**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

 

**For the quarterly period ended March31, 2003**

 

**o****                                          ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934.**

 

**For the transition period from                 to                 **

 

**Commission file number 0-18006**

 

**THE IMMUNE RESPONSE CORPORATION**

(Exact Name of Registrant as Specified in its Charter)

 

| **Delaware**                                                     |   | **33-0255679**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |   | (IRS Employer  Identification Number) |
|                                                             |   |                                  |
| **5931 Darwin Court, Carlsbad,  CA  92008**                 |
| (Address of Principal  Executive Offices)  (Zip Code)            |
|                                                             |   |                                  |
| **Telephone (760) 431-7080**                                     |
| (Registrant’s Telephone  Number, Including Area Code)       |

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

Yes o  No ý

 

Indicate the number of shares outstanding of each of the Issuer’sclasses of common stock, as of the latest practicable date.

 

As of April 30, 2003, 19,670,729 shares of common stock were outstanding.

 

 

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**THE IMMUNE RESPONSE CORPORATION**

 

**FORM 10-Q**

 

**QUARTERLY REPORT**

 

**TABLE OF CONTENTS**

 
| 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 | 16 |
|                            |
| Item  3.                        | Quantitative  and Qualitative Disclosures about Market Risk | 35 |
|                            |
| Item  4.                        | Controls  and Procedures | 35 |
|                            |
| PART II - OTHER INFORMATION     |
|                            |
| Item  1.                        | Legal  Proceedings | 36 |
|                            |   |   |
| Item  2.                        | Changes  in Securities | 36 |
|                            |
| Item  5.                        | Other  Information | 36 |
|                            |
| Item  6.                        | Exhibits  and Reports on Form 8-K | 36 |
|                            |
| Signature                       | 37 |
|                            |
| Certifications                  | 38 |
|                                 |  |  |  |

 

2

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**THE IMMUNE RESPONSE CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS**(in thousands, except share data)

 
|                                                                                                                                                        |   | **March 31,  2003** |   | **December 31,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|------------------------|--------|
|                                                                                                                                                        |   | **(unaudited)**     |   |                   |   |
| **Assets**                                                                                                                                                  |   |                |   |                   |   |
| Current assets:                                                                                                                                             |   |                |   |                   |   |
| Cash and cash equivalents                                                                                                                                   |   | $                   | 2,188  |                   | $      | 3,939 |   |
| Marketable securities - available-for-sale                                                                                                                  |   | 2                   |   | 2                      |   |
| Other current assets                                                                                                                                        |   | 549                 |   | 420                    |   |
| Total current assets                                                                                                                                        |   | 2,739               |   | 4,361                  |   |
|                                                                                                                                                        |   |                |   |                   |   |
| Property and equipment, net                                                                                                                                 |   | 6,145               |   | 6,483                  |   |
| Licensed technology, net                                                                                                                                    |   | 2,649               |   | 2,825                  |   |
| Deposits and other assets ($600 restricted as security for letter of  credit)                                                                               |   | 882                 |   | 896                    |   |
|                                                                                                                                                        |   |                |   |                   |   |
| Total assets                                                                                                                                                |   | $                   | 12,415 |                   | $      | 14,565 |   |
|                                                                                                                                                        |   |                |   |                   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                               |   |                |   |                   |   |
| Current liabilities:                                                                                                                                        |   |                |   |                   |   |
| Accounts payable                                                                                                                                            |   | $                   | 1,384  |                   | $      | 1,326 |   |
| Accrued expenses                                                                                                                                            |   | 874                 |   | 1,014                  |   |
| Short-term convertible note payable, related party                                                                                                          |   | 2,000               |   | —                 |   |
| Current portion of equipment notes payable                                                                                                                  |   | 661                 |   | 724                    |   |
| Capital lease liability                                                                                                                                     |   | 145                 |   | 217                    |   |
| Current portion of deferred revenue                                                                                                                         |   | 56                  |   | 56                     |   |
| Total current liabilities                                                                                                                                   |   | 5,120               |   | 3,337                  |   |
|                                                                                                                                                        |   |                |   |                   |   |
| Convertible notes payable, related party, net of discount of $9,746  and $10,848 and plus accrued interest of $869 and $594 at 2003 and 2002,  respectively |   | 4,864               |   | 3,487                  |   |
| Equipment notes payable, net of current portion                                                                                                             |   | 9                   |   | 141                    |   |
| Accrued excess lease costs                                                                                                                                  |   | 546                 |   | 637                    |   |
| Long-term deferred revenue, net of current portion                                                                                                          |   | 365                 |   | 378                    |   |
|                                                                                                                                                        |   |                |   |                   |   |
| Total liabilities                                                                                                                                           |   | 10,904              |   | 7,980                  |   |
|                                                                                                                                                        |   |                |   |                   |   |
| Commitments and contingencies                                                                                                                               |   |                |   |                   |   |
|                                                                                                                                                        |   |                |   |                   |   |
| Stockholders’ equity:                                                                                                                                  |   |                |   |                   |   |
| Preferred stock, 5,000,000 shares authorized; 0 shares issued and  outstanding                                                                              |   | —              |   | —                 |   |
| Common stock, $.0025 par value, 170,000,000 shares authorized;  19,670,729 shares issued and outstanding at March 31, 2003 and December 31,  2002           |   | 49                  |   | 49                     |   |
| Warrants                                                                                                                                                    |   | 13,684              |   | 13,684                 |   |
| Additional paid-in capital                                                                                                                                  |   | 250,771             |   | 250,656                |   |
| Accumulated other comprehensive income                                                                                                                      |   | 2                   |   | 2                      |   |
| Accumulated deficit                                                                                                                                         |   | (262,995            | )      | (257,806               | )      |
| Total stockholders’ equity                                                                                                                             |   | 1,511               |   | 6,585                  |   |
|                                                                                                                                                        |   |                |   |                   |   |
| Total liabilities and stockholders’ equity                                                                                                             |   | $                   | 12,415 |                   | $      | 14,565 |   |

 

See accompanying notes.

 

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**THE IMMUNE RESPONSE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**(in thousands, exceptper share amounts)(unaudited)

 
|                                                                                               |   | **Three months ended March 31,** |   |
|----------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                               |   | **2003**                         |   | **2002** |   |
| Revenues:                                                                                          |   |                             |   |   |   |
| Contract research revenue                                                                          |   | $                                | 7      |   | $ | 7 |   |
| Licensed research revenue                                                                          |   | 17                               |   | 2 |   |
|                                                                                               |   |                             |   |   |   |
|                                                                                               |   | 24                               |   | 9 |   |
|                                                                                               |   |                             |   |   |   |
| Expenses:                                                                                          |   |                             |   |   |   |
| Research and development                                                                           |   | 2,477                            |   | 3,808 |   |
| General and administrative                                                                         |   | 1,035                            |   | 1,147 |   |
| Exit and disposal related costs                                                                    |   | 285                              |   | — |   |
|                                                                                               |   |                             |   |   |   |
|                                                                                               |   | 3,797                            |   | 4,955 |   |
|                                                                                               |   |                             |   |   |   |
| Other income and (expense):                                                                        |   |                             |   |   |   |
| Investment income                                                                                  |   | 8                                |   | 14 |   |
| Interest expense - including $1,102 and $232 of non-cash accretion in  2003 and 2002, respectively |   | (1,424                           | )      | (352 | ) |
|                                                                                               |   |                             |   |   |   |
|                                                                                               |   | (1,416                           | )      | (338 | ) |
|                                                                                               |   |                             |   |   |   |
| Net loss                                                                                           |   | $                                | (5,189 | ) | $ | (5,284 | ) |
|                                                                                               |   |                             |   |   |   |
| Loss per share - basic and diluted                                                                 |   | $                                | (0.26  | ) | $ | (0.59 | ) |
|                                                                                               |   |                             |   |   |   |
| Weighted average number of shares outstanding                                                      |   | 19,671                           |   | 8,893 |   |

 

See accompanying notes.

 

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**THE IMMUNE RESPONSE CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS**(in thousands)(unaudited)

 
|                                                                         |   | **Three months ended March 31,** |   |
|------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                         |   | **2003**                         |   | **2002** |   |
| Operating activities:                                                        |   |                             |   |   |   |
| Net loss                                                                     |   | $                                | (5,189 | ) | $ | (5,284 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |   |                             |   |   |   |
| Depreciation and amortization                                                |   | 514                              |   | 558 |   |
| Operating expenses paid with previously issued common stock                  |   | 42                               |   | — |   |
| Stock option adjustments                                                     |   | 115                              |   | — |   |
| Deferred revenue                                                             |   | (13                              | )      | 191 |   |
| Accrued excess lease costs                                                   |   | (91                              | )      | — |   |
| Long-term accrued interest                                                   |   | 275                              |   | 60 |   |
| Accretion of convertible notes payable                                       |   | 1,102                            |   | 232 |   |
| Changes in operating assets and liabilities:                                 |   |                             |   |   |   |
| Other current assets                                                         |   | (171                             | )      | 309 |   |
| Accounts payable                                                             |   | 58                               |   | (223 | ) |
| Accrued expenses                                                             |   | (140                             | )      | (64 | ) |
| Net cash used in operating activities                                        |   | (3,498                           | )      | (4,221 | ) |
|                                                                         |   |                             |   |   |   |
| Investing activities:                                                        |   |                             |   |   |   |
| Sale of marketable securities, net                                           |   | —                           |   | 176 |   |
| Other assets                                                                 |   | 14                               |   | (38 | ) |
| Net cash provided by investing activities                                    |   | 14                               |   | 138 |   |
|                                                                         |   |                             |   |   |   |
| Financing activities:                                                        |   |                             |   |   |   |
| Principal payments under equipment notes and capital leases payable          |   | (267                             | )      | (169 | ) |
| Proceeds from issuances of convertible notes payable and warrants            |   | —                           |   | 2,000 |   |
| Proceeds from issuance of short-term convertible note payable                |   | 2,000                            |   | — |   |
| Proceeds from issuance of short-term secured promissory note                 |   | —                           |   | 2,000 |   |
| Net cash provided by financing activities                                    |   | 1,733                            |   | 3,831 |   |
|                                                                         |   |                             |   |   |   |
| Net decrease in cash and cash equivalents                                    |   | (1,751                           | )      | (252 | ) |
| Cash and cash equivalents at beginning of year                               |   | 3,939                            |   | 2,430 |   |
| Cash and cash  equivalents at end of period                                  |   | $                                | 2,188  |   | $ | 2,178 |   |
|                                                                         |   |                             |   |   |   |
| Supplemental disclosure of cash flow information:                            |   |                             |   |   |   |
| Interest paid                                                                |   | $                                | 322    |   | $ | 56 |   |
|                                                                         |   |                             |   |   |   |
| Supplemental disclosure of noncash investing and financing  activities:      |   |                             |   |   |   |
| Unrealized loss on marketable securities                                     |   | $                                | — |   | $ | (13 | ) |

 

See accompanying notes.

 

5

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**THE IMMUNE RESPONSE CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTSMarch 31, 2003(Unaudited)**

 

**1.****                            Basisof Presentation**

 

The condensed consolidated financial statements of The Immune ResponseCorporation and its wholly-owned subsidiary (“the Company”) for the threemonths ended March 31, 2003 and 2002 are unaudited.  All significant intercompany accounts and transactions have beeneliminated in consolidation.  Thesefinancial statements reflect all adjustments, consisting of only normalrecurring adjustments which, in the opinion of management, are necessary tofairly present the consolidated financial position of the Company as of March31, 2003, and the consolidated results of operations of the Company for thethree months ended March 31, 2003 and 2002.  The results of operations for the three months ended March 31,2003 are not necessarily indicative of the results to be expected for the yearended December 31, 2003.  For morecomplete financial information, these consolidated financial statements and thenotes thereto should be read in conjunction with the consolidated auditedfinancial statements for the year ended December 31, 2002 included in theCompany’s Form 10-K filed with the Securities and Exchange Commission.

 

In October 2002, the Company’s Board of Directors formally declared aone-for-four reverse stock split of issued and outstanding shares of commonstock.  The Company’s stockholdersauthorized the reverse split at their annual meeting held in June 2002.  All common share balances and net loss pershare amounts presented in these financial statements have been retroactivelyadjusted to reflect the reverse stock split.

 

Certain reclassifications have been made to conform prior periodfinancial information to the current presentation.  These reclassifications had no effect on reported income orlosses.

 

**2.****                            Organization,liquidity and going concern**

 

*Organization*

 

The Immune Response Corporation (the “Company”), a Delawarecorporation, is a biopharmaceutical company developing a therapeutic vaccinefor the treatment of HIV infection.  Wehave developed REMUNE®, an immune-based therapy, to inducespecific immune responses for the treatment of HIV.  We also have created six distinct therapeutic vaccines in variousstages of development for autoimmune diseases and cancer and have established anextensive patent portfolio spanning four different technologies with a total of173 patents issued to us worldwide.

 

As part of our restructuring program announced in September 2002, wehave ceased development of all therapeutic vaccines other than REMUNE®.  Subsequent to March 31, 2003, we havedisposed of excess assets and are negotiating an early lease termination for avacated headquarters facility resulting in exit and disposal related costs of$285,000 recognized as of March 31, 2003, and we are estimating approximately$700,000 of additional costs for the second quarter of 2003.  See Note 13.

 

*Liquidity and going concern*

 

The consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. The Company has operating and liquidity concerns due to historicallyreporting significant net losses and negative cash flows from operations.  As of March 31, 2003 and December 31,2002, the Company had a working capital deficiency of $2.4 million and working capitalof $1.0 million, respectivley, and an accumulated deficit of $263.0 million and$257.8 million, respectively.

 

On March 28, 2003, we issued to Cheshire Associates, an affiliateof one of our directors and principal stockholder,Mr. Kevin Kimberlin, a short-term convertible promissory note in theamount of $2.0 million, bearing interest at the rate of 8% per annum (the“March Note”).  We anticipate that theproceeds from the issuance of the March Note will be sufficient to fund ourplanned operations, excluding capital improvements and new clinical trialcosts, only through May 2003.  The MarchNote is convertible into either 1,626,016 shares of our common stock at a priceof $1.23 per share (which was the closing price of our common stock onMarch 27, 2003) or an equal amount of such other securities that theCompany may offer in the future by means of a private placement to “accreditedinvestors.”

 

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On May 15, 2003, we issued to Cheshire Associates, an affiliate of oneof our directors and principal stockholder, Mr. Kevin Kimberlin, ashort-term convertible promissory note in the amount of $1.0 million,bearing interest at the rate of 8% per annum (the “May Note”).  We anticipate that the proceeds from theissuance of the May Note will be sufficient to fund our planned operations,excluding capital improvements and new clinical trial costs, only into earlyJune 2003.  The May Note has aconvertible feature still to be determined in good faith negotiation prior tothe 120 day maturity.  See Note 13.

 

Notwithstanding the issuances of the March and May Notes, we willcontinue to have limited cash resources. Although our management recognizes the imminent need to secureadditional financing and currently is negotiating with certain third partiesthe terms and conditions of potential financing transactions, including theprivate placement transaction described in the immediately preceding paragraph,there can be no assurance that we will be successful in consummating any suchtransaction or, if we do consummate such a transaction, that the terms andconditions of such financing will not be unfavorable to us.  The failure by us to obtain additionalfinancing before early June 2003, will have a material adverse effect on us andlikely result in our inability to continue as a going concern.  As a result, our independent auditors haveconcluded that there is substantial doubt as to our ability to continue as agoing concern for a reasonable period of time, and have modified their reportin the form of an explanatory paragraph describing the events that have givenrise to this uncertainty regarding our 2002 annual consolidated financialstatements.

 

These factors, among others, raise substantial doubt about theCompany’s ability to continue as a going concern.  The consolidated financial statements do not include anyadjustments relating to the recoverability and classification of asset carryingamounts or the amount and classification of liabilities that might result shouldthe Company be unable to continue as a going concern.

 

**3.****                            Netloss per share**

 

Basic and diluted net loss per share is computed using the weightedaverage number of common shares outstanding during the period.  Potentially dilutive securities are excludedfrom the diluted net loss per share calculation, as the effect would beantidilutive.  Potentially dilutiveshares not included are 1.7 million shares for outstanding employee stockoptions, 11.1 million shares issuable under convertible notes payable, relatedparty, 9.8 million shares issuable under warrants outstanding,9.5 million shares issuable under A Warrants outstanding and1.5 million shares issuable under an option issued to the placement agentfor the private offering in December 2002.

 

**4.****                            Comprehensiveloss**

 

The Company accounts for comprehensive income in accordance with FASNo. 130, “Reporting Comprehensive Income.” The components of comprehensive loss are as follows:

 
|                                          |   | **Three  Months Ended  March 31,** |       |
|-----------------------------------------------|--------|------------------------------------|------------|
| **(in thousands)**                            |   | **2003**                           | ** ** | **2002** | ** ** |
|                                          |   |                               |       |   |   |
| Net loss                                      |   | $                                  | (5,189     | ) | $ | (5,284 | ) |
| Net unrealized  loss on marketable securities |   | —                             |       | (13 | ) |
| Comprehensive  loss                           |   | $                                  | (5,189     | ) | $ | (5,297 | ) |

 

**5.****                            Recent accounting pronouncements**

 

In August 2001, the Financial Accounting Standards Board, FASB, issuedFAS No. 143, “Accounting for Asset Retirement Obligations.”  This statement addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs.  It applies to all entities and legalobligations associated with the retirement of long-lived assets that resultfrom the acquisition, construction, development and/or normal operation oflong-lived assets, except for certain obligations of lessees.  This statement amends FAS No. 19,“Financial Accounting and Reporting by Oil and Gas Producing Companies,” andwas effective for financial statements issued for fiscal years beginning afterJune 15, 2002.  The adoption of FASNo. 143 did not have a material impact on the Company’s consolidatedfinancial position or results of operations.

 

In June 2002, the FASB issued FAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” FAS No. 146 addresses accounting and reporting for costs associatedwith exit or disposal activities and nullifies Emerging Issues Task Force IssueNo. 94-3, “Liability Recognition for Certain Employee Termination Benefitsand Other Costs to Exit an Activity (Including Certain Costs Incurred in aRestructuring).”  FAS No. 146requires that a

 

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liability for a cost associated with an exit or disposal activity berecognized and measured initially at fair value when the liability isincurred.  FAS No. 146 is effectivefor exit or disposal activities that are initiated after December 31, 2002.  See Note 13 for current and estimated costsfrom the exit and disposal of our vacated headquarters facility in progress andexpected to be completed by the end of the second quarter of 2003.

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others,” which disclosures are effective forfinancial statements issued after December 15, 2002.  While the Company has various guarantees includedin contracts in the normal course of business, primarily in the form ofindemnities, these guarantees would only result in immaterial increases infuture costs, but do not represent significant commitments or contingentliabilities of the indebtedness of others. The adoption of this statement did not have a material impact on theCompany’s financial position or results of operations.

 

**6.****                            Licensedtechnology**

 

In December 1999, the Company entered into a technology licensingagreement with Connetics Corporation (“Connetics”) and XOMA, (US) LLC(“XOMA”).  The agreement assignedexclusive rights to T cell receptor (“TCR”), intellectual property (issuedpatents and know-how) to the Company in exchange for approximate value of$4.9 million comprised of $500,000 in cash, 62,500 shares of common stock,$945,000 of short-term license contract payable and $2,664,000 of a potentialcontingent stock liability.  Theagreement also requires the Company to make royalty payments on future sales ofproducts, if any, related to the TCR intellectual property to Connetics, XOMAand Dr. Arthur Vandenbark, one of the inventors of the assignedtechnology.  The purchased technologydid not include any FDA approved products. The agreement terminates when the patent expires in 2014.  The Company owns additional TCR-relatedintellectual property and intends to carry forward development ofpharmaceutical products for the treatment of multiple sclerosis and otherautoimmune diseases using the technology.

 

In accordance with FAS No. 144, the Company had identifiedlicensed technology totaling $2.8 million at December 31, 2002 aslong-lived assets subject to annual impairment review.  Given the current financial status of the Company,its historical losses and the indeterminable outcome of the development andapproval of its products, there is substantial uncertainty as to the Company’sability to recover its investment in these long-lived assets through thegeneration of net future cash flows.  Inlight of this uncertainty, the Company obtained an independent third-partyappraisal of these long-lived assets in the first quarter of 2003.  As a result of such appraisal, licensedtechnology did not require an impairment charge for the year ended December 31,2002.

 

The Company capitalized the purchase cost to licensed technology.  The license contract was paid in full inOctober 2000 by four quarterly installments of $250,000 beginning in January2000.  The contingent stock liabilitywas settled in March 2000.  Noadditional shares of common stock were required to be issued pursuant to thevaluation contingency terms of the agreement.

 

**7.****                            Equipmentnotes payable**

 

In June 2002, the Company restructured its equipment loans withTransamerica Technology Finance Corporation (“Transamerica”).  As a result of the restructuring, theCompany cured the existing default under those loans and limited thecircumstances which could serve as the basis for any future default by theCompany.  Pursuant to the agreementssigned with Transamerica, the Company is obligated to pay Transamerica three$200,000 milestone payments upon receipt of proceeds from each of the followingtransactions:  (i) closing of theDecember 2002 private placement, (ii) exercise of the Class AWarrants and (iii) exercise of the Class B Warrants.  The first payment of $200,000 was paid aspart of the December 2002 private placement. These payments have and will reduce the Company’s existing Transamericadebt.  Additionally, Transamerica wasgranted a security interest in the Company’s assets, including a subordinatedinterest in the Company’s intellectual property.  The Company also remains obligated to make its scheduled debtpayments to Transamerica until the debt and interest has been paid infull.  The total amount owed to Transamericaas of March 31, 2003 and December 31, 2002 was approximately $670,000 and $865,000,respectively.

 

**8.****                            Convertiblenotes payable, related party**

 

In November 2001, the Company, entered into the Note Purchase Agreementand Intellectual Property Security Agreement with an accredited investor.  The investor, Kevin Kimberlin Partners, L.P.(“KKP”), is an affiliate of Kevin Kimberlin, a director and majorstockholder of the Company. Subsequently, the Note Purchase Agreement has been amended to add otheraffiliates and/or related parties of Kevin Kimberlin as investors.  These affiliated investors include OshkimLimited Partnership (“Oshkim”), The Kimberlin Family 1998 Irrevocable Trust(“KFIT”) and Cheshire Associates LLC (“Cheshire”).  Since November 2001 through December 31, 2002, the Companyhas

 

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privately placed a total of $15.7 million in convertible notes andwarrants.  In December 2002,$2.0 million of the notes were converted into the Company’s privateplacement of common stock and warrants, which leaves a remaining balance of$13.7 million of convertible notes and warrants at March 31, 2003 andDecember 31, 2002.

 

The Company used substantially all of the net proceeds from thesetransactions for product development, working capital and other generalcorporate purposes.  The Company filed aRegistration Statement on Form S-3 with the SEC to cover the resale of theunderlying shares of common stock.

 

All the notes bear interest at a fixed rate of 8% per year and aresecured by the intellectual property of the Company.  The notes have a three-year maturity from the date of originalissuance.  The notes are convertibleinto shares of the Company’s common stock at any time, at the option of theinvestors.  The conversion prices arebased on a percentage of the average closing bid prices of the Company’s commonstock for either a ten-day or five-day trading period ended on the daypreceding each closing.

 

Each note provides 100% warrant coverage.  The warrants are for a term of ten years.  The warrants are exercisable into shares ofthe Company’s common stock at any time, at the option of the investors.  The exercise prices are based on the averageclosing bid prices of the Company’s common stock for either a ten-day orfive-day trading period ended on the day preceding each closing.  Both the conversion prices of the notes andthe exercise prices of the warrants provide anti-dilution protection for theinvestors.

 

Following is a summary of the various terms and conversion features ofthe outstanding convertible notes payable, related party at March 31, 2003 andDecember 31, 2002:

 
|               |   |               |   |                             |       | **At  Issuance** |      | **# of Days**         |   | **After  Dilution Adjustments** |   |
|--------------------|--------|--------------------|--------|----------------------------------|------------|------------------|-----------|-----------------------|--------|---------------------------------|--------|
| **Issuance  Date** |   | **Maturity  Date** |   | **Convertible  Notes Principal** |       | **# of  Shares** |      | **Conversion  Price** |   | **% to  Market**                |   | **Average  Closing  Bid** |   | **# of  Shares** |   | **Conversion  Price** |   |
| 09-Nov-01          |   | 09-Nov-04          |   | $                                | 2,000,000  |             | 433,426   |                  | $      | 4.6144                          |   | 80 | % | 10 |   | 559,706 |   | $ | 3.5733 |   |
| 14-Feb-02          |   | 14-Feb-05          |   | 2,000,000                        |       | 429,000          |      | 4.6620                |   | 112.5                           | %      | 5 |   | 554,292 |   | 3.6082 |   |
| 03-May-02          |   | 03-May-05          |   | 4,000,000                        |       | 2,319,109        |      | 1.7248                |   | 80                              | %      | 10 |   | 2,745,367 |   | 1.4570 |   |
| 12-Nov-02          |   | 12-Nov-05          |   | 4,847,608                        |       | 4,243,354        |      | 1.1424                |   | 80                              | %      | 10 |   | 4,704,131 |   | 1.0305 |   |
| 15-Nov-02          |   | 15-Nov-05          |   | 200,000                          |       | 174,581          |      | 1.1456                |   | 80                              | %      | 10 |   | 193,648 |   | 1.0328 |   |
| 20-Nov-02          |   | 20-Nov-05          |   | 200,000                          |       | 184,638          |      | 1.0832                |   | 80                              | %      | 10 |   | 202,613 |   | 0.9871 |   |
| 27-Nov-02          |   | 27-Nov-05          |   | 215,000                          |       | 264,518          |      | 0.8128                |   | 80                              | %      | 10 |   | 272,462 |   | 0.7891 |   |
| 10-Dec-02          |   | 30-Jul-05          |   | 278,320                          |       | 187,851          |      | 1.4816                |   | 80                              | %      | 10 |   | 217,624 |   | 1.2789 |   |
|               |   |               |   | $                                | 13,740,928 |             | 8,236,477 |                  |   |                            |   |   |   |   | 9,449,843 |   |   |   |
|                    |        |                    |        |                                  |            |                  |           |                       |        |                                 |        |  |  |  |  |  |  |  |  |  |

 

Following is a summary of the various terms and exercise features ofthe warrants issued in conjunction with the convertible notes payable, relatedparty at March 31, 2003 and December 31, 2002:

 
|               |   |                 |   | **Fair Value**              |      | **At  Issuance** |      | **After  Dilution  Adjustments** |   |
|--------------------|--------|----------------------|--------|-----------------------------|-----------|------------------|-----------|----------------------------------|--------|
| **Issuance  Date** |   | **Expiration  Date** |   | **Allocated  to  Warrants** |      | **# of  Shares** |      | **Exercise  Price**              |   | **% to  Market** |   | **# of  Shares** |   | **Exercise  Price** |   |
| 09-Nov-01          |   | 09-Nov-11            |   | $                           | 1,076,000 |             | 433,426   |                             | $      | 5.7680 |   | 100 | % | 565,841 |   | $ | 4.4182 |   |
| 14-Feb-02          |   | 14-Feb-12            |   | 906,000                     |      | 429,000          |      | 4.1440                           |   | 100 | % | 550,599 |   | 3.2288 |   |
| 03-May-02          |   | 03-May-12            |   | 2,038,000                   |      | 2,319,109        |      | 2.1560                           |   | 100 | % | 2,820,396 |   | 1.7728 |   |
| 12-Nov-02          |   | 12-Nov-12            |   | 2,697,000                   |      | 4,243,354        |      | 1.4280                           |   | 100 | % | 4,887,883 |   | 1.2397 |   |
| 15-Nov-02          |   | 15-Nov-12            |   | 107,000                     |      | 174,581          |      | 1.4320                           |   | 100 | % | 201,191 |   | 1.2426 |   |
| 20-Nov-02          |   | 20-Nov-12            |   | 72,000                      |      | 184,638          |      | 1.3540                           |   | 100 | % | 210,881 |   | 1.1855 |   |
| 27-Nov-02          |   | 27-Nov-12            |   | 103,000                     |      | 264,518          |      | 1.0160                           |   | 100 | % | 286,544 |   | 0.9379 |   |
| 10-Dec-02          |   | 30-Jul-12            |   | 154,000                     |      | 187,851          |      | 1.8520                           |   | 100 | % | 224,422 |   | 1.5502 |   |
|               |   |                 |   | $                           | 7,153,000 |             | 8,236,477 |                             |   |   |   |   | 9,747,757 |   |   |   |
|                    |        |                      |        |                             |           |                  |           |                                  |        |  |  |  |  |  |  |  |  |  |

 

The cash proceeds of the notes were allocated prorata between therelative fair values of the notes and warrants at issuance using the BlackScholes valuation model for valuing the warrants.  After allocating the proceeds between the note and warrant, aneffective conversion price was calculated for the convertible note to determinethe beneficial conversion discount for each note.  The value of the beneficial conversion discount is recorded asadditional discount to the note.  Theresultant combined discount to the note is accreted back to the note principalbalance over the three-year term of the note and recorded as interestexpense.  The following is a summary ofthe allocation of the cash proceeds to the relative fair values of the notesand warrants and the components of the discount recorded upon issuance of eachnote:

 

9

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| **(in thousands)** |   |                              |   | **Fair Value  Allocation at  Issuance** |   | **Components  of Note Discount** |   | **Original  Note** |   |
|--------------------|--------|-----------------------------------|--------|-----------------------------------------|--------|----------------------------------|--------|--------------------|--------|
| **Issuance  Date** |   | **Convertible  Notes  Principal** |   | **Warrants**                            |   | **Notes**                        |   | **Warrants**       |   | **Beneficial  Conversion  Cost** |   | **Total  Discount** |   | **Balance  Net of  Discount** |   |
| 09-Nov-01          |   | $                                 | 2,000  |                                    | $      | 1,076                            |   | $                  | 924    |   | $ | 1,076 |   | $ | 924 |   | $ | 2,000 |   | $ | — |   |
| 14-Feb-02          |   | 2,000                             |   | 906                                     |   | 1,094                            |   | 906                |   | 639 |   | 1,545 |   | 455 |   |
| 03-May-02          |   | 4,000                             |   | 2,038                                   |   | 1,962                            |   | 2,038              |   | 1,962 |   | 4,000 |   | 3⁄4 |   |
| 12-Nov-02          |   | 4,848                             |   | 2,697                                   |   | 2,151                            |   | 2,697              |   | 2,151 |   | 4,848 |   | 3⁄4 |   |
| 15-Nov-02          |   | 200                               |   | 107                                     |   | 93                               |   | 107                |   | 93 |   | 200 |   | 3⁄4 |   |
| 20-Nov-02          |   | 200                               |   | 72                                      |   | 128                              |   | 72                 |   | 72 |   | 144 |   | 56 |   |
| 27-Nov-02          |   | 215                               |   | 103                                     |   | 112                              |   | 103                |   | 103 |   | 206 |   | 9 |   |
| 10-Dec-02          |   | 278                               |   | 154                                     |   | 124                              |   | 154                |   | 124 |   | 278 |   | 3⁄4 |   |
|               |   | $                                 | 13,741 |                                    | $      | 7,153                            |   | $                  | 6,588  |   | $ | 7,153 |   | $ | 6,068 |   | $ | 13,221 |   | $ | 520 |   |

 

Convertible notes payable, related party - net as it is presented onthe balance sheet consists of the following:

 
| **(in  thousands)**                                          |   | **March 31,  2003** |   | **December  31,  2002** |   |
|--------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                                         |   |                |   |                    |   |
| Convertible  notes payable, related party – face amount |   | $                   | 13,741 |                    | $      | 13,741 |   |
|                                                         |   |                |   |                    |   |
| Discount for  warrants and beneficial conversion             |   | (13,221             | )      | (13,221                 | )      |
| Discount  accreted on notes converted into private placement |   | (276                | )      | (276                    | )      |
| Accretion of  discount recorded as interest expense          |   | 3,751               |   | 2,649                   |   |
| Discount  balance, net                                       |   | (9,746              | )      | (10,848                 | )      |
|                                                         |   |                |   |                    |   |
| Long-term  accrued interest                                  |   | 869                 |   | 594                     |   |
| Convertible  notes payable, related party - net              |   | $                   | 4,864  |                    | $      | 3,487 |   |

 

*December Conversion*

 

In December 2002, as part of the Private Placement, the Companyconverted $2.0 million of related party convertible promissory notespreviously issued in June and July 2002. The Company recorded a $3.2 million beneficial inducement cost as aresult of the conversion.  The partiallyunpaid principal balance of $278,320 from the third note dated July 30,2002 was reissued to Cheshire on December 10, 2002 but with all theoriginal terms of the July 30, 2002 convertible note and warrant pursuantto the amended Note Purchase Agreement and Intellectual Property SecurityAgreement.  In addition, approximately$74,000 of accrued interest for the three notes was repaid with conversionproceeds.

 

The following is a summary of the previous notes, warrants and theirterms, less the amounts converted into the Private Placement:

 
|               |   | **Convertible  Notes**             |      | **Convertible  Notes** |    | **Warrants**          |   |
|--------------------|--------|------------------------------------|-----------|------------------------|---------|-----------------------|--------|
| **Issuance  Date** |   | **Principal &  Interest** |      | **# of  Shares**       |    | **Conversion  Price** |   | **# of  Shares** |   | **Exercise  Price** |   |
| 24-Jun-02          |   | $                                  | 1,000,000 |                   | 523,451 |                  | $      | 1.9104 |   | 523,451 |   | $ | 2.3880 |   |
| 11-Jul-02          |   | 566,638                            |      | 354,858                |    | 1.5968                |   | 354,858 |   | 1.9960 |   |
| 30-Jul-02          |   | 637,189                            |      | 430,068                |    | 1.4816                |   | 430,068 |   | 1.8520 |   |
| Accrued Interest   |   | 74,493                             |      |                   |    |                  |   |   |   |   |   |
| 10-Dec-02          |   | (2,000,000                         | )         | (1,121,000             | )       |                  |   | (1,121,000 | ) |   |   |
| 10-Dec-02          |   | $                                  | 278,320   |                   | 187,377 |                  | $      | 1.4816 |   | 187,377 |   | $ | 1.8520 |   |

 

*Private Placement*

 

In December 2002 (the “Private Placement”), the Company completed thePrivate Placement of common stock and warrants, which raised approximately$8.4 million in gross proceeds, including $6.4 million in newinvestment

 

10

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proceeds and $2.0 million of non-cash proceeds converted frompreviously issued related party convertible promissory notes.  We used the net cash proceeds ofapproximately $4.9 million (net of approximately $1.5 million inissuance costs) of the offering for general corporate purposes such asresearch, development, operations, personnel and regulatory expertise and torepay a portion of our outstanding indebtedness to Transamerica FinanceCorporation.  We could raise anadditional $29.5 million if all of the Class A warrants andClass B warrants issued in the offering, which are redeemable by us at$2.49 and $3.32, respectively, are exercised. Alternatively, we could raise an additional $12.7 million if onlythe Class A warrants are exercised. If all of the Class A andClass B warrants are exercised, we estimate that the $29.5 million inproceeds would provide us with sufficient funds to fund our planned operations,excluding capital improvements and new clinical trial costs, for an additional22 months.  If only the Class Awarrants are exercised, we estimate that the additional $12.7 millionwould provide us with sufficient funds to fund our planned operations,excluding capital improvements and new clinical trial costs, for an additionaltwelve months.  However, there can be noassurances that all or any portion of the warrants will be exercised by theinitial purchasers or by any subsequent holders.  We also issued to Spencer Trask Ventures, Inc., the placementagent for the private offering, an option to purchase 1,452,419 shares ofcommon stock and 1,452,419 Class A warrants.  We have not included the exercise of this option and Class Awarrants in the estimated proceeds discussed above.  As of March 31, 2003, no Class A Warrants had beenexercised.

 

*Short-Term Secured Promissory Notes,Related Party*

 

In March 2002, the Company issued a short-term secured promissory noteto Oshkim for $2.0 million.  Thenote earned interest at 8%, with a maturity date of May 5, 2002 and wassecured by the intellectual property of the Company.  As part of the May 2002 Closing, the short-term securedpromissory note was repaid in full with interest of approximately $19,000.

 

In August, September and October 2002, the Company issued short-termsecured promissory notes to the KFIT, Oshkim and Cheshire for approximately$4.6 million.  The notes earnedinterest at 8% per year, with a maturity date of November 30, 2002 andwere secured by the intellectual property of the Company.  The proceeds were used for working capitaland other general corporate purposes. KFIT and Oshkim have transferred all short-term secured promissory notesto Cheshire.  As part of the firstNovember Closing, the short-term secured promissory notes were repaid in fullwith interest of approximately $61,000.

 

**9.****                            Short-termconvertible promissory note, related party**

 

On March 28, 2003, we issued to Cheshire Associates, an affiliateof one of our directors and principal stockholder,Mr. Kevin Kimberlin, a short-term convertible promissory note in theamount of $2.0 million, bearing interest at the rate of 8% per annum (the“March Note”).  We anticipate that theproceeds from the issuance of the March Note will be sufficient to fund ourplanned operations, excluding capital improvements and new clinical trialcosts, only through May 2003.  The MarchNote is convertible into either 1,626,016 shares of our common stock at a priceof $1.23 per share (which was the closing price of our common stock onMarch 27, 2003) or an equal amount of such other securities that theCompany may offer in the future by means of a private placement to “accreditedinvestors.”

 

On May 15, 2003, we issued to Cheshire Associates, an affiliate of oneof our directors and principal stockholder, Mr. Kevin Kimberlin, ashort-term convertible promissory note in the amount of $1.0 million,bearing interest at the rate of 8% per annum (the “May Note”).  We anticipate that the proceeds from theissuance of the May Note will be sufficient to fund our planned operations,excluding capital improvements and new clinical trial costs, only into earlyJune 2003.  The May Note has aconvertible feature still to be determined in good faith negotiation prior tothe 120 day maturity.  See Note 13.

 

Notwithstanding the issuances of the March and May Notes, we willcontinue to have limited cash resources. Although our management recognizes the imminent need to secureadditional financing and currently is negotiating with certain third partiesthe terms and conditions of potential financing transactions, including theprivate placement transaction described in the immediately preceding paragraph,there can be no assurance that we will be successful in consummating any suchtransaction or, if we do consummate such a transaction, that the terms andconditions of such financing will not be unfavorable to us.  The failure by us to obtain additionalfinancing before early June 2003, will have a material adverse effect on us andlikely result in our inability to continue as a going concern.

 

**10.****                     Contingencies**

 

From time to time, the Company is subject to various claims andlitigation incidental to our business activities.  Since July 2001, several complaints have been filed in the UnitedStates District Court for the Southern District of

 

11

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California seeking an unspecified amount of damages on behalf of analleged class of persons, who purchased shares of the Company’s common stock atvarious times between May 17, 1999 and July 6, 2001.  The various complaints name the Company andcertain of its officers as defendants, as well as Agouron Pharmaceuticals, Inc.and one of its officers.  The complaintsallege that the Company, Agouron and/or such officers violated federalsecurities laws by misrepresenting and failing to disclose certain informationabout the results of clinical trials of REMUNEâ.  The complaints have been consolidated into asingle action under the name *In re Immune Response Securities Litigation*by order of the Court.  The Company hasnot yet formally responded to the complaints. Although the Company intends to vigorously defend the actions, theCompany can not now predict or determine the outcome or resolution of theseproceedings, or to estimate the amounts of, or potential range of, loss withrespect to these proceedings.  Inaddition, the timing of the final resolution of these proceedings isuncertain.  The range of possibleresolutions of these proceedings could include judgments against us or ourofficers or settlements that could require substantial payments by the Company,which could have a material adverse impact on our consolidated financialposition, results of operations and cash flows.  These proceedings also might require substantial attention of ourmanagement team and therefore divert their time and attention from our businessand operations.

 

**11.****                     Stockholders’equity**

 

In October 2002, the Company’s Board of Directors formally declared aone-for-four reverse stock split of issued and outstanding shares of commonstock.  The Company’s stockholdersauthorized the reverse split at their annual meeting held in June 2002.  All common share balances and net loss pershare amounts presented in these financial statements have been retroactivelyadjusted to reflect the reverse stock split.

 

*Stock transactions*

 

In December 2002, the Company completed the Private Placement of commonstock and warrants, which raised approximately $8.4 million in grossproceeds, including $6.4 million in new investment proceeds and$2.0 million of non-cash proceeds converted from previously issued relatedparty convertible promissory notes.  SeeNote 8.  The net proceeds totaled$4.9 million after issuance costs of approximately $1.5 million.  The Company also issued to Spencer TraskVentures, Inc., the placement agent for the Private Placement, an option to purchase1,452,419 shares of common stock and 1,452,419 Class A Warrants.  As per the June 2002 agreement withTransamerica, $200,000 of the offering proceeds were used to pay down theLong-term Equipment Notes Payable. Exercise of all warrants, including those Class A and Class BWarrants in the placement agent option, would result in total proceeds of$37.8 million.  Each unit had apurchase price of $100,000 and consists of (a) 112,995 shares of commonstock and (b) 112,995 Class A Warrants.  The Class A Warrants are exercisable for one share of commonstock and a Class B Warrant at $1.33, a 50 percent premium to the $0.885discounted Unit Price.  The Class BWarrants are exercisable for one share of common stock at $1.77, a 100 percentpremium to the $0.885 discounted Unit Price.

 

The common stock included in the units sold in the December PrivatePlacement are subject to resale restrictions. Notwithstanding the effectiveness of a registration statement onForm S-3, which the Company filed on December 13, 2002 and hassubsequently amended, until the date which is the earlier of (i) 210 daysfollowing the close of the offering of units or (ii) 90 days following theeffectiveness of the registration statement for Form S-1, each investor inthe units is prohibited from directly or indirectly offering, selling,transferring, assigning or otherwise disposing of any shares of common stockacquired by them in the December offering, other than shares of common stockacquired upon exercise of the warrants.

 

The Class A and Class B warrants may not be exercised byanyone other than the initial investor in the units until the registrationstatement on Form S-1 becomes effective.

 

The Company received authorization for quotation on the Nasdaq SmallCapMarket for the shares of common stock included in the units, as well as theshares of common stock underlying the warrants.  Additionally, the Company received conditional approval for thequotation of the Class A warrants and Class B warrants on the NasdaqSmallCap Market.  Representatives ofNasdaq have informed the Company that the Class A and Class Bwarrants may not be listed on the Nasdaq SmallCap Market until 100,000Class A warrants have been exercised. There can be no assurance that the criteria for authorization for thewarrants or our common stock will be satisfied by the Company on an ongoingbasis or that 100,000 Class A warrants will be exercised.

 

*Stock-based compensation*

 

The Company accounts for stock-based compensation in accordance withAccounting Principles Board, APB, No. 25, “Accounting for Stock Issued toEmployees.”  The Company has adopted thedisclosure-only provisions of FAS No. 123 “Accounting for Stock-BasedCompensation.”  Under APB No. 25,compensation expense relating to

 

12

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employee stock options is determined based on the excess of the marketprice of the Company’s stock over the exercise price on the date of grant, theintrinsic value method, versus the fair value method as provided under FAS No. 123.

 

At March 31, 2003, the Company had two stock-based employeecompensation plans.  The Companyaccounts for these plans under the recognition and measurement principles ofAPB No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations.  Accordingly, nostock-based employee compensation cost is reflected in net loss, as all optionsgranted under the plans had an exercise price equal to the market value of theunderlying common stock on the date of grant. Had compensation cost for the Company’s stock option plans beendetermined based on the fair value at the grant date for awards for threemonths ended March 31, 2003 and 2002, consistent with the provisions ofFAS No. 123, the Company’s net loss and loss per share would have increased.

 

The following table provides information as of March 31, 2003regarding compensation plans (including individual compensation arrangements)under which equity securities of The Immune Response Corporation are authorizedfor issuance (in thousands, except per share data):

 
| **Plan category**                                          |   | **Number of  securities to be  issued upon exercise  of outstanding  options, warrants  and rights  (a)** |   | **Weighted-average  exercise price of  outstanding options,  warrants and rights*  (b)** |   | **Number of securities  remaining available for  future issuance under equity  compensation plans  (excluding securities  reflected in column (a))  (c)** |   |
|------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Equity compensation plans approved by security holders     |   | 991                                                                                                       |   | $                                                                                        | 13.18  |                                                                                                                                                      | 678    |   |
| Equity compensation plans not approved by security holders |   | 750                                                                                                       |   | 1.20                                                                                     |   | 3,250                                                                                                                                                     |   |
| Total                                                      |   | 1,741                                                                                                     |   | $                                                                                        | 8.02   |                                                                                                                                                      | 3,928  |   |

 

----

*As adjusted forreverse stock split.

 

*Stock options*

 

The Company has an approved stock option plan to grant options topurchase common stock to employees and non-employee directors of the Companyand certain other individuals.  The planauthorizes the Company to issue or grant qualified and non-qualified options topurchase up to 2,475,000 shares of its common stock.  As of March 31, 2003, there were approximately 678,000shares available for grant.

 

Under the terms of the 1989 Stock Plan, options may be granted at notless than 100% and 85% of fair market value as of the date of grant forqualified and non-qualified options, respectively.  To date, all options have been issued at 100% of fair marketvalue.  Except for the non-employeedirectors, these options primarily become exercisable over a four-year periodfrom the date of grant.

 

Under the terms of the plan, non-qualified options will be granted tonon-employee directors at the fair market value as of the date of grant.  These options become exercisable in fourequal annual installments on each of the first four anniversaries of the dateof grant.  Additionally, the plan providesthat upon each date of the Company’s Annual Meeting of the Stockholders, non-employeedirectors are eligible to receive a grant of 1,562 shares at the fair marketvalue on date of grant with a one-ear vesting schedule.

 

In February 2003, a new stock option plan to grant options to purchasecommon stock to employees and non-employee directors of the Company and certainother individuals was estblished for 3,250,000 shares, subject to stockholderapproval at the Company’s Annual Meeting to be held May 20, 2003.

 

In addition, the Company granted options to purchase 750,000 shares of commonstock to John Bonfiglio, the new Chief Executive Officer hired in January 2003,per an employement agreement, not subject to any equity compensationplans.  For purposes of financialdisclosure, this agreement is treated as a third employee stock option plan.

 

Activity with respect to the various stock plans is summarized asfollows (in thousands):

 
|                              |   | **Stock Options  Outstanding** |   | **Weighted  Average Price** |   |
|-----------------------------------|--------|--------------------------------|--------|-----------------------------|--------|
| Balance at December 31, 2001 |   | 1,399                          |   | $                           | 23.12  |   |
| Granted                           |   | 625                            |   | 2.59                        |   |
| Exercised                         |   | 3⁄4                         |   | 3⁄4                      |   |
| Cancelled                         |   | (887                           | )      | 21.70                       |   |
| Balance at December 31, 2002 |   | 1,137                          |   | 12.95                       |   |
| Granted                           |   | 750                            |   | 1.20                        |   |
| Exercised                         |   | 3⁄4                         |   | 3⁄4                      |   |
| Cancelled                         |   | (146                           | )      | 11.35                       |   |
| Balance at March 31, 2003    |   | 1,741                          |   | $                           | 8.02   |   |

 

13

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Following is a summary of the optionsoutstanding as of March 31, 2003:

 
| **Range of  Exercise Prices**     |   | **Options  Outstanding** |   | **Weighted  Average  Remaining Life  In Years** |   | **Weighted  Average  Exercise Price** |   | **Options  Exercisable** |    | **Weighted  Average  Exercise Price  of Options  Exercisable** |   |
|-----------------------------------|--------|--------------------------|--------|-------------------------------------------------|--------|---------------------------------------|--------|--------------------------|---------|----------------------------------------------------------------|--------|
| $   1.20 - $  1.20 |   | 750,000                  |   | 9.79                                            |   | $                                     | 1.20   |                     | 85,128  |                                                           | $      | 1.20 |   |
| $   1.60 - $  2.36 |   | 380,706                  |   | 7.28                                            |   | 2.28                                  |   | 196,867                  |    | 2.25                                                           |   |
| $   3.68 - $20.50       |   | 371,898                  |   | 6.68                                            |   | 11.71                                 |   | 301,320                  |    | 12.93                                                          |   |
| $ 20.52 - $54.76                  |   | 234,079                  |   | 5.32                                            |   | 32.06                                 |   | 210,379                  |    | 32.78                                                          |   |
| $ 73.00 - $73.00                  |   | 4,687                    |   | 2.28                                            |   | 73.00                                 |   | 4,687                    |    | 73.00                                                          |   |
|                              |   | 1,741,370                |   | 7.96                                            |   | $                                     | 8.02   |                     | 798,381 |                                                           | $      | 14.63 |   |

 

At March 31, 2003, the Company had three stock-based employeecompensation plans, which are described more fully above. The Company accountsfor these plans under the recognition and measurement principles of APBNo. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations.  The Company hasadopted the disclosure-only provisions of FAS No. 123.  Accordingly, no stock-based employee compensationcost is reflected in net loss, as all options granted under the plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.  Had compensation costfor the Company’s stock option plans been determined based on the fair value atthe grant date for awards for three months ended March 31, 2003 and 2002,consistent with the provisions of FAS No. 123, the Company’s net loss andloss per share would have been increased to the pro forma amounts indicatedbelow (in thousands, except per share data):

 
|                                                                |   | **Three  Months Ended March 31,** |   |
|---------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                |   | **2003**                          |   | **2002** |   |
| Net loss  (attributable to common stockholders) 3⁄4  as reported |   | $                                 | 5,189  |   | $ | 5,284 |   |
| Less fair value  of stock-based employee compensation expense       |   | 124                               |   | 73 |   |
| Net loss (attributable  to common stockholders) 3⁄4  pro forma   |   | $                                 | 5,313  |   | $ | 5,357 |   |
| Net loss per  share (basic and diluted) 3⁄4  as reported         |   | $                                 | .26    |   | $ | .59 |   |
| Net loss per  share (basic and diluted) 3⁄4  pro forma           |   | $                                 | .27    |   | $ | .60 |   |

 

The fair value of each option grant was estimated on the date of grantusing the Black-Scholes option-pricing model with the following weightedaverage assumptions used for grants in 2003 and 2002:  risk-free interest rates of 2.78% and 2.628%, respectively, expectedoption lives of 5 years and a dividend rate of zero.  The volatility factor assumptions of the expected market price ofthe Company’s common stock were and 162% and 141%,  for 2003 and 2002, respectively.

 

Because FAS No. 123 has not been applied to options granted priorto January 1, 1995, the resulting pro forma compensation cost may not berepresentative of that to be expected in future years.  The weighted average fair value of optionsgranted for the three months ended March 31, 2003 and the year ended December31, 2002 was $1.16 and $2.20, respectively.

 

*Warrants*

 

Following is a summary of warrants outstanding as of March 31, 2003 andDecember 31, 2002:

 
| **Types of Warrants**       |   | **Amount** |       | **Warrants  Outstanding** |       | **Range of  Exercise  Prices** |             | **Warrant  Call Price** |   |
|-----------------------------|--------|------------|------------|---------------------------|------------|--------------------------------|------------------|-------------------------|--------|
| Related party  warrants     |   | $          | 7,153,000  |                      | 9,747,757  |                           | $ 1.016 - $5.768 |                    | none   |   |
| Class A warrants            |   | 2,664,000  |       | 9,522,071                 |       | $ 1.33                         |             | $ 2.49                  |   |
| Class B warrants            |   | 2,664,000  |       | 9,522,071                 |       | $ 1.77                         |             | $ 3.32                  |   |
| 20% Placement  agent option |   | 1,148,000  |       | 1,452,419                 |       | $ 0.885                        |             | none                    |   |
| Other                       |   | 55,000     |       | 12,500                    |       | $ 5.36                         |             | none                    |   |
|                        |   | $          | 13,684,000 |                      | 30,256,818 |                           |             |                    |   |   |

 

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At March 31, 2003, 50.7 million shares of common stock werereserved for the exercise of stock options, employee stock purchase plan,exercise of warrants, conversion of convertible notes payable, contingentwarrants and contingent shares subject to milestones per the amendments to theCompany’s License and Collaboration Agreement.

 

**12.****                     Remune®Collaboration**

 

In late June 2002, the Company amended its REMUNEâlicense and collaboration contract with Trinity Medical Group USA, Inc(“Trinity”).  The amended contractprovides for manufacturing costs and mark-up plus $50 per unit to be paid tothe Company.  The $50 per unit mark-upwould expire upon the earlier of the first one million doses of REMUNEâpurchased by Trinity or December 31, 2007.  As consideration for the increased per unit, purchase price to bepaid to the Company, Trinity was issued 1,000,000 shares of restricted commonstock valued at $2,360,000 and up to an additional 750,000 shares upon theoccurrence of certain sales milestones. All of the restricted shares issued to Trinity are subject toregistration rights.  In addition, theCompany waived the final $5.0 million common stock purchase obligation setforth in the original agreement, which would have applied in the event of theoptional technology transfer of REMUNEâmanufacturing rights in Trinity’s licensed territories.  Also, the Company provided an increase inthe amount of shares that Trinity will receive in exchange for a$5.0 million payment upon Thai government approval of REMUNEâto 500,000 shares from 83,333 shares.

 

**13.****                     Subsequentevents**

 

On May 15, 2003, we issued to Cheshire Associates, an affiliate of oneof our directors and principal stockholder, Mr. Kevin Kimberlin, ashort-term convertible promissory note in the amount of $1.0 million,bearing interest at the rate of 8% per annum (the “May Note”).  We anticipate that the proceeds from theissuance of the May Note will be sufficient to fund our planned operations,excluding capital improvements and new clinical trial costs, only into earlyJune 2003.  The May Note has aconvertible feature still to be determined in good faith negotiation prior tothe 120 day maturity.  See Note 9.

 

Notwithstanding the issuance of the May Note, we will continue to havelimited cash resources.  Although ourmanagement recognizes the imminent need to secure additional financing andcurrently is negotiating with certain third parties the terms and conditions ofpotential financing transactions, there can be no assurance that we will besuccessful in consummating any such transaction or, if we do consummate such atransaction, that the terms and conditions of such financing will not beunfavorable to us.  The failure by us toobtain additional financing before early June 2003, will have a materialadverse effect on us and likely result in our inability to continue as a goingconcern.

 

During May 2003, the Company held an auction to sell excess assetsassociated with our vacated headquarters facility located in Carlsbad,California.  The proceeds from theauction will be used to pay down equipment debt.  In addition, the Company is negotiating an early leasetermination for the vacated Carlsbad facility. Additional exit and disposal related costs are estimated to beapproximately $700,000, and will be incurred and recognized over the nextquarter.

 

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**Item 2****.  Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

The followingdiscussion contains forward-looking statements concerning our liquidity,capital resources, financial condition, results of operation and timing ofanticipated revenues and expenditures. Such statements are subject to risks anduncertainties that could cause actual results to differ materially from thoseprojected. Factors that could cause or contribute to such differences include,among others, those discussed under “Risk Factors.”  The following discussion should be read in conjunction with ourCondensed Consolidated Financial Statements and Notes thereto includedelsewhere in this Form 10-Q. These forward-looking statements speak onlyas of the date hereof. Except for our ongoing obligation to disclose materialinformation as required by federal securities laws, we undertake no obligationto publicly release the result of any revisions to these forward-lookingstatements that may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events*.*

 

**Overview**

 

We are a biopharmaceutical company developing immune-based therapies toinduce specific immune responses for the treatment of HIV. Until theimplementation of a restructuring program in September 2002, we also had beendeveloping immune-based therapies to induce specific immune responses for thetreatment of autoimmune diseases and cancer, as well as targeted, non-viraldelivery technology for gene therapy which are designed to enable the deliveryof genes directly to the liver via intravenous injection. As a result of ourrestructuring program, we have refocused our efforts entirely on REMUNE® andhalted development of all of our other products.

 

*Going Concern*

On March 28, 2003, we issued to CheshireAssociates, an affiliate of one of our directors and principal stockholders,Mr. Kevin Kimberlin, a short-term convertible promissory note in theamount of $2.0 million, bearing interest at the rate of 8% per annum. Weanticipate that the proceeds from such issuance will be sufficient to fund ourplanned operations, excluding capital improvements and new clinical trialcosts, only through May 2003. The note issued in March 2003 is convertible intoeither 1,626,016 shares of our common stock at a price of $1.23 per share(which was the closing price of our common stock on March 27, 2003) or anequal amount of such other securities that we may offer in the future by meansof a private placement to “accredited investors.”

 

On May 15, 2003, we issued to Cheshire Associates, an affiliate of oneof our directors and principal stockholder, Mr. Kevin Kimberlin, ashort-term convertible promissory note in the amount of $1.0 million,bearing interest at the rate of 8% per annum (the “May Note”).  We anticipate that the proceeds from theissuance of the May Note will be sufficient to fund our planned operations,excluding capital improvements and new clinical trial costs, only into earlyJune 2003.  The May Note has a convertiblefeature still to be determined in good faith negotiation prior to the 120 daymaturity.

 

Notwithstanding the issuances of the March and May Notes, we willcontinue to have limited cash resources. Although our management recognizes the imminent need to secureadditional financing and currently is negotiating with certain third partiesthe terms and conditions of potential financing transactions, including theprivate placement transaction described in the immediately preceding paragraph,there can be no assurance that we will be successful in consummating any suchtransaction or, if we do consummate such a transaction, that the terms andconditions of such financing will not be unfavorable to us.  The failure by us to obtain additionalfinancing before early June 2003, will have a material adverse effect on us andlikely result in our inability to continue as a going concern.  Our independent auditors have concluded thatthere is substantial doubt as to our ability to continue as a going concern fora reasonable period of time, and have, therefore, modified their report in theform of an explanatory paragraph describing the events that have given rise tothis uncertainty.

 

As of March 31, 2003,we had a consolidated accumulated deficit of $263.0 million. We have notgenerated revenues from the commercialization of any product. We expect tocontinue to incur substantial net operating losses over the next several years,which would imperil our ability to continue operations. We expect to experiencequarter-to-quarter fluctuations, as well, some of which could be significant,due to research, development, manufacturing scale-up and clinical trialactivities. We may not be able to generate sufficient product revenue to becomeprofitable on a sustained basis, or at all, and do not expect to generate productrevenue before the first quarter of 2004, if at all. We have operating andliquidity concerns due to our significant net losses, negative cash flows fromoperations and substantial working capital deficit. As a result of these andother factors, our independent auditors, BDO Seidman, LLP, indicated that thereis substantial doubt about our ability to continue as a going concern.

 

Management currentlyis evaluating equity financing alternatives to meet our future capitalrequirements. In addition, we are seeking collaborative partners for all of ourtechnologies. In any event, we will need to raise substantial additionalcapital to fund our operations. If we were unable to raise adequate capital, itwould have a

 

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material adverseeffect on us and would cause us to cease operations, at which time we will notbe able to satisfy our obligations. Our ability to find collaborative partnerscould be materially and adversely affected by the security interest held by Mr.Kimberlin and his related parties in substantially all of our intellectualproperty. See “Risk Factors—We May Be Unable To Enter Into AdditionalCollaborations Or Maintain Existing Ones.”

 

In December 2002, wecompleted a private offering of common stock and warrants resulting in $8.4million in gross proceeds, which includes $4.9 million (net of approximately$1.5 million in issuance costs) of new investment proceeds and $2.0 million ofnon-cash proceeds converted from previously issued related party convertiblepromissory notes. We recorded a $3.2 million beneficial inducement cost as aresult of the conversion of these promissory notes. We used the net proceeds ofthe offering for general corporate purposes such as research, development, operations,personnel and regulatory expertise and to repay a portion of our outstandingindebtedness to Transamerica Finance Corporation. We could raise an additional$29.5 million if all of the Class A warrants and Class B warrants issued in theoffering, which are redeemable by us if the price of our common stock is equalto or greater than $2.49 and $3.32, respectively, are exercised. Alternatively,we could raise an additional $12.7 million if only the Class A warrants areexercised. The net cash proceeds from the private offering funded our plannedoperations through March 31, 2003.

 

If all of the Class Aand Class B warrants are exercised, we estimate that the $29.5 million inproceeds would provide us with sufficient funds to fund our planned operations,excluding capital improvements, for approximately 22 months. If only the ClassA warrants are exercised, we estimate that the additional $12.7 million wouldprovide us with sufficient funds to fund our planned operations, excludingcapital improvements, for approximately twelve months. However, there can be noassurances that all or any portion of the warrants will be exercised by theinitial purchasers or by any subsequent holders. We also issued to SpencerTrask Ventures, Inc., the placement agent for the private offering, an optionto purchase 1,452,419 shares of common stock and 1,452,419 Class A warrants. Wehave not included the exercise of this option and Class A warrants in theestimated proceeds discussed above. As of March 2002, none of the Class A warrantshave been exercised.

 

On October 9, 2002,our Board of Directors formally declared a one-for-four reverse stock split ofissued and outstanding shares of common stock. On October 24, 2002, Nasdaqgranted us an additional 180 calendar day grace period to demonstratecompliance with the Nasdaq minimum $1.00 bid price per share requirement forcontinued listing. Subsequently, because the closing bid price of our commonstock was at $1.00 or greater for at least ten consecutive trading days,effective on October 31, 2002, Nasdaq informed us that we were in compliancewith its listing requirements. As of the quarter ended March 31, 2003, we havefailed to maintain the minimum stockholders’ equity requirment of at least $2.5million. See “Risk Factors—Our Stock May Become Delisted And Subject To PennyStock Rules, Which May Make It More Difficult For You To Sell Your Securities.”

 

*Operations*

In September 2002, weimplemented a restructuring program and management changes aimed at reducingcosts and refocusing our efforts on REMUNE® . The restructuring program reducedstaff and cut spending at our headquarters while maintaining limitedmanufacturing capacity at our production facility in King of Prussia,Pennsylvania. When fully implemented, the reductions are expected to contributean estimated $7.2 million in savings annually at approximately $600,000 in costsavings per month. Such projected cost savings assume the sublease of certainof our facilities in King of Prussia, PA and Carlsbad, CA. We have engaged theservices of a national real estate firm to sublease our vacant buildings inboth California and Pennsylvania. Not all of these subleases have beeneffected, and we cannot predict if or when these cost savings, if any, will beachieved or the actual amount of such savings until we enter into definitivesubleases covering the properties.

 

As of March 31, 2003,we were in the process of negotiating an early lease termination for ourvacated headquarters facility located in Carlsbad, California.  Additional exit and disposal relatedcosts are estimated to be approximately $700,000, and will be incurred andrecognized during the second quarter of 2003. This early lease termination isexpected to achieve an estimated savings of $3.4 million over the next two and one halfyears until the end of the lease term, at December 31, 2005.  During May 2003,  we held an auction to sell excess assetsassociated with our vacated facility located in Carlsbad, California.  The proceeds from the auction will be usedto pay down equipment debt.

 

**Other Significant Events**

 

Since July 2001,several complaints have been filed in the United States District Court for theSouthern District of California seeking an unspecified amount of damages onbehalf of an alleged Class of persons, who purchased shares of our common stockat various times between May 17, 1999 and July 6, 2001. The various complaintsname us and certain of our officers as defendants, as well as AgouronPharmaceuticals, Inc. and one of its officers. The complaints allege that we,Agouron and/or such officers violated federal securities laws bymisrepresenting and

 

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failing to disclosecertain information about the results of clinical trials of REMUNE ®. Thecomplaints have been consolidated into a single action under the name *In re  Immune Response Securities Litigation*byorder of the Court. Although we intend to vigorously defend the actions, we donot believe it is feasible to predict or determine the outcome or resolution ofthese proceedings or to estimate the amounts of, or potential range of, losswith respect to these proceedings. In addition, the timing of the finalresolution of these proceedings is uncertain. The range of possible resolutionsof these proceedings could include judgments against us or our officers orsettlements that could require substantial payments by us, which could have amaterial adverse impact on our financial position, results of operations andcash flows. These proceedings also might require substantial attention of ourmanagement team and therefore divert their time and attention from our businessand operations.

 

**Results of Operations**

 

***Three Months Ended March 31, 2003 and 2002***

We recorded revenuesof $24,000 for the three months ended March 31, 2003, as compared to $9,000 forthe corresponding period in 2002. The increase in revenues in 2003 is due tothe amortization of additional multi-year out-licensing contracts of variousintellectual property and/or patents that we own.  We expect no additional revenues unless it is earned throughcorporate collaborations or new research and development agreements. We havenot received any revenues from the sale of products and do not expect to deriverevenue from the sale of any products for the foreseeable future.

 

Our research anddevelopment expenditures were $2.5 million for the three months ended March 31,2003, as compared to $3.8 million for the corresponding period in 2002. Thisdecrease in research and development spending of $1.3 million is attributableto significant reductions in salaries, benefits and operating supplies,adjustments to our operational timelines and delaying expenditures, hiring andmanufacturing scale-up activities of REMUNE ® which reduced expenses by $.4million, reduced spending for clinical trials and related regulatory activitiesin 2003 due to completion or termination of clinical studies in ourimmune-based therapy programs which contributed $.4 million in savings anddecreasing activities on our other non-HIV development programs which resultedin reduced spending of $.5 million.

 

Our REMUNE ® clinicalspending should continue to decrease consistent with the prior quarters, butcould increase if we entered into any new research and developmentcollaborations. However, spending associated with our scale-up of themanufacturing process for REMUNE ® and the cost of producing clinical suppliesfor ongoing and future REMUNE ® studies is expected to increase during fiscalyear 2003 as we focus our financial resources entirely on REMUNE ®. Clinicalstudy spending for our other development programs has decreased beginning inthe second quarter of 2002 as we completed our Phase I/II clinical trialrelating to multiple sclerosis during the first quarter of 2002. We expectresearch and development expenditures for our other development programs toalso continue to decrease due to our restructuring in September 2002 which,among other things, was intended to focus our resources entirely on REMUNE ®.Overall, we expect future research and development expenditures for REMUNE ® toincrease but quarter to quarter fluctuations may occur due to the timing ofexpenditures. If we enter into additional collaborations, research anddevelopment expenditures for our other development programs would likelyincrease over their current levels. There can be no assurance that we willenter into any collaborations, that existing collaborations will not beterminated, or that we will be able to obtain other financing needed tocontinue our research and development efforts.

 

General andadministrative expenses were $1.0 million for the three months ended March 31,2003, as compared to $1.1 million for the corresponding period in 2002. Thisdecrease was primarily attributable to lower consulting and professional feesand lower insurance premiums. We expect quarterly general and administrativeexpenses to remain consistent with prior quarters with savings attributed tothe September 2002 restructuring being offset by possible increased consulting fees.

 

As of March 31, 2003,we were in the process of negotiating an early lease termination for ourvacated headquarters facility located in Carlsbad, California.  Additional exit and disposal relatedcosts are estimated to be approximately $700,000, and will be incurred andrecognized during the second quarter of 2003. This early lease termination isexpected to achieve an estimated savings of $3.4 million over the next two and one halfyears until the end of the lease term, at December 31, 2005.

 

Investment income was$8,000 for the three months ended March 31, 2003 as compared to $14,000 duringthe corresponding period in 2002. Interest expense increased to $1.4 millionfor the three months ended March 31, 2003, as compared to $352,000 for thecorresponding period in 2002. This increase is attributable to the issuance byus to related parties of approximately $15.7 million of 8% convertible notesand short-term promissory notes between January 2002 and March 2003.

 

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Accretion ofconvertible notes payable was $1.1 million for the three months ended March 31,2003, as compared to $232,000 for the corresponding period in 2002.  The increase is attributable to theoutstanding balance of the notes increasing from $4.0 million at March 2002versus $13.7 million at March 2003. Accretion represents the amortization tointerest expense, over a three-year period, of the value of the notes allocatedto the value of warrants issued in connection with the convertible notes andbeneficial conversion feature.

 

In December 2002, theFASB issued FAS No. 148, “Accounting for Stock-Based Compensation—Transitionand Disclosure,” which amended FAS No. 123 “Accounting for Stock-BasedCompensation.” The new standard provides alternative methods of transition fora voluntary change to the fair value based method of accounting for stock-basedemployee compensation. Additionally, the statement amends the disclosurerequirements of FAS No. 123 to require prominent disclosures in the annual andinterim financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method used on reported results.This statement is effective for financial statements for fiscal years endingafter December 15, 2002. In compliance with FAS No. 148, we have elected tocontinue to follow the intrinsic value method in accounting for our stock-basedemployee compensation plan as defined by APB No. 25, “Accounting for StockIssued to Employees,” and have made the applicable disclosures in Note 11 tothe Condensed Consolidated Financial Statements.

 

**Liquidity and Capital Resources**

 

On March 28, 2003, weissued to Cheshire Associates, a short-term convertible promissory note in theamount of $2.0 million, bearing interest at the rate of 8% per annum. Weanticipate that the proceeds from such issuance will be sufficient to fund ourplanned operations, excluding capital improvements and new clinical trialcosts, only through May 2003. The note issued in March 2003 is convertible intoeither 1,626,016 shares of our common stock at a price of $1.23 per share(which was the closing price of our common stock on March 27, 2003) or an equalamount of such other securities that we may offer in the future by means of aprivate placement to “accredited investors.”

 

On May 15, 2003, we issued to Cheshire Associates, an affiliate of oneof our directors and principal stockholder, Mr. Kevin Kimberlin, ashort-term convertible promissory note in the amount of $1.0 million,bearing interest at the rate of 8% per annum (the “May Note”).  We anticipate that the proceeds from theissuance of the May Note will be sufficient to fund our planned operations,excluding capital improvements and new clinical trial costs, only into earlyJune 2003.  The May Note has aconvertible feature still to be determined in good faith negotiation prior tothe 120 day maturity.

 

Notwithstanding the issuances of the March and May Notes, we willcontinue to have limited cash resources. Although our management recognizes the imminent need to secureadditional financing and currently is negotiating with certain third partiesthe terms and conditions of potential financing transactions, including theprivate placement transaction described in the immediately preceding paragraph,there can be no assurance that we will be successful in consummating any suchtransaction or, if we do consummate such a transaction, that the terms andconditions of such financing will not be unfavorable to us.  The failure by us to obtain additionalfinancing before early June 2003, will have a material adverse effect on us andlikely result in our inability to continue as a going concern.  Our independent auditors have concluded thatthere is substantial doubt as to our ability to continue as a going concern fora reasonable period of time, and have, therefore, modified their report in theform of an explanatory paragraph describing the events that have given rise tothis uncertainty.

 

Since our inception in1986 through December 31, 2002, we have financed our activities primarily frompublic and private sales of equity, funding from collaborations with corporatepartners, investment income and the issuance to entities affiliated with orrelated to Mr. Kimberlin, who is one of our directors and our principalstockholder, of convertible notes and warrants and short-term promissory notes.At March 31, 2003, we had a working capital deficiency of $2.4 million,including $2.2 million of cash, cash equivalents and marketable securities.This compares with working capital of $1.0 million and $3.9 million of cash,cash equivalents and marketable securities as of December 31, 2002. Workingcapital decreased during this period as a result of $3.5 million of cash usedin operations and $267,000 of equipment notes and lease payments. In March2003, we issued a $2.0 million short-term convertible note payable, whichprovided cash, but correspondingly increased current liabilities.

 

We could raise anadditional $29.5 million in gross proceeds if the warrants from the December2002 private offering are exercised in full. Alternatively, we could receive anadditional $12.7 million if only the Class A warrants are exercised. Weestimate that the additional $29.5 million from exercise of the warrants infull would be sufficient to fund our planned operations, excluding capitalimprovements, for approximately 22 months. If only the Class A warrants areexercised, the additional $12.7 million would be sufficient to fund our plannedoperations for approximately twelve months. There can be no assurances that allor any portion of the warrants will be exercised by the initial purchasers orby any subsequent holders or, if so, when such exercise might occur.

 

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Once we have used ourcurrent cash balances, we will be forced to look for alternative sources offunding which, even if available, may be on terms substantially less favorable.If we are unable to raise adequate capital, we may be required to delay, orreduce the scope of, our research or development of REMUNE ®, or take othermeasures to cut costs, which would have a material adverse effect on us andlikely result in our inability to continue as a going concern. In any event, wewill need to raise substantial additional capital to fund our operations beyondearly June 2003. We cannot provide any assurance, however, that changes in ourresearch and development plans or other changes affecting our operatingexpenses will not result in the expenditure of such resources before such time.See “Risk Factors—Our Current Cash Position, Additional Financing RequirementsAnd Limited Access To Financing Will Adversely Affect Our Ability To DevelopProducts And Continue As A Going Concern.”

 

We will need to raisesubstantial additional funds to conduct research and development, preclinicalstudies and clinical trials necessary to bring potential products to market andto establish manufacturing and marketing capabilities. We anticipate that forthe 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 overallexpenditures. Overall, future REMUNE ® research and development expendituresare expected to increase from current levels in the event additional financingis obtained. Future spending for research and development may further increaseif we enter into additional collaborations, but there can be no assurance thatwe will enter into any such collaborations. We have delayed additional capitalimprovements of approximately $1.0 million from 2002 related to the scale-up ofthe manufacturing process, but anticipate that those costs would need to beincurred in 2003 to continue the scale-up of the manufacturing process forREMUNE ®. Other anticipated costs with respect to REMUNE ®, includinginvestment in inventory, will depend on many factors including the need foradditional clinical trials and other factors, which will influence ourdetermination of the appropriate continued investment of our financialresources in this program.

 

Our future capitalrequirements will depend on many factors including whether all or any portionof the warrants from the December 2002 private offering will be exercised bythe initial purchasers or by any subsequent holders. Other capital requirementfactors include continued scientific progress in our research and developmentprograms, the scope and results of preclinical studies and clinical trials, thetime and costs involved in obtaining regulatory approvals, the costs involvedin filing, prosecuting and enforcing patent claims, the costs involved indefending claims in class actions, competing technological and marketdevelopments, the cost of manufacturing scale-up and inventories, effectivecommercialization activities and arrangements and other factors not within ourcontrol. We intend to seek additional funding through additional research anddevelopment agreements with suitable corporate collaborators and through publicor private financings, if available. However, we cannot provide assurance thatsuch collaboration arrangements or any public or private financings will beavailable on acceptable terms, if at all. If we raise funds through futureequity arrangements, further dilution to stockholders will result.

 

In June 2002, werestructured our equipment loans with Transamerica. As a result of therestructuring, we cured the existing default under those loans and limited thecircumstances which could serve as the basis for any future default by us.Pursuant to the agreements signed with Transamerica, we paid Transamerica$200,000 upon the closing of our private placement on December 10, 2002,and we are obligated to pay Transamerica $200,000 milestone payments uponreceipt of proceeds from each of the following transactions: (i) exercise ofthe Class A warrants and (ii) exercise of the Class B warrants. These paymentshave and will reduce our existing Transamerica debt. We also remain obligatedto make our scheduled debt payments to Transamerica until the debt and interesthas been paid in full. The total amount owed to Transamerica was approximately$670,000 and $865,000 as of March 31, 2003 and December 31, 2002, respectively.Additionally, Transamerica was granted a security interest in our assets,including a subordinated security interest in our intellectual property. Therecan be no assurance, however, that we will not in the future be in defaultunder our equipment loans with Transamerica and that Transamerica would notexercise its right to accelerate our debt and foreclose on some of our officeand laboratory equipment and intellectual property.

 

**Critical Accounting Policies**

 

***Risks and uncertainties***

The consolidatedfinancial statements have been prepared assuming that we will continue as agoing concern. We have operating and liquidity concerns due to historicallyreporting significant net losses and negative cash flows from operations.  As if March 31, 2003, we had a workingcapital deficiency of $2.4 million and an accumulated deficit of $263.0million.  As of December 31, 2002, wehad working capital of $1.0 million and an accumulated deficit of $257.8million.

 

On March 28, 2003, weissued to Cheshire Associates a short-term convertible promissory note in theamount of $2.0 million, bearing interest at the rate of 8% per annum. Weanticipate that the proceeds from the issuance of the March Note will besufficient to fund our planned operations, excluding capital improvements andnew clinical trial

 

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costs, only throughMay 2003. The note issued in March is convertible into either 1,626,016 sharesof our common stock at a price of $1.23 per share (which was the closing priceof our common stock on March 27, 2003) or an equal amount of such othersecurities that the Company may offer in the future by means of a privateplacement to “accredited investors.”

 

On May 15, 2003, we issued to Cheshire Associates, an affiliate of oneof our directors and principal stockholder, Mr. Kevin Kimberlin, ashort-term convertible promissory note in the amount of $1.0 million,bearing interest at the rate of 8% per annum (the “May Note”).  We anticipate that the proceeds from theissuance of the May Note will be sufficient to fund our planned operations,excluding capital improvements and new clinical trial costs, only into earlyJune 2003.  The May Note has aconvertible feature still to be determined in good faith negotiation prior tothe 120 day maturity.

 

Notwithstanding the issuances of the March and May Notes, we willcontinue to have limited cash resources. Although our management recognizes the imminent need to secureadditional financing and currently is negotiating with certain third partiesthe terms and conditions of potential financing transactions, including theprivate placement transaction described in the immediately preceding paragraph,there can be no assurance that we will be successful in consummating any suchtransaction or, if we do consummate such a transaction, that the terms andconditions of such financing will not be unfavorable to us.  The failure by us to obtain additionalfinancing before early June 2003, will have a material adverse effect on us andlikely result in our inability to continue as a going concern.  Our independent auditors have concluded thatthere is substantial doubt as to our ability to continue as a going concern fora reasonable period of time, and have, therefore, modified their report in theform of an explanatory paragraph describing the events that have given rise tothis uncertainty.

 

These factors, amongothers, raise substantial doubt about our ability to continue as a goingconcern. The condensed consolidated financial statements do not include anyadjustments relating to the recoverability and classification of asset carryingamounts or the amount and classification of liabilities that might resultshould we be unable to continue as a going concern.

 

Our products are invarious stages of development. Prior to generating product revenues, we mustcomplete the development of our products, including several years of humanclinical testing, and receive regulatory approvals prior to selling theseproducts in the human health care market. Our products may not be successfullydeveloped, regulatory approvals may not be granted, or patient and physicianacceptance of any of these products may not be achieved.

 

We face additionalrisks associated with biopharmaceutical companies whose products are in variousstages of development.  These risksinclude, among others, our need for additional financing to complete ourresearch and development programs and commercialize our technologies. Financingmay not be available to us when required or, if available, may not be availableunder favorable terms.

 

We believe thatpatents and other proprietary rights are important to our business. Our policyis to file patent applications to protect technology, inventions andimprovements to our inventions that we consider important to the development ofour business. The patent positions of pharmaceutical and biotechnology firms,including our company, are uncertain and involve complex legal and factualquestions for which important legal principles are largely unresolved. Changesin our estimates in the realizability of our intellectual property may have amaterial effect on our financial statements.

 

**Critical Accounting Estimates**

 

***Licensed technology***

Intangible assets arerecorded at cost and amortized over their estimated useful lives. In December1999, we acquired licenses to certain patent technology, which are beingamortized over seven years. Changes in our estimates of useful lives may have amaterial effect on our financial statements.

 

***Impairment of long-lived assets***

We evaluate potentialimpairment of long-lived assets in accordance with FAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets.” FAS No. 144 requires thatcertain long-lived assets, excluding investments under the equity method ofaccounting, be reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not be fullyrecoverable based on expected undiscounted cash flows that result from the useand eventual disposition of the asset. The amount of any impairment is measuredas the difference between the carrying value and the fair value of the impairedasset.

 

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In accordance with FASNo. 144, the Company has identified our property and equipment as long-livedassets subject to annual impairment review. Given our current financial status,our historical losses and the indeterminable outcome of the development andapproval of our products, there is substantial uncertainty as to our ability torecover our investment in these long-lived assets through the generation of netfuture cash flows. In light of this uncertainty, we obtained an independentthird-party appraisal of these long-lived assets in the first quarter of 2003.As a result of such appraisal, we recognized substantial impairment charges forthe year ended December 31, 2002.

 

**Risk Factors**

**You should carefully consider the risksand uncertainties described below before making an investment decision. Therisks and uncertainties described below are not the only ones facing us.Additional risks and uncertainties not presently known to us or that wecurrently deem immaterial also may impair our business and condition. If any ofthe following risks actually occur, our business and condition could beadversely affected. In those cases, the trading price of our common stock coulddecline, and you may lose all or part of your investment.**

 

**Our Current Cash Position, AdditionalFinancing Requirements And Limited Access To Financing Will Adversely AffectOur Ability To Develop Products And Continue Operations**

In addition to thefunds we received from our private placement of units in December 2002, we willneed to raise substantial additional funds to continue our operations and toconduct research and development, preclinical studies and clinical trialsnecessary to bring our potential products to market and to establishmanufacturing and marketing capabilities.

 

On March 28, 2003, weissued to Cheshire Associates, LLC, or Cheshire Associates, an affiliate of oneof our directors and principal stockholders, Mr. Kevin Kimberlin, a short-termconvertible promissory note in the amount of $2.0 million, bearing interest atthe rate of 8% per annum. We anticipate that the proceeds from such issuancewill be sufficient to fund our planned operations, excluding capitalimprovements and new clinical trial costs, only through May 2003. The noteissued in March 2003 is convertible into either 1,626,016 shares of our commonstock at a price of $1.23 per share (which was the closing price of our commonstock on March 27, 2003) or an equal amount of such other securities that wemay offer in the future by means of a private placement to “accreditedinvestors.”

 

On May 15, 2003, we issued to Cheshire Associates, an affiliate of oneof our directors and principal stockholder, Mr. Kevin Kimberlin, ashort-term convertible promissory note in the amount of $1.0 million,bearing interest at the rate of 8% per annum (the “May Note”).  We anticipate that the proceeds from theissuance of the May Note will be sufficient to fund our planned operations,excluding capital improvements and new clinical trial costs, only into earlyJune 2003.  The May Note has aconvertible feature still to be determined in good faith negotiation prior tothe 120 day maturity.

 

Notwithstanding the issuances of the March and May Notes, we willcontinue to have limited cash resources. Although our management recognizes the imminent need to secureadditional financing and currently is negotiating with certain third partiesthe terms and conditions of potential financing transactions, including theprivate placement transaction described in the immediately preceding paragraph,there can be no assurance that we will be successful in consummating any suchtransaction or, if we do consummate such a transaction, that the terms andconditions of such financing will not be unfavorable to us.  The failure by us to obtain additionalfinancing before early June 2003, will have a material adverse effect on us andlikely result in our inability to continue as a going concern.  Our independent auditors have concluded thatthere is substantial doubt as to our ability to continue as a going concern fora reasonable period of time, and have, therefore, modified their report in theform of an explanatory paragraph describing the events that have given rise tothis uncertainty.

 

As of March 31, 2003,we had net accumulated operating losses of approximately $263.0 million, cashand cash equivalents of only $2.2 million and a working capital deficiency ofapproximately $2.4 million. Because we do not anticipate generating any revenuefrom our products until at least the first quarter of 2004, if at all, we willcontinue to have negative cash flow and will need to raise substantialadditional capital to fund our operations beyond such time. We may receive upto $29.5 million in gross proceeds upon exercise in full of the Class A andClass B warrants, which we expect will be sufficient to fund our plannedoperations, excluding capital improvements and new clinical trial costs, for anadditional 22 months. Also, if our placement agent exercises the placementagent options and all 1,452,419 Class A and 1,452,419 Class B warrantsunderlying the option, we may receive approximately $4.5 million in grossproceeds, which could fund our planned operations for approximately anadditional 3 months. However, there can be no assurance that any of thewarrants will be exercised, or if exercised, when such exercise might occur orthat our placement agent will exercise the placement agent option or any of the

 

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Class A or Class Bwarrants included therein. As of March 31, 2003, no Class A or Class B warrantshave been exercised.

 

Although we anticipatethat development of REMUNE® will continue to represent a significant portion ofour overall expenditures, costs related to the development of REMUNE® decreasedin 2002. We expect our costs related to the development of REMUNE® to eitherincrease in 2003 and 2004 in the event we are able to raise additional capitalenabling us to pursue additional research and development projects, or toremain relatively the same if our financing efforts prove unsuccessful. Otheranticipated costs relating to the development of REMUNE® will depend on manyfactors — in particular, a potential decrease in such costs associated with ourability to establish a new collaborative, strategic or marketing partner toreplace Pfizer Inc., or Pfizer. See “— Pfizer Has Terminated Its CollaborationWith Us And We Have Had To Delay Or Abandon The Continued Development AndCommercialization Of REMUNE®,” “We May Be Unable To Enter Into AdditionalCollaborations Or Maintain Existing Ones” And “Our Failure To Develop AndCommercialize Products Successfully May Cause Us To Cease Operations.”

 

On September 9, 2002,we commenced the implementation of a cost reduction strategy to focus our corecompetencies on efforts related to the research, development, commercializationand production of REMUNE®. We anticipate that the cost reductions will impactour cash expenditures related to research, administrative and operationalcosts. In the process of implementing these cost reductions, we will incurone-time expenses related to severance, relocation of certain facilities andconsulting payments. Excluding these one-time payments and any expansion of ourresearch or manufacturing efforts, if all of our cost reductions are realized,we expect that these cost reductions will decrease our expenses significantly.However, we intend to increase our production capabilities at our King ofPrussia, Pennsylvania, facility which may necessitate additional cash andcapital requirements for such activities. In addition, there can be noassurances that we will be successful in implementing all or any portion ofthese cost reduction measures or that we will recognize all or any portion ofthe anticipated savings.

 

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

 

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

• the cost of manufacturing scale-up;

• the time and costs involved in obtaining regulatory approvals;

• continued scientific progress in our research and development programs;

• the scope and results of preclinical studies and clinical trials;

• the costs involved in filing, prosecuting and enforcing patent claims;

• competing technological and market developments;

• effective commercialization activities and arrangements;

• the costs of defending against and settling lawsuits; and

• other factors not within our control or known to us.

 

Our access to capitalcould be limited if we do not progress in:

 

• scaling up manufacturing;

• obtaining regulatory approvals;

• our research and development programs; or

• our preclinical and clinical trials.

 

Such access also couldbe limited by (i) overall financial market conditions, (ii) applicable NationalAssociation of Securities Dealers, or NASD, rules and federal and statesecurities laws, (iii) the perfected security interest in our intellectualproperty in respect of the aggregate $15.7 million in convertible notes issuedin November 2001, February 2002, May 2002, November 2002, December 2002 andMarch 2003 to affiliates and/or related parties of Mr. Kimberlin, one of ourdirectors and our principal stockholder, (iv) our obligations to TransamericaTechnology Finance Corporation, successor in interest to Transamerica BusinessCredit Corporation, or Transamerica, of approximately $670,000, (v) the effectof the exercise of certain outstanding options and warrants exercisable into12,350,008 shares of common stock, (vi) the effect of the conversion of theNovember 2001 and February, May, November and December 2002 convertible notesinto 9,449,843 shares of common stock, (vii) the issuance of 9,522,072 sharesof common stock and 9,522,072 Class A warrants to the selling security holdersin our private placement of units, and (viii) the issuance of the placementagent option to Spencer Track Ventures, Inc. which is exercisable for 1,452,419shares of common stock and 1,452,419 Class A warrants.

 

In June 2002, werestructured our equipment loans with Transamerica. As a result of therestructuring, we cured our then existing default under those loans and limitedthe circumstances which could serve as the basis for any future

 

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default by us.Pursuant to the agreements signed with Transamerica, upon the closing of theprivate placement, we paid to Transamerica $200,000 and are obligated to payTransamerica the following additional payments:

 

(i)                                     $200,000 when theaggregate net proceeds of any exercises of the Class A warrants equals or isgreater than $300,000; and

(ii)                                  $200,000 when theaggregate net proceeds of any exercises of the Class B warrants equals or isgreater than $300,000.

 

Although thesepayments have and will reduce our existing Transamerica debt, we also remainobligated to make our scheduled debt payments to Transamerica of $72,801 per monthuntil the total aggregate amount of the debt and interest has been paid infull. Additionally, we granted to Transamerica a security interest in certainof our assets, including a subordinated interest in our intellectual property.

 

There can be no assurance,however, that we will not in the future be in default under our equipment loanswith Transamerica and that Transamerica would not exercise its right toaccelerate our debt and foreclose on some of our office and laboratoryequipment and intellectual property. If this were to occur, it could result ina default under certain of our other debt instruments and would have a materialadverse effect on us and would result in us having to cease operations andbeing unable to satisfy our obligations.

 

**You Could Suffer Substantial DilutionOf Your Investment As A Result Of Proposed Subsequent Financings**

Although we havecompleted the private placement of units, we currently are actively consideringraising additional funds.  OnMarch 28, 2003, we issued to Cheshire Associates, an affiliate of one ofour directors and principal stockholders, Mr. Kimberlin, a short-termconvertible promissory note in the amount of $2.0 million, bearing interest atthe rate of 8% per annum. We anticipate that the proceeds from such issuancewill be sufficient to fund our planned operations, excluding capitalimprovements and new clinical trial costs, only through May 2003. The noteissued in March 2003 is convertible into either 1,626,016 shares of our commonstock at a price of $1.23 per share (which was the closing price of our commonstock on March 27, 2003) or an equal amount of such other securities that wemay offer in the future by means of a private placement to “accreditedinvestors.”

 

On May 15, 2003, we issued to Cheshire Associates, an affiliate of oneof our directors and principal stockholder, Mr. Kevin Kimberlin, ashort-term convertible promissory note in the amount of $1.0 million,bearing interest at the rate of 8% per annum (the “May Note”).  We anticipate that the proceeds from theissuance of the May Note will be sufficient to fund our planned operations,excluding capital improvements and new clinical trial costs, only into earlyJune 2003.  The May Note has aconvertible feature still to be determined in good faith negotiation prior tothe 120 day maturity.

 

Notwithstanding the issuances of the March and May Notes, we willcontinue to have limited cash resources. Although our management recognizes the imminent need to secureadditional financing and currently is negotiating with certain third partiesthe terms and conditions of potential financing transactions, including theprivate placement transaction described in the immediately preceding paragraph,there can be no assurance that we will be successful in consummating any suchtransaction or, if we do consummate such a transaction, that the terms andconditions of such financing will not be unfavorable to us.  The failure by us to obtain additionalfinancing before early June 2003, will have a material adverse effect on us andlikely result in our inability to continue as a going concern.  Our independent auditors have concluded thatthere is substantial doubt as to our ability to continue as a going concern fora reasonable period of time, and have, therefore, modified their report in theform of an explanatory paragraph describing the events that have given rise tothis uncertainty.

 

Any subsequentofferings may require the creation or issuance of a class or series of stockthat by its terms ranks senior to the common stock with respect to rightsrelating to dividends and/or liquidation. If we are unable to raise funds onterms favorable to our then existing shareholders, your ownership interest andthe value of your investment may be significantly diluted.

 

We do not expect toreceive proceeds from product revenues sooner than the first quarter of 2004,if at all. Notwithstanding our current financing efforts, we will continue tohave negative cash flow and will need to raise substantial additional capitalto fund our operations beyond such time. We may be able to secure financingonly on terms substantially less favorable to our current investors and to us,if at all. If we raise funds through equity arrangements, further dilution tostockholders will result. If we are unable to obtain financing before wegenerate enough revenue from our products to become cash flow break-even, wewill be unable to pay our debts and will be forced to cease operations andpotentially enter into bankruptcy.

 

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**You Could Suffer Substantial DilutionOf Your Investment As The Result Of Adjustments To The Convertible Notes,Warrants And Other Securities Issued In November 2001, February 2002, May 2002,July 2002, November 2002, December 2002, March 2003 and May 2003**

In November 2001, weissued to Kevin Kimberlin Partners LLP, or KKP, a $2.0 million convertible noteand a warrant, each of which were initially convertible and exercisable,respectively, for 433,426 shares of common stock. In February 2002, we issuedto Oshkim Limited Partnership, or Oshkim, a $2.0 million convertible note and awarrant, each of which were initially convertible and exercisable,respectively, for 429,000 shares of common stock, pursuant to the note purchaseagreement. In May 2002, we issued to Oshkim a $4.0 million convertible note anda warrant, each of which were initially convertible and exercisable,respectively, for 2,319,109 shares of common stock. Such notes were issuedpursuant to a note purchase agreement, dated November 11, 2001. The number ofshares, as well as the applicable conversion or exercise price, as the case maybe, are subject to weighted average antidilution adjustment in the event thatwe issue certain securities below the applicable conversion or exercise priceand in certain other events which would dilute your interest in us.

 

In June 2002, weissued to Oshkim a $1.0 million convertible note and a warrant, each of whichwas initially convertible and exercisable, respectively, for 523,451 shares ofcommon stock or $1.0 million in units offered in the private placement.  Additionally, on July 11, 2002, we issued toThe Kimberlin Family 1998 Irrevocable Trust, or the Kimberlin Family Trust, a$566,638 convertible note and a warrant, each of which was initiallyconvertible and exercisable, respectively, for 354,858 shares of common stock.On July 30, 2002, we issued to the Kimberlin Trust a $637,189 convertiblenote and a warrant, each of which was initially convertible and exercisable,respectively, for 430,068 shares of common stock. Up to $1.0 million of thenotes issued in July was convertible into units offered in the privateplacement. Each of the notes and warrants issued in November 2001 and February,May, June and July 2002 was subsequently contributed by the initial holder toCheshire Associates. On November 12, 2002, we issued to Cheshire Associates a$4,847,607.84 convertible note and a warrant, each of which is initiallyconvertible and exercisable, respectively, for 4,243,354 shares of commonstock. On November 15, 2002, we issued to Cheshire Associates a $200,000convertible note and a warrant, each of which is initially convertible andexercisable, respectively, for 174,581 shares of common stock. On November 20,2002, we issued to Cheshire Associates a $200,000 convertible note and awarrant, each of which is initially convertible and exercisable, respectively,for 184,638 shares of common stock. On November 27, 2002, we issued to CheshireAssociates a $215,000 convertible note and a warrant, each of which isinitially convertible and exercisable, respectively, for 264,518 shares ofcommon stock.

 

In conjunction withour private placement of units, $2.0 million of principal and interest on theJune and July notes and related warrants were converted by Cheshire Associatesinto 20 units. The convertible note and warrant issued to the Kimberlin FamilyTrust on July 30, 2002 and contributed to Cheshire Associates has been reducedto $278,320 as a result of the $2.0 million conversion and has been transferredto a new promissory note and warrant dated December 10, 2002 which wasinitially convertible and exercisable, respectively, for 187,851 shares ofcommon stock. Following the close of the unit offering, the number of sharesand applicable conversion and exercise price of the convertible notes andwarrants issued to Oshkim, KKP, the Kimberlin Family Trust and CheshireAssociates, respectively, were adjusted pursuant to their weighted averageanti-dilution provisions for the unit offering as well as for the conversion ofthe equity underlying the converted notes and warrants. Consequently, thenumber of shares of common stock issuable upon conversion of the outstandingconvertible notes has decreased to 9,449,843 and the number of shares of commonstock issuable upon the exercise of the related warrants has decreased to9,747,757 shares. Such number of shares, as well as the applicable conversionor exercise price, as the case may be, are subject to adjustment in the eventthat we issue certain securities below the applicable conversion or exerciseprice and in certain other events. This also may dilute your interest in us.

 

On March 28, 2003, weissued to Cheshire Associates, an affiliate of one of our directors andprincipal stockholders, Mr. Kevin Kimberlin, a short-term convertiblepromissory note in the amount of $2.0 million, bearing interest at the rate of8% per annum. We anticipate that the proceeds from such issuance will besufficient to fund our planned operations, excluding capital improvements andnew clinical trial costs, only through May 2003. The note issued in March 2003is convertible into either 1,626,016 shares of our common stock at a price of$1.23 per share (which was the closing price of our common stock on March 27,2003) or an equal amount of such other securities that we may offer in thefuture by means of a private placement to “accredited investors.”

 

On May 15, 2003, we issued to Cheshire Associates, an affiliate of oneof our directors and principal stockholder, Mr. Kevin Kimberlin, ashort-term convertible promissory note in the amount of $1.0 million,bearing interest at the rate of 8% per annum (the “May Note”).  We anticipate that the proceeds from the issuanceof the May Note will be sufficient to fund our planned operations, excludingcapital improvements and new clinical trial costs, only into early June2003.  The May Note has a convertiblefeature still to be determined in good faith negotiation prior to the 120 daymaturity.

 

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We also issued anoption to our placement agent to purchase 1,452,419 shares of common stock and1,452,419 Class A warrants which, if exercised, may dilute your interest in us.

 

On June 26, 2002, weentered into an agreement with Trinity Medical Group USA, Inc. and itsaffiliate, Trinity Medical Group, Co. Ltd., a Thailand company, collectivelyTrinity, to amend certain of our existing agreements with Trinity. Inconsideration for entering into these amendments, Trinity has received 1.0million shares of our common stock valued at approximately $2.4 million at thedate of the amendments and also will receive as additional consideration,250,000 shares of our common stock (up to 750,000 shares in the aggregate) asof the date of the satisfaction by Trinity of each of the followingobligations: (i) the purchase by Trinity from us of an aggregate of 300,000doses of REMUNE®, (ii) the purchase by Trinity from us of an aggregate of600,000 doses of REMUNE® and (iii) the purchase by Trinity from us of anaggregate of 1.0 million doses of REMUNE®. Under the current agreement, Trinityalso is obligated to purchase 500,000 shares of common stock at a purchaseprice of $10 per share on the date that is 30 days after the date on whichTrinity receives the required marketing approval from the Food and DrugAdministration of the Ministry of the Public Health of Thailand, or the ThaiFDA. The issuance by us to Trinity of these 2,250,000 shares of common stock,and the granting by us to Trinity of certain registration rights relating tosuch shares, will dilute your interest in us. On August 13, 2002, we informedTrinity that it was our intent to register 500,000 restricted shares of commonstock, held in the name of Trinity, through the filing of the registrationstatement of which this prospectus forms a part.

 

We may in the futureissue additional convertible notes, warrants or other securities. We areanticipating a subsequent offering which we plan to commence in the near futureif the Class A warrants are not exercised. The number of underlying shares ofcommon stock and the terms of the securities are not determinable at this time,but would dilute your interest in us.

 

**You Could Suffer Substantial DilutionOf Your Investment If Certain Warrants And Options To Purchase Common Stock AreExercised Or Our Convertible Notes Are Converted Into Common Stock**

As of March 31, 2003,we had reserved approximately 5.7 million shares of our common stock forpotential issuance upon the exercise of stock options or purchases under theemployee stock purchase plan. Issuance of any of these additional shares couldsubstantially dilute your interest in us. Furthermore, we have warrantsoutstanding which, if exercised, will purchase approximately 28,804,000 shares ofour common stock and approximately 9,450,000 shares which are issuable uponconversion of our outstanding convertible notes. Additionally, we issued anoption to our placement agent to purchase 1,452,419 shares of common stock and1,452,419 Class A warrants. The Class A warrants are exercisable for additionalshares of common stock and Class B warrants. In addition, we may issue up to750,000 shares of our common stock to Trinity pursuant to our License andCollaboration Agreement. See also “— You Could Suffer Substantial Dilution ofYour Investment As The Result Of Adjustments To The Convertible Notes, WarrantsAnd Other Securities Issued In November 2001, February 2002, May 2002, July2002, November 2002, December 2002, March 2003 and May 2003.”

 

**Our Independent Auditors Have ExpressedSubstantial Doubt As To Our Ability To Continue As A Going Concern**

As of March 31, 2003,we had a consolidated accumulated deficit of $263.0 million. We have notgenerated revenues from the commercialization of any product. We expect tocontinue to incur substantial net operating losses over the next several years,which would imperil our ability to continue operations. We may not be able togenerate sufficient product revenue to become profitable on a sustained basis,or at all, and do not expect to generate product revenue before the firstquarter of 2004, if at all. We have operating and liquidity concerns due to oursignificant net losses, negative cash flows from operations and substantialworking capital deficit. Additionally, it may take a significant length of timebefore we can raise capital from any subsequent financing. As a result of theseand other factors, our independent auditors, BDO Seidman, LLP, indicated thatthere is substantial doubt about our ability to continue as a going concern.

 

**Our Stock May Become Delisted AndSubject To Penny Stock Rules, Which May Make It More Difficult For You To SellYour Securities**

On March 12, 2002, ourcommon stock commenced trading below $1.00 per share on The Nasdaq National Market.The National Association of Securities Dealers Automated Quotation System, orNasdaq, listing rules provide that if the closing bid price of a company’sstock is below $1.00 for more than 30 consecutive trading days, the companyfaces possible delisting from Nasdaq. Additionally, Nasdaq listing rulesrequire that a company’s stockholder equity be at least $4.0 million, and afterOctober 2002, be at least $10.0 million. Due to our common stock trading below$1.00 per share for more than 30 consecutive days, as of April 23, 2002, wereceived notification from Nasdaq that our common stock would be delisted fromthe Nasdaq National Market if we could not demonstrate compliance with NASDrules by July 24, 2002.

 

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On September 4, 2002,the NASD approved our application to transfer our common stock to The NasdaqSmallCap Market and consequently extended, until October 22, 2002, the periodfor us to comply with the minimum $1.00 bid per share requirement. Our commonstock was moved to The Nasdaq SmallCap Market, effective September 9, 2002. OnSeptember 29, 2002, we submitted to Nasdaq a request to grant us an additional180 calendar-day grace period to demonstrate compliance with Nasdaq continuedlisting requirements. On October 24, 2002, Nasdaq granted us the 180 dayextension or until April 21, 2003. Subsequently, Nasdaq informed us that we metthe listing requirements.  However as ofMarch 31, 2003, we have fallen below the mininum stock holders’ equity requirementof $2.5 million for the Nasdaq SmallCap Market’s continued listing requirement.See “— We Implemented A 1-For-4 Reverse Stock Split. The Effect Of A ReverseSplit On The Trading Price Of Our Common Stock Is Unpredictable.”

 

The transfer of our commonstock to The Nasdaq SmallCap Market may adversely affect the liquidity andtrading volume of our common stock and reduce the number of market makerswilling to trade in our common stock, making it more likely that widerfluctuations in the quoted price of our common stock will occur. As a result,there is a risk that holders of our common stock will not be able to obtainaccurate price quotes or be able to correctly assess the market price of ourcommon stock. Increases in volatility also could make it more difficult topledge shares of our common stock as collateral, if holders sought to do so,because a lender also might be unable to accurately value our common stock.

 

If we are delistedfrom the Nasdaq for any reason, our common stock will be considered a pennystock under regulations of the Securities and Exchange Commission, or the SEC,and therefore would be subject to rules that impose additional sales practicerequirements on broker-dealers who buy and sell our securities. The additionalburdens imposed upon broker-dealers by these requirements could discouragebroker-dealers from effecting transactions in our common stock, which couldseverely limit the market liquidity of the common stock and warrants and yourability to sell our securities in the secondary market. We cannot assure youthat we will be able to maintain our listing on the Nasdaq. Being delistedwould limit our ability to raise additional financing.

 

**If An Active Trading Market Does NotDevelop For The Warrants, Holders Of Warrants May Not Be Able To Resell TheirClass A Or Class B Warrants**

We are unable topredict whether an active trading market will develop or be sustained for theClass A and Class B warrants.  If noactive trading market develops, holders of the warrants may not be able toresell their warrants at their fair market value or at all.

 

The Class A and ClassB warrants are issuances of new securities with no established trading market.The Class A and Class B warrants have been conditionally approved to list onthe Nasdaq SmallCap Market. Representatives from Nasdaq have informed us that,pursuant to certain Nasdaq rules, the Class A and Class B warrants cannot belisted until at least 100,000 Class A warrants have been exercised. We cannotassure you when, or if, we will meet the 100,000 threshold. If we do not meetthe 100,000 threshold, the liquidity of the Class A and Class B warrants may beaffected.

 

We are not aware ofany securities firm that intends to make a market in the warrants and anysecurities firm that does act as a market-maker could cease its market-makingat any time. In addition, the liquidity of the trading market in the warrants,and the market prices quoted for the warrants, may be adversely affected bychanges in the overall market conditions and by changes in our financialperformance or prospects in the prospects for companies in our industrygenerally. See “—There Are Limits On Your Ability To Exercise The Warrants AndAdverse Effects May Result From The Possible Redemption Of The Warrants.”

 

**We Implemented A 1-For-4 Reverse StockSplit. The Effect Of A Reverse Split On The Trading Price Of Our Common StockIs Unpredictable**

At our Annual Meetingof Stockholders held on June 17, 2002, our stockholders granted to our Board ofDirectors the discretion to effect a 1-for-4 reverse stock split. On October 9,2002, we announced that our Board of Directors had formally declared a 1-for-4reverse stock split of issued and outstanding shares of our common stockeffective as of the open of trading on October 9, 2002. Although thetheoretical effect of a reverse stock split is to increase the per share priceof common stock, the actual price effect of a reverse stock split is difficultto predict. There is historical evidence and academic research relating toreverse stock splits which indicates that shares of listed companies do notperform well subsequent to a reverse stock split. It is possible that thepost-split trading price of our stock could fall below the level one wouldexpect based on the proportional effect of the split alone.

 

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**An Existing Stockholder Directly OwnsApproximately 14.1% Of Our Common Stock And Has The Rights To Acquire AnAdditional 27,568,516 Shares, Of Our Common Stock Which Could Result InOwnership Of Up To Approximately 64.2% Of Our Outstanding Shares And CouldAllow Him To Influence Stockholder Votes**

Kevin B. Kimberlin, amember of our Board of Directors, together his affiliates and/or relatedparties currently own of record approximately 14.1% of our outstanding sharesof common stock and have the right to acquire through the conversion of notesand exercise of options and warrants beneficially owned by them 27,568,516additional shares. If the notes, options and warrants were to be converted andexercised in full, Mr. Kimberlin and his affiliates and/or related partieswould own approximately 64.2% of our outstanding shares of common stock on apost-conversion/exercised basis. As a result of his ownership of our commonstock and the ability to acquire additional shares, Mr. Kimberlin and hisaffiliates and/or related persons could have the ability to control orinfluence substantially all matters requiring approval by our stockholders,including the election of directors and the approval of mergers or otherbusiness combination transactions. If your interests as a stockholder aredifferent from his interests, you may not agree with his decisions and youmight be adversely affected thereby.

 

Mr. Kimberlin, inaddition to being one of our directors and our principal stockholder, is thecontrolling stockholder of Spencer Trask & Co., which is the parent companyof Spencer Trask Ventures, Inc., which acted as exclusive placement agent for,and was paid fees by us in connection with, the private placement of unitscompleted in December 2002.

 

**The Warrant Terms Were ArbitrarilyDetermined**

The exercise andredemption prices and other terms of the Class A and Class B warrants sold aspart of our private offering completed on December 10, 2002, were determinedthrough negotiations between us and our placement agent and do not necessarilybear any relationship to our assets, book value, revenues or financialcondition, or to any other recognized criterion of value. Such prices and otherterms of the warrants should not be construed to indicate or predict futuretrading prices of our warrants or common stock in the public markets.

 

**Limits On Ability To Exercise TheWarrants; Adverse Effects May Result From The Possible Redemption Of TheWarrants**

Purchasers of ourClass A and Class B warrants will be able to exercise the warrants only if acurrent prospectus relating to the securities underlying the warrants is thenin effect under the Securities Act of 1933, or the Securities Act, and thewarrants are qualified for sale or exempt from qualification under theapplicable securities or “blue sky” laws of the states in which the variousholders of the warrants then reside. Although we have agreed to make certainefforts to maintain the effectiveness of a current prospectus covering thesecurities underlying the warrants, there can be no assurance that we will beable to do so. The value of the warrants may be greatly reduced if a currentprospectus covering the securities to be issued upon the exercise of thewarrants is not kept effective under the Securities Act or if such securitiesare not qualified or exempt from qualification in the states in which theholders of the warrants then reside.

 

Subsequent purchasersof the Class A and Class B warrants may not exercise the warrants until theRegistration Statement on Form S-1 filed with the SEC on February 14, 2003 andsubsequently amended is declared effective by the SEC. We cannot assure youwhen or if the SEC will declare the Form S-1 effective and, if it is notdeclared effective, the warrants may never be exercisable.

 

Nasdaq has advised usthat it will not quote the Class A or Class B warrants on the Nasdaq SmallCapMarket until not less than 100,000 Class A warrants have been exercised.Although we have received conditional approval from Nasdaq to quote both theClass A and Class B warrants on Nasdaq once we reach the 100,000 threshold,holders of warrants may be subject to a lengthy delay before the Class A andClass B warrants are quoted on the Nasdaq SmallCap Market. We cannot assure youif or when Class A warrants will be exercised, or if they are exercised, whenthe 100,000 threshold will be attained.

 

In addition, thewarrants are subject to redemption by us, at a price of $0.01 per warrant, followingthe effectiveness of the Form S-1 and upon at least 30 days prior writtennotice to the holders of the warrants if the average of the closing bid pricesof common stock for any 10 consecutive trading days ending within 30 days priorto the date of the notice of redemption is greater than or equal to $2.49, inthe case of the redemption of the Class A warrants, and $3.32, in the case ofthe redemption of the Class B warrants. If the warrants are redeemed, holdersof warrants will lose their right to exercise the warrants, except during such30-day notice of redemption period. Upon the receipt of a notice of redemptionof the warrants, the holders will be required to: exercise the warrants and paythe exercise price at a time when it may be disadvantageous or difficult forthem to do so; sell the warrants at the then market price when they mightotherwise wish to hold the warrants; or accept the redemption price, which isequal to $0.01 per warrant.

 

**Legal Proceedings Could Require Us ToSpend Substantial Amounts Of Money And Impair Our Operations**

Since July 2001,several complaints have been filed in the United States District Court for theSouthern District of California seeking an unspecified amount of damages onbehalf of an alleged class of persons, who purchased shares of our common stockat various times between May 17, 1999 and July 6, 2001. The various complaintsname us, one

 

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of our directors, oneof our officers, Agouron Pharmaceuticals, Inc., or Agouron, and one of itsofficers, as defendants. The complaints allege that we, Agouron and/or suchofficers violated federal securities laws by misrepresenting and failing todisclose certain information about the results of clinical trials of REMUNE®.The complaints have been consolidated into a single action under the name *In re ImmuneResponse Securities Litigation*by order of the Court. We have notyet formally responded to the complaints. Although we intend to vigorouslydefend the actions, we can not now predict or determine the outcome orresolution of these proceedings, or to estimate the amounts of, or potentialrange of, loss with respect to these proceedings. In addition, the timing ofthe final resolution of these proceedings is uncertain. The range of possibleresolutions of these proceedings could include judgments against us or ourofficers or settlements that could require substantial payments by us, whichcould have a material adverse impact on our financial position, results of operationsand cash flows. These proceedings also might require substantial attention ofour management team and therefore divert their time and attention from ourbusiness and operations.

 

**The Annual Use Of Our Net OperatingLosses Has Likely Been Limited As A Result Of Changes In Our Ownership**

We have had numerousequity transactions that have more likely than not resulted in several changesin ownership of us as defined by Section 382 of the Internal Revenue Code of1986, as amended, or the Code. Pursuant to Sections 382 and 383 of the Code,the annual use of our net operating losses, or NOLs would be limited if thereis a cumulative change of ownership (as that term is defined in Section382(g)of the Code) of greater than 50% in the past three years. If such Section382 ownership change occurs, there would be a substantial limitation on ourability to utilize our NOLs to offset future taxable income. As reported inNote 15 to our Consolidated Financial Statements, we had approximately $218.0million of NOL carryforwards at such time. We have not completed our analysisif and when change(s) of ownership have occured, thus, there is uncertainty asto the realizability of our NOL’s. Furthermore, we cannot assure you, however,that we will generate taxable income in the future against which the NOLs couldbe applied.

 

On September 11, 2002,the State of California enacted one of the budget trailer bills implementingthe State’s 2002-2003 Budget Bill (A425). The new law suspends the NOLcarryover deduction for tax years 2002 and 2003. To compensate for thededuction suspension, the period of availability for these NOL deductions hasbeen extended for two years.

 

**Pfizer Has Terminated Its CollaborationWith Us And We Have Had To Delay Or Abandon The Continued Development AndCommercialization Of REMUNE®**

We received in July,2001, a letter from Pfizer which indicated that Pfizer had elected toimmediately terminate, in their entirety, all of its rights and obligationsunder our agreement with them. Our agreement with Pfizer permitted thistermination and the letter we received from Pfizer provided no explanation asto why Pfizer had elected to exercise its termination right.  In addition, no explanation has beenprovided to us by Pfizer at any time after the July, 2001 termination letter.Although we retained all rights relating to REMUNE® upon Pfizer’s termination,we lost a significant source of funding. Following the termination of ouragreement with Pfizer, we decided not to proceed with one of our clinicaltrials of REMUNE® developed by Agouron (subsequently acquired by Pfizer). Thetermination of this agreement has had, and may continue to have, a materialadverse effect on our stock price and, consequently, our ability tosuccessfully raise additional capital.

 

**We May Be Unable To Enter IntoAdditional Collaborations Or Maintain Existing Ones**

We are seekingadditional collaborative arrangements to develop and commercialize ourproducts. We may not be able to negotiate collaborative arrangements onfavorable terms in the future, or at all, and our current or futurecollaborative arrangements may not be successful or continue. We also arecontemplating a renegotiation of our License and Collaboration Agreement withTrinity. However, we have not yet entered into any significant discussions withTrinity regarding such renegotiation.

 

Cheshire Associates(an affiliate and/or related person of Mr. Kimberlin) has a perfected securityinterest in our intellectual property as collateral for the November 2001,February 2002, May 2002, November 2002, December 2002, March 2003 andMay 2003 convertible notes. Pursuant to an agreement with CheshireAssociates, we must comply with certain covenants with respect to ourintellectual property. Additionally, Transamerica has a subordinated securityinterest in our intellectual property. The security interests and covenantscould impair our ability to enter into collaborative and licensingarrangements.

 

**Our Failure To Develop AndCommercialize Products Successfully May Cause Us To Cease Operations**

We have not completedthe development of any product and, as part of our restructuring programannounced in September 2002, have ceased development of all products other thanREMUNE®. Our failure to develop and commercialize products successfully maycause us to cease operations. Our potential therapies which were underdevelopment prior to September 2002 will require significant additionalresearch and development efforts and

 

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regulatory approvalsprior to potential commercialization should these development efforts becontinued in the future.

 

The discontinuation inMay 1999 of a previous Phase III trial of REMUNE® due to the inability to meetcertain primary clinical endpoints has had a material adverse effect on us. Themost recent pivotal trial of REMUNE® conducted by our former collaborativepartner, Pfizer, was discontinued by us. See “—Pfizer Has Terminated ItsCollaboration With Us And We Have Had To Delay The Continued Development AndCommercialization Of REMUNE®.”  Wecannot assure you that any future trials of REMUNE® will be conducted.Furthermore, we cannot guarantee that we, or our corporate collaborators, ifany, will ever obtain any regulatory approvals of REMUNE®. We currently are focusingour core competencies on REMUNE® although there can be no assurance that wewill be successful in so doing.

 

Prior to the cessationof the development efforts in September 2002, our other therapies andtechnologies are at earlier stages of development than REMUNE® and may not beshown to be safe or effective and may never receive regulatory approval.  Some of our technologies have not yet beentested in humans. Regulatory authorities may not permit human testing ofpotential products based on these technologies. Even if human testing ispermitted, the products based on these technologies may not be successfullydeveloped or shown to be safe or effective.

 

The results of ourpreclinical studies and clinical trials may not be indicative of future clinicaltrial results. A commitment of substantial resources to conduct time-consumingresearch, preclinical studies and clinical trials will be required if we are todevelop any products. Delays in planned patient enrollment in our clinicaltrials may result in increased costs, program delays or both. None of ourpotential products may prove to be safe or effective in clinical trials.Approval of the Food and Drug Administration, the FDA, or other regulatoryapprovals, including export license permissions, may not be obtained and evenif successfully developed and approved, our products may not achieve marketacceptance. Any products resulting from our programs may not be successfullydeveloped or commercially available for a number of years, if at all.

 

Moreover, unacceptabletoxicity or side effects could occur at any time in the course of humanclinical trials or, if any products are successfully developed and approved formarketing, during commercial use of our products. Although preliminary researchand clinical evidence has shown REMUNE® to be safe, the appearance of anyunacceptable toxicity or side effects could interrupt, limit, delay or abortthe development of any of our products or, if previously approved, necessitatetheir withdrawal from the market.

 

**Our Patents And Proprietary TechnologyMay Not Be Enforceable And The Patents And Proprietary Technology Of Others MayPrevent Us From Commercializing Products**

We have a portfolio of173 patents worldwide. Although we believe these patents to be protected andenforceable, the failure to obtain meaningful patent protection for ourpotential products and processes would greatly diminish the value of ourpotential products and processes.

 

Cheshire Associates,an entity related to Mr. Kimberlin, has a perfected security interest in ourintellectual property as collateral for the November 2001, February 2002, May2002, November 2002, December 2002 and March 2003 convertible notes.Furthermore, Transamerica has a perfected subordinated security interest insubstantially all of our intellectual property as collateral for our equipmentloans with Transamerica.

 

In addition, whetheror not our patents are issued, or issued with limited coverage, others mayreceive patents, which contain claims applicable to our products. Patents weare not aware of may adversely affect our ability to develop and commercializeproducts. Also, our patents related to HIV therapy have expiration dates thatrange from 2010 to 2015 and our patents related to autoimmune diseases haveexpiration dates that range from 2010 to 2018. The limited duration of ourpatents could diminish the value of our potential products and processes.

 

The patent positionsof biotechnology and pharmaceutical companies are often highly uncertain andinvolve complex legal and factual questions. Therefore, the breadth of claimsallowed in biotechnology and pharmaceutical patents cannot be predicted. Wealso rely upon non-patented trade secrets and know how, and others mayindependently develop substantially equivalent trade secrets or know how. Wealso rely on protecting our proprietary technology in part throughconfidentiality agreements with our current and former corporate collaborators,employees, consultants and certain contractors. These agreements may be breached,and we may not have adequate remedies for any such breaches. In addition, ourtrade secrets may otherwise become known or independently discovered by ourcompetitors. Litigation may be necessary to defend against claims ofinfringement, to enforce our patents or to protect trade secrets. Litigationcould result in substantial costs and diversion of management effortsregardless of the results of the litigation. An adverse result in litigationcould subject us to significant liabilities to third parties, require disputedrights to be licensed or require us to cease using certain technologies.

 

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Our products andprocesses may infringe, or be found to infringe, on patents not owned orcontrolled by us. If relevant claims of third-party patents are upheld as validand enforceable, we could be prevented from practicing the subject matterclaimed in the patents, or would be required to obtain licenses or redesign ourproducts or processes to avoid infringement.

 

**The Lengthy Product Approval ProcessAnd Uncertainty Of Government Regulatory Requirements May Delay Or Prevent UsFrom Commercializing Products**

Clinical testing,manufacture, promotion, export and sale of our products are subject toextensive regulation by numerous governmental authorities in the United States,principally the FDA, and corresponding state and foreign regulatoryagencies.  This regulation may delay orprevent us from commercializing products. Noncompliance with applicablerequirements can result in, among other things, fines, injunctions, seizure orrecall of products, total or partial suspension of product manufacturing andmarketing, failure of the government to grant premarket approval, withdrawal ofmarketing approvals and criminal prosecution.

 

The regulatory processfor new therapeutic drug products, including the required preclinical studiesand clinical testing, is lengthy and expensive. We may not receive necessaryFDA 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 FDAwill require to be enrolled in the clinical trials in order to establish thesafety and efficacy of our products is uncertain.

 

Even if additionalclinical trials of REMUNE® are initiated and successfully completed, the FDAmay not approve REMUNE® for commercial sale. We may encounter significantdelays or excessive costs in our efforts to secure necessary approvals.Regulatory requirements are evolving and uncertain. Future United States orforeign legislative or administrative acts could also prevent or delayregulatory approval of our products. We may not be able to obtain the necessaryapprovals for clinical trials, manufacturing or marketing of any of our productsunder development. Even if commercial regulatory approvals are obtained, theymay include significant limitations on the indicated uses for which a productmay be marketed.

 

In addition, amarketed product is subject to continual FDA review. Later discovery ofpreviously unknown problems or failure to comply with the applicable regulatoryrequirements may result in restrictions on the marketing of a product orwithdrawal of the product from the market, as well as possible civil orcriminal sanctions.

 

Among the otherrequirements for regulatory approval is the requirement that prospectivemanufacturers conform to the FDA’s Good Manufacturing Practices, or GMP,requirements. In complying with the FDA’s GMP requirements, manufacturers mustcontinue to expend time, money and effort in production, record keeping andquality control to assure that products meet applicable specifications andother requirements. Failure to comply and maintain compliance with the FDA’sGMP requirements subjects manufacturers to possible FDA regulatory action andas a result, may have a material adverse effect on us. We, or our contractmanufacturers, if any, may not be able to maintain compliance with the FDA’sGMP requirements on a continuing basis. Failure to maintain compliance couldhave a material adverse effect on us.

 

The FDA has notdesignated expanded access protocols for REMUNE® as “treatment” protocols. TheFDA may not determine that REMUNE® meets all of the FDA’s criteria for use ofan investigational drug for treatment use. Even if REMUNE® is allowed fortreatment use, third party payers may not provide reimbursement for the costsof treatment with REMUNE®. The FDA also may not consider REMUNE® or any otherof our products under development to be appropriate candidates for acceleratedapproval, expedited review or fast track designation.

 

Marketing any drugproducts outside of the United States will subject us to numerous and varyingforeign regulatory requirements governing the design and conduct of humanclinical trials and marketing approval. Additionally, our ability to exportdrug candidates outside the United States on a commercial basis is subject tothe receipt from the FDA of export permission, which may not be available on atimely basis, if at all. Approval procedures vary among countries and caninvolve additional testing, and the time required to obtain approval may differfrom that required to obtain FDA approval. Foreign regulatory approvalprocesses include all of the risks associated with obtaining FDA approval setforth above, and approval by the FDA does not ensure approval by the healthauthorities of any other country, including those in Thailand.

 

Specifically, in orderfor us to export REMUNE® to Thailand for clinical use in that country, we needto meet a number of regulatory requirements. One of those requirements is thatwe must ensure that we can manufacture REMUNE® at our United Statesmanufacturing facility in a manner that is in “substantial compliance” withcurrent United States GMP requirements. We must provide the FDA with “crediblescientific evidence” that REMUNE® would be safe and effective under theconditions of proposed use in Thailand. Furthermore, the Thai FDA must (i)formally request the FDA to approve export of REMUNE® to Thailand, (ii) certifyto the FDA that it is aware that

 

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REMUNE® is notapproved in the United States or in any of several other countries withcomprehensive drug review and approval systems and (iii) concur that the scientificevidence presented to the FDA is “credible scientific evidence that REMUNE®will be reasonably safe and effective” for use in Thailand. There can be noassurance, however, that we will successfully meet any or all of theserequirements for the export of REMUNE®, and if we are unable to successfullymeet all regulatory requirements, we will not be permitted by the FDA to exportREMUNE® to Thailand for clinical use, even if the Thai government were toapprove REMUNE® for such use. There can be no assurance that Trinity, ourcollaborative partner, will be successful in its capacity or efforts to obtainregulatory approval from the Thai FDA.

 

**Technological Change And CompetitionMay Render Our Potential Products Obsolete**

The pharmaceutical andbiotechnology industries continue to undergo rapid change, and competition isintense and is expected to increase. Competitors may succeed in developingtechnologies and products that are more effective or affordable than any thatwe are developing or that would render our technology and products obsolete ornoncompetitive. Many of our competitors have substantially greater experience,financial and technical resources and production, marketing and developmentcapabilities than us. Accordingly, some of our competitors may succeed inobtaining regulatory approval for products more rapidly or effectively than us,or technologies and products that are more effective and affordable than anythat we are developing.

 

**Our Lack Of Commercial ManufacturingAnd Marketing Experience May Prevent Us From Successfully CommercializingProducts**

We have notmanufactured any of our products in commercial quantities. We may notsuccessfully make the transition from manufacturing clinical trial quantitiesto commercial production quantities or be able to arrange for contractmanufacturing and this could prevent us from commercializing products or limitour profitability from our products. Even if REMUNE® is successfully developedand receives FDA approval, we have not demonstrated the capability tomanufacture REMUNE® in commercial quantities. Except for REMUNE®, we have notdemonstrated the ability to manufacture in large-scale clinical quantities anyof our treatments. We rely on a third party for the final inactivation step ofthe REMUNE® manufacturing process. If the existing manufacturing operationsprove inadequate, there can be no assurance that any arrangement with a thirdparty can be established on a timely basis or that we can establish othermanufacturing capacity on a timely basis.

 

We have no experiencein the sales, marketing and distribution of pharmaceutical or biotechnologyproducts. Thus, our products may not be successfully commercialized even ifthey are developed and approved for commercialization.

 

The manufacturing processof our products involves a number of steps and requires compliance withstringent quality control specifications imposed by us and by the FDA.Moreover, our products can be manufactured only in a facility that hasundergone a satisfactory inspection and certification by the FDA. For thesereasons, we would not be able to quickly replace our manufacturing capacity ifwe were unable to use our manufacturing facilities as a result of a fire,natural disaster (including an earthquake), equipment failure or otherdifficulty, or if such facilities are deemed not in compliance with the GMPrequirements, and the noncompliance could not be rapidly rectified. Ourinability or reduced capacity to manufacture our products would prevent us fromsuccessfully commercializing our products.

 

We may enter intoarrangements with contract manufacturing companies to expand our own productioncapacity in order to meet requirements for our products, or to attempt toimprove manufacturing efficiency. If we choose to contract for manufacturingservices, we may encounter costs, delays and/or other difficulties inproducing, packaging and distributing our clinical trials and finished product.Further, contract manufacturers must also operate in compliance with the GMPrequirements; failure to do so could result in, among other things, thedisruption of our product supplies. Our potential dependence upon third partiesfor the manufacture of our products may adversely affect our profit margins andour ability to develop and deliver products on a timely and competitive basis.

 

**Our Other Therapies And TechnologiesHave Been Halted At Early Stages Of Development, Thus We Are Dependent Upon TheSuccess Of REMUNE®**

In September 2002, weannounced a restructuring program which includes focusing our core competenciesand financial resources on REMUNE®. As part of the restructuring, thedevelopment of our other therapies and technologies, which were at earlierstages of development than REMUNE® and have not yet been shown to be safe oreffective, has been halted. Our other therapies and technologies might never befully developed and if they are they might never receive regulatoryapproval.  Thus, we are completelydependent upon the success of REMUNE® and there can be no assurance that we willbe successful in developing or commercializing this product.

 

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**Adverse Determinations ConcerningProduct Pricing, Reimbursement and Related Matters Could Prevent Us FromSuccessfully Commercializing REMUNE® Or Any Of Our Other Products**

Our ability to earnsufficient revenue on REMUNE® or any other of our products will depend in parton the extent to which reimbursement for the costs of the products and relatedtreatments will be available from government health administration authorities,private health coverage insurers, managed care organizations and otherorganizations. Failure to obtain appropriate reimbursement may prevent us fromsuccessfully commercializing REMUNE® or any of our other products. Third-partypayers are increasingly challenging the prices of medical products andservices. If purchasers or users of REMUNE® or any of our other products arenot able to obtain adequate reimbursement for the cost of using the products,they may forego or reduce their use. Significant uncertainty exists as to thereimbursement status of newly approved health care products and whetheradequate third party coverage will be available.

 

**Our Success May Depend Upon TheAcceptance Of REMUNE® By The Medical And HIV-Activist Communities**

Our ability to marketand commercialize REMUNE® depends on the acceptance and utilization of REMUNE®by the medical and HIV-activist communities. We will need to developcommercialization initiatives designed to increase awareness about us andREMUNE® among targeted audiences, including public health and AIDS activistsand community-based outreach groups in additional to the investment community.Currently, we have not developed any such initiatives. Without such acceptanceof REMUNE®, the product upon which we are completely dependent, we may not beable to successfully commercialize REMUNE® or generate revenue.

 

**Product Liability Exposure May ExposeUs To Significant Liability**

We face an inherentbusiness risk of exposure to product liability and other claims and lawsuits inthe event that the development or use of our technology or prospective productsis alleged to have resulted in adverse effects. We may not be able to avoidsignificant liability exposure. We may not have sufficient insurance coverage,and we may not be able to obtain sufficient coverage at a reasonable cost. Aninability to obtain product liability insurance at acceptable cost or tootherwise protect against potential product liability claims could prevent orinhibit the commercialization of our products. A product liability claim couldhurt our financial performance. Even if we avoid liability exposure,significant costs could be incurred that could hurt our financial performance.

 

**If We Lose Our Key Personnel Or AreUnable To Attract And Retain Additional Personnel, We May Be Unable ToSuccessfully Develop Our Technology**

On May 21, 2002, weannounced that Howard Sampson resigned as our Vice President of Finance, ChiefFinancial Officer, Secretary and Treasurer. Subsequently, on June 21, 2002, weannounced the appointment of Michael L. Jeub as Vice President of Finance,Chief Financial Officer, Secretary and Treasurer. In September 2002, Dr. Carloresigned as our Chief Executive Officer and President. On January 7, 2003,after a four month search, we appointed John N. Bonfiglio, Ph.D., as our ChiefExecutive Officer. On January 13, 2003, we announced that Ronald B. Mossresigned as our President. There can be no assurances that we will not loseadditional members of our executive management team or, if so, whether we wouldbe able to hire adequate replacements for any such individuals.

 

Additionally, ourability to conduct business, raise additional financing and commercializeREMUNE® or our other products may be hindered if we lose additional executiveofficers or experienced personnel with historical knowledge of our business,transactions, science and technology. Currently, our most experienced executiveofficer has been with us for less than one year.

 

In addition, recruitingand retaining qualified scientific personnel to assist in scaling up ourmanufacturing facilities and perform future research and development work willbe critical to our success. It has been particularly difficult for us to retainpersonnel in light of the performance of our common stock and the incurrence ofsubstantial net operating losses. We do not have sufficient personnel to fullyexecute our business plan, and there is currently a shortage of skilledexecutives and scientists, which is likely to continue. As a result,competition for experienced executives and scientists from numerous companiesand academic and other research institutions may limit our ability to hire orretain new executives and other qualified personnel on acceptable terms. If wefail to attract and retain sufficient qualified personnel, we may not be ableto develop or implement our technology.

 

**Hazardous Materials And EnvironmentalMatters Could Expose Us To Significant Costs**

We may be required toincur significant costs to comply with current or future environmental laws andregulations. Although we do not currently manufacture commercial quantities ofour product candidates, we produce limited quantities of these products for ourclinical trials. Our research and development and manufacturing processesinvolve the controlled storage, use and disposal of hazardous materials,biological hazardous materials and radioactive compounds. We are subject tofederal, 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 ofthese materials comply with the standards prescribed by these laws andregulations, the risk of contamination or injury from these materials cannot becompletely eliminated. In the event of an incident, we could be held liable forany damages that result, and any liability could exceed our

 

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resources. Current orfuture environmental laws or regulations may have a material adverse effect onour operations, business and assets.

 

**Volatility Of Our Stock Price AndAbsence Of Dividends May Hurt Our Security Holders**

The market price ofour common stock has been and is likely to continue to be highly volatile.Factors such as the following could have a significant adverse impact on themarket price of our common stock:

 

• our ability to obtain additional financing and, if available, the termsand conditions of the financing;

• our financial position and results of operations;

• the results of preclinical studies and clinical trials by us, ourcollaborators or our competitors;

• concern as to, or other evidence of, the safety or efficacy of ourproducts or our competitors’ products;

• announcements of technological innovations or new products by us or ourcompetitors;

• U.S. and foreign governmental regulatory actions;

• actual or anticipated changes in drug reimbursement policies;

• developments with our collaborators;

• developments concerning patent or other proprietary rights of ours orour competitors (including litigation);

• status of litigation;

• period-to-period fluctuations in our operating results;

• changes in estimates of our performance by any securities analysts;

• new regulatory requirements and changes in the existing regulatoryenvironment;

• market conditions for biopharmaceutical stocks in general; and

• other factors not within our control.

 

We have never paidcash dividends on our common stock and do not anticipate paying any cashdividends in the foreseeable future.

 

**Changes To Financial AccountingStandards May Affect Our Reported Results Of Operations**

We prepare ourfinancial statements in conformity with accounting principles generally acceptedin the United States, or GAAP. GAAP are subject to interpretation by theAmerican Institute of Certified Public Accountants, the SEC and various bodiesformed to interpret and create appropriate accounting policies. A change inthose policies can have a significant effect on our reported results and mayeven affect our reporting of transactions completed before a change isannounced. Accounting policies affecting many other aspects of our business,including rules relating to the carrying value of long-lived assets, employeestock option grants and revenue recognition have recently been revised or areunder review. Changes to those rules or the questioning of current practicesmay adversely affect our reported financial results or the way we conduct ourbusiness. In addition, our preparation of financial statements in accordancewith GAAP requires that we make estimates and assumptions that affect therecorded amounts of assets and liabilities, disclosure of those assets andliabilities at the date of the financial statements and the recorded amounts ofexpenses during the reporting period. A change in the facts and circumstancessurrounding those estimates could result in a change to our estimates and couldimpact our future operating results. Additionally, certain provisions of theSarbanes-Oxley Act of 2002 will impact our business. In particular, thecreation by the SEC of an independent accounting oversight board to oversee andregulate audits will affect us and all public companies.

 

**Our Certificate of Incorporation AndBylaws Include Provisions That Could Make Attempts By Stockholders To ChangeManagement More Difficult**

The approval of 662/3 percent ofour voting stock is required to approve certain transactions and to takecertain stockholder actions, including the calling of special meetings ofstockholders and the amendment of any of the anti-takeover provisions, such asthose providing for a classified board of directors, contained in ourcertificate of incorporation. Further, pursuant to the terms of our stockholderrights plan, we have distributed a dividend of one right for each outstandingshare of common stock. These rights will cause substantial dilution to theownership of a person or group that attempts to acquire us on terms not approvedby our Board of Directors and may have the effect of deterring hostile takeoverattempts. The substantial aggregate equity positions of Mr. Kimberlin and hisaffiliates and/or related parties would make such hostile takeover attemptsvery unlikely. The practical effect of these provisions is to require a partyseeking control of us to negotiate with our Board of Directors, which coulddelay or prevent a change in control. These provisions could limit the pricethat investors might be willing to pay in the future for our securities andmake attempts by stockholders to change management more difficult.

 

We are subject to theanti-takeover provisions of Section 203 of the Delaware General CorporationLaw, which prohibits us from engaging in a “business combination” with an“interested stockholder” for a period of three years after the date of thetransaction in which the person first becomes an “interested stockholder,”unless the business combination is approved in a prescribed manner. Theapplication of Section 203 also could have the effect of delaying or preventinga change of control.

 

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**There May Be Risks Related To OurPrevious Use Of Arthur Andersen LLP As Our Independent Auditors**

On March 14, 2002,Arthur Andersen LLP, our independent public auditor, was indicted on federalobstruction of justice charges arising from the federal government’sinvestigation of Enron Corporation. On June 15, 2002, Arthur Andersen wasconvicted of these charges. Although we have engaged BDO Seidman, LLP,effective as of August 5, 2002, to replace Arthur Andersen as our independentpublic auditors, there are certain risks related to our consolidated financialstatements for the fiscal year ended December 31, 2000, which was auditedby Arthur Andersen. The SEC has said that it will continue accepting financialstatements audited by Arthur Andersen as long as a reasonable effort is made tohave Arthur Andersen reissue its reports and to obtain a manually signedaccountant’s report from Arthur Andersen. Former representatives of ArthurAndersen have notified us that Arthur Andersen is no longer able to reissue itsreports because the firm is no longer in existence.

 

Our currentindependent auditor, BDO Seidman, LLP, informed us that it discovered certainmisclassifications of certain convertible notes issued to us by a related partyin the financial statements included in our Annual Report on Form 10-K, asamended by Amendment No. 1 to Form 10-K, for the fiscal year ended December 31,2001. As a result of this misclassification, BDO Seidman, LLP re-audited ourfinancial statements and we have restated certain financial informationcontained in our Form 10-K/A for the fiscal year ended 2001. We also haverestated certain financial information contained in our Quarterly Report onForm 10-Q for the quarterly period ended March 31, 2002 by filing Amendment No.1 to the Quarterly Report. Certain amounts were incorrectly classified as debtrather than equity.

 

Certain investors,including significant funds and institutional investors, may choose not to holdor invest in securities of a company that does not have current financialreports available. Our access to the capital markets and our ability to maketimely filings with the SEC could be impaired if the SEC ceases acceptingfinancial statements from a prior period audited by Arthur Andersen for whichArthur Andersen will not reissue an audit report. In that case, we would not beable to access the public capital markets unless another independent accountingfirm is able to audit the financial statements originally audited by ArthurAndersen. Any delay or inability to access the public capital markets caused bythese circumstances would be disruptive and adversely affect the price and liquidityof our securities and would have a material adverse effect on our business andfinancial condition.

 

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

 

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

 

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

 

Under the supervision and with the participation of our management,including the Chief Executive Officer and Chief Financial Officer, anevaluation was performed of the effectiveness of the design and operation ofour disclosure controls and procedures (as defined in Rule 13a-14 (c) under theExchange Act of 1934) as of a date within 90 days prior to the filing of thisquarterly report.  Based on thisevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat, as of the date of the evaluation, our disclosure controls and procedureswere effective in timely alerting management to material information relatingto us required to be disclosed in our periodic SEC filings.  There were no significant changes in ourinternal controls or, to our knowledge, in other factors that couldsignificantly affect these internal controls subsequent to the date ofevaluation.

 

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###### **PART II****.  OTHERINFORMATION**

 

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

 

Since July 2001, several complaints have beenfiled in the United States District Court for the Southern District ofCalifornia seeking an unspecified amount of damages on behalf of an allegedclass of persons, who purchased shares of our common stock at various timesbetween May 17, 1999 and July 6, 2001. The various complaints name us and certain of our officers asdefendants, as well as Agouron Pharmaceuticals, Inc. and one of itsofficers.  The complaints allege thatwe, Agouron and/or such officers violated federal securities laws bymisrepresenting and failing to disclose certain information about the resultsof clinical trials of REMUNE®.  The complaints have beenconsolidated by order of the Court into a single action under the name *In re Immune**ResponseSecurities Litigation*.  Wehave not yet formally responded to the complaints.  Although we intend to vigorously defend the actions, we do notbelieve it is feasible to predict or determine the outcome or resolution ofthese proceedings, or to estimate the amounts of, or potential range of, losswith respect to these proceedings.  Inaddition, the timing of the final resolution of these proceedings isuncertain.  The range of possibleresolutions of these proceedings could include judgments against us or ourofficers or settlements that could require substantial payments by us, whichcould have a material adverse impact on our financial position, results ofoperations and cash flows.  Theseproceedings also might require substantial attention of our management team andtherefore divert their time and attention from our business and operations.

 

**Item 2.****  Changes in Securities**

 

On March 28, 2003, we issued to Cheshire Associates LLC, an affiliateof one of our directors and principal stockholder, Mr. Kevin Kimberlin, ashort-term convertible promissory note in the amount of $2.0 million, bearinginterest at the rate of 8% per annum. The note is convertible into either 1,626,016 shares of our common stockat a price of $1.23 per share (which was the closing price of our common stockon March 27, 2003) or an equal amount of such other securities that we mayoffer in the future by means of a private placement to "accreditedinvestors."

 

## **Item 5****.  Other Information**

 

The Chief Executive Officer and Chief Financial Officer of the Companyhave certified that the Quarterly Report of the Company and Form 10-Q for thequarterly period ended March 31, 2003 fully complies with the requirements ofsection 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. (ss)78m or (ss) 78o(d)) and that information contained in such report fairlypresents, in all material respects, the financial condition and results of operationsof the Company.

 

## **Item 6****.  Exhibits and Reports on Form 8-K**

 

a)              Exhibits

 

                        10.136             8% Convertible Secured PromissoryNote dated as of March 28, 2003.

                        99.1                 Certification for Section 906of Sarbanes-Oxley Act of 2002.

 

b)               Reports on Form 8-K

 

None

 

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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 theundersigned thereunto duly authorized.

 

 
|                      |   | THE IMMUNE RESPONSE CORPORATION                        |
|---------------------------|--------|--------------------------------------------------------|
|                      |   |                                                   |
|                      |   |                                                   |
| Date:  May  20, 2003 |   | /s/ Michael L. Jeub                                    |   |
|                      |   | Michael L. Jeub                                        |
|                      |   | Vice President of Finance and Chief Financial  Officer |

 

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**CERTIFICATIONS**

 

I, John N. Bonfiglio, Ph.D., certify that:

 

## 1.               I have reviewed thisquarterly report on Form 10-Q of The Immune Response Corporation;

 

2.             Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the  registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is being prepared;

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date: May 20, 2003 |                      |
|--------------------|---------------------------|
|               |                      |
|               |                      |
|               | /s/ John N.  Bonfiglio    |   |
|               | John N.  Bonfiglio, Ph.D. |
|               | Chief Executive  Officer  |

 

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I, Michael L. Jeub, certify that:

 

## 1.               I have reviewed thisquarterly report on Form 10-Q of The Immune Response Corporation;

 

2.             Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

7.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

8.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosurecontrols and procedures to ensure that material information relating tothe  registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

9.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

c)              any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date: May 20, 2003 |                          |
|--------------------|-------------------------------|
|               |                          |
|               |                          |
|               | /s/ Michael L.  Jeub          |   |
|               | Michael L. Jeub               |   |
|               | Vice President of Finance and |   |
|               | Chief Financial Officer       |   |

 

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