The Immune Response Corporation

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2004

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-18006

THE IMMUNE RESPONSE CORPORATION

(Exact name of registrant as specified in its charter)


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


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

Registrant’s telephone number, including area code: (760) 431-7080

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x 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 x

As of October 31, 2004, there were 48,601,103 shares of our common stock outstanding.

THE IMMUNE RESPONSE CORPORATION

INDEX


	Page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets – September 30, 2004 and December 31, 2003		3
Condensed Consolidated Statements of Operations – Three and Nine months ended September 30, 2004 and 2003		4
Condensed Consolidated Statements of Cash Flows – Nine months ended September 30, 2004 and 2003		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3. Quantitative and Qualitative Disclosures About Market Risk		21
Item 4. Controls and Procedures		22
Part II OTHER INFORMATION
Item 1. Legal Proceedings		22
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		22
Item 3. Defaults Upon Senior Securities		22
Item 4. Submission of Matters to a Vote of Security Holders		22
Item 5. Other Information		22
Item 6. Exhibits and Reports on Form 8-K		22
SIGNATURES		23
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

The Immune Response Corporation

Condensed Consolidated Balance Sheets

(in thousands, except for share amounts)


	September 30,			December 31,
	2004			2003
	(unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	12,291		$	12,838
Marketable securities — available-for-sale		—			4
Other current assets		284			372

		12,575			13,214
Property and equipment, net		4,588			4,949
Licensed technology, net		1,590			2,119
Deposits and other assets ($600 restricted as security for letter of credit)		690			690

	$	19,443		$	20,972

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	675		$	1,151
Accrued expenses		689			1,112
Short-term convertible notes, related party		—			3,899
Current portion of convertible promissory notes, related party, net of discount of $389 plus accrued interest of $185 at September 30, 2004		1,541			—
Current portion of deferred rent and accrued excess lease costs		221			452
Current portion of deferred revenue		45			56

		3,171			6,670

Convertible promissory notes, related party, net of discount of $2,008 and $4,167 plus accrued interest of $822 and $575 at September 30, 2004 and December 31, 2003, respectively, net of current portion		4,277			3,616
Long-term deferred rent and accrued excess lease costs, net of current portion		2,283			1,990
Long-term deferred revenue, net of current portion		172			323

		9,903			12,599

Stockholders’ Equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized; 688,146 Series A shares issued and outstanding at September 30, 2004 with a liquidation preference aggregating $4,392		13,952			—
Common stock, $.0025 par value, 170,000,000 shares authorized; 48,515,670 and 41,201,187 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively		121			102
Warrants		20,875			17,777
Additional paid-in capital		298,086			290,346
Accumulated other comprehensive income		—			4
Accumulated deficit		(323,494	)		(299,856	)

Total stockholders’ equity		9,540			8,373

	$	$19,443		$	$20,972

See accompanying notes to condensed consolidated financial statements.

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The Immune Response Corporation

Condensed Consolidated Statements of Operations

(in thousands, except for per share amounts)

(unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2004			2003			2004			2003
Revenues:
Licensed research revenue	$	277		$	7		$	291		$	30
Contract research revenue		7			7			21			22

		284			14			312			52

Expenses:
Research and development		3,086			3,131			9,441			8,135
General and administrative		781			1,024			2,504			4,361
Exit and disposal related costs		—			38			—			1,374

		3,867			4,193			11,945			13,870

Other income and (expense):
Investment income		39			6			82			17
Interest expense — including non-cash accretion of $590 and $2,345 for three months and $1,770 and $6,475 for nine months, respectively		(739	)		(2,672	)		(2,229	)		(7,494	)
Beneficial inducement cost		—			—			(4,923	)		—
Loss on extinguishment of debt		—			—			(4,935	)		—

		(700	)		(2,666	)		(12,005	)		(7,477	)

Net loss		(4,283	)		(6,845	)		(23,638	)		(21,295	)
Deemed stock dividend		—			(13,251	)		—			(13,251	)
Less preferred stock dividends		(93	)		—			(274	)		—

Net loss attributable to common stockholders	$	(4,376	)	$	(20,096	)	$	(23,912	)	$	(34,546	)

Basic and diluted loss per share:
Net loss	$	(0.09	)	$	(0.21	)	$	(0.52	)	$	(0.88	)

Net loss attributable to common stockholders	$	(0.09	)	$	(0.62	)	$	(0.53	)	$	(1.43	)

Weighted average number of shares outstanding		48,458			32,277			45,268			24,097

See accompanying notes to condensed consolidated financial statements.

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The Immune Response Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Nine months ended September 30,
	2004			2003
Cash Flows From Operating Activities:
Net loss	$	(23,638	)	$	(21,295	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,224			1,455
Operating expenses paid with common stock and warrants		276			541
Stock option adjustments		(385	)		917
Deferred revenue		(162	)		(41	)
Deferred rent		187			—
Accrued excess lease costs		(125	)		(252	)
Long-term accrued interest		432			665
Accretion of notes		1,770			6,475
Impairment of long-term asset		—			438
Beneficial inducement cost		4,923			—
Loss on extinguishment of debt		4,935			—
Interest expense converted into Series A preferred stock		219			—
(Gain) loss on sale or disposal of fixed assets		14			(46	)
Changes in operating assets and liabilities:
Other current assets		88			(153	)
Accounts payable		(476	)		(827	)
Accrued expenses		(423	)		57

Net cash used in operating activities		(11,141	)		(12,066	)

Cash Flows From Investing Activities:
Purchase of property and equipment		(351	)		—
Proceeds from sale of equipment, net		4			112
Other		—			197

Net cash provided by (used in) investing activities		(347	)		309

Cash Flows From Financing Activities:
Payments of equipment notes and capital leases		—			(1,082	)
Net proceeds from private placement of common stock		10,709			—
Net proceeds from exercises of Unit Purchase Options		110			—
Proceeds from issuance of short-term convertible notes, related party		—			3,899
Proceeds from exercises of stock warrants		—			10,138
Net offering costs for Series A preferred stock		(23	)		—
Net proceeds from common stock purchases through employee plans		145			190

Net cash provided by financing activities		10,941			13,145

Net increase (decrease) in cash and cash equivalents		(547	)		1,388
Cash and cash equivalents - beginning of year		12,838			3,941

Cash and cash equivalents - end of period	$	12,291		$	5,329

Supplemental Disclosure of Cash Flow Information:
Interest paid	$	23		$	275

Supplemental Disclosure of Noncash Information:
Promissory notes and interest converted into Series A preferred stock	$	4,118		$	—

Convertible notes and interest converted into common stock	$	—		$	7,361

Value allocated to common stock as debt discount	$	—		$	385

Common stock and warrants issued for consulting services, 401K match and offering costs	$	1,082		$	1,149

Unrealized gain on marketable securities	$	—		$	2

See accompanying notes to condensed consolidated financial statements.

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THE IMMUNE RESPONSE CORPORATION

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1 — Interim Financial Statements:

The accompanying condensed consolidated balance sheet as of September 30, 2004 and the condensed consolidated statements of operations for the three and nine months ended September 30, 2004 and 2003 and of cash flows for the nine months ended September 30, 2004 and 2003 have been prepared by The Immune Response Corporation (the “Company”) and have not been audited. The condensed consolidated financial statements of the Company include the accounts of its wholly owned subsidiary I.R.C. Inc. All significant intercompany transactions and accounts have been eliminated in consolidation. These consolidated financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for all periods presented. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2003. Interim operating results are not necessarily indicative of operating results for the full year.

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

Stock-Based Compensation

During April 2003, the Company repriced and accelerated the vesting of stock options to purchase 664,007 shares previously granted to employees and outside directors. The weighted average share price was reduced from $10.04 per share to $1.12 per share. This repricing was expensed using the intrinsic valuation method required under APB No. 25. The Company recorded additional employee compensation (benefit) expense of $(139,000) and $(287,000) for the repriced options during the three and nine months ended September 30, 2004, respectively and $(371,000) and $736,000 for the three and nine months ended September 30, 2003, respectively.

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Net loss attributable to common stockholders:
As reported	$	(4,376,000	)	$	(20,096,000	)	$	(23,912,000	)	$	(34,546,000	)
Stock-based employee compensation expense (benefit) included in net loss		(139,000	)		(371,000	)		(287,000	)		736,000
Fair value of stock-based employee compensation		(380,000	)		(904,000	)		(1,851,000	)		(2,462,000	)

Pro forma	$	(4,895,000	)	$	(21,371,000	)	$	(26,050,000	)	$	(36,272,000	)

Net loss per share (basic and diluted):
As reported	$	(0.09	)	$	(0.62	)	$	(0.53	)	$	(1.43	)

Pro forma	$	(0.10	)	$	(0.66	)	$	(0.58	)	$	(1.51	)

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THE IMMUNE RESPONSE CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)

Note 2 — The Company:

The Immune Response Corporation (Nasdaq: IMNR) is a biopharmaceutical company dedicated to becoming a leading immune-based therapy (“IBT”) company in HIV and multiple sclerosis (MS). The Company’s HIV products are based on its patented whole-killed virus technology, co-invented by Company founder Dr. Jonas Salk, to stimulate HIV immune responses. We currently have three active IBT programs; Remune® and IR103 target HIV and NeuroVax^TM targets MS. Remune®, currently in Phase II clinical trials, is being developed as a first-line treatment for people with early-stage HIV. We have initiated development of a new immune-based therapy, IR103, which incorporates a second-generation immunostimulatory oligonucleotide adjuvant and is currently in Phase I clinical trials in Canada and the United Kingdom.

We are also developing an immune-based therapy for MS, NeuroVax^TM, which is currently in Phase II clinical trials and has shown potential therapeutic value for this difficult-to-treat disease.

Note 3 — Going Concern:

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses since inception and has an accumulated deficit of $323,494,000 as of September 30, 2004. The Company will not generate meaningful revenues in the foreseeable future.

These factors, among others, raised substantial doubt about the Company’s ability to continue as a going concern. Our former registered public accounting firm, BDO Seidman, LLP, indicated in their audit report on the 2003 consolidated financial statements that there is substantial doubt about our ability to continue as a going concern.

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

On January 7, 2004, $3,899,000 of previously issued, related party convertible promissory notes plus accrued interest of approximately $219,000 were converted into 688,146 shares of Series A convertible preferred stock (see Note 5). On April 30, 2004, the Company raised approximately $11,850,000 in gross proceeds through a private placement (see Note 8). The Company believes that its current resources are sufficient to fund its planned operations, including necessary capital expenditures and new clinical trials, for at least the next eight months.

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

The short-term convertible notes totaling $3,899,000, described below, plus approximately $219,000 of accrued interest were converted into 688,146 shares of Series A convertible preferred stock on January 7, 2004 (see Note 5).

On March 28, 2003, the Company issued to Cheshire Associates, LLC, a related party, a short-term convertible note in the amount of $2,000,000, bearing interest at the rate of 8% per annum, due March 28, 2004 (the “March Note”). The March Note was convertible into 1,626,016 shares of common stock at a price of $1.23 per share.

In May 2003, the Company issued to Cheshire two short-term convertible notes in the aggregate amount of $1,080,000, bearing interest at the rate of 8% per annum, due May 2004 and January 2004, respectively (the “May Notes”). One of the May Notes, with a principal balance of $1,000,000, was convertible into shares of common stock on terms to be negotiated in good faith prior to its maturity date. The $80,000 May Note was convertible into 59,259 shares of common stock at a price of $1.35 per share.

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

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THE IMMUNE RESPONSE CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)

Note 5 — Series A Preferred Stock:

On January 7, 2004, Cheshire Associates, LLC, a related party, converted $3,899,000 of previously issued, short-term convertible notes plus accrued interest of approximately $219,000 into 688,146 shares of Series A convertible preferred stock (Series A) at $5.984 per share. The holders of shares of Series A have the right to further convert each share of Series A into anywhere from five to twelve shares of common stock, depending on the date of conversion. The Series A votes with the holders of common stock as a single class. The Series A is only entitled to three votes for each share of Series A.

The Series A has dividend and liquidation preferences over common stock holders. The holders of the Series A are entitled to receive cumulative dividends on each share of Series A at the rate of 9% per annum until the earliest of (i) July 7, 2006, (ii) the date the Series A is redeemed and (iii) the date the Series A is converted into common stock. At September 30, 2004 accumulated but undeclared dividends on the Series A amounted to $274,000. The liquidation preference at September 30, 2004 aggregated $4,392,000.

In addition, the holders of Series A are entitled to protective provisions that require 66 2/3% of the outstanding Series A to approve, among other things, creating a new class of security with dividend or liquidation rights equal or senior to the Series A convertible preferred stock, a liquidation or recapitalization or increasing the number of shares reserved for issuance under the Company’s stock option plans to greater than 10% of the Company’s outstanding capital stock (on an as if converted, fully-diluted basis). The Series A also contains anti-dilution provisions.

The conversion of $2,080,000 of short-term convertible notes into Series A resulted in a non-cash charge to operations of approximately $4,923,000 in the first quarter of 2004 as a beneficial inducement cost, representing the difference between the fair value of the common stock into which the Series A is convertible (at the most preferential rate) compared to the fair value of the common stock into which the related debt was convertible in accordance with FAS No. 84, “Induced Conversions of Convertible Debt.”

Conversion of the remaining $1,819,000 of the short-term convertible notes resulted in a non-cash charge to operations of approximately $4,935,000 in the first quarter of 2004 as a loss on the extinguishment of debt, representing the difference between the carrying value of the related debt and the fair value of the Series A issued.

Note 6 – Revenues Under Collaborative Agreements:

The Company earns revenue from licensing its proprietary technology and performing services under research and development contracts. Any initial fees under license and option agreements, under which the Company also provides research and development services, are recognized over the term of the research and development or other relevant period. Payments for options to a license for the Company’s technology are recognized over the option period. Revenues from the achievement of milestones are recognized over the remaining development period. Revenues under research and development contracts are recognized as the services are performed. Advance payments received in excess of amounts earned are classified as deferred revenue.

In September 2004, the Company transferred to NovaRx Corporation (“NovaRx”) its in-license rights to certain cancer-related technology and received an initial payment of $150,000. The Company recognized this payment as revenue and fully recognized the remaining deferred revenue of $121,000 for previous sublicense agreements with NovaRx. The Company had previously in-licensed this technology from The Sidney Kimmel Cancer Center and Dr. Masayoshi Namba. The Company will have no future contractual obligations under either the in-licensing or out-licensing agreements. NovaRx also agreed to pay the Company an additional $900,000 due on or before August 2007. The Company will recognize this revenue upon collection, due to the uncertainty of NovaRx’s ability to pay the fee at this time. All other revenues recognized were from the amortization of other multi-year out-licensing contracts covering various intellectual property that we own.

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THE IMMUNE RESPONSE CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)

Note 7 — Net Loss per Share:

Basic and diluted net loss per share is computed using the weighted average number of common shares outstanding during the period. Potentially dilutive securities are excluded from the diluted net loss per share calculation, as the effect would be antidilutive. Potentially dilutive shares not included are 3,400,000 common shares for the Series A convertible preferred stock, 5,500,000 shares for outstanding employee stock options, 6,600,000 shares issuable under convertible promissory notes, related party, 16,100,000 shares issuable under warrants outstanding, 9,400,000 shares issuable under Class B warrants outstanding and 1,700,000 shares issuable under an option issued to the placement agent for the private offering in December 2002.

Note 8 — Private Placement:

On April 30, 2004 the Company raised $10,709,000, net of $1,141,000 of offering costs, in connection with a private placement of approximately 6,800,000 shares of common stock at $1.75 per share to a number of institutional investors. Investors also received five-year warrants to purchase an aggregate of approximately 2,031,000 shares of common stock at $2.75 per share with an allocated value of $2,569,000. The investors were not affiliated with the Company, except for one investor that is an affiliate of Cheshire; that investor purchased 342,857 shares and 102,857 warrants for $600,000. In connection with this private placement, the Company issued additional warrants to purchase 541,714 shares of common stock to Rodman & Renshaw, Inc., the placement agent for this offering, with a value of $805,000, representing non-cash offering costs. The Company has an effective registration statement with the Securities and Exchange Commission covering the resale of the common shares and the underlying shares of common stock. Proceeds from the financing will be used to fund the Company’s ongoing clinical activities and for general corporate purposes.

Note 9 — Exit and Disposal Related Costs:

During May 2003, the Company disposed of excess assets, and in August 2003 the Company negotiated an early lease termination for the Company’s former, vacated Carlsbad, California headquarters facility resulting in exit and disposal related costs of $1,374,000 recognized as of September 30, 2003.

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THE IMMUNE RESPONSE CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains forward-looking statements concerning our liquidity, capital resources, financial condition, results of operation and timing of anticipated revenues and expenditures. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include those discussed under “Certain Risk Factors,” as well as those discussed elsewhere in this Form 10-Q. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. Except for our ongoing obligation to disclose material information as required by federal securities laws, we undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be indicated in order to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

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

Liquidity and Capital Resources

As of September 30, 2004, we had a consolidated accumulated deficit of $323,494,000. We have not generated revenues from the commercialization of any product. We expect to continue to incur substantial net operating losses over the next several years, which would imperil our ability to continue operations. We may not be able to generate sufficient product revenue to become profitable on a sustained basis, or at all, and do not expect to generate significant product revenue before the third quarter of 2008, if at all. We have operating and liquidity concerns due to our significant net losses and negative cash flows from operations. As a result of these and other factors, our former registered public accounting firm, BDO Seidman, LLP, indicated in their audit report on the 2003 consolidated financial statements that there is substantial doubt about our ability to continue as a going concern.

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

As of September 30, 2004, we had outstanding approximately $5,818,000 (net of discount of $2,397,000, plus accrued interest of $1,007,000) of convertible, related party debt. All of the notes bear interest at a fixed rate of 8% per year and are secured by our intellectual property. The notes mature at various dates through November 2005. The notes are convertible into shares of the Company’s common stock at any time, at the option of the investors. The conversion prices range from $1.7248 to $0.8128.

In January 2004, in a transaction with a company related to Mr. Kimberlin, we converted $4,100,000 of previously issued promissory notes and accrued interest into 688,000 shares of Series A Convertible Preferred Stock. On April 30, 2004, we raised approximately $11,850,000 in gross proceeds through a private placement of common stock and warrants, primarily to unaffiliated investors. We believe that our current resources are sufficient to fund our planned operations, including necessary capital expenditures and new clinical trials, for at least the next eight months.

We could raise an additional $16,700,000 if all of the Class B warrants issued as a result of Class A warrant exercises since July 7, 2003, which are redeemable by us if the price of our common stock is equal to or greater than $3.32, are exercised. The exercise price is $1.77 per share. Because at that price it would be profitable for the warrant holders to exercise their warrants rather than to allow the redemption to proceed, we assume they would choose to exercise. However, there is no assurance that our stock price will rise to the $3.32 per share redemption trigger price. Also, there can be no assurances that all or any portion of the warrants will be exercised by the initial purchasers or by any subsequent holders.

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stock is equal to or greater than $8.00 for 20 consecutive trading days. Because at that price it would be profitable for the warrant holders to exercise their warrants rather than to allow the redemption to proceed, we assume they would choose to exercise. However, there is no assurance that our stock price will rise to the $8.00 per share redemption trigger price. Also, there can be no assurances that all or any portion of the warrants will be exercised by the initial purchasers or by any subsequent holders.

Additionally, we could raise $7,100,000 if all the warrants issued in connection with the April 2004 private placement are exercised for cash. The warrants issued in the April 2004 private placement are exercisable by the holders at any time between October 2004 and April 2009 at $2.75 per share. However, there is no assurance that our stock price will rise to the $2.75 per share exercise price and/or that all or any portion of the warrants will be exercised by the initial purchasers or by any subsequent holders.

As we use our current cash balances, we continue to look for alternative sources of funding which, even if available, may be on terms substantially less favorable. If we are unable to raise adequate capital, we may be required to delay, or reduce the scope of, our research or development of Remune^®, IR103 and NeuroVax^TM or take other measures to cut costs, which would have a material adverse effect on us and likely result in our inability to continue as a going concern.

We will need to raise very substantial additional funds over several years to conduct research and development, preclinical studies and clinical trials necessary to bring potential products to market and to establish manufacturing and marketing capabilities. We anticipate that for the foreseeable future, the scale-up of the manufacturing process for Remune^®, IR103 and NeuroVax^TM and the cost of producing clinical supplies for ongoing and future Remune^®, IR103 and NeuroVax^TM studies will continue to represent a significant portion of our overall expenditures. Overall, future Remune^®, IR103 and NeuroVax^TM research and development expenditures are expected to increase from current levels in the event additional financing is obtained. Future spending for research and development may further increase if we enter into additional collaborations, but there can be no assurance that we will enter into any such collaborations. We anticipate additional capital improvements of approximately $750,000 to scale-up the manufacturing process for Remune^® and IR103 through 2006. Other anticipated costs with respect to Remune^®, IR103 and NeuroVax^TM, including investment in inventory, will depend on many factors including the need for additional clinical trials and other factors, which will influence our determination of the appropriate continued investment of our financial resources in these programs.

Our future capital requirements will depend on many factors including whether the remaining warrants will be exercised by the initial purchasers or by any subsequent holders. Other capital requirement factors include continued scientific progress in our research and development programs, the scope and results of preclinical studies and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, the costs involved in defending claims in class actions, competing technological and market developments, the cost of manufacturing scale-up and inventories, effective commercialization activities and arrangements and other factors not within our control. We intend to seek additional funding through additional research and development agreements with suitable corporate collaborators and through public or private financing, if available. However, we cannot provide assurance that such collaboration arrangements or any public or private financing will be available on acceptable terms, if at all. If we raise funds through future equity arrangements, significant further dilution to stockholders will result.

Results of Operations

Three and Nine Months Ended September 30, 2004 Compared to Three and Nine Months Ended September 30, 2003.

We recorded revenues for the three and nine months ended September 30, 2004 of $284,000 and $312,000, respectively, as compared to $14,000 and $52,000 for the corresponding period in 2003. In September 2004, we transferred to NovaRx Corporation (“NovaRx”) our in-license rights to certain cancer-related technology and received an initial payment of $150,000. We recognized this payment as revenue and fully recognized the remaining deferred revenue of $121,000 for previous sublicense agreements with NovaRx. We have no future contractual obligations under either the in-licensing or out-licensing agreements. NovaRx also agreed to pay us an additional $900,000 due on or before August 2007. We will recognize this amount as revenue only upon collection, due to the uncertainty of NovaRx’s ability to pay the fee at this time. All other revenues were from the amortization of other multi-year out-licenses of technology. We expect no additional revenues unless it is earned through corporate collaborations or new research and development agreements. We have not received any revenues from the sale of products and do not expect to derive revenue from the sale of any products for the foreseeable future.

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Our research and development expenditures for the three and nine months ended September 30, 2004 were $3,086,000 and $9,441,000, respectively, as compared to $3,131,000 and $8,135,000 for the corresponding periods in 2003. The increase in research and development expenses during the first nine months of 2004 is attributable to our increased HIV clinical development activity, manufacturing scale-up activities for Remune^® and IR103 and the cost of producing clinical supplies of NeuroVax^TM.

Expenses associated with our scale-up of the manufacturing process for Remune^® and IR103, the cost of producing clinical supplies for ongoing and future Remune^®, IR103 and NeuroVax^TM studies and additional clinical trials for NeuroVax^TM are expected to increase during the next several quarters as we focus our financial resources on Remune^®, IR103 and NeuroVax^TM. Clinical study spending for our other development programs has decreased sharply beginning in the second quarter of 2002. If we enter into additional collaborations, research and development expenditures for our other development programs would likely increase over their current levels. There can be no assurance that we will enter into any collaborations, that existing collaborations will not be terminated, or that we will be able to obtain other financing needed to continue our research and development efforts.

General and administrative expenses for the three and nine months ended September 30, 2004 were $781,000 and $2,504,000, respectively, as compared to $1,024,000 and $4,361,000 for the corresponding periods in 2003. These figures include $736,000 of non-cash expense in the first nine months of 2003 related to the repricing of employee stock options in 2003, and non-cash benefit of $287,000 in the first nine months of 2004, $139,000 in the third quarter of 2004 and $371,000 in the third quarter of 2003, all representing variable accounting for the repriced options. The reductions in general and administrative expenses year-to-year reflect ongoing cost containment efforts. In future quarters those efforts may be somewhat offset by possible increased consulting fees.

During May 2003, we disposed of excess assets, and in August 2003 we negotiated an early lease termination for our Carlsbad, California headquarters facility resulting in exit and disposal related costs of $1,374,000 recognized as of September 30, 2003.

Interest expense decreased to $739,000 and $2,229,000, respectively, for the three and nine months ended September 30, 2004 as compared to $2,672,000 and $7,494,000 for the corresponding period in 2003. The decrease during the first nine months of 2004 is attributable to an overall reduction in levels of debt.

Our net loss per share decreased during 2004 as a result of the decreased net loss and by the increase in our weighted average number of shares outstanding, due to several securities issuance transactions, as compared to 2003.

Critical Accounting Policies and Estimates

We believe that patents and other proprietary rights are important to our business. Licensed technology is recorded at cost and is amortized over its estimated useful life. In December 1999, we acquired licenses to certain patent technology, which are being amortized over seven years. Changes in our estimates of useful lives may have a material effect on our financial statements.

We evaluate potential impairment of long-lived assets in accordance with FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” FAS No. 144 requires that certain long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable based on expected undiscounted cash flows that result from the use and eventual disposition of the asset. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

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

In September 2002, we implemented a restructuring program and management changes aimed at reducing costs and refocusing our efforts on Remune^®. The restructuring program reduced staff and cut spending at our headquarters while maintaining limited manufacturing capacity at one of our production facilities in King of Prussia, Pennsylvania. Since then we have also renewed our

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focus on NeuroVax™ and commenced development of IR103. During May 2003, we disposed of excess assets, and during August 2003, we negotiated an early lease termination for our former Carlsbad, California headquarters facility resulting in exit and disposal related costs of approximately $1,400,000. During 2003, we recorded an additional charge of $2,000,000 related to the estimated net rental expense of our vacant manufacturing facility in Pennsylvania. These costs have been accounted for in accordance with Emerging Issues Task Force 94-3.

Certain Risk Factors

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

Our failure to successfully develop our product candidates, Remune^®, IR103 and NeuroVax^TM may cause us to cease operations

We have not completed the development of any products. As part of our restructuring program announced in September 2002, we halted development of most of our products other than Remune^® and NeuroVax^TM . Our other potential therapies, which were under development prior to September 2002, would require significant additional research and development efforts, funding and regulatory approvals if we recommence development in the future. We are dependent upon our ability to successfully develop Remune^®, IR103 and NeuroVax^TM and our failure to do so may cause us to cease operations.

In May 1999 we discontinued a Phase III clinical endpoint trial of Remune^® because differences in clinical endpoints were not observed between treatment groups and extending the trial would have been unlikely to provide sufficient additional clinical endpoints. The discontinuation of the Phase III trial has had a material adverse effect on us. Additionally, the most recent pivotal trial of Remune^® conducted by our former collaborative partner, Pfizer, was discontinued by us. See “—Pfizer has terminated its collaboration with us, which has hindered the continued development and commercialization of Remune^®.” We cannot assure you that any future Phase III trials of Remune^® (or related drug candidate, IR103) will be conducted. Furthermore, we cannot guarantee that we, or our corporate collaborators, if any, will ever obtain any regulatory approvals of Remune^®(or related drug candidate, IR103).

Before the cessation of the development efforts of our products other than Remune^® and NeuroVax^TM in September 2002, our technologies and other potential therapies were at earlier stages of development than Remune^® and had not been shown to be safe or effective. Some of our technologies have not been tested on humans. Even if we do continue development of our other potential products, regulatory authorities may not permit human testing of the potential products based on these technologies. Even if human testing were permitted, the products based on these technologies may not be successfully developed or shown to be safe or effective.

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

Moreover, unacceptable toxicity or side effects could occur at any time in the course of human clinical trials or, if any products are successfully developed and approved for marketing, during commercial use of our products. Although preliminary research and clinical evidence have shown Remune^®, IR103 and NeuroVax^TM to be safe, the appearance of any unacceptable toxicity or side effects could interrupt, limit, delay or abort the development of any of our products or, if previously approved, necessitate their withdrawal from the market.

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Our current cash position, significant financing requirements and limited access to financing may adversely affect our ability to develop products and continue operations

We have never generated any revenue from product sales. As of September 30, 2004, we had an accumulated deficit of approximately $323,494,000, cash and cash equivalents of only approximately $12,291,000 and working capital of only approximately $9,404,000. Because we do not anticipate generating any revenue from our products until at least the third quarter of 2008, if at all, we will continue to have negative cash flow and will need to raise substantial additional capital to fund our operations beyond the spring of 2005. We will need to raise substantial funds to continue our operations and to conduct research and development, preclinical studies and clinical trials necessary to bring our potential products to market and to establish manufacturing and marketing capabilities.

We will continue to have limited cash resources. There can be no assurance that we will be successful in consummating any financing transaction or, if consummated, that the terms and conditions will not be unfavorable to us.

We could raise an additional $16,700,000 if all of the Class B warrants that were issued upon exercise of our Class A warrants are exercised. Our Class B warrants are redeemable by us if the price of our common stock is equal to or greater than $3.32 for ten consecutive trading days. However, there can be no assurances that our stock price will rise to $3.32 so as to enable us to call the Class B warrants for redemption, nor that (even in that event) all or any portion of the warrants will be exercised by the initial purchasers or by any subsequent holders.

We could raise an additional $11,800,000 if all the warrants issued in connection with the October 2003 private placement are exercised for cash. The warrants issued in the October 2003 private placement are redeemable by us if the price of our common stock is equal to or greater than $8.00 for 20 consecutive trading days. However, there can be no assurances that our stock price will rise to $8.00 so as to enable us to call the warrants for redemption, nor that (even in that event) all or any portion of the warrants will be exercised by the initial purchasers or by any subsequent holders.

On September 9, 2002, we commenced the implementation of a cost reduction strategy to focus our core competencies on efforts related to the research, development, commercialization and production of Remune^®. The cost reductions related to research, administrative and operational costs have been offset by increased costs relating to increasing our production capabilities at our King of Prussia, Pennsylvania facility and conducting additional clinical trials. Since then we have also renewed our focus on NeuroVax^TM and commenced development of IR103.

The timing and amount of our future capital requirements will depend on many factors, including (but not limited to):

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

• the time and costs involved in obtaining regulatory approvals;

• continued scientific progress in our research and development programs;

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

• the cost of manufacturing scale-up;

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

• competing technological and market developments;

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• effective commercialization activities and arrangements;

• the costs of defending against and settling lawsuits; and/or

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

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

• obtaining regulatory approvals;

• our research and development programs;

• our preclinical and clinical trials; or

• scaling up manufacturing.

Our access to capital also could be limited by:

• overall financial market conditions;

• applicable Nasdaq rules and federal and state securities laws;

• the perfected security interest in our intellectual property in respect of the aggregate $7,208,000 principal amount in convertible promissory notes issued to affiliates and/or related parties of Kevin Kimberlin, (who is one of our directors and our principal stockholder (See “An existing stockholder owns approximately 14.5% of our outstanding common stock and has the rights to acquire an additional 23,554,671 shares of our common stock, which could result in ownership of up to approximately 43.0% of our outstanding shares and could allow him to control or influence stockholder votes”);

• the effect of the potential for exercise of outstanding options and warrants exercisable into approximately 22,600,000 shares of common stock;

• the effect of the potential for conversion of 688,000 shares of Series A Convertible Preferred Stock issued in January 2004. The Series A is currently convertible into 4,128,000 shares of common stock up to a maximum of 8,300,000 shares of common stock; and

• the issuance of the placement agent option to Spencer Trask Ventures, Inc., (an affiliate of Kevin Kimberlin) and its transferees that is exercisable for 1,700,000 shares of common stock and 1,438,000 Class A warrants, which are not redeemable by us.

An existing stockholder owns approximately 14.5% of our outstanding common stock and has the rights to acquire an additional 23,554,671 shares of our common stock, which could result in ownership of up to approximately 43.0% of our outstanding shares and could allow him to control or influence stockholder votes

Kevin B. Kimberlin, a member of our Board of Directors, together with his affiliates and/or related parties, currently owns of record approximately 14.5% of our outstanding shares of common stock. He and they also have the right to acquire, through the conversion of notes and exercise of options and warrants beneficially owned by them, 23,554,671 additional shares. If his/their notes, options and warrants were to be converted and exercised in full, Mr. Kimberlin and his affiliates and/or related parties would own approximately 43.0% of our outstanding shares of common stock on a post-conversion/exercise basis. As a result of ownership of our common stock and the ability to acquire additional shares, Mr. Kimberlin and his affiliates and/or related persons have the ability to influence, and possibly control, substantially all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. If your interests as a stockholder are different from his interests, you may not agree with his decisions and you might be adversely affected thereby.

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The lengthy product approval process and uncertainty of government regulatory requirements may delay or prevent us from commercializing products. We must work to re-establish our credibility with the FDA

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

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

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

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

Among the other requirements for regulatory approval is the requirement that prospective manufacturers conform to the FDA’s Good Manufacturing Practices, or GMP, requirements. In complying with the FDA’s GMP requirements, manufacturers must continue to expend time, money and effort in production, record keeping and quality control to assure that products meet applicable specifications and other requirements. Failure to comply and maintain compliance with the FDA’s GMP requirements subjects manufacturers to possible FDA regulatory action and as a result may have a material adverse effect on us. We, or our contract manufacturers, if any, may not be able to maintain compliance with the FDA’s GMP requirements on a continuing basis. Failure to maintain compliance could have a material adverse effect on us.

The FDA has not designated expanded access protocols for Remune^® or our other products as “treatment” protocols. The FDA may not determine that Remune^® or our other products meets all of the FDA’s criteria for use of an investigational drug for treatment use. Even if Remune^® or our other products are allowed for treatment use, third party payers may not provide reimbursement for the costs of treatment with Remune^® or our other products. The FDA also may not consider Remune^® or our other products under development to be appropriate candidates for accelerated approval, expedited review or fast track designation.

The timing and substance of most FDA decisions are, as a practical matter, discretionary. Past events have raised doubts in the minds of some persons at the FDA regarding our corporate credibility and the viability of Remune^®. Our efforts to re-establish our credibility may not succeed; but if they don’t, the FDA approvals that are indispensable if we are to survive and succeed may be delayed or denied despite any merit our applications may have.

Marketing any drug products outside of the United States will subject us to numerous and varying foreign regulatory requirements governing the design and conduct of human clinical trials and marketing approval. Additionally, our ability to export drug candidates outside the United States on a commercial basis is subject to the receipt from the FDA of export permission, which may not be available on a timely basis, if at all. Approval procedures vary among countries and can involve additional testing, and the time required to obtain approval may be even longer than that required to obtain FDA approval. Foreign regulatory approval processes include all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the health authorities of any other country, including those in Thailand.

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Specifically, before we will be permitted to export Remune® to Thailand for clinical use in that country, we need to meet a number of regulatory requirements. One of those requirements is that we must ensure that we can manufacture Remune® at our United States manufacturing facility in a manner that is in “substantial compliance” with current United States GMP requirements. We must provide the FDA with “credible scientific evidence” that Remune® would be safe and effective under the conditions of proposed use in Thailand. Furthermore, the Thailand FDA must (i) formally request the FDA to approve export of Remune® to Thailand, (ii) certify to the FDA that it is aware that Remune® is not approved in the United States or in any of several other countries with comprehensive drug review and approval systems and (iii) concur that the scientific evidence presented to the FDA is “credible scientific evidence that Remune® will be reasonably safe and effective” for use in Thailand. There can be no assurance, however, that we will successfully meet any or all of these requirements for the export of Remune®, and if we are unable to successfully meet all regulatory requirements, we will not be permitted by the FDA to export Remune® to Thailand for clinical use, even if the Thai government were to approve Remune® for clinical use, which it has not yet done and might never do. There can be no assurance that Trinity Medical Group USA, Inc. and its affiliate, Trinity Medical Group, Co. Ltd., a Thailand company, our collaborative partner, will be successful in its efforts to obtain regulatory approval from the Thailand FDA.

Technological change and competition may render our potential products obsolete

The pharmaceutical and biotechnology industries continue to undergo rapid change, and competition is intense and we expect it to increase. Competitors may succeed in developing technologies and products that are more effective or affordable than any that we are developing or that would render our technology and products obsolete or noncompetitive. Many of our competitors have substantially greater experience, financial and technical resources and production and development capabilities than us. Accordingly, some of our competitors may succeed in obtaining regulatory approval for products more rapidly or effectively than us, or technologies and products that are more effective and/or affordable than any that we are developing.

Our lack of commercial manufacturing and marketing experience may prevent us from successfully commercializing products

We have not manufactured any of our products in commercial quantities. We may not successfully make the transition from manufacturing clinical trial quantities to commercial production quantities or be able to arrange for contract manufacturing and this could prevent us from commercializing products or limit our profitability from our products. Even if Remune® or our other products are successfully developed and receives FDA approval, we have not demonstrated the capability to manufacture Remune® or our other products in commercial quantities. Except for Remune® (and, by extension, IR103), we have not demonstrated the ability to manufacture any of our treatments in large-scale clinical quantities. We rely on a third party for the final inactivation step of the Remune® manufacturing process. If the existing manufacturing operations prove inadequate, there can be no assurance that any arrangement with a third party can be established on a timely basis or that we can establish other manufacturing capacity on a timely basis.

We have no experience in the sales, marketing and distribution of pharmaceutical or biotechnology products. Thus, our products may not be successfully commercialized even if they are developed and approved for commercialization and even if we can manufacture them. In addition, our competitors will have significantly greater marketing resources and power than we will.

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

We may enter into arrangements with contract manufacturing companies to expand our own production capacity in order to meet requirements for our products, or to attempt to improve manufacturing efficiency. If we choose to contract for manufacturing services, we may encounter costs, delays and /or other difficulties in producing, packaging and distributing our clinical trials and finished product. Further, contract manufacturers must also operate in compliance with the GMP requirements; failure to do so could result in, among other things, the disruption of our product supplies. Our potential dependence upon third parties for the manufacture of

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our products may adversely affect our profit margins and our ability to develop and deliver products on a timely and competitive basis.

Adverse determinations concerning product pricing, reimbursement and related matters could prevent us from successfully commercializing Remune^® or any of our other products

Our ability to earn revenue on Remune^® or any other of our products will depend in part on the extent to which reimbursement for the costs of the products and related treatments will be available from government health administration authorities, private health coverage insurers, managed care organizations and other organizations. Failure to obtain appropriate reimbursement may prevent us from successfully commercializing Remune^® or any of our other products. Third-party payers are increasingly challenging the prices of medical products and services. If purchasers or users of Remune^® or any of our other products are not able to obtain adequate reimbursement for the cost of using the products, they may forego or reduce their use. Significant uncertainty exists as to the reimbursement status of newly approved health care products and whether adequate third party coverage will be available. In addition, many HIV patients live in poor countries, which may be unable to afford to pay substantial sums for their citizens’ HIV therapies. Political pressure exists to seek to require manufacturers of HIV therapies to supply them at below-market prices to poor persons and/or poor countries, and this pressure may increase in the future.

Our success may depend upon the acceptance of Remune^® and IR103 by the medical and HIV-activist communities

Our ability to market and commercialize Remune^® and IR103 depends on the acceptance and utilization of Remune^® and IR103 by the medical and HIV-activist communities. Physician inertia may be a problem for us as it is for many emerging medical products companies. We will need to develop commercialization initiatives designed to increase awareness about us and Remune^® and IR103 among targeted audiences, including public health and AIDS activists and community-based outreach groups in addition to the investment community. Currently, we have not developed any commercialization initiatives.

Hazardous materials and environmental matters could expose us to significant costs

We may be required to incur significant costs to comply with current or future environmental laws and regulations. Although we do not currently manufacture commercial quantities of our product candidates, we produce limited quantities of these products for our clinical trials. Our research and development and manufacturing processes involve the controlled storage, use and disposal of hazardous materials, biological hazardous materials and radioactive compounds. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and some waste products. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, the risk of contamination or injury from these materials cannot be completely eliminated. In the event of an incident, we could be held liable for any damages that result, and any liability could exceed our resources. Current or future environmental laws or regulations may have a material adverse effect on our operations, business and assets.

Pfizer terminated its collaboration with us, which has hindered the continued development and commercialization of Remune^®

We received in July 2001, a letter from Pfizer which indicated that Pfizer had elected to immediately terminate, in their entirety, all of its rights and obligations under our agreement with them. Our agreement with Pfizer permitted this termination. Although we retained all rights relating to Remune^® upon Pfizer’s termination, we lost a significant source of funding. Following the termination of our agreement with Pfizer, we decided not to proceed with one of our clinical trials of Remune^® developed by Agouron (subsequently acquired by Pfizer). The termination of this agreement has had, and may continue to have, a material adverse effect on our stock price and, consequently, our ability to successfully raise additional capital.

We may be unable to enter into additional collaborations

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

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As collateral for the notes with a current principal balance of $7,208,000 and accrued interest of $1,007,000 outstanding to parties affiliated with and/or related to Kevin Kimberlin, one of our directors and principal stockholders, such parties have a perfected security interest in our intellectual property. Pursuant to the security agreement, we must comply with covenants with respect to our intellectual property. The security interests and covenants could impair our ability to enter into collaborative and licensing arrangements.

Our patents and proprietary technology may not be enforceable and the patents and proprietary technology of others may prevent us from commercializing products. Some of our patents expire fairly soon

We have a portfolio of 173 patents worldwide. Although we believe these patents to be protected and enforceable, the failure to obtain meaningful patent protection for our potential products and processes would greatly diminish the value of our potential products and processes.

In addition, whether or not our patents are issued, or issued with limited coverage, others may receive patents, which contain claims applicable to our products. Patents we are not aware of may adversely affect our ability to develop and commercialize products. Also, our patents related to HIV therapy have expiration dates that range from 2010 to 2017 and our patents related to autoimmune diseases have expiration dates that range from 2010 to 2019. The limited duration of our patents could diminish the value of our potential products and processes, particularly since we do not expect to generate any revenue from our products sooner than the third quarter of 2008, if at all.

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

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

You could suffer substantial dilution of your investment as a result of past and future financings

We will continue to have limited cash resources. Although our management recognizes the need to secure additional financing, there can be no assurance that we will be successful in consummating any financing transaction or, if consummated, that the terms and conditions of the financing will not be unfavorable to us.

In the last three years we have issued very large numbers of shares, plus other securities convertible or exercisable for additional very large numbers of shares, in order to raise cash as required for our survival. Indeed, in 2003 alone, our outstanding number of common shares increased from 19,671,000 to 41,201,000. As a result, pre-existing stockholders have been substantially diluted. Any further near- term financings will almost certainly involve substantial dilution of outstanding equity.

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

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

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You could suffer substantial dilution of your investment if warrants and options to purchase common stock are exercised for common stock

As of September 30, 2004 we had reserved approximately 7,200,000 shares of our common stock for potential issuance upon the exercise of stock options or awards and purchases under our employee 401K match and stock purchase plans. Issuance of these additional shares could substantially dilute your interest in us. Furthermore, we have warrants outstanding which, if exercised, will purchase approximately 25,500,000 shares of our common stock and approximately 6,600,000 shares are issuable upon conversion of our outstanding convertible notes, subject to adjustment. Additionally, our placement agent in the December 2002 private placement, and its transferees, hold unit options to purchase approximately 1,702,000 shares of common stock and 1,438,000 Class A warrants, which are not redeemable by us, subject to adjustment. The Class A warrants are exercisable for additional shares of common stock and Class B warrants, subject to adjustment. In addition, we may issue up to 1,250,000 shares of our common stock to Trinity pursuant to our License and Collaboration Agreement. In addition, we will require substantial additional financings, which even if successful will probably require the issuance of very substantial amounts of potentially dilutive securities. See also “—You could suffer substantial dilution of your investment as a result of past and future financings.”

Our stock may become delisted and subject to penny stock rules, which may make it more difficult for you to sell your securities

On September 3, 2004, we received notice from the Nasdaq Stock Market (“Nasdaq”) that we were not in compliance with Nasdaq Marketplace Rule 4310(c)(4) due to the fact that the closing price of our common stock was below $1.00 for the last 30 consecutive trading days. In accordance with Nasdaq Marketplace Rule 4310(c)(8)(D), we have until March 2, 2005 to regain compliance by having our common stock close at or above $1.00 for a minimum of 10 consecutive trading days. Provided, however, that Nasdaq may require that our common stock trade at or above $1.00 for up to 20 consecutive trading days before deeming us to be in compliance with Nasdaq listing standards.

If we are delisted from the Nasdaq for any reason, our common stock might be considered a penny stock under regulations of the Securities and Exchange Commission, and if so would be subject to rules that impose additional sales practice requirements on broker-dealers who buy and sell our securities. The additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of the common stock and warrants and your ability to sell our securities in the secondary market. We cannot assure you that we will be able to maintain our listing on the Nasdaq SmallCap Market. Being delisted would also hurt our ability to raise additional financing.

Legal proceedings could require us to spend substantial amounts of money and impair our operations

Since July 2001, several complaints have been filed in the United States District Court for the Southern District of California seeking an unspecified amount of damages on behalf of an alleged class of persons, who purchased shares of our common stock at various times between May 17, 1999 and July 6, 2001. The complaints have been consolidated into a single action under the name In re Immune Response Securities Litigation by order of the Court and a consolidated, amended complaint was filed in July 2003. The consolidated, amended complaint names us and certain of our former officers as defendants, as well as Agouron Pharmaceuticals, Inc. and one of its officers. The consolidated, amended complaint alleges that we, Agouron and/or such officers violated federal securities laws by misrepresenting and failing to disclose certain information about the results of clinical trials of Remune®. On October 31, 2003 the defendants filed motions to dismiss the consolidated, amended complaint. The court has not yet ruled on the motions. Although we intend to vigorously defend the actions, we cannot now predict or determine the outcome or resolution of these proceedings, or to estimate the amounts of, or potential range of, loss with respect to these proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against us or our former officers or settlements that could require substantial payments by us, which could have a material adverse impact on our consolidated financial position, results of operations and cash flows. These proceedings also might require substantial attention of our management team and therefore, regardless of whether we win or lose the litigation, divert their time and attention from our business and operations.

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Our certificate of incorporation and bylaws include provisions that could make attempts by stockholders to change management more difficult

The approval of 66 2/3% of our voting stock is required to approve specified transactions and to take specified stockholder actions, including the calling of special meetings of stockholders and the amendment of any of the anti-takeover provisions, including those providing for a classified board of directors, contained in our certificate of incorporation. Further, pursuant to the terms of our stockholder rights plan, we have distributed a dividend of one preferred stock purchase right for each outstanding share of common stock. These rights will cause substantial dilution to the ownership of a person or group that attempts to acquire us on terms not approved by our Board of Directors and may have the effect of deterring hostile takeover attempts. The substantial aggregate equity positions of Mr. Kimberlin and his affiliates and/or related parties would make a hostile takeover attempts very unlikely. The practical effect of these provisions is to require a party seeking control of us to negotiate with our Board of Directors, which could delay or prevent a change in control. These provisions could limit the price that investors might be willing to pay in the future for our securities and make attempts by stockholders to change management more difficult.

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

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

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

Additionally, our ability to conduct business, raise additional financing and commercialize Remune® or our other products may be hindered if we lose additional executive officers or experienced personnel with historical knowledge of our business, transactions, science and technology.

In addition, recruiting and retaining qualified scientific personnel to assist in scaling up our manufacturing facilities and performing future research and development work will be critical to our success. It has been particularly difficult for us to retain personnel in light of the performance of our common stock and the incurrence of substantial net operating losses. We do not have sufficient personnel to fully execute our business plan, and there is currently a shortage of skilled executives and scientists, which is likely to continue. As a result, competition for experienced executives and scientists from numerous companies and academic and other research institutions may limit our ability to hire or retain new executives and other qualified personnel on acceptable terms. If we fail to attract and retain sufficient qualified personnel, we may not be able to develop or implement our technology.

Product liability exposure may expose us to significant liability

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We invest our excess cash primarily in U.S. government securities and money market accounts. These instruments have maturities of two years or less when acquired. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions. Furthermore, our debt is at fixed rates. Accordingly, we believe that, while the instruments we hold are subject to changes in the financial standing of the issuer of such

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securities, these instruments are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.

Item 4. Controls and Procedures

Dr. John N. Bonfiglio, our principal executive officer, and Michael K. Green, our principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)) have concluded that, as of September 30, 2004, our disclosure controls and procedures are effective.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

None

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

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b) Reports on Form 8-K

We filed on September 8, 2004 a Form 8-K (Items 1.01, 3.01 and 9.01) for an event of September 2, 2004. On September 2, 2004, we sold to NovaRx Corporation (“NovaRx”) our in-license rights to certain cancer-related technology we had previously in-licensed from the Sidney Kimmel Cancer Center (“SKCC”) and Masayoshi Namba, M.D. (“Namba”) and sublicensed the same technology to NovaRx. Under novation agreements signed on September 2, 2004, we assigned our rights and were relieved of our obligations under the earlier license agreements. In exchange, NovaRx agreed to pay us $1,050,000, of which $150,000 was paid at signing and the balance will be due no later than August 16, 2007.

That same Form 8-K also reported that on September 3, 2004, we received notice from the Nasdaq Stock Market (“Nasdaq”) that we were not in compliance with Nasdaq Marketplace Rule 4310(c)(4) due to the fact that the closing price of our common stock was below $1.00 for 30 consecutive trading days. In accordance with Nasdaq Marketplace Rule 4310(c)(8)(D), we have until March 2, 2005 to regain compliance by having our common stock close at or above $1.00 for a minimum of 10 consecutive trading days. Provided, however, that Nasdaq may in its discretion require that our common stock trade at or above $1.00 for up to 20 consecutive trading days before deeming us to be in compliance with Nasdaq listing standards.

We filed on September 21, 2004 a Form 8-K (Item 4.01) for an event of September 15, 2004. On September 15, 2004, our Audit Committee dismissed BDO Seidman, LLP as our registered public accounting firm and appointed Levitz, Zacks & Ciceric as our new registered public accounting firm for the fiscal year ending December 31, 2004.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	THE IMMUNE RESPONSE CORPORATION
Date: November 12, 2004	By:
		/s/ Michael K. Green

		Michael K. Green,
		Chief Financial Officer

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Exhibit Index


Exhibit
Number		Description of Document
	31.1	Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).

	31.2	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).

	32.1	Certification pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2	Certification pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Exhibit

Number

Description of Document

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).

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

•		the time and costs involved in obtaining regulatory approvals;

•		continued scientific progress in our research and development programs;

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

•		the cost of manufacturing scale-up;

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

•		competing technological and market developments;

•		effective commercialization activities and arrangements;

•		the costs of defending against and settling lawsuits; and/or

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

•		obtaining regulatory approvals;

•		our research and development programs;

•		our preclinical and clinical trials; or

•		scaling up manufacturing.

•		overall financial market conditions;

•		applicable Nasdaq rules and federal and state securities laws;

•		the perfected security interest in our intellectual property in respect of the aggregate $7,208,000 principal amount in convertible promissory notes issued to affiliates and/or related parties of Kevin Kimberlin, (who is one of our directors and our principal stockholder (See “An existing stockholder owns approximately 14.5% of our outstanding common stock and has the rights to acquire an additional 23,554,671 shares of our common stock, which could result in ownership of up to approximately 43.0% of our outstanding shares and could allow him to control or influence stockholder votes”);

•		the effect of the potential for exercise of outstanding options and warrants exercisable into approximately 22,600,000 shares of common stock;

•		the effect of the potential for conversion of 688,000 shares of Series A Convertible Preferred Stock issued in January 2004. The Series A is currently convertible into 4,128,000 shares of common stock up to a maximum of 8,300,000 shares of common stock; and

•		the issuance of the placement agent option to Spencer Trask Ventures, Inc., (an affiliate of Kevin Kimberlin) and its transferees that is exercisable for 1,700,000 shares of common stock and 1,438,000 Class A warrants, which are not redeemable by us.