverse effect on
us.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The FDA has not designated expanded access
protocols for REMUNE® as treatment protocols. The FDA may not determine that
REMUNE® meets all of the FDAs criteria for use of an investigational drug for
treatment use. Even if REMUNE® is allowed for treatment use, third party payers may not
provide reimbursement for the costs of treatment with REMUNE®.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The FDA may not consider REMUNE®
      or any other of our products under development to be appropriate candidates
      for accelerated approval, expedited review or fast track designation.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Marketing any drug products outside of the
United States will subject us to numerous and varying foreign regulatory requirements
governing the design and conduct of human clinical trials and marketing approval.
Additionally, our ability to export drug candidates outside the United States on a
commercial basis is subject to the receipt of export licenses, which may not be available
on a timely basis, if at all. Approval procedures vary among countries and can involve
additional testing, and the time required to obtain approval may differ from that
required to obtain FDA approval. Foreign regulatory approval
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 20 | 
| | -- | 

---





|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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Technological Change and Competition May Render
Our Potential Products Obsolete The biotechnology industry continues to undergo rapid
change, and competition is intense and is expected to increase. Competitors may succeed
in developing technologies and products that are more effective or affordable than any
that we are developing or that would render our technology and products obsolete and
noncompetitive. Many of our competitors have substantially greater experience, financial
and technical resources and production, marketing and development capabilities than us.
Accordingly, some of our competitors may succeed in obtaining regulatory approval for
products more rapidly or effectively than us.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Our Lack of Commercial Manufacturing and
Marketing Experience May Prevent Us from Successfully Commercializing Products 
      We have not manufactured any of our product candidates 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. Even if REMUNE® is successfully
      developed and receives FDA approval, we have not demonstrated the capability
      to manufacture REMUNE® in commercial quantities.
      Except for REMUNE®, we have not demonstrated
      THE ability to manufacture our treatments in large-scale clinical quantities
      either. 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 products. Thus, our products may not be successfully
commercialized even if they are developed and approved for commercialization.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|The manufacturing process of our products
involves a number of steps and requires compliance with stringent quality control
specifications imposed by us and by the FDA. Moreover, our products can only be
manufactured in a facility that has undergone a satisfactory inspection by the FDA. For
these reasons, we would not be able quickly to replace our manufacturing capacity if we
were unable to use our manufacturing facilities as a result of a fire, natural disaster
(including an earthquake), equipment failure or other difficulty, or if such facilities
are deemed not in compliance with the FDAs 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 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 and encounter delays or difficulties in
establishing relationships with manufacturers to produce, package and distribute our
finished products, clinical trials, market introduction and subsequent sales of the
products would be delayed. Further, contract manufacturers must also operate in
compliance with the FDAs GMP requirements; failure to do so could result in, among other
things, the disruption of product supplies. Our potential dependence upon third parties
for the manufacture of our products may adversely affect our profit margins and our
ability to develop and deliver products on a timely and competitive basis.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Adverse Determinations Concerning Product
Pricing, Reimbursement and Related Matters Could Prevent Us from Successfully
Commercializing Products Our ability to earn sufficient revenue on our products will
depend in part on the extent to which reimbursement for the costs of the products and
related treatments will be available from government health administration authorities,
private health coverage insurers, managed care organizations and other organizations.
Failure to obtain appropriate reimbursement could prevent us from successfully
commercializing products. Third party payers are increasingly challenging the price of
medical products and services. If purchasers or users of our 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.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Product Liability Exposure May Expose Us to
Significant Liability We face an inherent business risk of exposure to product liability
and other claims 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 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
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 21 | 
| | -- | 

---





|our financial performance. Even if we avoid
liability exposure, significant costs could be incurred that could hurt our financial
performance.
|----------------------------------------------------------------------------------------------------------------------------------------------



|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 accidental contamination
or injury from these materials cannot be completely eliminated. In the event of an
accident, 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 materially
and adversely affect our operations, business or assets.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|You Could Suffer Substantial Dilution of Your
Investment if Certain Options to Purchase Common Stock are Exercised As of March 31, 2002
we had reserved 6.9 million shares of our Common Stock for potential issuance upon the
exercise of stock options or purchases under the employee stock purchase plan. Issuance
of any of these additional shares could substantially dilute your interest in our company.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Volatility Of Stock Price and Absence Of
Dividends May Hurt Common Stockholders The market price of our Common Stock, like that of
the Common Stock of many other biopharmaceutical companies, has been and is likely to be
highly volatile. Factors such as the following could have a significant adverse impact on
the market price of our Common Stock:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | our financial position;
|- |  | -----------------------

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

| |  | concern as to, or other evidence of, the safety
      or efficacy of our products or our competitors products;
|- |  | ---------------------------------------------------------------------------------------------------------------

| |  | announcements of technological innovations or
      new products by us or our competitors;
|- |  | ------------------------------------------------------------------------------------------

| |  | governmental regulatory actions;
|- |  | --------------------------------

| |  | actual or anticipated changes in drug reimbursement
      policies;
|- |  | -------------------------------------------------------------------

| |  | developments with our collaborators;
|- |  | ------------------------------------

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

| |  | status of litigation;
|- |  | ---------------------

| |  | period-to-period fluctuations in our operating
      results;
|- |  | -------------------------------------------------------------

| |  | changes in estimates of our performance by securities
      analysts;
|- |  | ---------------------------------------------------------------------

| |  | market conditions for biopharmaceutical stocks
      in general; and
|- |  | --------------------------------------------------------------------

| |  | other factors not within our control.
|- |  | -------------------------------------



|We have never paid cash dividends on our Common
Stock and do not anticipate paying any cash dividends in the foreseeable future.
|--------------------------------------------------------------------------------------------------------------------------------



|Changes to Financial Accounting Standards May
Affect Our Reported Results of Operations We prepare our financial statements to conform
with generally accepted accounting principles, or GAAP. GAAP are subject to
interpretation by the American Institute of Certified Public Accountants, the Securities
and Exchange Commission and various bodies formed to interpret and create appropriate
accounting policies. A change in those policies can have a significant effect on our
reported results and may even affect our reporting of transactions completed before a
change is announced. Accounting policies affecting many other aspects of our business,
including rules relating to purchase and pooling-of-interests accounting for business
combinations, employee stock option grants and revenue recognition have recently been
revised or are under review. Changes to those rules or the questioning of current
practices may adversely affect our reported financial results or the way we conduct our
business. In addition, our preparation of financial statements in accordance with GAAP
requires that we make estimates and assumptions that affect the recorded amounts of
assets and liabilities, disclosure of those assets and liabilities at the date of the
financial statements and the recorded amounts of expenses during the reporting period. A
change in the facts and circumstances surrounding those estimates could result in a
change to our estimates and could impact our future operating results.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 22 | 
| | -- | 

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|Our Certificate of Incorporation and Bylaws
Include Provisions that Could Make Attempts by Stockholders to Change Management More
Difficult The approval of 66 2/3 percent of our voting stock is required to approve
certain transactions and to take certain stockholder actions, including the calling of
special meetings of stockholders and the amendment of any of the anti-takeover
provisions, such as those providing for a classified board of directors, contained in our
certificate of incorporation. The practical effect of these provisions is to make
attempts by stockholders to change management more difficult.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|We May Experience Power Blackouts and Higher
Electricity and Gas Prices as a Result of Californias Current Energy Crisis, Which Could
Disrupt Our Operations and Increase Our Expenses California is in the midst of an energy
crisis that could disrupt our operations and increase our expenses. We rely on a major
southern California public utility to supply power to our facilities in southern
California. Due to problems associated with the deregulation of the power industry in
California and shortages in wholesale electricity and gas supplies, customers have been
faced with increased utility prices, power shortages and, in some cases, rolling
blackouts. If blackouts interrupt our power supply, we may be temporarily unable to
continue operations at our facilities. Any such interruption of operations at our
facilities could delay research and development activities as well as delay our ability
to develop or provide our clinical supplies or services, all of which could damage our
reputation and result in potentially lost revenue, either of which could substantially
harm our business and results of operations.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|There May Be Risks Related to Our Use of Arthur
Andersen LLP as Our Independent Auditors On March 14, 2002, Arthur Andersen LLP, our
independent auditor, was indicted on federal obstruction of justice charges arising from
the U.S. governments investigation of Enron Corporation. Arthur Andersen LLP has stated
that it intends to vigorously contest the indictment. Nevertheless as a public company,
we are required to file with the SEC annual financial statements audited by independent
auditors. The SEC has said that it will continue accepting financial statements audited
by Arthur Andersen, and interim financial statements reviewed by it, so long as Arthur
Andersen is able to make certain representations to its clients. Certain investors,
including significant funds and institutional investors, may choose not to hold or invest
in securities of a company that does not have current financial reports available. Our
access to the capital markets and our ability to make timely filings with the SEC could
be impaired if the SEC ceases to accept financial statements audited by Arthur Andersen,
if Arthur Andersen becomes unable to make to us the required representations, or if for
any reason, Arthur Andersen (including the loss of key members of our audit team from
Arthur Andersen) is unable to perform for us required services on a timely basis. In such
case, we would promptly seek to engage new independent auditors, but such actions could
be disruptive and affect the price and liquidity of our securities.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 3.      Quantitative and Qualitative
Disclosures about Market Risk
|-----------------------------------------------------------------------



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



|PART II.   OTHER INFORMATION
|----------------------------



|Item 1.   Legal Proceedings
|---------------------------



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



| | 23 | 
| | -- | 

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|Item 4.   Submission of Matter to a Vote of
Security Holders
|------------------------------------------------------------



|On April 2, 2002 the Company held a Special
Meeting of Stockholders. The following action was taken at the special meeting. As of
February 12, 2002, the record date, 35,572,099 shares were entitled to vote at the Annual
Meeting.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|1. | The stockholders approved, for purposes
      of NASD Rules, the issuance of the Companys common stock issuable
      on the conversion or exercise, respectively, of notes and warrants previously
      sold and proposed to be sold, pursuant to the note purchase agreement with
      Kevin Kimberlin Partners, L.P. and Oshkim Limited Partnership. There were
      17,591,149 shares voted in favor of the proposal, 343,376 shares voted against
      the proposal, 573,150 shares abstained with no broker non-votes.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|a)    Exhibits
|--------------



|10.89 | 8% Secured Promissory Note dated March
      20, 2002 issued to Oshkim Limited Partnership
|----- | ------------------------------------------------------------------------------------------



|10.90 | Amendment No. 2 dated May 3, 2002 to
      the Note Purchase Agreement dated as of November 9, 2001, between the Company,
      Kevin Kimberlin Partners, L.P. and Oshkim Limited Partnership
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.91 | 8% Convertible Secured Promissory Note
      dated May 3, 2002 issued to Oshkim Limited Partnership
|----- | ---------------------------------------------------------------------------------------------------



|10.92 | Warrant Agreement dated as of May 3,
      2002 between the Company and Oshkim Limited Partnership
|----- | --------------------------------------------------------------------------------------------------



|b) | Reports on Form 8-K
|-- | -------------------



| | A report on Form 8-K, with exhibits
      attached thereto, dated February 14, 2002, was filed by The Immune Response
      Corporation reporting under Item 5, Other Events, to disclose the private
      placement of a $2.0 million convertible note and warrant to an accredited
      investor.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | A report on Form 8-K, with exhibits
      attached thereto, dated February 21, 2002, was filed by The Immune Response
      Corporation reporting under Item 5, Other Events, to disclose an amendment
      to the Rights Agreement.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 24 | 
| | -- | 

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|SIGNATURE
|---------



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



|THE IMMUNE RESPONSE CORPORATION
|-------------------------------



|
|



|Date: May 15,
      2002 | /s/  Dennis J. Carlo
      
      Dennis J. Carlo, Ph.D.
      President and Chief
      Executive Officer
|------------------------ | ----------------------------------------------------------------------------------------------------------
|                         |                                                                                                           



| | 25 | 
| | -- | 

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