-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FpZnifSzkLclr6xK21HU9/Nq8AbTL9zgeTO+IcF7QmS46ee6xKr4eIQa3Xaa1qil wHaXiMtt7Gb6UApTSfjgsg== 0001047469-03-003704.txt : 20030203 0001047469-03-003704.hdr.sgml : 20030203 20030203162422 ACCESSION NUMBER: 0001047469-03-003704 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20030203 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMMUNE RESPONSE CORP CENTRAL INDEX KEY: 0000817785 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 330255679 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-18006 FILM NUMBER: 03536756 BUSINESS ADDRESS: STREET 1: 5935 DARWIN COURT CITY: CARLSBAD STATE: CA ZIP: 92008 BUSINESS PHONE: 6194317080 MAIL ADDRESS: STREET 1: 5935 DARWIN COURT CITY: CARLSBAD STATE: CA ZIP: 92008 10-Q/A 1 a2102256z10-qa.htm 10-Q/A
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A
Amendment No. 1

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 0-18006

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

Delaware (State or Other Jurisdiction of Incorporation or Organization)		33-0255679 (IRS Employer Identification Number)
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 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 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's classes of common stock, as of the latest practicable date.

As of April 30, 2002, 8,897,887 shares of common stock were outstanding (as adjusted for the 1-for-4 reverse stock split, effective as of October 9, 2002).

This Form 10-Q/A is being filed as Amendment No. 1 to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission for the quarter ended March 31, 2002 (the "Form 10-Q") by The Immune Response Corporation (the Company"). This Form 10-Q/A (a) revises presentation of certain of the Company's Consolidated Financial Statements for the fiscal year ended December 31, 2001 and the quarter ended March 31, 2002 by correcting the misclassification of certain convertible notes from debt to equity, (b) makes corresponding changes to the Management's Discussion and Analysis of Financial Condition and Results of Operations and (c) updates Management's Discussion and Analysis of Financial Condition and Results of Operations to reflect certain additional subsequent events. This Form 10-Q/A has also been revised to reflect the one-for-four reverse stock split effective as of October 9, 2002.

This amendment does not otherwise update the disclosures set forth as originally filed in the Form 10-Q thereto and does not otherwise reflect events occurring after the original filing of the Form 10-Q.

THE IMMUNE RESPONSE CORPORATION

FORM 10-Q/A

QUARTERLY REPORT

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	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	14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	31
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 4.	Submission of Matters to a Vote of Security Holders	32
Item 5.	Other Information	32
Item 6.	Exhibits and Reports on Form 8-K	33
Signature		34
Certifications		34

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

			March 31, 2002 (restated)			December 31, 2001 (restated)
			(unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	2,178		$	2,430
	Marketable securities—available-for-sale			82			271
	Other current assets			552			861

		Total current assets		2,812			3,562
Property and equipment, net				8,645			9,026
Licensed technology				3,355			3,532
Investment in MicroGenomics, Inc.				562			562
Deposits and other assets ($600 restricted as security for letter of credit)				854			816

		Total assets	$	16,228		$	17,498

Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable		$	892		$	1,115
	Accrued expenses			1,210			1,274
	Short-term secured promissory note, related party			2,000			—
	Current portion of equipment notes payable			662			643
	Current portion of deferred revenue			43			29

		Total current liabilities		4,807			3,061
Convertible notes payable, net of discount of $3,216 and $1,904 at March 31, 2002 and December 31, 2001, respectively				866			119
Equipment notes payable				940			1,128
Long-term deferred revenue				279			102

		Total liabilities		6,892			4,410

Stockholders' equity:
	Preferred stock, 5,000,000 shares authorized; no shares issued and outstanding			—			—
	Common stock, $.0025 par value, 65,000,000 shares authorized, 8,893,037 and 8,893,025 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively			89			89
	Warrants			2,037			1,131
	Additional paid-in capital			239,458			238,819
	Accumulated other comprehensive income			7			20
	Accumulated deficit			(232,255	)		(226,971	)

		Total stockholders' equity		9,336			13,088

		Total liabilities and stockholders' equity	$	16,228		$	17,498

See accompanying notes.

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

		Three months ended March 31,
		2002 (restated)			2001
Revenues:
	Contract research revenue	$	7		$	64
	Licensed research revenue		2			968

			9			1,032

Expenses:
	Research and development		3,808			5,333
	General and administrative		1,147			1,227

			4,955			6,560

Other revenue and expense:
	Investment income		14			734
	Interest expense		(120	)		(90	)
	Accretion of convertible notes payable		(232	)		—

Net loss			(5,284	)		(4,884	)
Accretion of preferred stock			—			(70	)
Preferred dividends			—			(185	)

Net loss applicable to common stockholders		$	(5,284	)	$	(5,139	)

Loss per common share—basic and diluted:
	Net loss	$	(0.59	)	$	(0.63	)

	Net loss applicable to common stockholders	$	(0.59	)	$	(0.67	)

Weighted average number of shares outstanding used in per share calculations			8,893,026			7,702,496

See accompanying notes.

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

					Three months ended March 31,
					2002 (restated)			2001
Operating activities:
	Net loss				$	(5,284	)	$	(4,884	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization				558			507
		Deferred revenue				191			(27	)
		Recognition of deferred revenue from prior periods				—			(944	)
		Accretion of convertible notes payable and long-term accrued interest				292			—
		Deferred rent expense				—			(29	)
		Changes in operating assets and liabilities:
			Other current assets			309			(408	)
			Accounts payable			(223	)		(440	)
			Accrued expenses			(64	)		321

				Net cash used in operating activities		(4,221	)		(5,904	)

Investing activities:
	Sale of marketable securities, net					176			5,416
	Purchase of property and equipment					—			(686	)
	Other assets					(38	)		—

				Net cash provided by investing activities		138			4,730

Financing activities:
	Principal payments under equipment notes payable					(169	)		(150	)
	Proceeds from issuance of convertible note payable and warrant					2,000			—
	Proceeds from issuance of short-term secured promissory note					2,000			—
	Net proceeds from common stock purchases through employee plans					—			5

				Net cash provided by (used in) financing activities		3,831			(145	)

Net decrease in cash and cash equivalents						(252	)		(1,319	)
Cash and cash equivalents at beginning of year						2,430			7,124

Cash and cash equivalents at end of period					$	2,178		$	5,805

Supplemental disclosure of cash flow information:
	Interest paid				$	56		$	77

Supplemental disclosure of noncash investing and financing activities:
	Unrealized loss on marketable securities				$	(13	)	$	(438	)

	Accretion of convertible preferred stock				$	—		$	70

	Payment of convertible preferred stock dividends with common stock				$	—		$	189

See accompanying notes.

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

1. Basis of Presentation

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

Restatement

The Company's previously issued consolidated financial statements for the three months ended March 31, 2002 have been restated. This restatement is described in detail below and in Note 9. In addition, these consolidated financial statements have been revised to reflect the one-for-four reverse stock split, effective as of October 9, 2002.

The Company noted certain misclassifications of certain convertible notes issued by us to a related party. The effects of these misclassifications impacted the audited consolidated financial statements as of and for the year ended December 31, 2001 and the unaudited Form 10-Q as of and for the three months ended March 31, 2002. The Company's previously issued consolidated financial statements for the year ended December 31, 2001 have been restated to correct an overstatement of interest expense of $400,000, an understatement of additional paid-in capital of $480,000 and an understatement of the discount to the convertible notes payable, related party of $880,000. The consolidated financial statements for the three months ended March 31, 2002 have been restated to correct an understatement of interest expense of $104,000, an understatement of additional paid-in capital of $639,000 and an understatement of the discount to the convertible notes payable, related party of $535,000.

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

2. Organization, Liquidity and Going Concern

Organization

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

Liquidity and going concern

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has operating and liquidity concerns due to historically reporting significant net losses and negative cash flows from operations. As of March 31, 2002, the

Company had an accumulated deficit of $232.3 million and current liabilities exceeded current assets by approximately $2.0 million.

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

Management is currently evaluating equity financing alternatives to meet the Company's future capital requirements. In addition, the Company is seeking collaborators for all of our technologies. Management estimates that the Company's available cash resources along with the issuance of convertible notes and warrants, short-term promissory notes, and the close of the private placement, will be sufficient to fund the Company's planned operations through March 2003. In any event, the Company will need to raise substantial additional capital to fund its operations beyond March 2003. If the Company is unable to raise adequate capital, it would have a material adverse effect on the Company and would cause the Company to cease operations, at which time the Company may not be able to satisfy its obligations. See Notes 9 and 13.

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

In October 2002, the Company's Board of Directors formally declared a one-for-four reverse stock split of issued and outstanding shares of common stock. The Company's stockholders authorized the reverse stock split at their annual meeting held in June 2002.

3. Contingencies

From time to time, the Company is subject to various claims and litigation incidental to our business activities. Since July 2001, several complaints have been filed in the United States District Court for the Southern District of California seeking an unspecified amount of damages on behalf of an alleged class of persons, who purchased shares of our common stock at various times between May 17, 1999 and July 6, 2001. The various complaints name us and certain of our officers as defendants, as well as Agouron Pharmaceuticals, Inc. and one of its officers. The complaints allege that we, Agouron and/or such officers violated federal securities laws by misrepresenting and failing to disclose certain information about the results of clinical trials of REMUNE®. The complaints have been consolidated into a single action under the name In re Immune Response Securities Litigation by order of the Court. The Company has not yet formally responded to the complaints. Although the Company intends to vigorously defend the actions, we can not 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 officers or settlements that could require substantial payments by the Company, 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 divert their time and attention from our business and operations.

4. Long-Lived Assets

The Company evaluates potential impairment of long-lived assets in accordance with Statement of Financial Accounting Standards ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets". FAS No. 121 establishes procedures for review of recoverability and measurement of impairment, if necessary, of long-lived assets and certain identifiable intangibles held and used by an entity. FAS No. 121 requires that those assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable based on expected undiscounted cash flows attributable to that asset. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. As of December 31, 2001, the Company recorded an impairment adjustment for its investment in MicroGenomics, Inc. See Note 6.

In accordance with FAS No. 144, the Company has identified its property and equipment totaling $8.6 million and licensed technology totaling $3.4 million at March 31, 2002 as its long-lived assets subject to impairment review. Given the current financial status of the Company, its historical losses, and the indeterminable outcome of the development and approval of its products, there is substantial uncertainty as to the Company's ability to recover its investment in these long-lived assets through the generation of net future cash flows. In light of this uncertainty, the Company plans to obtain an independent third party appraisal of these long-lived assets in the fourth quarter of 2002. As a result of such appraisal, a substantial impairment charge may be recognized.

5. Recent Accounting Pronouncements

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

In August 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS No. 144 supersedes FAS No. 121, "Accounting for the Impairment of Long-Lived Assets," and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. The provisions of FAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. Management has not yet determined the impact of the adoption of FAS No. 144 on the Company's financial position or results of operations.

In April 2002, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 145, "Rescission of FASB Statements No. 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," to update, clarify and simplify existing accounting pronouncements. FASB Statement No. 4, which required all gains and losses from debt extinguishment to be aggregated and, if material, classified as an extraordinary item, net of related tax effect, was rescinded. Consequently, FASB Statement No. 64, which amended FASB Statement No. 4, was rescinded because it was no longer necessary. The adoption of SFAS 145 did not have a material impact on the Company's financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with a exit or disposal activity be recognized and measured initially at fair value when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Management of the Company does not expect the adoption of this statement to have a material effect on the Company's financial statements.

6. Investment in MicroGenomics, Inc.

In December 2000, the Company acquired a 25% ownership interest in MicroGenomics, Inc., ("MGI"), a privately held microbial genomics company, of which Dr. Dennis J. Carlo, former President and CEO of the Company, is a 6.4% stockholder and the chairman of the board of directors of MGI. As part of the agreement, the Company issued 135,135 shares of its common stock valued at $2 million in exchange for MGI's preferred stock equal, on an as converted basis, to 25% of the equity capitalization of MGI on a diluted basis. The Company has an effective registration statement with the Securities and Exchange Commission covering the resale of 135,135 shares of common stock owned by MGI. Additionally, as part of the agreement, the Company agreed that should the common stock issued to MGI be worth less than $3 million on the one-year anniversary of the closing, the Company would issue additional stock up to that value. The Company recorded its investment in MGI at a cost of $3 million, which includes the $1 million stock valuation guarantee. The Company accounted for this investment under the equity method of accounting.

In December 2001, the Company and MGI agreed to settle the $1 million stock valuation guarantee by reducing our ownership interest in MGI to 6.25% of their equity capitalization on a fully diluted basis. No additional shares of common stock were required to be issued pursuant to the revised agreement. In conjunction with the revised agreement and the reduced ownership percentage, the Company decreased the carrying value of its investment by the $1 million stock liability and an additional adjustment for impairment of $1.2 million based on an independent valuation analysis dated November 2001. In 2001, the Company changed its accounting for this investment to the cost method.

7. Net Loss Per Share

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

8. Comprehensive Income

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

	Three Months Ended March 31,
	2002 (restated)			2001
	(in thousands)
Net loss	$	(5,284	)	$	(4,884	)
Net unrealized loss on marketable securities		(13	)		(438	)

Comprehensive loss	$	(5,297	)	$	(5,322	)

9. Convertible Notes Payable, Related Party

The Company had significant additional financings, subsequent to March 31, 2002 through the issuance of convertible notes payable. See Note 13.

2001 Closing

In November 2001 ("2001 Closing"), the Company privately placed a $2.0 million convertible note and warrant to an accredited investor. Furthermore, the investor and the Company have agreed that, upon the achievement of certain commercial and technical milestones, the Company may sell and the investor may buy additional notes and warrants, under certain conditions. The investor, Kevin Kimberlin Partners, L.P. ("KKP"), is an affiliate of Mr. Kevin Kimberlin, a director and major stockholder of the Company. The Company used substantially all of the net proceeds from the transaction for product development, working capital and other general corporate purposes. The Company has filed a registration statement on Form S-3 with the Securities and Exchange Commission to cover the resale of the underlying shares of common stock.

The note bears interest at a rate of 8% per year and is secured by the intellectual property of the Company. The note matures on November 9, 2004, but is convertible into shares of the Company's common stock at any time prior to maturity, at the option of the investor, initially at a conversion price of $4.6144 per share. The conversion price was based on a 20% discount to the average closing bid price of the Company's common stock for the ten-day trading period ended November 8, 2001. The value of the conversion discount for the convertible note is approximately $924,000, which is being amortized as interest expense over the three-year term of the note. The warrant is for a term of ten years and is initially exercisable for up to 433,426 shares of the Company's common stock with an exercise price of $5.768 per share. The exercise price was based on the average closing bid price of the Company's common stock for the ten-day trading period ended November 8, 2001. The warrant was valued at approximately $1.1 million and has been recorded as a discount to the note. The $2.0 million cash proceeds have been allocated between the relative fair values of the note and warrant. The resultant discount to the note is being accreted over the three-year term of the note. Both the conversion price of the note and exercise price of the warrant provide anti-dilution protection for the investor.

February Closing

In February 2002 ("February Closing"), the Company privately placed with Oshkim Limited Partnership ("Oshkim") a $2.0 million convertible note and warrant by amending the Note Purchase Agreement and Intellectual Property Security Agreement with KKP from the 2001 Closing. Oshkim is an affiliate of Mr. Kimberlin. The amendments added Oshkim as a party to the agreements and

allowed us to issue the note and warrant in the February Closing to Oshkim on different terms than the note and warrant issued in the 2001 Closing.

The February Closing note bears interest at a rate of 8% per year and is secured by the intellectual property of the Company. The note matures on February 14, 2005, but is convertible into shares of the Company's common stock at any time prior to maturity, at the option of the investor, initially at a conversion price of $4.662 per share. The conversion price was based on a 112.5% premium to the average closing bid price of the Company's common stock for the five-day trading period ended February 13, 2002. The value of the conversion discount for the convertible note is approximately $639,000, which is being amortized as interest expense over the three-year term of the note. The warrant is for a term of ten years and is initially exercisable for up to 429,000 shares of the Company's common stock with an exercise price of $4.144 per share. The exercise price was based on the average closing bid price of the Company's common stock for the five-day trading period ended February 13, 2002. The warrant was valued at approximately $906,000 and has been recorded as a discount to the note. The resultant discount to the note is being accreted over the three-year term of the note. Both the conversion price of the note and exercise price of the warrant provide anti-dilution protection for the investor.

The Company noted certain misclassifications of the 2001 Closing and February Closing notes issued by us to a related party. The effects of these misclassifications impacted the audited consolidated financial statements as of and for the year ended December 31, 2001 and the unaudited Form 10-Q as of and for the three months ended March 31, 2002. The Company's previously issued consolidated financial statements for the year ended December 31, 2001 have been restated to correct an overstatement of interest expense of $400,000, an understatement of additional paid-in capital of $480,000 and an understatement of the discount to the convertible notes payable, related party of $880,000. The consolidated financial statements for the three months ended March 31, 2002 have been restated to correct an understatement of interest expense of $104,000, an understatement of additional paid-in capital of $639,000 and an understatement of the discount to the convertible notes payable, related party of $535,000.

10. Short-Term Secured Promissory Note, Related Party

In March 2002, the Company issued a short-term secured promissory note to Oshkim for $2.0 million. The note earned interest at 8%, with a maturity date of May 5, 2002 and was secured by the intellectual property of the Company. In May 2002, the short-term secured promissory note was repaid in full with interest of approximately $19,000. See Note 13.

11. Redeemable, Convertible Preferred Stock

As required by the terms of the Company's Series F Redeemable, Convertible Preferred Stock ("Series F Stock"), in April 2001, the Company converted 160.7 shares of the 200 shares outstanding of its Series F Stock into 1,052,231 shares of common stock of the Company; and in May 2001, the Company redeemed the remaining 39.3 shares of Series F Stock for cash of $2,783,045. As of May 2001, the Company had no issued and outstanding shares of Series F Stock.

The Series F Stock paid a dividend of 7.5% per annum. In general, the dividend was payable in shares of common stock or cash at the Company's option. For the three months ended March 31, 2001 16,870 shares of the Company's common stock were issued as dividends to the Series F stockholders. The Company has an effective registration statement with the Securities and Exchange Commission covering the resale of up to 607,618 shares of the common stock issued on the conversion of the Series F Stock.

12. REMUNE® Collaboration with Pfizer Inc.

During June 1998, the Company and Pfizer entered into a binding agreement under which the Company agreed to exclusively license to Pfizer certain rights relating to REMUNE®, its immune-based therapy under development for the treatment of HIV infection. In July 2001, the Company received notification of the termination by Pfizer of the continued development and commercialization of REMUNE®. The Company regained full rights to REMUNE® as a result of Pfizer's decision to end the collaboration. In addition, the Company recognized approximately $7.7 million of the remaining deferred revenue from the collaboration in the third quarter of 2001. License revenue of $968,000 was recognized for the three months ended March 31, 2001 prior to the termination. According to the Company's revenue recognition policies, as modified by SAB No. 101, the deferred revenue received from Pfizer, comprised of a license fee, a milestone payment and common stock purchase premiums, was deemed as earned upon the termination of the development agreement.

As of March 31, 2002, the Company had received a total of $47 million from Pfizer under the agreement, including the initial $10 million license fee, a $5 million milestone payment, $18 million in payments to support research and development and $14 million in payments for the purchase of the Company's common stock priced at a premium to the market. The Company has an effective registration statement with the Securities and Exchange Commission covering the resale of 329,402 shares of common stock owned by Pfizer's affiliate, Agouron Pharmaceuticals, Inc.

13. Subsequent Events

Various Financings

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

The May Closing note bears interest at a rate of 8% per year and is secured by the intellectual property of the Company. The note matures on May 3, 2005, but is convertible into shares of the Company's common stock at any time, at the option of the investor, initially at a conversion price of $1.7248 per share. The conversion price was based on a 20% discount to the average closing bid price of the Company's common stock for the ten-day trading period ended May 2, 2002. The value of the conversion discount for the convertible note is $1,962,000, which is being amortized as interest expense over the three-year term of the note. The warrant is for a term of ten years and is initially exercisable for up to 2,319,109 shares of the Company's common stock with an exercise price of $2.156 per share. The exercise price was based on the average closing bid price of the Company's common stock for the ten-day trading period ended May 2, 2002. The warrant was valued at approximately $2.0 million and has been recorded as a discount to the note. The resultant discount to the note is being accreted over the three-year term of the note. Both the conversion price of the note and exercise price of the warrant provide anti-dilution protection for the investor.

In June 2002 ("June Closing"), the Company privately placed with Oshkim a $1.0 million convertible note and warrant pursuant to the amended Note Purchase Agreement and Intellectual Property Security Agreement.. The proceeds were used for product development, working capital and other general corporate purposes. Oshkim has transferred all convertible notes and warrants to Cheshire Associates LLC ("Cheshire"), an entity affiliated with Kevin Kimberlin. Cheshire exchanged the convertible note for ten units offered in connection with the December 2002 private offering.

In July 2002 ("July Closing"), the Company privately placed with The Kimberlin Family 1998 Irrevocable Trust ("KFIT"), in two placements, approximately $567,000 on July 11, 2002 and $637,000

on July 30, 2002 convertible notes and warrants pursuant to the amended Note Purchase Agreement and Intellectual Property Security Agreement. The proceeds were used for product development, working capital and other general corporate purposes. KFIT has transferred all convertible notes and warrants to Cheshire. Cheshire exchanged $1.0 million of the convertible notes issued in the July Closing for ten units offered in connection with the December 2002 private offering. The balance of the notes issued in the July Closing was transferred to a new convertible note and warrant dated December 11, 2002 in accordance with and on the same terms as the convertible notes and warrants issued in the November Closings.

In August and September 2002, the Company issued short-term secured promissory notes to KFIT for $3,590,000. The notes earned interest at 8%, with a maturity date of November 30, 2002 and were secured by the intellectual property of the Company. In October 2002, the Company issued additional short-term secured promissory notes to KFIT and Oshkim for $977,000. The notes earned interest at 8%, with a maturity date of November 30, 2002 and were secured by the intellectual property of the Company. In November 2002, the short-term secured promissory notes were repaid in full with interest of approximately $61,000.

In November 2002 ("November Closings"), the Company privately placed convertible notes and warrants of approximately $5.5 million to Cheshire pursuant to the amended Note Purchase Agreement and Intellectual Property Security Agreement with similar terms to the 2001 and May Closings. Proceeds of approximately $4.6 million were used to repay the short-term secured promissory notes issued in August, September and October 2002, plus accrued interest of approximately $61,000. The remaining proceeds were used for working capital and other general corporate purposes.

Transamerica Agreement

In June 2002, the Company restructured our equipment loans with Transamerica Technology Finance Corporation ("Transamerica"). As a result of the restructuring, the Company cured the existing default under those loans and limited the circumstances, which could serve as the basis for any future default by the Company. Pursuant to the agreements signed with Transamerica, the Company is obligated to pay Transamerica three $200,000 milestone payments upon receipt of proceeds from each of the following transactions: (i) closing of the December 2002 private placement, (ii) exercise of the Class A Warrants and (iii) exercise of the Class B Warrants. The first payment of $200,000 was paid as part of the December 2002 private placement. These payments have and will reduce the Company's existing Transamerica debt. Additionally, Transamerica was granted a security interest in our assets, including a subordinated interest in our intellectual property. The Company also remains obligated to make its scheduled debt payments to Transamerica until the debt and interest has been paid in full. The total amount owed to Transamerica as of March 31, 2002 was approximately $1.6 million.

Trinity Agreement

In late June 2002, the Company amended its REMUNE® license and collaboration contract with Trinity Medical Group USA, Inc ("Trinity"). The amended contract provides for manufacturing costs and mark-up plus $50 per unit to be paid to the Company. The $50 per unit mark-up would expire upon the earlier of the first one million doses of REMUNE® purchased by Trinity or December 31, 2007. As consideration for the increased per unit, purchase price to be paid to the Company, Trinity was issued 1,000,000 shares of restricted common stock valued at $2,360,000 and up to an additional 750,000 shares upon the occurrence of certain sales milestones. All of the restricted shares issued to Trinity are subject to registration rights. In addition, the Company waived the final $5.0 million common stock purchase obligation set forth in the original agreement, which would have applied in the event of the optional technology transfer of REMUNE® manufacturing rights in Trinity's licensed territories. Also, the Company provided an increase in the amount of shares that Trinity will receive in

exchange for a $5.0 million payment upon Thai government approval of REMUNE® to 500,000 shares from 83,333 shares.

NASDAQ Status

On September 9, 2002, the Company transferred to the NASDAQ SmallCap Market from the NASDAQ National Market. This transfer allowed us an extended period of time to comply with the minimum requirements for continued listing. On October 9, 2002, our Board of Directors formally declared a one-for-four reverse stock split of issued and outstanding shares of common stock. On October 24, 2002 NASDAQ granted the Company an additional 180 calendar day grace period to demonstrate compliance with the NASDAQ minimum $1.00 bid price per share requirement for continued listing. Subsequently, because the closing bid price of our common stock was at $1.00 or greater for at least ten consecutive trading days, effective on October 31, 2002, NASDAQ informed the Company that it now meets the listing requirements.

In October 2002, the Company obtained, for purposes of NASD rules, stockholder approval at a special meeting of the stockholders for the private placement transactions completed in May, June and July 2002 and future placements, pursuant to the Note Purchase Agreement with KKP, Oshkim and KFIT. Also at this meeting, the stockholders ratified the selection of BDO Seidman, LLP, as the Company's independent auditors.

Private Placement

In December 2002 ("December Closing"), the Company completed a private offering of common stock and warrants, which raised approximately $8.4 million in gross proceeds, including $6.4 million in new investment and $2.0 million of non-cash proceeds converted from previously issued related party convertible promissory notes. The Company also issued to Spencer Trask Ventures, Inc., the placement agent for the December Closing, an option to purchase 1,452,419 shares of common stock and 1,452,419 Class A Warrants. As per the June 2002 agreement with Transamerica, $200,000 of the offering proceeds were used to pay down the Long-term Equipment Notes Payable. Exercise of all warrants, including those Class A and Class B Warrants in the placement agent option, would result in total proceeds of $37.8 million. Each unit had a purchase price of $100,000 and consists of (a) 112,995 shares of common stock and (b) 112,995 Class A Warrants. The Class A Warrants are exercisable for one share of common stock and a Class B Warrant at $1.33, a 50 percent premium to the $0.885 discounted Unit Price. The Class B Warrants are exercisable for one share of common stock at $1.77, a 100 percent premium to the $0.885 discounted Unit Price.

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

This discussion contains forward-looking statements concerning our operating results and timing of anticipated revenues and expenditures. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include those discussed under "Risk Factors". The following should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-Q. These forward-looking statements speak only as of the date hereof. Except for our ongoing obligation to disclose material information as required by federal securities laws, we undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Summary

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

We have not been profitable since inception and had an accumulated deficit of $232.3 million as of March 31, 2002. To date, we have not recorded any revenues from the sale of products. Revenues recorded through March 31, 2002 were primarily received from contract research, licensing of technology, milestone achievement payments and investment income. We expect our operating losses to continue, as well as to have quarter-to-quarter fluctuations, some of which could be significant, due to research, development, manufacturing scale-up and clinical trial activities. We cannot provide assurance that we will be able to generate sufficient product revenue to become profitable at all or on a sustained basis.

As discussed in Note 1 to these condensed consolidated financial statements, we have noted certain misclassifications of certain convertible notes issued by us to a related party. The effects of these misclassifications impacted the audited consolidated financial statements as of and for the year ended December 31, 2001 and the unaudited Form 10-Q as of and for the three months ended March 31, 2002. The net result to Net Loss was a decrease of $0.1 million for the three months ended March 31, 2002. These misclassifications have been amended throughout and accordingly, we are filing this amended March 31, 2002 Form 10-Q. We previously filed an amended Form 10-K following the completion of the re-audit for the year ended December 31, 2001.

In February 2002 ("February Closing"), we privately placed with Oshkim Limited Partnership ("Oshkim") a $2.0 million convertible note and warrant by amending the Note Purchase Agreement and Intellectual Property Security Agreement with Kevin Kimberlin Partners, L. P. ("KKP") from the 2001 Closing. Oshkim is an affiliate of Mr. Kimberlin. The amendments added Oshkim as a party to the agreements and allowed us to issue the note and warrant in the February Closing to Oshkim on different terms than the note and warrant issued in the 2001 Closing.

The February Closing note bears interest at a rate of 8% per year and is secured by our intellectual property. The note matures on February 14, 2005, but is convertible into shares of our common stock at any time prior to maturity, at the option of the investor, initially at a conversion price of $4.662 per share. The conversion price was based on a 112.5% premium to the average closing bid price of our common stock for the five-day trading period ended February 13, 2002. The value of the conversion discount for the convertible note is approximately $639,000, which is being amortized as interest expense over the three-year term of the note. The warrant is for a term of ten years and is initially exercisable for up to 429,000 shares of our common stock with an exercise price of $4.144 per share. The exercise price was based on the average closing bid price of our common stock for the five-day trading period ended February 13, 2002. The warrant was valued at approximately $906,000 and has been recorded as a discount to the note. The resultant discount to the note is being accreted over the three-year term of the note. Both the conversion price of the note and exercise price of the warrant provide anti-dilution protection for the investor.

In March 2002, we issued a short-term secured promissory note to Oshkim for $2.0 million. The note earned interest at 8%, with a maturity date of May 5, 2002 and was secured by our intellectual property. In May 2002, the short-term secured promissory note was repaid in full with interest of approximately $19,000.

defend the actions, we can not 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 officers or settlements that could require substantial payments by us, which could have a material adverse impact on our financial position, results of operations and cash flows. These proceedings also might require substantial attention of our management team and therefore divert their time and attention from our business and operations.

In July 2001, we regained full rights to REMUNE® due to the termination by Agouron Pharmaceuticals, Inc., a Pfizer company, or Pfizer, of the agreement we had with them relating to the development and commercialization of REMUNE®. As a result of this termination, we recognized approximately $7.7 million in deferred revenue from the collaboration in the third quarter of 2001. Also, as a result of this termination and along with delays in manufacturing scale-up operations, we have adjusted our operational timelines and delayed expenditures and activities where prudent to conserve resources. See Note 12 to the Condensed Consolidated Financial Statements.

2002 Subsequent Events

As of the date of filing of this Amendment No. 1, we have limited cash resources available to fund our planned operations. If we are unable to obtain additional funding by March 31, 2003, we will need to consider ceasing our ongoing business operations and the filing by us of a petition for liquidation or reorganization under the Bankruptcy Code.

As part of a recent restructuring program, we implemented certain management changes. Effective as of September 6, 2002, Dennis J. Carlo, Ph.D., resigned as our Chief Executive Officer, President and Chief Scientific Officer. Dr. Carlo remains a member of our Board of Directors and has assumed the position of Senior Strategist. On the same date, Ron Moss, M.D., was appointed our interim President until a new Chief Executive Officer could be hired. On January 6, 2003, we appointed John N. Bonfiglio, Ph.D. as our new Chief Executive Officer, and Dr. Ronald B. Moss resigned as of January 10, 2003.

In December 2002 ("December Closing"), we completed a private offering of common stock and warrants, which raised approximately $8.4 million in gross proceeds, including $6.4 million of new investment proceeds and $2.0 million of non-cash proceeds converted from previously issued related party convertible promissory notes. The Company also issued to Spencer Trask Ventures, Inc., the placement agent for the December Closing, an option to purchase 1,452,419 shares of common stock and 1,452,419 Class A Warrants. Exercise of all warrants, including those Class A and Class B Warrants in the placement agent option, would result in total proceeds of $37.8 million. Each unit had a purchase price of $100,000 and consists of (a) 112,995 shares of common stock and (b) 112,995 Class A Warrants. The Class A Warrants are exercisable for one share of common stock and a Class B Warrant at $1.33, a 50 percent premium to the $0.885 discounted Unit Price. The Class B Warrants are exercisable for one share of common stock at $1.77, a 100 percent premium to the $0.885 discounted Unit Price.

In October 2002, we obtained, for purposes of NASD rules, stockholder approval at a special meeting of the stockholders for the private convertible debt transactions we completed in May 2002, June 2002 and July 2002 and future placements, pursuant to the Note Purchase Agreement with KKP, Oshkim and The Kimberlin Family 1998 Irrevocable Trust ("KFIT"). Also at this meeting, our stockholders ratified the selection of BDO Seidman, LLP, as our independent auditors.

In August, September and October 2002, we issued short-term secured promissory notes to KFIT, Oshkim and Cheshire Associates LLC ("Cheshire") for approximately $4.6 million. The notes earned interest at 8%, with a maturity date of November 30, 2002 and were secured by our intellectual

property. In November 2002 ("November Closings"), we privately placed convertible notes and warrants of approximately $5.5 million to Cheshire pursuant to the amended Note Purchase Agreement and Intellectual Property Security Agreement with similar terms to the 2001 and May Closings. Proceeds of approximately $4.6 million were used to repay the short-term secured promissory notes issued in August, September and October 2002, plus accrued interest of approximately $61,000. The remaining proceeds were used for working capital and other general corporate purposes.

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 ramping up manufacturing capacity at our production facility in King of Prussia, Pennsylvania. When fully implemented, the reductions are expected to contribute an estimated $7.2 million in savings annually at approximately $600,000 in cost savings per month. Such projected cost savings assume the sublease of certain of our facilities in King of Prussia, PA and Carlsbad, CA. Not all of these subleases have yet been effected, and we cannot predict when or the actual savings achieved until we enter into all such contracts, if at all.

On September 9, 2002, we transferred to the Nasdaq SmallCap Market from the Nasdaq National Market. This transfer allowed us an extended period of time to comply with the minimum requirements for continued listing. On October 9, 2002, our Board of Directors formally declared a one-for-four reverse stock split of issued and outstanding shares of common stock. On October 24, 2002, Nasdaq granted us an additional 180 calendar day grace period to demonstrate compliance with the Nasdaq minimum $1.00 bid price per share requirement for continued listing. Subsequently, because the closing bid price of our common stock was at $1.00 or greater for at least ten consecutive trading days, effective on October 31, 2002, Nasdaq informed us that we now meet the listing requirements.

In July 2002 ("July Closing"), we continued to finance our operations with additional private placements with affiliates of Kevin Kimberlin, who is one of our directors and major stockholder. We privately placed with KFIT, in two placements, approximately $567,000 on July 11, 2002 and $637,000 on July 30, 2002, convertible notes and warrants pursuant to the amended Note Purchase Agreement and Intellectual Property Security Agreement. The proceeds were used for product development, working capital and other general corporate purposes. KFIT has transferred all convertible notes and warrants to Cheshire, an entity affiliated with Kevin Kimberlin. Cheshire exchanged $1.0 million of the convertible notes issued in the July Closing for ten units offered in connection with our December 2002 private offering. The balance of the notes issued in the July Closing was transferred to a new convertible note and warrant dated December 11, 2002 in accordance with and on the same terms as the convertible notes and warrants issued at the November Closings.

In June 2002, we restructured our equipment loans with Transamerica Technology Finance Corporation ("Transamerica"). As a result of the restructuring, we cured the existing default under those loans and limited the circumstances, which could serve as the basis for any future default by us. Pursuant to the agreements signed with Transamerica, we are obligated to pay Transamerica three $200,000 milestone payments upon receipt of proceeds from each of the following transactions: (i) closing of the December 2002 private placement, (ii) exercise of the Class A Warrants and (iii) exercise of the Class B Warrants. The first payment of $200,000 was paid as part of the December 2002 private placement. These payments have and will reduce our existing Transamerica debt. Additionally, Transamerica was granted a security interest in our assets, including a subordinated interest in our intellectual property. We also remain obligated to make our scheduled debt payments to Transamerica until the debt and interest has been paid in full. The total amount owed to Transamerica as of March 31, 2002 was approximately $1.6 million.

In late June 2002, we amended our REMUNE® license and collaboration contract with Trinity Medical Group USA, Inc. ("Trinity"). The amended contract provides for manufacturing costs and mark-up plus $50 per unit to be paid to us. The $50 per unit mark-up would expire upon the earlier of

the first one million doses of REMUNE® purchased by Trinity or December 31, 2007. As consideration for the increased per unit, purchase price to be paid to us, Trinity was issued 1,000,000 shares of restricted common stock valued at approximately $2.4 million and up to an additional 750,000 shares upon the occurrence of certain sales milestones. All of the restricted shares issued to Trinity are subject to registration rights. In addition, we waived the final $5.0 million common stock purchase obligation set forth in the original agreement, which would have applied in the event of the optional technology transfer of REMUNE® manufacturing rights in Trinity's licensed territories. Also, we provided an increase in the amount of shares that Trinity will receive in exchange for a $5.0 million payment upon Thai government approval of REMUNE® to 500,000 shares from 83,333 shares.

In June 2002 ("June Closing"), we privately placed with Oshkim a $1.0 million convertible note and warrant pursuant to the amended Note Purchase Agreement and Intellectual Property Security Agreement. The proceeds were used for product development, working capital and other general corporate purposes. The convertible note was exchanged for ten units offered in connection with our December 2002 private offering.

In May 2002 ("May Closing"), we privately placed with Oshkim a $4.0 million convertible note and warrant pursuant to the amended Note Purchase Agreement and Intellectual Property Security Agreement. Proceeds of approximately $2.0 million were used to repay the short-term secured promissory note issued in March 2002 plus interest, which was due May 5, 2002. The remaining proceeds were used for product development, working capital and other general corporate purposes.

The May Closing note bears interest at a rate of 8% and is secured by our intellectual property. The note matures on May 3, 2005, but is convertible into shares of our common stock at any time, at the option of the investor, initially at a conversion price of $1.7248 per share. The conversion price was based on a 20% discount to the average closing bid price of our common stock for the ten-day trading period ended May 2, 2002. The value of the conversion discount for the convertible note is $1,962,000, which is being amortized as interest expense over the three-year term of the note. The warrant is for a term of ten years and is initially exercisable for up to 2,319,109 shares of our common stock with an exercise price of $2.156 per share. The exercise price was based on the average closing bid price of our common stock for the ten-day trading period ended May 2, 2002. The warrant was valued at approximately $2.0 million and has been recorded as a discount to the note. The resultant discount to the note is being accreted over the three-year term of the note. Both the conversion price of the note and exercise price of the warrant provide anti-dilution protection for the investor.

Results of Operations

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

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

ongoing and future REMUNE® studies more than likely will decrease in the foreseeable future or until we raise additional capital or enter into a new research and development collaboration.

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

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

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

Liquidity and Capital Resources

Since our inception through March 31, 2002, we have financed our activities primarily from public and private sales of equity, funding from collaborations with corporate partners, investment income and convertible notes. At March 31, 2002, we had a working capital deficit of $2.0 million, including $2.3 million of cash, cash equivalents and marketable securities. This compares with working capital as of December 31, 2001 of $501,000, including $2.7 million of cash, cash equivalents and marketable securities. Working capital decreased as a result of the cost of operations of $4.2 million. This decrease in working capital was offset by the sale of a $2.0 million convertible note and warrant at the February Closing and the issuance of the $2.0 million short-term secured promissory note in March 2002.

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

The consolidated financial statements have been prepared assuming that we will continue as a going concern. If adequate funds are not available under the note purchase agreement, or from alternative funding sources or if future funding should cease under the note purchase agreement, we may be required to delay, reduce the scope of, or eliminate one or more of our research or

development programs, or take other measures to cut costs, which could have a material adverse effect on us and would cause us to cease operations, at which time we may not be able to satisfy our obligations. We estimate that our available cash resources as of December 31, 2001, along with the $18.6 million raised in equity and debt placements through December 2002 will be sufficient to fund our planned operations through March 2003. In any event, we will need to raise substantial additional capital to fund our operations beyond March 2003. We cannot provide assurance, however, that changes in our research and development plans or other changes affecting our operating expenses will not result in the expenditure of such resources before such time. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Critical Accounting Policies

Principles of consolidation

The consolidated financial statements include our accounts and those of our wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.

Investments in other entities

We use the equity method to account for investments in corporate entities in which we have a voting interest of 20% to 50%, or in which we otherwise have the ability to exercise significant influence. Under the equity method, the investment is originally recorded at cost and adjusted to recognize our share of net earnings or losses of the investee, limited to the extent of our investment in the investee. Changes in these estimates may have a material effect on our financial statements.

Risks and uncertainties

Substantially all of our revenues were previously derived from a collaborative arrangement with Pfizer. However, in July 2001, we received notification of termination of our development and commercial collaboration with Pfizer.

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

We face additional risks associated with biopharmaceutical companies whose products are in various stages of development. These risks include, among others, our need for additional financing to complete our research and development programs and commercialize our technologies. Financing may not be available to us when required or under favorable terms.

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

Licensed technology

Intangible assets are recorded at cost and amortized over their estimated useful lives. 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.

Impairment of long-lived assets

We evaluate potential impairment of long-lived assets in accordance with Statement of Financial Accounting Standards ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets". FAS No. 121 establishes procedures for review of recoverability and measurement of impairment, if necessary, of long-lived assets and certain identifiable intangibles held and used by an entity. FAS No. 121 requires that those assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable based on expected undiscounted cash flows attributable to that asset. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. As of December 31, 2001, we recorded an impairment adjustment for our investment in MicroGenomics, Inc.

In accordance with FAS No. 144, we have identified property and equipment totaling $8.6 million and licensed technology totaling $3.4 million at March 31, 2002 as long-lived assets subject to 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 plan to obtain an independent third party appraisal of these long-lived assets in the fourth quarter of 2002. As a result of such appraisal, a substantial impairment charge may be recognized.

RISK FACTORS

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

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

Our Current Cash Position, Additional Financing Requirements and Limited Access to Financing Will Adversely Affect Our Ability to Develop Products and Continue Operations

We will need to raise additional funds to continue day to day operations and to conduct research and development, preclinical studies and clinical trials necessary to bring our potential products to market and to establish manufacturing and marketing capabilities. A failure to raise additional funds, would require us to scale back or eliminate some or all of our research and development programs or license to third parties products or technologies that we would otherwise seek to develop ourselves and would cause us to cease operations, at which time we will not be able to satisfy our obligations. We estimate that our existing capital resources, along with net proceeds of approximately $2.0 million from the issuance of a $4.0 million convertible note and warrant in May 2002 (after repayment of the $2.0 million short-term secured promissory note issued in March 2002 with interest), will be sufficient to fund our planned operations into June 2002. In any event, we will need to raise substantial additional capital to fund our operations beyond such time. If we raise funds through equity arrangements, further dilution to stockholders will result. If we are unable to raise money before such time, we will be unable to pay our debts and will be forced to cease operations and potentially enter into bankruptcy.

As of May 3, 2002, the Company did not have reserved and available a sufficient number of authorized but unissued shares of common stock for the purpose of issuing common stock upon the

exercise in full of the May Closing warrant or for any potential future equity or convertible debt offerings. The Company has agreed to promptly take all corporate action, as may be necessary, to increase its authorized but unissued shares of common stock to provide for a sufficient number of shares to cover the exercise in full of the May Closing warrant. A proposal to increase the Company's authorized shares of common stock is to be considered for approval by our stockholders at the upcoming Annual Meeting of stockholders scheduled for June 17, 2002.

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

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

•: continued scientific progress in our research and development programs;
•: the scope and results of preclinical studies and clinical trials;
•: the time and costs involved in obtaining regulatory approvals;
•: the costs involved in filing, prosecuting and enforcing patent claims;
•: competing technological and market developments;
•: the cost of manufacturing scale-up;
•: effective commercialization activities and arrangements;
•: the costs of defending against lawsuits; and
•: other factors not within our control.

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

•: our research and development programs;
•: our preclinical and clinical trials;
•: obtaining regulatory approvals; or
•: scaling up manufacturing.

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

On May 20, 2002, Transamerica delivered to us a notice indicating that in their view our financial condition constitutes a material adverse event, which in turn constituted an event of default, under the Loan Agreement. As a result of the restructuring, we cured the existing default under those loans and limited the circumstances, which could serve as the basis for any future default by us. Pursuant to the agreements signed with Transamerica, we will be obligated to pay Transamerica three $200,000 milestone payments upon receipt of proceeds from each of the following transactions: (i) closing of the current private offering, (ii) exercise of the Class A warrants and (iii) exercise of the Class B warrants. These payments would reduce our existing Transamerica debt. Additionally, Transamerica was granted a security interest in our assets, including a subordinated interest in our intellectual property. We also remain obligated to make our scheduled debt payments to Transamerica until the debt and interest has been paid in full. The total amount owed to Transamerica was approximately $1.4 million as of June 30, 2002. Of the approximately $1.5 million currently outstanding under the Loan Agreement, $662,000 is

recorded as a current liability on our financial statements included in this Form 10-Q, and the balance of $940,000 is recorded as long-term debt as of March 31, 2002.

You Could Suffer Substantial Dilution of Your Investment as the Result of Adjustments to the Convertible Notes and Warrants Issued in November 2001, February 2002 and May 2002 or if We Issue Additional Securities in the Future

In November 2001, we issued a convertible note and warrant, which are initially convertible and exercisable, respectively, for 433,426 shares of Common Stock each. The numbers of shares, as well as the applicable conversion or exercise price, as the case may be, are subject to adjustment in the event that we issue securities below the applicable conversion or exercise price. This would dilute your interest in our company.

In February 2002, we issued a convertible note and warrant, which are initially convertible and exercisable, respectively, for 429,000 shares of Common Stock each. The numbers of shares, as well as the applicable conversion or exercise price, as the case may be, are subject to adjustment in the event that we issue securities below the applicable conversion or exercise price. This would dilute your interest in our company.

In May 2002, we issued a convertible note and warrant, which are initially convertible and exercisable, respectively, for 2,319,109 shares of Common Stock each. The numbers of shares, as well as the applicable conversion or exercise price, as the case may be, are subject to adjustment in the event that we issue securities below the applicable conversion or exercise price. This would dilute your interest in our company.

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

An Existing Stockholder Beneficially Owns Approximately 6.2% of our Common Stock and has the Rights to Acquire an Additional 6,363,070 Shares of our Common Stock Which Could Allow him to Influence Stockholder Votes

Kevin Kimberlin, a member of our Board of Directors, and his affiliates currently beneficially own approximately 6.2% of our outstanding shares of Common Stock and have the right to acquire 6,363,070 additional shares of our Common Stock through the conversion of notes and exercise of warrants beneficially owned by them. If the notes and warrants were to be converted and exercised, Mr. Kimberlin and his affiliates would own approximately 45% of our outstanding shares of Common Stock on a post-conversion/exercised basis. As a result of his ownership of our Common Stock and ability to acquire additional shares, Mr. Kimberlin and his affiliates would be able to control substantially all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. If your interests as a stockholder are different from his interests as both a director and a stockholder, you may not agree with his decisions and therefore you might be adversely affected thereby.

Our Stock May Become Subject to Penny Stock Rules, Which may make it More Difficult for You to Sell Your Shares due to the Notification from Nasdaq Regarding Noncompliance with Nasdaq Listing Qualifications

Since March 12, 2002 our common stock has traded below $1.00 per share on The Nasdaq National Market. Nasdaq listing rules provide that if the closing bid price of a company's stock is below $1.00 for more than thirty consecutive trading days, the company faces possible delisting from Nasdaq. Additionally, Nasdaq listing rules require that a company's stockholder equity be at least $4.0 million, and after October 2002, be at least $10.0 million. Due to our common stock trading below $1.00 per

share for more than 30 consecutive days as of April 23, 2002, we received notification from Nasdaq that we may be delisted from The Nasdaq National Market if we cannot demonstrate compliance with the NASD rule by July 24, 2002. In order to regain compliance, the closing bid price per share for the Company's common stock must be $1.00 or more for a minimum of ten consecutive trading days during any period through July 24, 2002. Alternatively, before July 24, 2002, we could apply to transfer our securities to The Nasdaq SmallCap Market, which could extend the period to comply with the minimum $1.00 bid per share requirement until October 22, 2002. If we are delisted from Nasdaq, our common stock will be considered a penny stock under regulations of the Securities and Exchange Commission and would therefore be subject to rules that impose additional sales practice requirements on broker-dealers who sell our securities. The additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of the common stock and your ability to sell our securities in the secondary market. We cannot assure you that we will be able to maintain our listing on the Nasdaq. This would have the effect of limiting our ability to raise additional financing.

We May Implement a 1-for-4 Reverse Stock Split. The Effect of a Reverse Split on the Trading Price of our Common Stock is Unpredictable

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

Legal Proceedings Could Require Us to Spend Substantial Amounts of Money and Impair Our Operations

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

Pfizer has Terminated Its Collaboration with Us and We May Have To Delay or Abandon REMUNE®

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

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

We are seeking additional collaborative arrangements to develop and commercialize our products. We may not be able to negotiate collaborative arrangements on favorable terms, or at all, in the future and our current or future collaborative arrangements may not be successful or continue. Investors, which are affiliated with a board member, have a perfected security interest in our intellectual property as collateral for the November 2001, February 2002 and May 2002 convertible notes. Pursuant to an Intellectual Property Security Agreement with the investors, we must comply with certain covenants with respect to our intellectual property. The security interest and covenants could impair our ability to enter into collaborative and licensing arrangements. Under the 1998 Schering collaboration for gene delivery technology, Schering's obligation to fund expired on December 31, 1999. Without funding arrangements, we may have to abandon some of our products under development.

Our Failure to Develop and Commercialize Products Successfully May Cause Us to Cease Operations

We have not completed the development of any products. Our failure to develop and commercialize products successfully may cause us to cease operations. Our potential therapies under development will require significant additional research and development efforts and regulatory approvals prior to potential commercialization.

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

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

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

Unacceptable toxicity or side effects may occur at any time in the course of human clinical trials or, if any products are successfully developed and approved for marketing, during commercial use of our products. The appearance of any unacceptable toxicity or side effects could interrupt, limit, delay or abort the development of any of our products or, if previously approved, necessitate their withdrawal from the market.

Our Patents and Proprietary Technology May Not Provide Us with Any Benefit and the Patents and Proprietary Technology of Others May Prevent Us from Commercializing Products

A failure to obtain meaningful patent protection for our potential products and processes would greatly diminish the value of our potential products and processes.

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

In addition, whether or not our patents are issued, or issued with limited coverage, others may receive patents, which contain claims applicable to our products. Patents we are not aware of may adversely affect our ability to develop and commercialize products.

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

We also rely on protecting our proprietary technology in part through confidentiality agreements with our current and former corporate collaborators, employees, consultants and certain contractors. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or independently discovered by our competitors. Our products and processes may infringe, or be found to infringe, on patents not owned or controlled by us. If relevant claims of third-party patents are upheld as valid and enforceable, we could be prevented from practicing the subject matter claimed in the patents, or would be required to obtain licenses or redesign our products or processes to avoid infringement. Licenses may not be available at all or on commercially reasonable terms, and we may not be able to redesign our products or processes to avoid infringement. Litigation may be necessary to defend against claims of infringement, to enforce our patents or to protect trade secrets. Litigation could result in substantial costs and diversion of management efforts regardless of the results of the litigation. An adverse result in litigation could subject us to significant liabilities to third parties, require disputed rights to be licensed or require us to cease using certain technologies.

Our History of Operating Losses and Our Expectations of Continuing Losses May Hurt Our Ability to Continue Operations

As of March 31, 2002 we had a consolidated accumulated deficit of $232.3 million. We have not generated revenues from the commercialization of any product. We expect to incur substantial net operating losses over the next several years, which may imperil our ability to continue operations. We may not be able to generate sufficient product revenue to become profitable on a sustained basis, or at all.

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

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

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

Even if additional clinical trials of REMUNE® are initiated and successfully completed, the FDA may not approve REMUNE® for commercial sale. We may encounter significant delays or excessive costs in our efforts to secure necessary approvals. Regulatory requirements are evolving and uncertain. Future United States or foreign legislative or administrative acts could also prevent or delay regulatory

approval of our products. We may not be able to obtain the necessary approvals for clinical trials, manufacturing or marketing of any of our products under development. Even if commercial regulatory approvals are obtained, they may include significant limitations on the indicated uses for which a product may be marketed.

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

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

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

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

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

Technological Change and Competition May Render Our Potential Products Obsolete

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

Our Lack of Commercial Manufacturing and Marketing Experience May Prevent Us from Successfully Commercializing Products

We have not manufactured any of our product candidates in commercial quantities. We may not successfully make the transition from manufacturing clinical trial quantities to commercial production quantities or be able to arrange for contract manufacturing and this could prevent us from commercializing products. Even if REMUNE® is successfully developed and receives FDA approval, we

have not demonstrated the capability to manufacture REMUNE® in commercial quantities. Except for REMUNE®, we have not demonstrated the ability to manufacture our treatments in large-scale clinical quantities either. We rely on a third party for the final inactivation step of the REMUNE® manufacturing process. If the existing manufacturing operations prove inadequate, there can be no assurance that any arrangement with a third party can be established on a timely basis or that we can establish other manufacturing capacity on a timely basis.

We have no experience in the sales, marketing and distribution of pharmaceutical products. Thus, our products may not be successfully commercialized even if they are developed and approved for commercialization.

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

We may enter into arrangements with contract manufacturing companies to expand our own production capacity in order to meet requirements for our products, or to attempt to improve manufacturing efficiency. If we choose to contract for manufacturing services and encounter delays or difficulties in establishing relationships with manufacturers to produce, package and distribute our finished products, clinical trials, market introduction and subsequent sales of the products would be delayed. Further, contract manufacturers must also operate in compliance with the FDA's GMP requirements; failure to do so could result in, among other things, the disruption of product supplies. Our potential dependence upon third parties for the manufacture of our products may adversely affect our profit margins and our ability to develop and deliver products on a timely and competitive basis.

Adverse Determinations Concerning Product Pricing, Reimbursement and Related Matters Could Prevent Us from Successfully Commercializing Products

Our ability to earn sufficient revenue on our products will depend in part on the extent to which reimbursement for the costs of the products and related treatments will be available from government health administration authorities, private health coverage insurers, managed care organizations and other organizations. Failure to obtain appropriate reimbursement could prevent us from successfully commercializing products. Third party payers are increasingly challenging the price of medical products and services. If purchasers or users of our products are not able to obtain adequate reimbursement for the cost of using the products, they may forego or reduce their use. Significant uncertainty exists as to the reimbursement status of newly approved health care products and whether adequate third party coverage will be available.

Product Liability Exposure May Expose Us to Significant Liability

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

Hazardous Materials and Environmental Matters Could Expose Us to Significant Costs

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

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

As of March 31, 2002 we had reserved 1.7 million shares of our Common Stock for potential issuance upon the exercise of stock options or purchases under the employee stock purchase plan. Issuance of any of these additional shares could substantially dilute your interest in our company.

Volatility Of Stock Price and Absence Of Dividends May Hurt Common Stockholders

The market price of our Common Stock, like that of the Common Stock of many other biopharmaceutical companies, has been and is likely to be highly volatile. Factors such as the following could have a significant adverse impact on the market price of our Common Stock:

•: our financial position;
•: the results of preclinical studies and clinical trials by us, our collaborators or our competitors;
•: concern as to, or other evidence of, the safety or efficacy of our products or our competitors' products;
•: announcements of technological innovations or new products by us or our competitors;
•: governmental regulatory actions;
•: actual or anticipated changes in drug reimbursement policies;
•: developments with our collaborators;
•: developments concerning patent or other proprietary rights of ours or our competitors (including litigation);
•: status of litigation;
•: period-to-period fluctuations in our operating results;
•: changes in estimates of our performance by securities analysts;
•: market conditions for biopharmaceutical stocks in general; and
•: other factors not within our control.

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

Changes to Financial Accounting Standards May Affect Our Reported Results of Operations

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

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

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

We May Experience Power Blackouts and Higher Electricity and Gas Prices as a Result of California's Current Energy Crisis, Which Could Disrupt Our Operations and Increase Our Expenses

California is in the midst of an energy crisis that could disrupt our operations and increase our expenses. We rely on a major southern California public utility to supply power to our facilities in southern California. Due to problems associated with the deregulation of the power industry in California and shortages in wholesale electricity and gas supplies, customers have been faced with increased utility prices, power shortages and, in some cases, rolling blackouts. If blackouts interrupt our power supply, we may be temporarily unable to continue operations at our facilities. Any such interruption of operations at our facilities could delay research and development activities as well as delay our ability to develop or provide our clinical supplies or services, all of which could damage our reputation and result in potentially lost revenue, either of which could substantially harm our business and results of operations.

There May Be Risks Related to Our Use of Arthur Andersen LLP as Our Independent Auditors

On March 14, 2002, Arthur Andersen LLP, our independent auditor, was indicted on federal obstruction of justice charges arising from the U.S. government's investigation of Enron Corporation. Arthur Andersen LLP has stated that it intends to vigorously contest the indictment. Nevertheless as a public company, we are required to file with the SEC annual financial statements audited by independent auditors. The SEC has said that it will continue accepting financial statements audited by Arthur Andersen, and interim financial statements reviewed by it, so long as Arthur Andersen is able to make certain representations to its clients. Certain investors, including significant funds and institutional investors, may choose not to hold or invest in securities of a company that does not have current financial reports available. Our access to the capital markets and our ability to make timely filings with the SEC could be impaired if the SEC ceases to accept financial statements audited by Arthur Andersen, if Arthur Andersen becomes unable to make to us the required representations, or if

for any reason, Arthur Andersen (including the loss of key members of our audit team from Arthur Andersen) is unable to perform for us required services on a timely basis. In such case, we would promptly seek to engage new independent auditors, but such actions could be disruptive and affect the price and liquidity of our securities.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation was performed of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14 (c) under the Exchange Act of 1934) as of a date within 90 days prior to the filing of this quarterly report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the date of the evaluation, our disclosure controls and procedures were effective in timely alerting management to material information relating to us required to be disclosed in our periodic SEC filings. There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect these internal controls subsequent to the date of evaluation.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Since July 2001, several complaints have been filed in the United States District Court for the Southern District of California seeking an unspecified amount of damages on behalf of an alleged class of persons, who purchased shares of our common stock at various times between May 17, 1999 and July 6, 2001. The various complaints name us and certain of our officers as defendants, as well as Agouron Pharmaceuticals, Inc. and one of its officers. The complaints allege that we, Agouron and/or such officers violated federal securities laws by misrepresenting and failing to disclose certain information about the results of clinical trials of REMUNE®. The complaints have been consolidated into a single action under the name In re Immune Response Securities Litigation by order of the Court. We have not yet formally responded to the complaints. Although we intend to vigorously defend the actions, we can not 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 officers or settlements that could require substantial payments by us, which could have a material adverse impact on our financial position, results of operations and cash flows. These proceedings also might require substantial attention of our management team and therefore divert their time and attention from our business and operations.

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

On April 2, 2002 the Company held a Special Meeting of Stockholders. The following action was taken at the special meeting. As of February 12, 2002, the record date, 8,893,024 shares were entitled to vote at the Annual Meeting.

1.: The stockholders approved, for purposes of NASD Rules, the issuance of the Company's common stock issuable on the conversion or exercise, respectively, of notes and warrants previously sold and proposed to be sold, pursuant to the note purchase agreement with Kevin Kimberlin Partners, L.P. and Oshkim Limited Partnership. There were 4,397,787 shares voted in favor of the proposal, 85,844 shares voted against the proposal, 143,287 shares abstained with no broker non-votes.

Item 5. Other Information

The Chief Executive Officer and Chief Financial Officer of the Company have certified that the Amended Quarterly Report of the Company and Form 10-Q/A for the quarterly period ended March 31, 2002 fully complies with the requirements of section 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 fairly presents, in all material respects, the financial condition and results of operations of the Company.

Item 6. Exhibits and Reports on Form 8-K

a): Exhibits

10.89(1)		8% Secured Promissory Note dated March 20, 2002 issued to Oshkim Limited Partnership
10.90(1)		Amendment No. 2 dated May 3, 2002 to the Note Purchase Agreement dated as of November 9, 2001, between the Company, Kevin Kimberlin Partners, L.P. and Oshkim Limited Partnership
10.91(1)		8% Convertible Secured Promissory Note dated May 3, 2002 issued to Oshkim Limited Partnership
10.92(1)		Warrant Agreement dated as of May 3, 2002 between the Company and Oshkim Limited Partnership

(1): Incorporated by reference to the Exhibits of the same number filed with the Company's March 31, 2002 Form 10-Q.
b): Reports on Form 8-K

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

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

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 REPONSE CORPORATION
/s/ JOHN N. BONFIGLIO John N. Bonfiglio Ph.D.	Chief Executive Officer	February 3, 2003
/s/ MICHAEL L. JEUB Michael L. Jeub	Vice President, Finance, Chief Financial Officer	February 3, 2003

CERTIFICATIONS

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

1.: I have reviewed this quarterly report on Form 10-Q/A of The Immune Response Corporation;
2.: Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.: Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

Date: February 3, 2003

/s/ JOHN N. BONFIGLIO

John N. Bonfiglio Ph.D.

Chief Executive Officer

February 3, 2003

I, Michael L. Jeub, certify that:

1.: I have reviewed this quarterly report on Form 10-Q/A of The Immune Response Corporation;
2.: Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.: Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

Date: February 3, 2003

MICHAEL L. JEUB

Michael L. Jeub

Vice President, Finance,
Chief Financial Officer

February 3, 2003

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE IMMUNE RESPONSE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
THE IMMUNE RESPONSE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share data) (unaudited)
THE IMMUNE RESPONSE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
THE IMMUNE RESPONSE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002

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

RISK FACTORS