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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

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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 September 30, 2001

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

For the transition period from  to

Commission file number 0-18006

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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(Address of Principal Executive Offices)

92008(Zip Code)


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

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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 October 30, 2001, 35,109,670 shares of common stock were outstanding.

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THE IMMUNE RESPONSE CORPORATION  FORM 10-Q  QUARTERLY REPORT    TABLE OF CONTENTS

|                             |  |                                                                                       |  | Page
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART IFINANCIAL INFORMATION
|Item 1.                      |  | Financial Statements                                                                  |  |     
|                             |  | Condensed Consolidated Balance Sheets                                                 |  | 3   
|                             |  | Condensed Consolidated Statements of Operations                                       |  | 4   
|                             |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5   
|                             |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6   
|Item 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 12  
|Item 3.                      |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 23  
|PART IIOTHER INFORMATION   
|Item 1.                      |  | Legal Proceedings                                                                     |  | 24  
|Signature                    |  | 25                                                                                   

2

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Part I. Financial Information

Item 1. Financial Statements

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

|                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                               | September 30,
2001         |        | December 31,
2000 |       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ----------------- | ------
|
|Assets                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                              
|Current assets:                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                               |                            |        |                   |       
|                                                                                                                                                                                                                                                                                                  | Cash and cash equivalents                                                                                                                                                                     |                            | $      | 4,484             |       
|                                                                                                                                                                                                                                                                                                  | Marketable securitiesavailable-for-sale                                                                                                                                                      |                            |        | 1,481             |       
|                                                                                                                                                                                                                                                                                                  | Other current assets                                                                                                                                                                          |                            |        | 1,355             |       
|                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                               |                            |        |                   |       
|                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                               | Total current assets       |        |                   | 7,320 
|Property and equipment, net                                                                                                                                                                                                                                                                       |                                                                                                                                                                                               |                            | 8,512  |                   |       
|Licensed technology                                                                                                                                                                                                                                                                               |                                                                                                                                                                                               |                            | 3,708  |                   |       
|Investment in MicroGenomics, Inc.                                                                                                                                                                                                                                                                 |                                                                                                                                                                                               |                            | 2,877  |                   |       
|Deposits and other assets                                                                                                                                                                                                                                                                         |                                                                                                                                                                                               |                            | 849    |                   |       
|                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                               |                            |        |                   |       
|                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                               | $                          | 23,266 |                   | $     
|                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                               |                            |        |                   |       
|Liabilities and stockholders' equity                                                                                                                                                                                                                                                              |                                                                                                                                                                                              
|Current liabilities:                                                                                                                                                                                                                                                                              |                                                                                                                                                                                               |                            |        |                   |       
|                                                                                                                                                                                                                                                                                                  | Accounts payable                                                                                                                                                                              |                            | $      | 877               |       
|                                                                                                                                                                                                                                                                                                  | Accrued expenses                                                                                                                                                                              |                            |        | 1,491             |       
|                                                                                                                                                                                                                                                                                                  | Contingent stock liabilities                                                                                                                                                                  |                            |        | 1,000             |       
|                                                                                                                                                                                                                                                                                                  | Current portion of equipment notes payable                                                                                                                                                    |                            |        | 624               |       
|                                                                                                                                                                                                                                                                                                  | Current portion of deferred revenue                                                                                                                                                           |                            |        | 108               |       
|                                                                                                                                                                                                                                                                                                  | Deferred rent obligation                                                                                                                                                                      |                            |        |                  |       
|                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                               |                            |        |                   |       
|                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                               | Total current liabilities  |        |                   | 4,100 
|Equipment notes payable                                                                                                                                                                                                                                                                           |                                                                                                                                                                                               |                            | 1,310  |                   |       
|Long-term deferred revenue                                                                                                                                                                                                                                                                        |                                                                                                                                                                                               |                            | 109    |                   |       
|Redeemable, convertible preferred stock, $.001 par value, 400 shares authorized, none and 200 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively (preference in liquidation of
$0 and $10,000,000 at September 30, 2001 and December 31, 2000, respectively) |                                                                                                                                                                                               |                            |       |                   |       
|Stockholders' equity:                                                                                                                                                                                                                                                                             |                                                                                                                                                                                               |                            |        |                   |       
|                                                                                                                                                                                                                                                                                                  | Preferred stock, 5,000,000 shares authorized; none and 200 shares issued and outstanding as redeemable, convertible preferred stock at September 30, 2001 and December 31, 2000, respectively |                            |        |                  |       
|                                                                                                                                                                                                                                                                                                  | Common stock, $.0025 par value, 65,000,000 shares authorized, 35,109,670 and 30,743,017 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively               |                            |        | 88                |       
|                                                                                                                                                                                                                                                                                                  | Warrants                                                                                                                                                                                      |                            |        |                  |       
|                                                                                                                                                                                                                                                                                                  | Additional paid-in capital                                                                                                                                                                    |                            |        | 237,409           |       
|                                                                                                                                                                                                                                                                                                  | Accumulated other comprehensive income                                                                                                                                                        |                            |        | 34                |       
|                                                                                                                                                                                                                                                                                                  | Accumulated deficit                                                                                                                                                                           |                            |        | (219,784          | )     
|                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                               |                            |        |                   |       
|                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                               | Total stockholders' equity |        |                   | 17,747
|                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                               |                            |        |                   |       
|                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                               | $                          | 23,266 |                   | $     
|                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                               |                            |        |                   |       

See accompanying notes.

3

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

|                                                                 |                                                             | Three months ended September 30, |            | Nine months ended September 30, |  
|---------------------------------------------------------------- | ----------------------------------------------------------- | -------------------------------- | ---------- | ------------------------------- | -
|
|
|Revenues:                                                        |                                                             |                                  |            |                                 |  
|                                                                 | Contract research revenue                                   |                                  | $          | 68                              |  
|                                                                 | Licensed research revenue                                   |                                  |            | 7,719                           |  
|                                                                 |                                                             |                                  |            |                                 |  
|                                                                 |                                                             |                                  | 7,787      |                                 |  
|                                                                 |                                                             |                                  |            |                                 |  
|Expenses:                                                        |                                                             |                                  |            |                                 |  
|                                                                 | Research and development                                    |                                  |            | 5,006                           |  
|                                                                 | General and administrative                                  |                                  |            | 1,398                           |  
|                                                                 |                                                             |                                  |            |                                 |  
|                                                                 |                                                             |                                  | 6,404      |                                 |  
|                                                                 |                                                             |                                  |            |                                 |  
|Other income and expense:                                        |                                                             |                                  |            |                                 |  
|                                                                 | Equity in loss of investee                                  |                                  |            | (64                             | )
|                                                                 | Investment income, net                                      |                                  |            | 99                              |  
|                                                                 | Other income                                                |                                  |            | 1                               |  
|                                                                 |                                                             |                                  |            |                                 |  
|Income (loss) before cumulative effect of accounting change      |                                                             |                                  | 1,419      |                                 |  
|Cumulative effect of accounting change                           |                                                             |                                  |           |                                 |  
|                                                                 |                                                             |                                  |            |                                 |  
|Net income (loss)                                                |                                                             |                                  | 1,419      |                                 |  
|Accretion of preferred stock                                     |                                                             |                                  |           |                                 |  
|Preferred dividends                                              |                                                             |                                  |           |                                 |  
|                                                                 |                                                             |                                  |            |                                 |  
|Net income (loss) applicable to common stockholders              |                                                             | $                                | 1,419      |                                 | $
|                                                                 |                                                             |                                  |            |                                 |  
|Income (loss) per sharebasic and diluted:                       |                                                             |                                  |            |                                 |  
|                                                                 | Income (loss) before cumulative effect of accounting change |                                  | $          | 0.04                            |  
|                                                                 | Cumulative effect of accounting change                      |                                  |            |                                |  
|                                                                 |                                                             |                                  |            |                                 |  
|                                                                 | Net income (loss)                                           |                                  | $          | 0.04                            |  
|                                                                 |                                                             |                                  |            |                                 |  
|                                                                 | Net income (loss) applicable to common stockholders         |                                  | $          | 0.04                            |  
|                                                                 |                                                             |                                  |            |                                 |  
|Weighted average common shares outstanding                       |                                                             |                                  | 35,109,497 |                                 |  
|                                                                 |                                                             |                                  |            |                                 |  
|Weighted average common and common equivalent shares outstanding |                                                             |                                  | 35,734,789 |                                 |  
|                                                                 |                                                             |                                  |            |                                 |  

See
accompanying notes.

4

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

|                                                                       |                                                                             | Nine months ended September 30,                    |                           
|---------------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------------- | --------------------------
|
|
|Operating activities:                                                  |                                                                             |                                                    |                           
|                                                                       | Net loss                                                                    |                                                    | $                         
|                                                                       | Adjustments to reconcile net loss to net cash used in operating activities: |                                                    |                           
|                                                                       |                                                                             | Cumulative effect of accounting change             |                           
|                                                                       |                                                                             | Depreciation and amortization                      |                           
|                                                                       |                                                                             | Equity in loss of investee                         |                           
|                                                                       |                                                                             | Deferred revenue                                   |                           
|                                                                       |                                                                             | Recognition of deferred revenue from prior periods |                           
|                                                                       |                                                                             | Deferred rent expense                              |                           
|                                                                       |                                                                             | Gain on sale of assets                             |                           
|                                                                       |                                                                             | Changes in operating assets and liabilities:       |                           
|                                                                       |                                                                             |                                                    | Other current assets      
|                                                                       |                                                                             |                                                    | Accounts payable          
|                                                                       |                                                                             |                                                    | Accrued expenses          
|                                                                       |                                                                             |                                                    | Licensed contracts payable
|                                                                       |                                                                             |                                                    |                           
|                                                                       |                                                                             |                                                    |                           
|                                                                       |                                                                             |                                                    |                           
|Investing activities:                                                  |                                                                             |                                                    |                           
|                                                                       | Sale (purchase) of marketable securities, net                               |                                                    |                           
|                                                                       | Purchase of property and equipment                                          |                                                    |                           
|                                                                       | Proceeds from sale of land and equipment                                    |                                                    |                           
|                                                                       | Other assets                                                                |                                                    |                           
|                                                                       |                                                                             |                                                    |                           
|                                                                       |                                                                             |                                                    |                           
|                                                                       |                                                                             |                                                    |                           
|Financing activities:                                                  |                                                                             |                                                    |                           
|                                                                       | Proceeds from equipment notes payable                                       |                                                    |                           
|                                                                       | Principal payments under equipment notes payable                            |                                                    |                           
|                                                                       | Cash paid upon conversion of convertible preferred stock to common stock    |                                                    |                           
|                                                                       | Net proceeds from sale of common stock through public offering              |                                                    |                           
|                                                                       | Proceeds from other sales of common stock                                   |                                                    |                           
|                                                                       | Convertible preferred stock dividends paid in cash                          |                                                    |                           
|                                                                       | Net proceeds from exercise of stock options                                 |                                                    |                           
|                                                                       |                                                                             |                                                    |                           
|                                                                       |                                                                             |                                                    |                           
|                                                                       |                                                                             |                                                    |                           
|Net increase (decrease) in cash and cash equivalents                   |                                                                             |                                                    | (2,640                    
|Cash and cash equivalents at beginning of year                         |                                                                             |                                                    | 7,124                     
|                                                                       |                                                                             |                                                    |                           
|Cash and cash equivalents at end of period                             |                                                                             | $                                                  | 4,484                     
|                                                                       |                                                                             |                                                    |                           
|Supplemental disclosure of cash flow information:                      |                                                                             |                                                    |                           
|                                                                       | Interest paid                                                               |                                                    | $                         
|                                                                       |                                                                             |                                                    |                           
|Supplemental disclosure of noncash investing and financing activities: |                                                                             |                                                    |                           
|                                                                       | Unrealized gain (loss) on marketable securities                             |                                                    | $                         
|                                                                       |                                                                             |                                                    |                           
|                                                                       | Settlement of contingent stock liability to equity                          |                                                    | $                         
|                                                                       |                                                                             |                                                    |                           
|                                                                       | Accretion of convertible preferred stock                                    |                                                    | $                         
|                                                                       |                                                                             |                                                    |                           
|                                                                       | Payment of convertible preferred stock dividends with common stock          |                                                    | $                         
|                                                                       |                                                                             |                                                    |                           
|                                                                       | Settlement of warrants upon expiration to paid-in capital                   |                                                    | $                         
|                                                                       |                                                                             |                                                    |                           
|                                                                       | Conversion of convertible preferred stock to common stock                   |                                                    | $                         
|                                                                       |                                                                             |                                                    |                           

See accompanying notes.

5

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THE IMMUNE RESPONSE CORPORATION        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        September 30, 2001

1. Basis of Presentation

The condensed consolidated financial statements of The Immune Response Corporation, or the Company, for the three and nine-month periods ended
September 30, 2001 and 2000 are unaudited. 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 September 30, 2001, and the consolidated results of operations for the three and nine-month periods ended
September 30, 2001 and 2000. The results of operations for the three and nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the year
ended December 31, 2001. 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, 2000 included in the Company's Form 10-K filed with the Securities and Exchange Commission.

2. Operational Overview

In July 2001, the Company received notification of termination by Agouron Pharmaceuticals, Inc. (a Pfizer company), or Pfizer, of the development
and commercial collaboration for REMUNE®. Our financial condition, results of operations and cash flows may be adversely affected in subsequent quarters due to this termination. 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.

In
addition, management is currently evaluating equity financing alternatives to meet our future capital requirements. We estimate that our available cash resources along with the
$2 million from the recently issued convertible note and warrant will be sufficient to fund our planned operations for the remainder of the year. In any event, we will need to raise substantial
additional capital to fund our operations beyond 2001. 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 may not be able to satisfy our obligations. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. See
Notes 5, 10 and 11.

3. Long-Lived Assets

The Company evaluates potential impairment of long-lived assets in accordance with Statement of Financial Accounting Standards ("FAS") FAS
No. 121, "Accounting for the Impairment of Long-Lived Assets". FAS No. 121 establishes procedures for review of recoverability and measurement of impairment, if necessary, of
long-lived assets and certain identifiable intangibles held and used by an entity. FAS No. 121 requires that those assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully recoverable based on expected undiscounted cash flows attributable to that 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 September 30, 2001, the Company believes that there has not been any impairment of the Company's
long-lived assets or other identifiable intangibles.

6

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4. Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board ("FASB") issued FAS No. 143, "Accounting for Asset Retirement Obligations." This
statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to
all entities and legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of
long-lived assets, except for certain obligations of lessees. This statement amends FASB Statement 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.

In
August 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS No. 144 addresses financial
accounting and reporting 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 APB 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 (as previously defined in that Opinion). The provisions of FAS No. 144
are effective for financial statements issued for fiscal years beginning after December 15, 2001, with early application encouraged and generally are to be applied prospectively. Management has
not yet determined the impact of the adoption of FAS No. 144 on the Company's financial position or results of operations.

5. Change In Accounting Principle

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101"Revenue Recognition in
Financial Statements" ("SAB No. 101"). SAB No. 101 reflects the SEC's views on revenue recognition. Historically the Company recognized revenue from license fees and option agreements in
the period in which the agreement was signed if the fees were non-refundable and there were no significant performance obligations remaining. Milestone payments were recognized as revenue
as the milestones were achieved.

SAB
No. 101 requires that when there has not been the culmination of the earnings process, revenue from upfront fees will be deferred and recognized over the period in which
the revenue is deemed to have been earned. Under the Company's license and option agreements where milestone payments are made, the Company will defer the revenue and recognize it over the remaining
development or expected development period.

Under
certain agreements the Company is paid to perform required research and development services during the research period specified in the agreement. For these agreements, the
Company historically recognized the revenue for the research services as the services were provided. This accounting is unchanged under SAB No. 101. However, under SAB No. 101, the
Company believes that any up front option or license payment under this type of agreement would have to be deferred and recognized over the research period.

7

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The Company implemented SAB No. 101 in the fourth quarter of 2000, by restating the first, second and third quarters of their 2000 financial statements. The statement of
operations reflects a one-time charge to earnings for the cumulative effect of the change in accounting principle as of January 1, 2000, of $13.2 million. Deferred license
revenue recognized for the first, second third and quarters of 2000 was $960,000, $968,000 and $968,000, respectively, to reflect the SAB No. 101 restatement adjustments. The balance of the
deferred revenue was to be recognized as revenue over the expected development period, which was estimated to be through June 2003. However in July 2001, the Company received
notification of termination of the development and commercial collaboration with Pfizer, and
recognized the remainder of approximately $7.7 million of deferred revenue under the agreement in the third quarter. See Note 10.

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 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 million on the one-year anniversary of the
closing, the Company would issue additional stock up to that value. The Company has recorded its investment in MGI at cost, including the $1 million stock valuation guarantee. The Company
accounts for this investment under the equity method of accounting.

8

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7. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three months ended September 30, 2001:

Numerator:Net incomenumerator for basic earnings per shareincome available to common stockholders

$
1,419,000Effect of dilutive securities


Numerator for diluted earnings per shareincome available to common stockholders after assumed conversions

$
1,419,000Denominator:Denominator for basic earnings per shareweighted average shares


35,109,497Effect of dilutive securities:Stock option plan


625,292Denominator for diluted earnings per shareadjusted weighted average shares and assumed conversions


35,734,789Basic earnings per share

$
0.04Diluted earnings per share

$
0.04


Options
to purchase 5,472,616 shares of common stock were outstanding at September 30, 2001, but were not included in the computation of diluted earnings per share because the
option's exercise prices were greater than the average market price of the common shares for the three months ended September 30, 2001; and therefore, the effect would be antidilutive.

For
the nine months ended September 30, 2001 and the three and nine months ended September 30, 2000, net loss per share is computed using the weighted average number of
common shares outstanding during those periods. Outstanding stock options, warrants and the effect of conversion of the Series F Convertible Preferred Stock are not included in the calculations
of net loss per share because their effect would be antidilutive. Therefore, there is no difference between basic and diluted net loss per share for those periods. The weighted average number of
shares outstanding for the nine months ended
September 30, 2001 and the three and nine months ended September 30, 2000 were 33,271,295, 28,912,001 and 27,749,763, respectively.

9

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8. Comprehensive Income (Loss)

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
September 30,

Nine Months Ended
September 30,(in thousands)2001

2000

2001

2000(Restated)



(Restated)Net income (loss)

$
1,419

$
(5,169
)
$
(8,756
)
$
(21,962
)Net unrealized gain (loss) on marketable securities


(58
)

1,042


(383
)

1,949Comprehensive income (loss)

$
1,361

$
(4,127
)
$
(9,139
)
$
(20,013
)


9. Redeemable, Convertible Preferred Stock and Equity Transactions

In April 1998, the Company sold 200 shares of its Series F Redeemable, Convertible Preferred Stock, or Series F Stock, in return for gross
proceeds of $10 million. As required by the terms of the 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 nine months ended
September 30, 2001 and 2000, 144,036 and 64,901 shares, respectively, of the Company's common stock were issued as dividends to the Series F stockholders. The Company has an effective
registration statement with the SEC covering the resale of up to 2,430,471 shares of the common stock issued on the conversion of the Series F Stock.

In
April 2001, warrants to purchase up to 2,051,281 shares of common stock expired, unexercised. The $2.1 million value of the warrants was reclassified to
paid-in capital.

10. 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 in deferred revenue from the collaboration in the third quarter of 2001. According to the Company's revenue recognition policies, as modified
by SAB No. 101, the deferred revenue received from Pfizer, comprised of a license fee, a milestone payment and common stock purchase premiums, was deemed as earned upon the termination of the
development agreement. See Note 5.

As
of September 30, 2001, the Company had received a total of $47 million from Pfizer under the agreement, including the initial $10 million license fee, a
$5 million milestone payment, $18 million in payments to support research and development and $14 million in payments for the purchase of the

10

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Company's common stock priced at a premium to the market. In January 2000, the Company received a $5 million payment from Pfizer consisting of $3 million for research and
development and $2 million for the purchase of 266,667 shares of unregistered common stock priced at a $333,000 premium to the market price. This was the final payment in a series of six
quarterly payments made by Pfizer to fund research and development and to purchase unregistered common stock under the June 1998 agreement. The amounts referenced above were recognized as
revenue in the period received and have subsequently been adjusted to reflect a change in accounting principle. See Note 5. The Company has an effective registration statement with the
Securities and Exchange Commission covering the resale of 1,317,609 shares of common stock owned by Pfizer's affiliate, Agouron Pharmaceuticals, Inc.

11. Subsequent Event

In November 2001, the Company privately placed a $2,000,000 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., is controlled by 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 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 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 $321,000, all of which will be 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 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.

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Item 2. Management's Discussion and Analysis of Financial Conditions 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. 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 immune responses for the treatment of HIV, autoimmune diseases and
cancer. In addition, we are developing a targeted, non-viral delivery technology for gene therapy, which is designed to enable the delivery of genes directly to the liver via intravenous
injection.

We
have not been profitable since inception and had an accumulated deficit of $219.8 million as of September 30, 2001. To date, we have not recorded any revenues from
the sale of products. Revenues recorded through September 30, 2001 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. We estimate that our available cash resources along with the
$2 million from the recently issued convertible note and warrant will be sufficient to fund our planned operations for the remainder of the year. In any event, we will need to raise substantial
additional capital to fund our operations beyond 2001. 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 may not be able to satisfy our obligations.

In
November 2001, we privately placed a $2,000,000 convertible note and warrant to an accredited investor. Furthermore, we have agreed that, upon the achievement of certain
commercial and technical milestones, we may sell and they may buy additional notes and warrants, under certain conditions. The investor, Kevin Kimberlin Partners, L.P., is controlled by Kevin
Kimberlin, who is one of our directors and major stockholder. We plan to use substantially all of the net proceeds from the transaction for product development, working capital and other general
corporate purposes. We have 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 we file to register for our own account or the account of any others. The note bears interest at a rate of 8% per year and
is secured by our intellectual property. The note matures on November 9, 2004, but is convertible into shares of our common stock at any time, at the option of the investor, initially at a
conversion price of $1.15 per share. The warrant is initially exercisable for up to 1,733,703 shares of our common stock with an exercise price of $1.44 per share. The conversion price is based on a
20% discount to the average closing bid price of our common stock for the ten-day trading period ended November 8, 2001. Both the conversion price of the note and exercise price of
the warrant provide anti-dilution protection for the investor.

In
July 2001, we regained full rights to REMUNE® due to the termination by Agouron Pharmaceuticals, Inc., a Pfizer company, or Pfizer, of our development and
commercialization

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collaboration for REMUNE® (our immune-based therapy under development for the treatment of HIV infection). As a result of this termination, we recognized approximately $7.7 million
in deferred revenue from the collaboration in the third quarter of 2001. Also, as a result of this termination and along with delays in manufacturing scale-up operations, we have adjusted
our operational timelines and delayed expenditures and activities where prudent to conserve resources. See Notes 2, 5, 10 and 11.

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 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®. We have not yet formally responded to the complaints. We intend to vigorously defend the actions.

As
required by the terms of the Series F Stock, in April 2001, we converted 160.7 shares of the 200 shares outstanding of the Series F Stock for 4,208,924 shares
of our common stock; and in May 2001, we redeemed the remaining 39.3 shares of the Series F Stock for cash of $2.8 million.

In
December 1999, the SEC issued Staff Accounting Bulletin 101, or SAB No. 101, "Revenue Recognition in Financial Statements". We implemented SAB No. 101 in the
fourth quarter of 2000 by
adjusting the first, second and third quarters of our 2000 financial statements. Our statement of operations reflects a one-time charge to earnings of $13.2 million for the
cumulative effect of the change in accounting principle as of January 1, 2000. Deferred revenue recognized, to reflect the application of the SAB No. 101 restatement adjustments, was
$960,000, $968,000 and $968,000 for the first, second and third quarters of 2000, respectively. Deferred revenue of $968,000 per quarter was recognized in the first and second quarters of 2001 based
on the expected development period, which was estimated to be through June 2003. Due to the termination of the development agreement with Pfizer, the remaining deferred revenue of approximately
$7.7 million was recognized as revenue during the third quarter of 2001. See Notes 2, 5 and 10 to the Condensed Consolidated Financial Statements.

Results of Operations

We recorded revenues for the three and nine months ended September 30, 2001 of $7.8 million and $9.9 million, respectively, as compared to
$1.1 million and $6.3 million for the same periods in 2000. The increased revenues for 2001 were primarily attributed to deferred revenues recognized from the SAB 101 adjustment
including the final recognition of $7.7 million upon termination of the development agreement with Pfizer. As a result, we expect no additional revenue unless it is earned through new research
and development agreements, if any. The revenue in 2000 was the result of receiving the final $3.0 million quarterly research and development payment under the agreement with Pfizer. 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.

Research
and development expenditures for the three and nine months ended September 30, 2001 were $5.0 million and $15.3 million, respectively, as compared to
$5.6 million and $15.8 million during the same periods in 2000. The decrease in research and development spending of approximately $600,000 from 2000 to 2001 for the three months was due
primarily to adjusting our operational timelines and delaying expenditures and activities of the manufacturing scale-up of REMUNE®. Due to the recent termination notification
from Pfizer, we have reviewed clinical information provided by Pfizer on studies that they had been funding and determined that it is not feasible for us to continue their studies. Those studies were
terminated by Pfizer during the third quarter. For any future studies to be initiated, we would need to raise additional capital or enter into a new research and development collaboration; until such
time, our REMUNE® clinical spending should remain somewhat consistent

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with the prior quarters primarily because the recently halted U.S., pivotal HIV clinical study was conducted and paid for by Pfizer. 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.

We
expect future clinical study spending for our other development programs to remain consistent with this quarter 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 three and nine months ended September 30, 2001 were $1.4 million and $4.2 million, respectively, as compared to
$1.2 million and $3.4 million for the same periods in 2000. This increase in spending was primarily attributed to higher professional fees and insurance costs for the current nine
months. We expect general and administrative expenses for the remainder of 2001 to remain consistent with first, second and third quarter levels with possible increases in professional fees and
insurance costs as a result of litigation.

Investment
income, net, decreased to $99,000 and $949,000 for the three and nine months ended September 30, 2001, respectively, from $611,000 and $3.4 million for the
same periods in 2000. The decrease in investment income in 2001 compared to 2000 was due primarily to the sales of approximately $2.5 million of an equity security in 2000 as compared to the
net gains of approximately $416,000 of investment securities in 2001. Interest income was lower due to lower cash balances overall in interest bearing investments for the three and nine months ended
in 2001 as compared to the same periods in 2000.

Other
income of $736,000 for the nine months ended September 30, 2000 was attributable to the gain recognized from the sale in the first quarter of 2000 of undeveloped property
adjacent to our headquarters facility in Carlsbad, California for approximately $2.0 million gross proceeds.

Liquidity and Capital Resources

Since our inception through September 30, 2001, we have financed our activities primarily from public and private sales of equity, funding from
collaborations with corporate partners and investment income. At September 30, 2001, we had working capital of $3.2 million, including $6.0 million of cash, cash equivalents and
marketable securities. This compares with working capital as of December 31, 2000 of $20.6 million, including $28.4 million of cash, cash equivalents and marketable securities.
Working capital decreased as a result of the cost of operations of $17.9 million, purchase of equipment coming off lease of $603,000, other equipment purchases of $339,000 and redemption of all
of the Series F Stock for $2.8 million in cash and shares of our common stock.

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 $500,000 for 2001 related to the
scale-up

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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 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 we raise funds through equity arrangements, further dilution to stockholders will result.

If
adequate funds are not available, 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, which could have a material adverse effect on us and would cause us to cease operations, at which time we may not be able to satisfy our obligations. We estimate that our existing capital
resources along with the $2 million from the recently issued convertible note and warrant will be sufficient to fund our planned operations through 2001. 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. In any event, we will need
to raise substantial additional capital to fund our operations beyond 2001.

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 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.

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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. Food and Drug Administration, or FDA, or other regulatory 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 Additional Financing Requirements and Limited Access to Financing May Adversely Affect Our Ability to Develop Products and Continue Operations

We will need to raise additional funds 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 may not be able to satisfy our
obligations. We estimate that our existing capital resources along with the $2 million from the recently issued convertible note and warrant will be sufficient to fund our planned operations
through 2001. In any event, we will need to raise substantial additional capital to fund our operations beyond 2001. If we raise funds through equity arrangements, further dilution to stockholders
will result.

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 2000. Costs relating to the development of REMUNE® during the first nine months of 2001 have remained constant with the prior year.

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



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



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It
could also be limited by overall financial market conditions, the collateralization by a perfected security interest in our intellectual property for the convertible note issued in
November 2001and the effect of potential anti-dilutive adjustments to the November 2001 convertible note and warrant.

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 has had a material adverse effect on our stock price, and therefore our ability to successfully raise
additional capital may be affected.

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®. 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 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.

We May Be Unable to Enter Into Additional Collaborations or Maintain Existing Ones

We intend to seek 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. An investor and board member has a perfected security interest in
our intellectual property as collateral for the November 2001 convertible note. Pursuant to an Intellectual Property Security Agreement with the investor, 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 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.

An
investor and board member has a perfected security interest in our intellectual property as collateral for the November 2001 convertible note.

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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. We are aware that
AstraZeneca PLC has acquired the rights to a patent, which has been issued in Europe and other countries, that may interfere with our ability to develop some of our technologies related to autoimmune
disease if the patent is upheld after current opposition proceedings. This patent, and others that 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 unpatented 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 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, such as the patent owned by AstraZeneca PLC. 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 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 September 30, 2001 we had a consolidated accumulated deficit of $219.8 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.

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The Lengthy Product Approval Process and Uncertainty of Government Regulatory Requirements May Delay or Prevent Us From Commercializing Products

Clinical testing, manufacture, promotion and sale of our products are subject to extensive regulation by numerous governmental authorities in the United
States, principally the FDA, and corresponding state and foreign regulatory agencies. This regulation may delay or prevent us from commercializing products. Noncompliance with applicable requirements
can result in, among other things, fines, injunctions, seizure 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. Approval procedures vary among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA
approval. Foreign regulatory approval processes include all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the health
authorities of any other country.

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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

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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 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 as the Result of the Issuance of Additional Shares of our Common Stock to MicroGenomics or Adjustments to the
Convertible Note and Warrant Issued in November 2001

In December 2000, we issued 540,540 shares of our common stock to MicroGenomics, Inc., a private company, valued at $2 million in exchange
for MicroGenomics preferred stock equal, on an as converted basis, to 25% of the equity capitalization of MicroGenomics on a diluted basis. If the value of the 540,540 shares of our common stock is
worth less than $3 million on December 13, 2001, we will be obligated to issued additional shares of our common stock to MicroGenomics so that the aggregate value of shares issued to
MicroGenomics will be worth $3 million at that time. Although, the number of
shares, which may be issuable to MicroGenomics, is limited to an amount which would not violate Nasdaq rules, the issuance of any of these additional shares could substantially dilute your interest in
our company.

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.

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You Could Suffer Substantial Dilution of Your Investment if Certain Options to Purchase Common Stock are Exercised

As of September 30, 2001 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:



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 December 1999, the SEC issued SAB No. 101,
"Revenue Recognition in Financial Statements." We implemented SAB No. 101 in the fourth quarter of 2000 by adjusting the first, second and third quarters of our 2000 financial statements. Our
statement of operations reflects a one-time charge to earnings of $13.2 million for the cumulative effect of the change in accounting principle as of

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January 1, 2000. Deferred revenue recognized, to reflect the application of the SAB No. 101 adjustment, was approximately $968,000 for each quarter of 2000. Deferred revenue of $968,000
per quarter was recognized in the first and second quarters of 2001 based on the expected development period, which was estimated to be through June 2003. Due to the termination of the
development agreement with Pfizer, the remaining deferred revenue of approximately $7.7 million was recognized as revenue during the third quarter of 2001. See Notes 5 and 10 to the Condensed
Consolidated Financial Statements.

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.

Our Certificate of Incorporation and Bylaws Include Provisions that Could Make Attempts by Stockholders to Change Management More Difficult

The approval of 662/3 percent of our voting stock is required to approve certain transactions and to take certain stockholder actions, including
the calling of special meetings of stockholders and the amendment of any of the anti-takeover provisions, such as those providing for a classified board of directors, contained in our
certificate of incorporation. 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.

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.

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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 common stock of the Company at various times between May 17, 1999 and July 6, 2001. The various
complaints name as defendants the Company and certain of its officers as well as Agouron Pharmaceuticals, Inc. and one of its officers. The complaints allege that the Company, Agouron and/or
such officers violated federal securities laws by misrepresenting and failing to disclose certain information about the results of clinical trials of REMUNE®. We have not yet formally
responded to the complaints. We intend to vigorously defend the actions.

On
August 30, 2000, the Company initiated an arbitration before the American Arbitration Association against the Regents of the University of California and Dr. James O.
Kahn, to enforce certain obligations of confidentiality regarding data from certain clinical trials. On September 25, 2000, those respondents counterclaimed for a declaration of their alleged
rights of access and publication of such data from the 806 clinical trial. In October 2001, the arbitration was dismissed without prejudice by stipulation of both parties.

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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: November 14, 2001 |  | /s/HOWARD SAMPSONHoward Sampson Vice President, Finance,
Chief Financial Officer,
Secretary and Treasurer

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