10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EX­CHANGE ACT OF 1934.
For the quarterly period ended June 30, 2003
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	33-0255679
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification Number)

5931 Darwin Court, Carlsbad, CA  92008

(Address of Principal Executive Offices)

(Zip Code)

Telephone (760) 431-7080

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all 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 July 29, 2003,  32,275,526 shares of common stock were outstanding.

THE IMMUNE RESPONSE CORPORATION

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Operations	4
		Condensed Consolidated Statements of Cash Flows	5
		Condensed Consolidated Statements of Stockholders' Equity	6
		Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		40
Item 4.	Controls and Procedures		41
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings		42
Item 2.	Changes in Securities and Use of Proceeds		42
Item 4.	Submission of Matters to a Vote of Security Holders		43
Item 5.	Other Information		43
Item 6.	Exhibits and Reports on Form 8-K		44
Signature			45

2

THE IMMUNE RESPONSE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	June 30, 2003			December 31, 2002
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,302		$	3,939
Marketable securities - available-for-sale	2			2
Other current assets	845			420
Total current assets	2,149			4,361
Property and equipment, net	5,711			6,483
Licensed technology, net	2,472			2,825
Deposits and other assets ($600 restricted as security for letter of credit)	858			896
Total assets	$	11,190		$	14,565
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	1,358		$	1,326
Accrued expenses	1,206			1,014
Short-term unsecured promissory notes, net of discount of $314	686			—
Short-term convertible notes payable, related party	3,899			—
Current portion of equipment notes payable	280			724
Capital lease liability	36			217
Current portion of deferred revenue	56			56
Total current liabilities	7,521			3,337
Convertible notes payable, related party, net of discount of $6,789 and $10,848 and plus accrued interest of $312 and $594 at 2003 and 2002, respectively	3,069			3,487
Equipment notes payable, net of current portion	—			141
Accrued excess lease costs	1,178			637
Long-term deferred revenue, net of current portion	351			378
Total liabilities	12,119			7,980
Commitments, contingencies and subsequent events
Stockholders’ equity (deficit):
Preferred stock, 5,000,000 shares authorized; 0 shares issued and outstanding	—			—
Common stock, $.0025 par value, 170,000,000 shares authorized; 21,628,390 and 19,670,729 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively	54			49
Warrants	13,734			13,684
Additional paid-in capital	257,537			250,656
Accumulated other comprehensive income	2			2
Accumulated deficit	(272,256		)	(257,806		)
Total stockholders’ equity (deficit)	(929		)	6,585
Total liabilities and stockholders’ equity (deficit)	$	11,190		$	14,565

See accompanying notes.

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THE IMMUNE RESPONSE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three months ended June 30,						Six months ended June 30,
	2003			2002			2003			2002
Revenues:
Contract research revenue	$	7		$	7		$	14		$	14
Licensed research revenue	7			4			24			6
	14			11			38			20
Expenses:
Research and development	2,527			3,753			5,004			7,561
General and administrative	2,348			1,233			3,383			2,380
Exit and disposal related costs	1,005			—			1,290			—
Collaborative contract costs	—			2,360			—			2,360
	5,880			7,346			9,677			12,301
Other revenue and expense:
Investment income	3			8			11			22
Interest expense - including non-cash accretion of $3,028 and $576 for three months and $4,130 and $828 for six months, respectively	(3,398		)	(774		)	(4,822		)	(1,146		)
Net loss	$	(9,261	)	$	(8,101	)	$	(14,450	)	$	(13,405	)
Loss per share - basic and diluted	$	(0.46	)	$	(0.91	)	$	(0.72	)	$	(1.50	)
Weighted average number of shares outstanding	20,203,965			8,951,287			19,938,820			8,922,317

See accompanying notes.

4

THE IMMUNE RESPONSE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six months ended June 30,
	2003			2002
Operating activities:
Net loss	$	(14,450	)	$	(13,405	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,001			1,128
Operating expenses accrued or paid with common stock	136			—
Operating expenses paid with warrants	20			—
Stock option adjustments	1,323			—
Collaborative contract costs	—			2,360
Deferred revenue	(27		)	229
Accrued excess lease costs	541			—
Long-term accrued interest	523			193
Accretion of convertible notes and short-term unsecured notes	4,130			828
Gain on sale of assets	(46		)	—
Changes in operating assets and liabilities:
Other current assets	(209		)	438
Accounts payable	32			(10		)
Accrued expenses	(28		)	36
Net cash used in operating activities	(7,054		)	(8,203		)
Investing activities:
Sale of marketable securities, net	—			251
Purchase of property and equipment	(26		)	—
Proceeds from sale of equipment	196			—
Other assets	38			(38		)
Net cash provided by investing activities	208			213
Financing activities:
Principal payments under equipment notes and capital leases payable	(766		)	(342		)
Proceeds from issuances of convertible notes payable and warrants	—			7,000
Proceeds from issuance of short-term convertible notes payable	3,899			—
Proceeds from short-term unsecured promissory notes	1,000			—
Net proceeds from common stock purchases through employee plans	76			9
Net cash provided by financing activities	4,209			6,667
Net decrease in cash and cash equivalents	(2,637		)	(1,323		)
Cash and cash equivalents at beginning of year	3,939			2,430
Cash and cash equivalents at end of period	$	1,302		$	1,107
Supplemental disclosure of cash flow information:
Interest paid	$	105		$	125
Supplemental disclosure of noncash investing and financing activities:
Convertible notes payable converted into common stock	$	4,195		$	—
Common stock issued for long-term accrued interest upon conversion of notes	$	805		$	—
Common stock issued for consulting contracts	$	102		$	—
Value allocated to common stock issued as debt discount	$	385		$	—
Warrants issued for consulting contracts	$	50		$	—
Unrealized loss on marketable securities	$	—		$	(18	)
Common stock issued for collaborative contracts	$	—		$	2,360

See accompanying notes.

5

THE IMMUNE RESPONSE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS

(in thousands)

(unaudited)

	Common Stock						AdditionalPaid-in			AccumulatedOtherComprehensive			Accumulated			TotalStockholders’			Comprehensive
	Shares	Amount			Warrants		Capital			Income (Loss)			Deficit			Equity			Income (Loss)
Balance at December 31, 2001	8,893	$	89		$	1,131	$	238,819		$	20		$	(226,971	)	$	13,088
Issuance of common stock and warrants in private placement,net of issuance costs of $1,523	7,262	18			4,064		822			—			—			4,904
Conversion of convertible notes into private placement	2,260	6			1,265		729			—			—			2,000
Beneficial inducement cost for convertible notes convertedinto private placement	—	—			—		3,200			—			—			3,200
Issuance of placement agent option in private placement	—	—			1,148		(1,148		)	—			—			—
Warrants issued in conjunction with convertible notes	—	—			6,076		—			—			—			6,076
Convertible notes discount	—	—			—		5,421			—			—			5,421
Reclassification for stock split	—	(67		)	—		67			—			—			—
Issuance of common stock for collaborative contract costs	1,000	2			—		2,358			—			—			2,360
Issuance of common stock for consulting contract	250	1			—		378			—			—			379
Issuance of common stock for employee stock plans	6	—			—		10			—			—			10
Change in unrealized gain on marketable securities	—	—			—		—			(18		)	—			(18		)	$	(18	)
Net loss	—	—			—		—			—			(30,835		)	(30,835		)	(30,835		)
Balance at December 31, 2002	19,671	49			13,684		250,656			2			(257,806		)	6,585			$	(30,853	)
Conversion of convertible notes into common stock	1,614	4			—		4,996			—			—			5,000
Warrants issued in conjunction with consulting contract	—	—			32		—			—			—			32
Issuance of common stock  and warrant for debt discount	167	1			18		384			—			—			403
Issuance of common stock for consulting contract	74	—			—		102			—			—			102
Issuance of common stock for employee stock plans	102	—			—		76			—			—			76
Intrinsic valuation for repriced employee stock options	—	—			—		1,107			—			—			1,107
Variable accounting for options granted to nonemployees	—	—			—		216			—			—			216
Change in unrealized gain on marketable securities	—	—			—		—			—			—			—			$	—
Net loss	—	—			—		—			—			(14,450		)	(14,450		)	(14,450		)
Balance at June 30, 2003	21,628	$	54		$	13,734	$	257,537		$	2		$	(272,256	)	$	(929	)	$	(14,450	)

See accompanying notes.

6

THE IMMUNE RESPONSE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003

(Unaudited)

1.Basis of Presentation

The condensed consolidated financial statements of The Immune Response Corporation and its wholly owned subsidiary (“the Company”) for the three and six months ended June 30, 2003 and 2002 are unaudited.  All significant intercompany accounts and transactions have been eliminated in consolidation.  These financial statements reflect all adjustments, consisting of only normal recurring adjustments which, in the opinion of management, are necessary to fairly present the consolidated financial position of the Company as of June 30, 2003, and the consolidated results of operations of the Company for the three and six months ended June 30, 2003 and 2002.  The results of operations for the three and six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the year ended December 31, 2003.  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, 2002 included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

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 split at their annual meeting held in June 2002.  All common share balances and net loss per share amounts presented in these financial statements have been retroactively adjusted to reflect the reverse stock split.

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 (the “Company”), a Delaware corporation, is a biopharmaceutical company developing a therapeutic vaccine for the treatment of HIV infection.  We have developed REMUNE^®, an immune-based therapy, to induce specific immune responses for the treatment of HIV.  We also have created six distinct therapeutic vaccines in various stages of development for autoimmune diseases and cancer and have established an extensive patent portfolio spanning four different technologies with a total of 173 patents issued to us worldwide.

As part of our restructuring program announced in September 2002, we have ceased development of all therapeutic vaccines other than Remune^®.  During May 2003, we disposed of excess assets, and we are negotiating an early lease termination for our former vacated headquarters facility resulting in exit and disposal related costs of approximately $1.3 million recognized as of June 30, 2003, including an estimate of approximately $700,000 of additional costs accrued for a potential settlement of a claim filed by the landlord for breach of contract under the lease.  See Notes 11 and 14.

Liquidity and going concern

The condensed 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 June 30, 2003 and December 31, 2002, the Company had a working capital deficiency of $5.4 million and working capital of $1.0 million, respectively, and an accumulated deficit of $272.3 million and $257.8 million, respectively.

During June 2003, Cheshire Associates, LLC (“Cheshire”) exercised its option to convert $4.2 million of principal on notes issued to it in November 2001, February 2002, part of the principal of the May 2002 note and all accrued and unpaid interest of $.8 million into 1,613,572 shares of our common stock.  Cheshire is an affiliate of one of our directors and principal stockholder, Mr. Kevin Kimberlin.  The balance of the May 2002 note and all accrued and unpaid interest thereon was transferred to two new notes in the approximate amounts of $2.4 million and $1.4 million, respectively.  During July 2003, the note in the amount of $2.4 million was cancelled as payment for the aggregate

7

exercise price of Class A warrants to purchase 1,774,888 shares and an additional 887,444 incentive shares of our common stock in connection with the July 7, 2003 incentive share offering described below.

During July 2003, we raised $9.3 million in gross proceeds through the voluntary exercise of 6,992,236 of our Class A warrants.  The proceeds included $6.9 million in cash and the cancellation of $2.4 million of convertible notes previously issued to Cheshire. The Company issued an additional 3,496,118 shares equal to one half share of common stock for each Class A warrant exercised as an incentive to induce holders of the Class A warrants to exercise their Class A warrants and to allow the Company to obtain a “lock-up” on the shares of common stock issued to the holders of such exercised Class A warrants in the December 2002 unit offering and the shares of the common stock issued upon the exercise of the Class A warrants (including the additional one half share of common stock), prohibiting the sale of such common stock for 270 days, with the “lock-up” period expiring on April 4, 2004. The incentive shares issued as part of the offering represent an inducement to participate in the voluntary exercise and will result in a charge to our statement of operations for beneficial inducement cost in the third quarter of 2003.

On July 30, 2003 the Company exercised its option to redeem the remaining outstanding Class A warrants on September 3, 2003. If all the outstanding Class A warrants are exercised, the Company would receive gross proceeds of approximately $3.4 million. The Company anticipates that the aggregate proceeds from the exercise of the Class A warrants, together with the exercise of the Class A warrants on July 7, 2003, will be sufficient to fund our planned operations, including necessary capital expenditures and new clinical trials, into the first quarter of 2004.

At a special meeting of our stockholders held on July 7, 2003, we received stockholder approval to conduct a private offering of up to $5.0 million of Series A Convertible Preferred Stock.  The holders of shares of our Series A Convertible Preferred Stock will have the right to convert each share of Series A Convertible Preferred Stock into shares of our common stock.  Cheshire may convert all of the convertible promissory notes issued to it between January 1, 2003 and July 7, 2003 into shares of Series A Convertible Preferred Stock.  The Series A Convertible Preferred Stock will receive dividends in preference to any dividend issued to holders of shares of our common stock.  Additionally, the holders of shares of our Series A Convertible Preferred Stock are entitled to liquidation preference.  As of July 31, 2003, we have not commenced the offering.

Notwithstanding the exercise of the Class A warrants, we will continue to have limited cash resources.  Although our management recognizes the need to secure additional financing and currently is exploring its options, there can be no assurance that we will be successful in consummating any such transaction or, if we do consummate such a transaction, that the terms and conditions will not be unfavorable to us. The failure by us to obtain additional financing before the first quarter of 2004 (assuming the exercise of all the remaining Class A warrants), will have a material adverse effect on us and likely result in our inability to continue as a going concern. Our independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty regarding our 2002 annual consolidated financial statements.

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.

3.Net loss per share

Basic and diluted net loss per share is computed using the weighted average number of common shares outstanding during the period.  Potentially dilutive securities are excluded from the diluted net loss per share calculation, as the effect would be antidilutive.  Potentially dilutive shares not included are 3.6 million shares for outstanding employee stock options, 10.7 million shares issuable under convertible notes payable, related party, 9.8 million shares issuable under warrants outstanding, 9.5 million shares issuable under A warrants outstanding and 1.5 million shares issuable under an option issued to the placement agent for the private offering in December 2002.

8

4. Comprehensive loss

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

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2003			2002			2003			2002
Net loss	$	(9,261	)	$	(8,101	)	$	(14,450	)	$	(13,405	)
Net unrealized loss on marketable securities	—			(5		)	—			(18		)
Comprehensive loss	$	(9,261	)	$	(8,106	)	$	(14,450	)	$	(13,423	)

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 was effective for financial statements issued for fiscal years beginning after June 15, 2002.  The adoption of FAS No. 143 did not have a material impact on the Company’s consolidated financial position or results of operations.

In June 2002, the FASB issued FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  FAS No. 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).”  FAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value when the liability is incurred.  FAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002.  See Note 2 for current and estimated costs from the exit and disposal of our vacated headquarters facility including ongoing negotiations regarding early lease termination.

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

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which establishes standards for the classification and measurement of certain financial instruments with characteristics of both liability and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the Company on July 1, 2003. We do not expect the adoption of SFAS No. 150 to have a material effect on our consolidated financial statements.

6.Licensed technology

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

In accordance with FAS No. 144, the Company had identified licensed technology totaling $2.8 million at December 31, 2002 as long-lived assets subject to annual impairment review.  Given the current financial status of the Company, its historical losses and the indeterminable outcome of the development 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 obtained an independent third-party appraisal of these long-lived assets in the first quarter of 2003.  As a result of such appraisal, licensed technology did not require an impairment charge for the year ended December 31, 2002.

9

The Company capitalized the purchase cost to licensed technology.  The license contract was paid in full in October 2000 by four quarterly installments of $250,000 beginning in January 2000.  The contingent stock liability was settled in March 2000.  No additional shares of common stock were required to be issued pursuant to the valuation contingency terms of the agreement.

7.Equipment notes payable

In June 2002, the Company restructured its equipment loans with Transamerica Technology Finance Corporation (“Transamerica”).  As a result of the loan 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 paid Transamerica $200,000 upon the closing of the December 2002 private placement.

During May 2003, the Company held an auction to sell excess assets associated with our vacated headquarters facility located in Carlsbad, California.  Transamerica was paid $187,000 of total auction proceeds.  In July 2003, the Company paid $200,000, the second milestone payment, as a result of the exercise of the Class A warrants.  In August 2003, the loans were paid in full with a final payment of $35,000.  See Note 14.  The total amount owed to Transamerica as of June 30, 2003 and December 31, 2002 was approximately $280,000 and $865,000, respectively.

8.Convertible notes payable, related party

In November 2001, the Company entered into the Note Purchase Agreement and Intellectual Property Security Agreement with an accredited investor.  The investor, Kevin Kimberlin Partners, L.P. (“KKP”), is an affiliate of Kevin Kimberlin, a director and major stockholder of the Company.  Subsequently, the Note Purchase Agreement has been amended to add other affiliates and/or related parties of Kevin Kimberlin as investors.  These affiliated investors include Oshkim Limited Partnership (“Oshkim”), The Kimberlin Family 1998 Irrevocable Trust (“KFIT”) and Cheshire.  Since November 2001 through December 31, 2002, the Company has privately placed a total of $15.7 million in convertible notes and warrants.  In December 2002, $2.0 million of the notes were converted into the Company’s private placement of common stock and warrants.  In June 2003, $4.2 million of the notes plus $0.8 million of accrued interest were converted into the Company’s common stock, which leaves a remaining balance of $9.5 million and $13.7 million of convertible notes and warrants at June 30, 2003 and December 31, 2002, respectively.  Subsequent to June 30, 2003, a $2.4 million note was cancelled as payment for the aggregate exercise price for Class A warrants exercised by Cheshire as part of the incentive share offering.  See Note 14.

The Company used substantially all of the net proceeds from these transactions for product development, working capital and other general corporate purposes.  The Company filed a Registration Statement on Form S-3 with the SEC to cover the resale of the underlying shares of common stock, which was declared effective on June 23, 2003.

All the notes bear interest at a fixed rate of 8% per year and are secured by the intellectual property of the Company.  The notes have a three-year maturity from the date of original issuance.  The notes are convertible into shares of the Company’s common stock at any time, at the option of the investors.  The conversion prices are based on a percentage of the average closing bid prices of the Company’s common stock for either a ten-day or five-day trading period ended on the day preceding each closing.

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

Following is a summary of the various terms and conversion features of the outstanding convertible notes payable, related party at June 30, 2003 and December 31, 2002:

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Issuance Date	Maturity Date	Convertible Notes Principal			At Issuance					# of Days Average Closing Bid	After Dilution Adjustments
					# of Shares	Conversion Price		% to Market			# of Shares		Conversion Price
09-Nov-01	09-Nov-04	$	2,000,000		433,426	$	4.6144	80	%	10	559,706		$	3.5733
14-Feb-02	14-Feb-05	2,000,000			429,000	4.6620		112.5	%	5	554,292		3.6082
03-May-02	03-May-05	4,000,000			2,319,109	1.7248		80	%	10	2,745,367		1.4570
12-Nov-02	12-Nov-05	4,847,608			4,243,354	1.1424		80	%	10	4,704,131		1.0305
15-Nov-02	15-Nov-05	200,000			174,581	1.1456		80	%	10	193,648		1.0328
20-Nov-02	20-Nov-05	200,000			184,638	1.0832		80	%	10	202,613		0.9871
27-Nov-02	27-Nov-05	215,000			264,518	0.8128		80	%	10	272,462		0.7891
10-Dec-02	30-Jul-05	278,320			187,851	1.4816		80	%	10	217,624		1.2789
December 31, 2002		13,740,928			8,236,477						9,449,843
03-Jun-03	Conversion	(4,195,000		)	n/a	n/a		n/a		n/a	(1,247,656	)	$1.457 - $3.6082
June 30, 2003		$	9,545,928								8,202,187

Following is a summary of the various terms and exercise features of the warrants issued in conjunction with the convertible notes payable, related party at June 30, 2003 and December 31, 2002:

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

The cash proceeds of the notes were allocated prorata between the relative fair values of the notes and warrants at issuance using the Black Scholes valuation model for valuing the warrants.  After allocating the proceeds between the note and warrant, an effective conversion price was calculated for the convertible note to determine the beneficial conversion discount for each note.  The value of the beneficial conversion discount is recorded as additional discount to the note.  The resultant combined discount to the note is accreted back to the note principal balance over the three-year term of the note and recorded as interest expense.  The following is a summary of the allocation of the cash proceeds to the relative fair values of the notes and warrants and the components of the discount recorded upon issuance of each note:

	Convertible Notes Principal																		Original Note Balance Net of Discount
(in thousands)										Components of Note Discount
				Fair Value Allocation at Issuance						Warrants			Beneficial Conversion Cost			Total Discount
Issuance Date
				Warrants			Notes
09-Nov-01	$	2,000		$	1,076		$	924		$	1,076		$	924		$	2,000		$	—
14-Feb-02	2,000			906			1,094			906			639			1,545			455
03-May-02	4,000			2,038			1,962			2,038			1,962			4,000			¾
12-Nov-02	4,848			2,697			2,151			2,697			2,151			4,848			¾
15-Nov-02	200			107			93			107			93			200			¾
20-Nov-02	200			72			128			72			72			144			56
27-Nov-02	215			103			112			103			103			206			9
10-Dec-02	278			154			124			154			124			278			¾
31-Dec-02	13,741			7,153			6,588			7,153			6,068			13,221			520
03-Jun-03	(4,195		)	(2,081		)	(2,114		)	(2,081		)	(1,659		)	(3,740		)	(455		)
30-Jun-03	$	9,546		$	5,072		$	4,474		$	5,072		$	4,409		$	9,481		$	65

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

(in thousands)	June 30, 2003			December 31, 2002
Convertible notes payable, related party – face amount	$	9,546		$	13,741
Discount for warrants and beneficial conversion	(13,221		)	(13,221		)
Discount accreted on notes converted into private placement	(276		)	(276		)
Accretion of discount recorded as interest expense	6,708			2,649
Discount balance, net	(6,789		)	(10,848		)
Long-term accrued interest	312			594
Convertible notes payable, related party - net	$	3,069		$	3,487

December Conversion

In December 2002, as part of the Private Placement (as defined below), the Company converted $2.0 million of related party convertible promissory notes and cancelled warrants previously issued in June and July 2002.  The Company recorded a $3.2 million beneficial inducement cost as a result of the conversion.  The partially unpaid principal balance of $278,320 from the third note dated July 30, 2002 was reissued to Cheshire on December 10, 2002 but with all the original terms of the July 30, 2002 convertible note and warrant pursuant to the amended Note Purchase Agreement and Intellectual Property Security Agreement.  In addition, approximately $74,000 of accrued interest for the three notes was repaid with conversion proceeds.

The following is a summary of the previous notes, warrants, the remaining balances and their terms, less the amounts converted into the Private Placement:

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

June 2003 Conversion

In June 2003, the $4.2 million of related party convertible promissory notes previously issued to Cheshire in November 2001, February 2002 and May 2002 were converted into common stock.  The Company recorded an additional $1.9 million of non-cash accretion for the notes, which represents beneficial conversion cost, as a result of the conversion.  The partially unpaid principal balance of $3.8 million from the third note dated May 3, 2002 was reissued to Cheshire as two new notes dated July 7, 2003.  The July 7, 2003 notes have all the original terms of the May 3, 2002 convertible note which was issued pursuant to the amended Note Purchase Agreement and Intellectual Property Security Agreement.  The May 2002 warrants are still outstanding and have not been affected for the June 2003 note conversion.  In addition, approximately $805,000 of accrued interest for the three notes was repaid as part of the conversion.

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The following is a summary of the previous notes, the remaining balance and their terms, less the amounts converted into common stock:

Issuance Date	Convertible Notes Principal & Interest			Convertible Notes
				# of Shares		Conversion  Price
09-Nov-01	$	2,000,000		559,706		$	3.5733
14-Feb-02	2,000,000			554,292		3.6082
03-May-02	4,000,000			2,745,367		1.4570
Accrued Interest	805,000			365,915		various
03-Jun-03	(5,000,000		)	(1,613,572	)
30-Jun-03	$	3,805,000		2,611,708		$	1.4570

Private Placement

In December 2002 (the “Private Placement”), the Company completed the Private Placement of common stock and warrants, which raised approximately $8.4 million in gross proceeds, including $6.4 million in new investment proceeds and $2.0 million of non-cash proceeds converted from previously issued related party convertible promissory notes.  We used the net cash proceeds of approximately $4.9 million (net of approximately $1.5 million in issuance costs) of the offering for general corporate purposes such as research, development, operations, personnel and regulatory expertise and to repay a portion of our outstanding indebtedness to Transamerica Finance Corporation.  As of June 30, 2003, we could raise an additional $29.5 million if all of the Class A warrants and Class B warrants issued in the offering, which are redeemable by us at $2.49 and $3.32, respectively, are exercised.  Alternatively, we could raise an additional $12.7 million if only the Class A warrants are exercised. If all of the Class A and Class B warrants are exercised, we estimate that the $29.5 million in proceeds would provide us with sufficient funds to fund our planned operations, including capital improvements and new clinical trial costs, for an additional 18 months.  If only the Class A warrants are exercised, we estimate that the additional $12.7 million would provide us with sufficient funds to fund our planned operations, including capital improvements and new clinical trial costs, into the first quarter of 2004.  However, there can be no assurances that all of the warrants will be exercised by the initial purchasers or by any subsequent holders.  We also issued to Spencer Trask Ventures, Inc., the placement agent for the private offering, an option to purchase 1,452,419 shares of common stock and 1,452,419 Class A warrants, which are not redeemable by the Company.  We have not included the exercise of this option and Class A warrants in the estimated proceeds discussed above.  As of June 30, 2003, no Class A warrants had been exercised.

On July 7, 2003, the Company issued shares of common stock under a partial voluntary exercise of Class A warrants as part of the incentive share offering. The proceeds included $6.9 million in cash and the noncash cancellation of $2.4 million of convertible notes.  Additionally on July 30, 2003 the Company exercised its option to redeem the remaining outstanding Class A warrants on September 3, 2003. If all the outstanding Class A warrants are exercised, the Company would receive gross proceeds of approximately $3.4 million.  See Note 14.

9.Short-term convertible promissory notes, related party

On March 28, 2003, we issued to Cheshire a short-term convertible promissory note in the amount of $2.0 million, bearing interest at the rate of 8% per annum due March 28, 2004 (the “March Note”). The proceeds from the issuance of the March Note were used to fund our operations.  The March Note is convertible into either 1,626,016 shares of our common stock at a price of $1.23 per share (which was the closing  price of our common stock on March 27, 2003) or into the proposed offering discussed below.

In May 2003, we issued to Cheshire two short-term convertible promissory notes in the aggregate amount of $1.08 million, bearing interest at the rate of 8% per annum due May 2004 and September 2003 (the “May Notes”). The proceeds from the issuance of the May Notes were used to fund our operations.  The May Notes have a convertible feature still to be determined in good faith negotiation prior to the 120-day maturity of each note.

In June 2003, we issued to Cheshire a short-term convertible promissory note in the amount of $819,000, bearing interest at the rate of 8% per annum due October 2003 (the “June Note”).  The proceeds from the issuance of the June note were used

13

to fund our operations.  The June Note has a convertible feature still to be determined in good faith negotiation prior to the 120-day maturity.

Alternatively, Cheshire may convert all of the above convertible promissory notes issued between January 1, 2003 and July 7, 2003 into shares of Series A Convertible Preferred Stock in connection with a proposed offering, which was approved at a special meeting of our stockholders in July 2003.  As of July 31, 2003, we have not commenced the offering.

10.Short-term unsecured promissory notes

In June 2003, the Company issued $1.0 million of short-term unsecured promissory notes to accredited investors, which bear interest at the rate of 12% per annum. In conjunction with the notes, the Company issued 166,665 shares of common stock that were given to investors.  The Company recorded a discount on the loan of $385,000 as the fair value allocation between the stock granted and the loan principal.  The notes were repaid with interest in July 2003 with proceeds from the Class A warrant incentive share offering. See Note 14.

11.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 the Company’s common stock at various times between May 17, 1999 and July 6, 2001.  The various complaints name the Company and certain of its officers as defendants, as well as Agouron Pharmaceuticals, Inc. and one of its officers.  The complaints allege that the Company, Agouron and/or such officers violated federal securities laws by misrepresenting and failing to disclose certain information about the results of clinical trials of Remune^â.  The complaints have been consolidated into a single action under the name In re Immune Response Securities Litigation by order of the Court and a consolidated amended complaint has been filed.  The Company has not yet formally responded to the consolidated amended complaint.  Although the Company intends to vigorously defend the actions, the Company 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.

In July 2003, Respimun Associates Ltd., our landlord, filed a complaint against us in Superior Court of California.  The complaint alleges a breach of contract for the payment of rent at our vacated former headquarters facility in Carlsbad, California ($79,385 per month plus late charges and other amounts).  We intend to defend the claim.  However, we have accrued approximately $700,000 relating to this matter, which represents management’s expectation of the minimum amount the Company will be obligated to pay upon settlement of this matter.

12.Stockholders’ equity

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 split at their annual meeting held in June 2002.  All common share balances and net loss per share amounts presented in these financial statements have been retroactively adjusted to reflect the reverse stock split.

Stock transactions

During June 2003, the Company converted $4.2 million of principal on notes issued in November 2001, February 2002, part of the principal of the May 2002 note and all accrued and unpaid interest of $.8 million into 1,613,572 shares of our common stock by Cheshire.  The balance of the May 2002 note and all accrued and unpaid interest thereon was transferred to two new notes in the approximate amounts of $2.4 million and $1.4 million, respectively.

In June 2003, in conjunction with the issuance of $1.0 million in short-term unsecured promissory notes issued to accredited investors, the Company issued 166,665 shares of its common stock. The Company recorded a discount on the loan of $385,000 as the fair value allocation between the stock granted and the loan principal.

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In June 2003,  the Company issued 74,492 shares of its common stock for consulting services performed from August 2002 through January 2003 equal to $102,000.  For the period January 2003 through June 2003, the Company accrued $77,000 for consulting services that will be paid in common stock.  For the period January 2003 through June 2003, the Company issued $49,000 in warrants for consulting services.

In December 2002, the Company completed the Private Placement, which raised approximately $8.4 million in gross proceeds, including $6.4 million in new investment proceeds and $2.0 million of non-cash proceeds converted from previously issued related party convertible promissory notes.  See Note 8.  The net proceeds totaled $4.9 million after issuance costs of approximately $1.5 million.  The Company also issued to Spencer Trask Ventures, Inc., the placement agent for the Private Placement, an option to purchase 1,452,419 shares of common stock and 1,452,419 Class A warrants, which are not redeemable by the Company.  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.  As of June 30, 2003, 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.

On July 7, 2003, the Company issued shares of common stock under a partial voluntary exercise of Class A warrants as part of the incentive share offering. The proceeds included $6.9 million in cash and the noncash cancellation of $2.4 million of convertible notes previously issued to Cheshire as payment for the aggregate exercise price for the purchase of 1,774,888 shares and an additional 887,444 incentive shares.  The incentive shares issued as part of the offering represent an inducement to participate in the voluntary exercise and will result in a charge to our statement of operations for beneficial inducement cost in the third quarter of 2003.  Additionally on July 30, 2003 the Company exercised its option to redeem the remaining outstanding Class A warrants on September 3, 2003. If all the outstanding Class A warrants are exercised, the Company would receive gross proceeds of approximately $3.4 million.  See Note 14.

The Company’s registration statements on Forms S-1 (Registration No. 333-103260) and S-3 (Registration No. 333-101856) registering the common stock sold in the Private Placement were declared effective by the SEC on June 23, 2003.

The Company received authorization for listing of the shares of common stock included in the units, as well as the shares of common stock underlying the warrants on the Nasdaq SmallCap Market.  Additionally, the Company received approval for the quotation of the Class A warrants and Class B warrants on the Nasdaq SmallCap Market under the trading symbols “IMNRW” and “IMNRZ”, respectively.

Stock-based compensation

The Company accounts for stock-based compensation in accordance with Accounting Principles Board, APB, No. 25, “Accounting for Stock Issued to Employees.”  The Company has adopted the disclosure-only provisions of FAS No. 123 “Accounting for Stock-Based Compensation.”  Under APB No. 25, compensation expense relating to employee stock options is determined based on the excess of the market price of the Company’s stock over the exercise price on the date of grant, the intrinsic value method, versus the fair value method as provided under FAS No. 123.

At June 30, 2003, the Company had two stock-based employee compensation plans.  The Company accounts for these plans under the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.  Generally, no stock-based employee compensation cost is reflected in net loss for employee grants, as options granted under the plans have an exercise price equal to the market value of the underlying common stock on the date of grant.  Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant date for awards for the three and six months ended June 30, 2003 and 2002, consistent with the provisions of FAS No. 123, the Company’s net loss and loss per share would have increased.

During April 2003, the Company repriced and accelerated the vesting of stock options to purchase 664,007 shares previously granted to employees and outside directors.  The weighted average share price was reduced from $10.04 per share to $1.12 per share.  This repricing has been expensed using the intrinsic valuation method required under APB No. 25 during the three months ended June 30, 2003.  The Company recorded additional employee compensation of $ 1,107,000 for the repriced options.

The Company also makes grants to nonemployees under the two plans.  These grants are subject to variable accounting under FAS No. 123 and are expensed as the options vest over the contract period.  The expenses recorded for the three and six months ended June 30, 2003 were $115,000 and $216,000, respectively.

15

The following table provides information as of June 30, 2003 regarding compensation plans (including individual compensation arrangements) under which equity securities of The Immune Response Corporation are authorized for issuance (in thousands, except per share data):

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights* (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	2,808	$	2.80	2,008
Equity compensation plans not approved by security holders	750	1.20		—
Total	3,558	$	2.46	2,008

*As adjusted for reverse stock split.

Stock options

The Company has an approved stock option plan, the 1989 Stock Plan, to grant options to purchase common stock to employees and non-employee directors of the Company and certain other individuals.  The plan authorizes the Company to issue or grant qualified and non-qualified options to purchase up to 2,475,000 shares of its common stock.  As of June 30, 2003, there were approximately 767,000 shares available for grant.

Under the terms of the 1989 Stock Plan, options may be granted at not less than 100% and 85% of fair market value as of the date of grant for qualified and non-qualified options, respectively.  To date, all options have been issued at 100% of fair market value.  Except for the non-employee directors, these options primarily become exercisable over a four-year period from the date of grant.

Under the terms of the plan, non-qualified options will be granted to non-employee directors at the fair market value as of the date of grant.  These options become exercisable in four equal annual installments on each of the first four anniversaries of the date of grant.

In February 2003, a new stock option plan to grant options to purchase common stock to employees and non-employee directors of the Company and certain other individuals was established for 3,250,000 shares, and approved by the stockholders at the Company’s Annual Meeting held May 20, 2003.  As of June 30, 2003, there were approximately 1,241,000 shares available for grant.

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

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

	Stock Options Outstanding		Weighted Average Price
Balance at December 31, 2001	1,399		$	23.12
Granted	625		2.59
Exercised	¾		¾
Cancelled	(887	)	21.70
Balance at December 31, 2002	1,137		12.95
Granted	2,872		1.14
Repriced	664		1.12
Exercised	(103	)	1.12
Cancelled	(1,012	)	9.75
Balance at June 30, 2003	3,558		$	2.46

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Following is a summary of the options outstanding as of June 30, 2003:

Range of Exercise Prices	Options Outstanding	Weighted Average Remaining Life In Years	Weighted Average Exercise Price		Options Exercisable	Weighted Average Exercise Price of Options Exercisable
$0.95 - $1.00	12,766	2.95	$	0.98	5,979	$	1.00
$1.12 - $1.12	2,526,608	9.09	1.12		1,647,641	1.12
$1.20 - $1.20	750,000	9.54	1.20		126,642	1.20
$2.28 - $16.52	144,455	4.64	7.08		105,064	8.66
$18.50 - $73.00	124,409	5.11	32.13		107,845	33.38
	3,558,238	8.84	$	2.46	1,993,171	$	3.27

At June 30, 2003, the Company had three stock-based employee compensation plans, which are described more fully above. The Company accounts for these plans under the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.  The Company has adopted the disclosure-only provisions of FAS No. 123.  Accordingly, no stock-based employee compensation cost is reflected in net loss for options granted, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant date for awards for three and six months ended June 30, 2003 and 2002, consistent with the provisions of FAS No. 123, the Company’s net loss and loss per share would have been increased to the pro forma amounts indicated below (in thousands, except per share data):

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Net loss (attributable to common stockholders) ¾ as reported	$	(9,261	)	$	(8,101	)	$	(14,450	)	$	(13,405	)
Less fair value of stock-based employee compensation expense	(1,704		)	(73		)	(1,828		)	(146		)
Net loss (attributable to common stockholders) ¾ pro forma	$	(10,695	)	$	(8,174	)	$	(16,278	)	$	(13,551	)
Net loss per share (basic and diluted) ¾ as reported	$	(0.46	)	$	(.91	)	$	(0.72	)	$	(1.50	)
Net loss per share (basic and diluted) ¾ pro forma	$	(0.53	)	$	(.91	)	$	(0.82	)	$	(1.52	)

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2003 and 2002:  risk-free interest rates of 2.49% and 2.628%, respectively, expected option lives of 5 years and a dividend rate of zero.  The volatility factor assumptions of the expected market price of the Company’s common stock were and 163% and 141%, for 2003 and 2002, respectively.

Because FAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.  The weighted average fair value of options granted for the three and six months ended June 30, 2003 and the year ended December 31, 2002 was $1.16, $1.08 and $2.20, respectively.

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Warrants

Following is a summary of warrants outstanding as of June 30, 2003 and December 31, 2002:

Types of Warrants	Amount		Warrants Outstanding	Range of Exercise Prices		Warrant Call Price
Related party warrants	$	7,153,000	9,747,757	$1.016 - $5.768		none
Class A warrants	2,664,000		9,522,072	$	1.33	$	2.49
Class B warrants	2,664,000		9,522,072	$	1.77	$	3.32
20% Placement agent option	1,148,000		1,452,419	$	0.885	none
Other	55,000		12,500	$	5.36	none
December 31, 2002	13,684,000		30,256,820
Other	50,000		58,933	$ 2.00 - $3.50		none
June 30, 2003	$	13,734,000	30,315,753

At June 30, 2003, 50.9 million shares of common stock were reserved for the exercise of stock options, employee stock purchase plan, exercise of warrants, conversion of convertible notes payable, contingent warrants and contingent shares subject to milestones per the amendments to the Company’s License and Collaboration Agreement.

13.Remune® Collaboration

In late June 2002, the Company amended its REMUNE^â 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^â 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^â 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^â to 500,000 shares from 83,333 shares.

14.Subsequent events

During July 2003, we raised $9.3 million in gross proceeds through the voluntary exercise of 6,992,236 of our Class A warrants.  The proceeds included $6.9 million in cash and the cancellation of $2.4 million of convertible notes previously issued to Cheshire as payment for the aggregate exercise price the purchase of 1,774,888 shares and an additional 887,444 incentive shares.  The Company issued an additional 3,496,118 shares equal to one half share of common stock for each Class A warrant exercised as an incentive to induce holders of the Class A warrants to exercise their Class A warrants and to allow the Company to obtain a “lock-up” on the shares of common stock issued to the holders of such exercised Class A warrants in the December 2002 unit offering and the shares of the common stock issued upon the exercise of the Class A warrants (including the additional one half share of common stock), prohibiting the sale of such common stock for 270 days, with the “lock-up” period expiring on April 4, 2004.  The incentive shares issued as part of the offering represent an inducement to participate in the voluntary exercise and will result in a charge to our statement of operations for beneficial inducement cost in the third quarter of 2003.

In July 2003, the $1.0 million short-term unsecured promissory notes issued in June 2003 were repaid with interest in July 2003 with proceeds from the Class A warrant incentive share offering.

In July 2003, the Company paid Transamerica $200,000, the second milestone payment, as a result of the exercise of the Class A warrants.  In August 2003 the loans were paid in full with a final payment of $35,000.

On July 30, 2003 the Company exercised its option to redeem the remaining outstanding Class A warrants on September 3, 2003. If all the outstanding Class A warrants are exercised, the Company would receive gross proceeds of approximately $3.4 million. The Company anticipates that the aggregate proceeds from the exercise of the Class A warrants, together with the exercise of the Class A warrants on July 7, 2003, will be sufficient to fund our planned operations, including necessary capital expenditures and new clinical trials, into the first quarter of 2004.

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At a special meeting of our stockholders held on July 7, 2003, we received stockholder approval to conduct a private offering of up to $5.0 million of Series A Convertible Preferred Stock.  The holders of shares of our Series A Convertible Preferred Stock will have the right to convert each share of Series A Convertible Preferred Stock into shares of our common stock.  Cheshire may convert all of the convertible promissory notes issued to it between January 1, 2003 and July 7, 2003 into shares of Series A Convertible Preferred Stock.  The Series A Convertible Preferred Stock will receive dividends in preference to any dividend issued to holders of shares of our common stock.  Additionally, the holders of shares of our Series A Convertible Preferred Stock are entitled to liquidation preference.  As of July 31, 2003, we have not commenced the offering.

In July 2003 Respimun Associates Ltd., our landlord, filed a complaint against us in Superior Court of California.  The complaint alleges a breach of contract for the payment of rent at our former headquarters facility in Carlsbad, California ($79,385 per month plus late charges and other amounts).  We intend to defend the claim.  However, we have accrued approximately $700,000 to cover a potential settlement.

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

The following discussion contains forward-looking statements concerning our liquidity, capital resources, financial condition, results of operation and timing of anticipated revenues and expenditures. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include, among others, those discussed under “Risk Factors.”  The following discussion should be read in conjunction with our 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.

Overview

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

Going Concern

On May 9, 15, and June 6, 2003, we issued to Cheshire Associates, LLC, or Cheshire, an affiliate of one of our directors and principal stockholder, Mr. Kevin Kimberlin, short-term convertible promissory notes in the amounts of $80,000, $1.0 million and $819,000, respectively, bearing interest at the rate of 8% per annum (the “Notes”). The proceeds from the issuance of the Notes were used to fund our operations.  The Notes have convertible features still to be determined in good faith negotiation prior to their respective maturities.

On June 23, 2003, we issued $1.0 million of unsecured promissory notes to accredited investors, which bear interest at the rate of 12% per annum.  In conjunction with the notes, we issued 166,665 shares of common stock as a discount on the loan.  The notes were paid with interest in July 2003 with proceeds from the Class A warrant incentive share offering discussed below.

During July 2003, we raised $9.3 million in gross proceeds through the voluntary exercise of 6,992,236 of our Class A warrants.  The proceeds included $6.9 million in cash and the cancellation of $2.4 million of convertible notes previously issued to Cheshire. We issued an additional 3,496,118 shares equal to one half share of common stock for each Class A warrant exercised as an incentive to induce holders of the Class A warrants to exercise their Class A warrants and to allow us to obtain a “lock-up” on the shares of common stock issued to the holders of such exercised Class A warrants in the December 2002 unit offering and the shares of the common stock issued upon the exercise of the Class A warrants (including the additional one half share of common stock), prohibiting the sale of such common stock for 270 days, with the “lock-up” period expiring on April 4, 2004.

On July 30, 2003, we exercised our option to redeem the remaining outstanding Class A warrants on September 3, 2003. If all the outstanding Class A warrants are exercised, we would receive gross proceeds of approximately $3.4 million. We anticipate that the aggregate proceeds from the exercise of the Class A warrants, together with the exercise of the Class A warrants on July 7, 2003, will be sufficient to fund our planned operations, including necessary capital expenditures and new clinical trials, into the first quarter of 2004.

At a special meeting of our stockholders held on July 7, 2003, we received stockholder approval to conduct a private offering of up to $5.0 million of Series A Convertible Preferred Stock.  The holders of shares of our Series A Convertible Preferred Stock will have the right to convert each share of Series A Convertible Preferred Stock into shares of our common stock.  Cheshire may convert all of the convertible promissory notes issued to them between January 1, 2003 and July 7, 2003 into shares of Series A Convertible Preferred Stock.  The Series A Convertible Preferred Stock will receive dividends in preference to any dividend issued to holders of shares of our common stock.  Additionally, the holders of shares of our Series A Convertible Preferred Stock are entitled to liquidation preference.  As of July 31, 2003, we have not commenced the offering.

Notwithstanding the exercise of the Class A warrants, we will continue to have limited cash resources.  Although our management recognizes the need to secure additional financing and currently is exploring its options, there can be no assurance that we will be successful in consummating any such transaction or, if we do consummate such a

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transaction, that the terms and conditions will not be unfavorable to us.  The failure by us to obtain additional financing before the first quarter of 2004 (assuming the exercise of all the remaining Class A warrants), will have a material adverse effect on us and likely result in our inability to continue as a going concern.  Our independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty regarding our 2002 annual consolidated financial statements.

As of June 30, 2003, we had a consolidated accumulated deficit of $272.3 million. We have not generated revenues from the commercialization of any product.  We expect to continue to incur substantial net operating losses over the next several years, which would imperil our ability to continue operations. We expect to experience quarter-to-quarter fluctuations, as well, some of which could be significant, due to research, development, manufacturing scale-up and clinical trial activities. We may not be able to generate sufficient product revenue to become profitable on a sustained basis, or at all, and do not expect to generate product revenue before the first quarter of 2007, if at all. We have operating and liquidity concerns due to our significant net losses, negative cash flows from operations and substantial working capital deficit. As a result of these and other factors, our independent auditors, BDO Seidman, LLP, indicated that there is substantial doubt about our ability to continue as a going concern.

Our management currently is evaluating equity financing alternatives to meet our future capital requirements. In addition, we are seeking collaborative partners for all of our technologies. In any event, we will need to raise substantial additional capital to fund our operations.  If we were unable to raise adequate capital, it would have a material adverse effect on us and would cause us to cease operations, at which time we will not be able to satisfy our obligations.  Our ability to find collaborative partners could be materially and adversely affected by the security interest held by Mr. Kimberlin and his related parties in substantially all of our intellectual property. See “Risk Factors—We May Be Unable To Enter Into Additional Collaborations Or Maintain Existing Ones.”

We could raise an additional $16.8 million if all of the Class B warrants issued as a result of Class A warrant exercises since July 7, 2003, which are redeemable by us if the price of our common stock is equal to or greater than $3.32, are exercised.  We believe the proceeds would provide us with sufficient funds to fund our planned operations, including capital improvements and new clinical trial costs, for an additional twelve months, however, there can be no assurances that all or any portion of the warrants will be exercised by the initial purchasers or by any subsequent holders. We also issued to Spencer Trask Ventures, Inc., the placement agent for the December 2002 private placement, an option to purchase 1,452,419 shares of common stock and 1,452,419 Class A warrants, which are not redeemable by us.  We have not included the exercise of this option and Class A warrants in the estimated proceeds discussed above. As of June 2002, none of the Class B warrants have been exercised.

Operations

In September 2002, we implemented a restructuring program and management changes aimed at reducing costs and refocusing our efforts on REMUNE®. The restructuring program reduced staff and cut spending at our headquarters while maintaining limited manufacturing capacity at 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. We have engaged the services of a national real estate firm to sublease our vacant buildings in both California and Pennsylvania. Not all of these subleases have been effected, and we cannot predict if or when these cost savings, if any, will be achieved or the actual amount of such savings until we enter into definitive subleases covering the properties.

During May 2003, we disposed of excess assets, and we are negotiating an early lease termination for our former vacated headquarters facility resulting in exit and disposal related costs of approximately $1.3 million recognized as of June 30, 2003, including an estimate of approximately $700,000 of additional costs accrued to cover a potential settlement.

On July 23, 2003 Respimun Associates Ltd., our landlord, filed a complaint against us in Superior Court of California.  The complaint alleges a breach of contract for the payment of rent at our former headquarters facility in Carlsbad, California ($79,385 per month plus late charges and other amounts).  We intend to defend the claim.  However, we have accrued approximately $700,000 to cover a potential settlement.

Other Significant Events

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

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consecutive trading days, effective on October 31, 2002, Nasdaq informed us that we were in compliance with its listing requirements.  As of the quarter ended June 30, 2003, we have failed to maintain the minimum stockholders’ equity requirement of at least $2.5 million. However, the Company has met an alternative test in that it has maintained a market value of its listed securities of over $35.0 million.  See “Risk Factors—Our Stock May Become Delisted And Subject To Penny Stock Rules, Which May Make It More Difficult For You To Sell Your Securities.”

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 and a consolidated amended complaint filed.   We have not yet formally responded to the consolidated amended complaint.  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. These proceedings also might require substantial attention of our management team and therefore divert their time and attention from our business and operations.

Results of Operations

Three and Six Months Ended June 30, 2003 and 2002

We recorded revenues for the three and six months ended June 30, 2003 of $14,000 and $38,000, respectively, as compared to $11,000 and $20,000 for the corresponding periods in 2002. The increase in revenues in 2003 is due to the amortization of additional multi-year out-licensing contracts of various intellectual property and/or patents that we own.  We expect no additional revenues unless it is earned through corporate collaborations or new research and development agreements.  We have not received any revenues from the sale of products and do not expect to derive revenue from the sale of any products for the foreseeable future.

Our research and development expenditures for the three and six months ended June 30, 2003 were $2.5 million and $5.0 million, respectively, as compared to $3.8 million and $7.6 million for the corresponding periods in 2002. The decreases from 2002 to 2003 in research and development spending of $1.2 million and $2.6 million for the three and six month periods, respectively, are attributable to significant reductions in salaries, benefits and operating supplies, adjustments to our operational timelines and delaying expenditures, hiring and manufacturing scale-up activities of REMUNE®, as well as reduced spending for clinical trials and related regulatory activities in 2003. These significant reductions are a direct result of our restructuring program announced in September 2002 and included completion or termination of clinical studies in our immune-based therapy programs and decreasing activities on our other non-HIV development programs.

Our REMUNE® clinical spending should continue to decrease 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 is expected to increase during fiscal year 2003 as we focus our financial resources on REMUNE®. Clinical study spending for our other development programs has decreased beginning in the second quarter of 2002 as we completed our Phase I/II clinical trial relating to multiple sclerosis during the first quarter of 2002. We expect research and development expenditures for our other development programs to also continue to decrease due to our restructuring in September 2002 which, among other things, was intended to focus our resources on REMUNE®. Overall, we expect future research and development expenditures for REMUNE® to increase but quarter to quarter fluctuations may occur due to the timing of expenditures. If we enter into additional collaborations, research and development expenditures for our other development programs would likely increase over their current levels. There can be no assurance that we will enter into any collaborations, that existing collaborations will not be terminated, or that we will be able to obtain other financing needed to continue our research and development efforts.

General and administrative expenses for the three and six months ended June 30, 2003 were $2.3 million and $3.4 million, respectively, as compared to $1.2 and $2.4 million for the corresponding periods in 2002.  This increase was primarily attributable to a one-time adjustment of $1.2 million made in the second quarter of 2003 to salaries expense to reflect the repricing of employee stock options.  We expect quarterly general and administrative expenses

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to remain consistent with prior quarters with savings attributed to the September 2002 restructuring being offset by possible increased consulting fees.

During May 2003, we disposed of excess assets, and we are negotiating an early lease termination for our former vacated headquarters facility resulting in exit and disposal related costs of $1.3 million recognized as of June 30, 2003, including an estimate of approximately $700,000 of additional costs accrued to cover a potential settlement of a claim filed by the landlord for breach of contract under the lease.

Investment income decreased to $3,000 and $11,000 for the three and six months ended June 30, 2003, respectively, from $8,000 and $22,000 for the same periods in 2002. The decrease in investment income in 2003 from 2002 was primarily due to overall lower cash balances in interest bearing investments and lower interest rates earned.

Interest expense increased to $3.4 million and $4.8 million for the three and six months ended June 30, 2003, respectively, as compared to $774,000 and $1.1 million for the corresponding periods in 2002.  Accretion of convertible notes payable, as a component of interest expense, was $3.0 million and  $4.1 million for the three and six months ended June 30, 2003, respectively, as compared to $576,000 and $828,000 for the corresponding periods in 2002.  Accretion of short-term unsecured promissory notes, as a component of interest expense, was $71,000 for the three and six months ended June 30, 2003.  The increase in 2003 from 2002 is partly attributable to the conversion of $5.0 million of convertible debt into common stock with an additional beneficial conversion expense of $1.9 million recognized upon conversion.  The remainder of the increase is due to higher non-cash accretion overall due to higher average convertible debt balances in 2003 as compared to 2002.  Accretion represents the amortization to interest expense, over a three-year period, of the value of the notes allocated to the value of warrants issued in connection with the convertible notes and beneficial conversion feature.

In December 2002, the FASB issued FAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” which amended FAS No. 123 “Accounting for Stock-Based Compensation.” The new standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the statement amends the disclosure requirements of FAS No. 123 to require prominent disclosures in the annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for financial statements for fiscal years ending after December 15, 2002. In compliance with FAS No. 148, we have elected to continue to follow the intrinsic value method in accounting for our stock-based employee compensation plan as defined by APB No. 25, “Accounting for Stock Issued to Employees,” and have made the applicable disclosures in Note 12 to the Condensed Consolidated Financial Statements.

Liquidity and Capital Resources

On March 28, 2003, we issued to Cheshire, a short-term convertible promissory note in the amount of $2.0 million, bearing interest at the rate of 8% per annum. The proceeds were used to fund our operations. The note is convertible into either 1,626,016 shares of our common stock at a price of $1.23 per share (which was the closing price of our common stock on March 27, 2003) or an equal amount of such other securities that we may offer in the future by means of a private placement to “accredited investors.”

On May 9, 15, and June 6, 2003, we issued to Cheshire short-term convertible promissory notes in the amounts $80,000, $1.0 million and $819,000, respectively, bearing interest at the rate of 8% per annum (the “Notes”). The proceeds from the issuance of the Notes were used to fund our operations.  The Notes have convertible features still to be determined in good faith negotiation prior to their respective maturities.

During May 2003, we held an auction to sell excess assets associated with our vacated former headquarters facility located in Carlsbad, California.  Transamerica was paid $187,000 of total auction proceeds.  In July 2003, we paid $200,000, the second milestone payment owed under the June 2002 loan restructuring agreement, as a result of the exercise of the Class A warrants.  In August 2003, the loans were paid in full with a final payment of $35,000.  The total amount owed to Transamerica as of June 30, 2003 and December 31, 2002 was approximately $280,000 and $865,000, respectively.

During June 2003, Cheshire exercised their option to convert $4.2 million of principal on notes issued to them in November 2001, February 2002, part of the principal of the May 2002 note and all accrued and unpaid interest of $.8 million into 1,613,572 shares of our common stock.  The balance of the May 2002 note and all accrued and unpaid interest thereon was transferred to two new notes in the approximate amounts of $2.4 million and $1.4 million, respectively.  During July 2003, the note in the amount of $2.4 million was cancelled as payment for the aggregate

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exercise price of Class A warrants to purchase 1,774,888 shares and an additional 887,444 incentive shares of our common stock in connection with the July 7, 2003 incentive share offering described below.

On June 23, 2003, we issued $1,000,000 of unsecured promissory notes to accredited investors, which bear interest at the rate of 12% per annum.  In conjunction with the notes, we issued 166,665 shares of common stock as a discount on the loan.  The notes were paid with interest in July 2003 with proceeds from the Class A warrant incentive share offering discussed below.

During July 2003, we raised $9.3 million in gross proceeds through the voluntary exercise of 6,992,236 of our Class A warrants.  The proceeds included $6.9 million in cash and the cancellation of $2.4 million of convertible notes previously issued to Cheshire. We issued an additional 3,496,118 shares equal to one half share of common stock for each Class A warrant exercised as an incentive to induce holders of the Class A warrants to exercise their Class A warrants and to allow us to obtain a “lock-up” on the shares of common stock issued to the holders of such exercised Class A warrants in the December 2002 unit offering and the shares of the common stock issued upon the exercise of the Class A warrants (including the additional one half share of common stock), prohibiting the sale of such common stock for 270 days, with the “lock-up” period expiring on April 4, 2004.  The incentive shares issued as part of the offering represent an inducement to participate in the voluntary exercise and will result in a charge to our statement of operations for beneficial inducement cost in the third quarter of 2003.

On July 30, 2003, we exercised our option to redeem the remaining outstanding Class A warrants on September 3, 2003. If all the outstanding Class A warrants are exercised, we would receive gross proceeds of approximately $3.4 million. We anticipate that the aggregate proceeds from the exercise of the Class A warrants, together with the exercise of the Class A warrants on July 7, 2003, will be sufficient to fund our planned operations, including necessary capital expenditures and new clinical trials, into the first quarter of 2004.

At a special meeting of our stockholders held on July 7, 2003, we received stockholder approval to conduct a private offering of up to $5.0 million of Series A Convertible Preferred Stock.  The holders of shares of our Series A Convertible Preferred Stock will have the right to convert each share of Series A Convertible Preferred Stock into shares of our common stock.  Cheshire may convert all of the convertible promissory notes issued to them between January 1, 2003 and July 7, 2003 into shares of Series A Convertible Preferred Stock.  The Series A Convertible Preferred Stock will receive dividends in preference to any dividend issued to holders of shares of our common stock.  Additionally, the holders of shares of our Series A Convertible Preferred Stock are entitled to liquidation preference.  As of July 31, 2003, we have not commenced the offering.

Notwithstanding the above transactions including the exercise of the Class A warrants, we will continue to have limited cash resources.  Although our management recognizes the need to secure additional financing and currently is exploring its options, there can be no assurance that we will be successful in consummating any such transaction or, if we do consummate such a transaction, that the terms and conditions will not be unfavorable to us.  The failure by us to obtain additional financing before the first quarter of 2004 (assuming the exercise of all the remaining Class A warrants), will have a material adverse effect on us and likely result in our inability to continue as a going concern.  Our independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty regarding our 2002 annual consolidated financial statements.

We could raise an additional $16.8 million if all of the Class B warrants issued as a result of Class A warrant exercises since July 7, 2003, which are redeemable by us if the price of our common stock is equal to or greater than $3.32, are exercised.  We believe the proceeds would provide us with sufficient funds to fund our planned operations, including capital improvements and new clinical trial costs, for an additional twelve months, however, there can be no assurances that all or any portion of the warrants will be exercised by the initial purchasers or by any subsequent holders. We also issued to Spencer Trask Ventures, Inc., the placement agent for the December 2002 private placement, an option to purchase 1,452,419 shares of common stock and 1,452,419 Class A warrants, which are not redeemable by us.  We have not included the exercise of this option and Class A warrants in the estimated proceeds discussed above. As of June 2002, none of the Class B warrants have been exercised.

Since our inception in 1986, we have financed our activities primarily from public and private sales of equity, funding from collaborations with corporate partners, investment income and the issuance to entities affiliated with or related to Mr. Kimberlin, who is one of our directors and our principal stockholder, of convertible notes and warrants and short-term promissory notes. At June 30, 2003, we had a working capital deficiency of $5.4 million, including $1.3 million of cash, cash equivalents and marketable securities. This compares with working capital of $1.0 million and $3.9 million of cash, cash equivalents and marketable securities as of December 31, 2002. Working capital decreased during this period as a result of $7.1 million of cash used in operations and $766,000 of equipment notes and capital lease payments. During March, May and June 2003, we issued $3.9 million of short term

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convertible notes payable, and $1.0 million of short-term unsecured promissory notes, which provided cash but correspondingly increased current liabilities.

Once we have used our current cash balances, we will be forced to look for alternative sources of funding which, even if available, may be on terms substantially less favorable.  If we are unable to raise adequate capital, we may be required to delay, or reduce the scope of, our research or development of REMUNE®, or take other measures to cut costs, which would have a material adverse effect on us and likely result in our inability to continue as a going concern. In any event, we will need to raise substantial additional capital to fund our operations beyond the first quarter of 2004. We cannot provide any 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. See “Risk Factors—Our Current Cash Position, Additional Financing Requirements And Limited Access To Financing Will Adversely Affect Our Ability To Develop Products And Continue As A Going Concern.”

We will need to raise substantial additional funds to conduct research and development, preclinical studies and clinical trials necessary to bring potential products to market and to establish manufacturing and marketing capabilities. We anticipate that for the foreseeable future, the scale-up of the manufacturing process for REMUNE® and the cost of producing clinical supplies for ongoing and future REMUNE® studies will continue to represent a significant portion of our overall expenditures. Overall, future REMUNE® research and development expenditures are expected to increase from current levels in the event additional financing is obtained. Future spending for research and development may further increase if we enter into additional collaborations, but there can be no assurance that we will enter into any such collaborations. We anticipate additional capital improvements of approximately $1.0 million to scale-up of the manufacturing process for REMUNE®. Other anticipated costs with respect to REMUNE ®, including investment in inventory, will depend on many factors including the need for additional clinical trials and other factors, which will influence our determination of the appropriate continued investment of our financial resources in this program.

Our future capital requirements will depend on many factors including whether the remaining portion of the warrants from the December 2002 Private Placement will be exercised by the initial purchasers or by any subsequent holders. Other capital requirement factors include continued scientific progress in our research and development programs, the scope and results of preclinical studies and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, the costs involved in defending claims in class actions, competing technological and market developments, the cost of manufacturing scale-up and inventories, effective commercialization activities and arrangements and other factors not within our control. We intend to seek additional funding through additional research and development agreements with suitable corporate collaborators and through public or private financing, if available. However, we cannot provide assurance that such collaboration arrangements or any public or private financing will be available on acceptable terms, if at all.  If we raise funds through future equity arrangements, further dilution to stockholders will result.

Critical Accounting Policies

Risks and uncertainties

The consolidated financial statements have been prepared assuming that we will continue as a going concern. We have operating and liquidity concerns due to historically reporting significant net losses and negative cash flows from operations.  As of June 30, 2003, we had a working capital deficiency of $5.4 million and an accumulated deficit of $272.3 million.  As of December 31, 2002, we had working capital of $1.0 million and an accumulated deficit of $257.8 million.

During July 2003, we raised $9.3 million in gross proceeds through the voluntary exercise of 6,992,236 of our Class A warrants.  The proceeds included $6.9 million in cash and the cancellation of $2.4 million of convertible notes previously issued to Cheshire. We issued an additional 3,496,118 shares equal to one half share of common stock for each Class A warrant exercised as an incentive to induce holders of the Class A warrants to exercise their Class A warrants and to allow us to obtain a “lock-up” on the shares of common stock issued to the holders of such exercised Class A warrants in the December 2002 unit offering and the shares of the common stock issued upon the exercise of the Class A warrants (including the additional one half share of common stock), prohibiting the sale of such common stock for 270 days, with the “lock-up” period expiring on April 4, 2004.

On July 30, 2003, we exercised our option to redeem the remaining outstanding Class A warrants on September 3, 2003. If all the outstanding Class A warrants are exercised, we would receive gross proceeds of approximately $3.4 million. We anticipate that the aggregate proceeds from the exercise of the Class A warrants, together with the exercise of the Class A warrants on July 7, 2003, will be sufficient to fund our planned operations, including necessary capital expenditures and new clinical trials, into the first quarter of 2004.

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At a special meeting of our stockholders held on July 7, 2003, we received stockholder approval to conduct a private offering of up to $5.0 million of Series A Convertible Preferred Stock.  The holders of shares of our Series A Convertible Preferred Stock will have the right to convert each share of Series A Convertible Preferred Stock into shares of our common stock.  Cheshire may convert all of the convertible promissory notes issued to them between January 1, 2003 and July 7, 2003 into shares of Series A Convertible Preferred Stock.  The Series A Convertible Preferred Stock will receive dividends in preference to any dividend issued to holders of shares of our common stock.  Additionally, the holders of shares of our Series A Convertible Preferred Stock are entitled to liquidation preference.  As of July 31, 2003, we have not commenced the offering.

Notwithstanding the exercise of the Class A warrants, we will continue to have limited cash resources.  Although our management recognizes the need to secure additional financing and currently is exploring its options, there can be no assurance that we will be successful in consummating any such transaction or, if we do consummate such a transaction, that the terms and conditions will not be unfavorable to us.  The failure by us to obtain additional financing before the first quarter of 2004 (assuming the exercise of all the remaining Class A warrants), will have a material adverse effect on us and likely result in our inability to continue as a going concern.  Our independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty regarding our 2002 annual consolidated financial statements.

These factors, among others, raise substantial doubt about our ability to continue as a going concern. The condensed 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 we be unable to continue as a going concern.

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, if available, may not be available 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 we consider important to the development of our business. The patent positions of pharmaceutical and biotechnology firms, including our company, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved. Changes in our estimates in the realizability of our intellectual property may have a material effect on our financial statements.

Critical Accounting Estimates

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

In accordance with FAS No. 144, the Company has identified our property and equipment as long-lived assets subject to annual impairment review. Given our current financial status, our historical losses and the indeterminable outcome of the development and approval of our products, there is substantial uncertainty as to our ability to recover our investment in these long-lived assets through the generation of net future cash flows. In light of this uncertainty,

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we obtained an independent third-party appraisal of these long-lived assets in the first quarter of 2003. As a result of such appraisal, we recognized substantial impairment charges for the year ended December 31, 2002.

Risk Factors

You should carefully consider the risks and uncertainties 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 also may impair our business and condition. If any of the following risks actually occur, our business, operations and condition 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

In addition to the funds we received from our private placement of units in December 2002, we will need to raise substantial additional funds to continue our operations and to conduct research and development, preclinical studies and clinical trials necessary to bring our potential products to market and to establish manufacturing and marketing capabilities.

On March 28, 2003, we issued to Cheshire, a short-term convertible promissory note in the amount of $2.0 million, bearing interest at the rate of 8% per annum. The proceeds were used to fund our operations. The note is convertible into either 1,626,016 shares of our common stock at a price of $1.23 per share (which was the closing price of our common stock on March 27, 2003) or an equal amount of such other securities that we may offer in the future by means of a private placement to “accredited investors.”

On May 9, 15, and June 6, 2003, we issued to Cheshire short-term convertible promissory notes in the amounts of $80,000, $1.0 million and $819,000, respectively, bearing interest at the rate of 8% per annum (the “Notes”). The proceeds from the issuance of the Notes were used to fund our operations.  The Notes have convertible features still to be determined in good faith negotiation prior to their respective maturities.

During May 2003, we held an auction to sell excess assets associated with our vacated former headquarters facility located in Carlsbad, California.  Transamerica was paid $187,000 of total auction proceeds.  In July 2003, we paid $200,000, the second milestone payment owed under the June 2002 loan restructuring agreement, as a result of the exercise of the Class A warrants.  In August 2003, the loans were paid in full with a final payment of $35,000.  The total amount owed to Transamerica as of June 30, 2003 and December 31, 2002 was approximately $280,000 and $865,000, respectively.

During June 2003, Cheshire exercised their option to convert $4.2 million of principal on notes issued to them in November 2001, February 2002, part of the principal of the May 2002 note and all accrued and unpaid interest of $.8 million into 1,613,572 shares of our common stock.  The balance of the May 2002 note and all accrued and unpaid interest thereon was transferred to two new notes in the approximate amounts of $2.4 million and $1.4 million, respectively.  During July 2003, the note in the amount of $2.4 million was cancelled as payment for the aggregate exercise price of Class A warrants to purchase 1,774,888 shares and an additional 887,444 incentive shares of our common stock in connection with the July 7, 2003 incentive share offering described below.

On June 23, 2003, we issued $1,000,000 of unsecured promissory notes to accredited investors, which bear interest at the rate of 12% per annum.  In conjunction with the notes, we issued 166,665 shares of common stock as a discount on the loan.  The notes were paid with interest in July 2003 with proceeds from the Class A warrant incentive share offering discussed below.

During July 2003, we raised $9.3 million in gross proceeds through the voluntary exercise of 6,992,236 of our Class A warrants.  The proceeds included $6.9 million in cash and the cancellation of $2.4 million of convertible notes previously issued to Cheshire. We issued an additional 3,496,118 shares equal to one half share of common stock for each Class A warrant exercised as an incentive to induce holders of the Class A warrants to exercise their Class A warrants and to allow us to obtain a “lock-up” on the shares of common stock issued to the holders of such exercised Class A warrants in the December 2002 unit offering and the shares of the common stock issued upon the exercise of the Class A warrants (including the additional one half share of common stock), prohibiting the sale of such common stock for 270 days, with the “lock-up” period expiring on April 4, 2004.

On July 30, 2003, we exercised our option to redeem the remaining outstanding Class A warrants on September 3, 2003. If all the outstanding Class A warrants are exercised, we would receive gross proceeds of approximately

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$3.4 million. We anticipate that the aggregate proceeds from the exercise of the Class A warrants, together with the exercise of the Class A warrants on July 7, 2003, will be sufficient to fund our planned operations, including necessary capital expenditures and new clinical trials, into the first quarter of 2004.

At a special meeting of our stockholders held on July 7, 2003, we received stockholder approval to conduct a private offering of up to $5.0 million of Series A Convertible Preferred Stock.  The holders of shares of our Series A Convertible Preferred Stock will have the right to convert each share of Series A Convertible Preferred Stock into shares of our common stock.  Cheshire may convert all of the convertible promissory notes issued to them between January 1, 2003 and July 7, 2003 into shares of Series A Convertible Preferred Stock.  The Series A Convertible Preferred Stock will receive dividends in preference to any dividend issued to holders of shares of our common stock.  Additionally, the holders of shares of our Series A Convertible Preferred Stock are entitled to liquidation preference.  As of July 31, 2003, we have not commenced the offering.

Notwithstanding the above transactions including the exercise of the Class A warrants, we will continue to have limited cash resources.  Although our management recognizes the need to secure additional financing and currently is exploring its options, there can be no assurance that we will be successful in consummating any such transaction or, if we do consummate such a transaction, that the terms and conditions will not be unfavorable to us.  The failure by us to obtain additional financing before the first quarter of 2004 (assuming the exercise of all the remaining Class A warrants), will have a material adverse effect on us and likely result in our inability to continue as a going concern.  Our independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty regarding our 2002 annual consolidated financial statements.

As of June 30, 2003, we had net accumulated operating losses of approximately $272.3 million, cash and cash equivalents of only $1.3 million and a working capital deficiency of approximately $5.4 million.  Because we do not anticipate generating any revenue from our products until at least the first quarter of 2007, if at all, we will continue to have negative cash flow and will need to raise substantial additional capital to fund our operations beyond such time.  We could raise an additional $16.8 million if all of the Class B warrants issued as a result of Class A warrant exercises since July 7, 2003, which are redeemable by us if the price of our common stock is equal to or greater than $3.32, are exercised.  We believe the proceeds would provide us with sufficient funds to fund our planned operations, including capital improvements and new clinical trial costs, for an additional twelve months, however, there can be no assurances that all or any portion of the warrants will be exercised by the initial purchasers or by any subsequent holders. We also issued to Spencer Trask Ventures, Inc., the placement agent for the December 2002 private placement, an option to purchase 1,452,419 shares of common stock and 1,452,419 Class A warrants, which are not redeemable by us.  We have not included the exercise of this option and Class A warrants in the estimated proceeds discussed above. As of June 2002, none of the Class B warrants have been exercised.

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 2002. We expect our costs related to the development of REMUNE® to increase in 2003 and 2004 in the event we are able to raise additional capital enabling us to pursue additional research and development projects. Other anticipated costs relating to the development of REMUNE® will depend on many factors — in particular, a potential decrease in such costs associated with our ability to establish a new collaborative, strategic or marketing partner to replace Pfizer Inc., or Pfizer. See “— Pfizer Has Terminated Its Collaboration With Us And We Have Had To Delay Or Abandon The Continued Development And Commercialization Of REMUNE®,” “We May Be Unable To Enter Into Additional Collaborations Or Maintain Existing Ones” And “Our Failure To Develop And Commercialize Products Successfully May Cause Us To Cease Operations.”

On September 9, 2002, we commenced the implementation of a cost reduction strategy to focus our core competencies on efforts related to the research, development, commercialization and production of REMUNE®. We anticipate that the cost reductions will impact our cash expenditures related to research, administrative and operational costs. In the process of implementing these cost reductions, we will incur one-time expenses related to severance, relocation of certain facilities and consulting payments. Excluding these one-time payments and any expansion of our research or manufacturing efforts, if all of our cost reductions are realized, we expect that these cost reductions will decrease our expenses significantly. However, we intend to increase our production capabilities at our King of Prussia, Pennsylvania, facility which will necessitate additional cash and capital requirements for such activities. In addition, there can be no assurances that we will be successful in implementing all or any portion of these cost reduction measures or that we will recognize all or any portion of the anticipated savings.

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

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

• the cost of manufacturing scale-up;

• the time and costs involved in obtaining regulatory approvals;

• continued scientific progress in our research and development programs;

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

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

• competing technological and market developments;

• effective commercialization activities and arrangements;

• the costs of defending against and settling lawsuits; and

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

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

• scaling up manufacturing;

• obtaining regulatory approvals;

• our research and development programs; or

• our preclinical and clinical trials.

Such access also could be limited by (i) overall financial market conditions, (ii) applicable National Association of Securities Dealers, or NASD, rules and federal and state securities laws, (iii) the perfected security interest in our intellectual property in respect of the aggregate $13.4 million in convertible notes issued in May 2002, November 2002, December 2002 and March 2003, May 2003, June 2003 and July 2003 to affiliates and/or related parties of Mr. Kimberlin, one of our directors and our principal stockholder,  (iv) the effect of the exercise of certain outstanding options and warrants exercisable into approximately 13.4 million shares of common stock, (v) the effect of the conversion of the May, November and December 2002, May 2003, June 2003 and July 2003 convertible notes into approximately 10.7 million shares of common stock, (vi) the issuance of 9,522,072 shares of common stock and 9,522,072 Class A warrants to the selling security holders in our private placement of units, and (vii) the issuance of the placement agent option to Spencer Trask Ventures, Inc. which is exercisable for 1,452,419 shares of common stock and 1,452,419 Class A warrants, which are not redeemable by us.

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

Although we have completed the private placement of units, we currently are actively considering raising additional funds. On March 28, 2003, we issued to Cheshire, a short-term convertible promissory note in the amount of $2.0 million, bearing interest at the rate of 8% per annum. The note is convertible into either 1,626,016 shares of our common stock at a price of $1.23 per share (which was the closing price of our common stock on March 27, 2003) or an equal amount of such other securities that we may offer in the future by means of a private placement to “accredited investors” as discussed below.

On May 9, 15, and June 6, 2003, we issued to Cheshire short-term convertible promissory notes in the amounts of $80,000, $1.0 million and $819,000, respectively, bearing interest at the rate of 8% per annum (the “Notes”). The Notes have convertible features still to be determined in good faith negotiation prior to their respective maturities.

Alternatively, Cheshire may convert all of the convertible promissory notes issued between January 1, 2003 and July 7, 2003 into shares of Series A Convertible Preferred Stock in connection with a proposed offering.   We received stockholder approval to conduct a private offering of up to $5.0 million of Series A Convertible Preferred Stock at a special meeting of our stockholders held on July 7, 2003.  The holders of shares of our Series A Convertible Preferred Stock will have the right to convert each share of Series A Convertible Preferred Stock into shares of our common stock.  The Series A Convertible Preferred Stock will receive dividends in preference to any dividend issued to holders of shares of our common stock.  Additionally, the holders of shares of our Series A Convertible Preferred Stock are entitled to liquidation preference.  As of July 31, 2003, we have not commenced the offering.

Notwithstanding the above transactions, we will continue to have limited cash resources.  Although our management recognizes the need to secure additional financing, there can be no assurance that we will be successful in consummating any such transaction or, if we do consummate such a transaction, that the terms and conditions of such financing will not be unfavorable to us.  The failure by us to obtain additional financing before the first quarter of 2004 (assuming the conversion of all of the remaining Class A warrants), will have a material adverse effect on us and likely result in our inability to continue as a going concern.  Our independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have, therefore, modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty regarding our annual consolidated financial statements.

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

We do not expect to receive proceeds from product revenues sooner than the first quarter of 2007, if at all. Notwithstanding our current financing efforts, we will continue to have negative cash flow and will need to raise substantial additional capital to fund our operations beyond such time. We may be able to secure financing only on terms substantially less favorable to our current investors and to us, if at all. If we raise funds through equity arrangements, further dilution to stockholders will result. If we are unable to obtain financing before we generate enough revenue from our products to become cash flow break-even, we will be unable to pay our debts and will be forced to cease operations and potentially enter into bankruptcy.

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

In November 2001, we issued to Kevin Kimberlin Partners LLP, or KKP, a $2.0 million convertible note and a warrant, each of which were initially convertible and exercisable, respectively, for 433,426 shares of common stock. In February 2002, we issued to Oshkim Limited Partnership, or Oshkim, a $2.0 million convertible note and a warrant, each of which were initially convertible and exercisable, respectively, for 429,000 shares of common stock, pursuant to the note purchase agreement. In May 2002, we issued to Oshkim Limited Partnership, or Oshkim, a $4.0 million convertible note and a warrant, each of which were initially convertible and exercisable, respectively, for 2,319,109 shares of common stock. Such notes were issued pursuant to a note purchase agreement, dated November 11, 2001. The number of shares, as well as the applicable conversion or exercise price, as the case may be, are subject to weighted average antidilution adjustment in the event that we issue certain securities below the applicable conversion or exercise price and in certain other events which would dilute your interest in us. All the principal and all accrued and unpaid interest on notes issued in November 2001 and February 2002 and part of the principal on the May 2002 note was converted on June 3, 2003 by Cheshire Associates into 1,613,572 shares of our common stock.  The balance of the May 2002 note and all accrued and unpaid interest thereon was transferred to two new notes in the approximate amounts of $2.4 and $1.4, respectively.  The July 7, 2003 note in the amount of $2.4 was cancelled as payment for the aggregate exercise price of Class A warrants to purchase 2,622,332 shares of our common stock in connection with the July 7, 2003 incentive share offering.

In June 2002, we issued to Oshkim a $1.0 million convertible note and a warrant, each of which was initially convertible and exercisable, respectively, for 523,451 shares of common stock or $1.0 million in units offered in the private placement.  Additionally, on July 11, 2002, we issued to The Kimberlin Family 1998 Irrevocable Trust, or the Kimberlin Family Trust, a $566,638 convertible note and a warrant, each of which was initially convertible and exercisable, respectively, for 354,858 shares of common stock. On July 30, 2002, we issued to the Kimberlin Trust a $637,189 convertible note and a warrant, each of which was initially convertible and exercisable, respectively, for 430,068 shares of common stock. Up to $1.0 million of the notes issued in July was convertible into units offered in the private placement. Each of the notes and warrants issued in November 2001 and February, May, June and July 2002 was subsequently contributed by the initial holder to Cheshire Associates.

On November 12, 2002, we issued to Cheshire Associates a $4,847,608 convertible note and a warrant, each of which is initially convertible and exercisable, respectively, for 4,243,354 shares of common stock. On November 15, 2002, we issued to Cheshire Associates a $200,000 convertible note and a warrant, each of which is initially convertible and exercisable, respectively, for 174,581 shares of common stock. On November 20, 2002, we issued to Cheshire Associates a $200,000 convertible note and a warrant, each of which is initially convertible and exercisable, respectively, for 184,638 shares of common stock. On November 27, 2002, we issued to Cheshire Associates a $215,000 convertible note and a warrant, each of which is initially convertible and exercisable, respectively, for 264,518 shares of common stock.

In conjunction with our private placement of units, $2.0 million of principal and interest on the June and July notes and related warrants were converted by Cheshire Associates into 20 units. The convertible note and warrant issued to the Kimberlin Family Trust on July 30, 2002 and contributed to Cheshire Associates has been reduced to $278,320 as a result of the $2.0 million conversion and has been transferred to a new promissory note and warrant dated December 10, 2002 which was initially convertible and exercisable, respectively, for 187,851 shares of common stock. Following the close of the unit offering, the number of shares and applicable conversion and exercise price of the convertible notes and warrants issued to Oshkim, KKP, the Kimberlin Family Trust and Cheshire Associates, respectively, were adjusted pursuant to their weighted average anti-dilution provisions for the unit offering as well as for the conversion of the equity underlying the converted notes and warrants. Consequently, the number of shares of common stock issuable upon conversion of the outstanding convertible notes has decreased

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to 9,449,843 and the number of shares of common stock issuable upon the exercise of the related warrants has decreased to 9,747,757 shares. Such number 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 certain securities below the applicable conversion or exercise price and in certain other events. This also may dilute your interest in us.

On March 28, 2003, we issued to Cheshire Associates a short-term convertible promissory note in the amount of $2.0 million, bearing interest at the rate of 8% per annum.  The note issued in March 2003 is convertible into either 1,626,016 shares of our common stock at a price of $1.23 per share (which was the closing price of our common stock on March 27, 2003) or an equal amount of such other securities that we may offer in the future by means of a private placement to “accredited investors” as discussed below.

On May 9, 15 and June 6, 2003, we issued to Cheshire Associates short-term convertible promissory notes in the amount of $80,000, $1.0 million and $819,000, respectively, bearing interest at the rate of 8% per annum (the “ Notes”).  The Notes have a convertible feature still to be determined in good faith negotiation prior to their respective maturities.

Alternatively, Cheshire may convert all of the convertible promissory notes issued to them between January 1, 2003 and July 7, 2003 into shares of Series A Convertible Preferred Stock in connection with a proposed offering.  We received stockholder approval to conduct a private offering of up to $5.0 million of Series A Convertible Preferred Stock at a special meeting of our stockholders held on July 7, 2003.  The holders of shares of our Series A Convertible Preferred Stock will have the right to convert each share of Series A Convertible Preferred Stock into shares of our common stock.  The Series A Convertible Preferred Stock will receive dividends in preference to any dividend issued to holders of shares of our common stock.  Additionally, the holders of shares of our Series A Convertible Preferred Stock are entitled to liquidation preference.  As of July 31, 2003, we have not commenced the offering.

We also issued an option to our placement agent to purchase 1,452,419 shares of common stock and 1,452,419 Class A warrants (which are not redeemable by us) which, if exercised, may dilute your interest in us.

On June 26, 2002, we entered into an agreement with Trinity Medical Group USA, Inc. and its affiliate, Trinity Medical Group, Co. Ltd., a Thailand company, collectively Trinity, to amend certain of our existing agreements with Trinity. In consideration for entering into these amendments, Trinity has received 1.0 million shares of our common stock valued at approximately $2.4 million at the date of the amendments and also will receive as additional consideration, 250,000 shares of our common stock (up to 750,000 shares in the aggregate) as of the date of the satisfaction by Trinity of each of the following obligations: (i) the purchase by Trinity from us of an aggregate of 300,000 doses of REMUNE®, (ii) the purchase by Trinity from us of an aggregate of 600,000 doses of REMUNE® and (iii) the purchase by Trinity from us of an aggregate of 1.0 million doses of REMUNE®. Under the current agreement, Trinity also is obligated to purchase 500,000 shares of common stock at a purchase price of $10 per share on the date that is 30 days after the date on which Trinity receives the required marketing approval from the Food and Drug Administration of the Ministry of the Public Health of Thailand, or the Thai FDA. The issuance by us to Trinity of these 2,250,000 shares of common stock, and the granting by us to Trinity of certain registration rights relating to such shares, will dilute your interest in us. On June 23, 2002, the registration statement covering the sale of 500,000 shares of common stock, held in the name of Trinity, was declared effective by the SEC.

We may in the future issue additional convertible notes, warrants or other securities. We are anticipating a subsequent offering which we plan to commence in the near future if the Class B warrants are not exercised. 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 us.

You Could Suffer Substantial Dilution Of Your Investment If Certain Warrants And Options To Purchase Common Stock Are Exercised Or Our Convertible Notes Are Converted Into Common Stock

As of June 30, 2003, we had reserved approximately 5.6 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 us. Furthermore, we have warrants outstanding which, if exercised, will purchase approximately 19.3 million shares of our common stock and approximately 10.7 million shares which are issuable upon conversion of our outstanding convertible notes.  Additionally, we issued an option to our placement agent to purchase 1,452,419 shares of common stock and 1,452,419 Class A warrants, which are not redeemable by us. The Class A warrants are exercisable for additional shares of common stock and Class B warrants.  In addition, we may issue up to 750,000 shares of our common stock to Trinity pursuant to our License and Collaboration Agreement. See also “— You Could Suffer Substantial Dilution of Your Investment As The Result Of Adjustments To The Convertible Notes, Warrants And Other Securities Issued In May 2002, July 2002, November 2002, December 2002, March 2003, May 2003, June 2003 and July 2003.”

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Our Independent Auditors Have Expressed Substantial Doubt As To Our Ability To Continue As A Going Concern

As of June 30, 2003, we had a consolidated accumulated deficit of $272.3 million. We have not generated revenues from the commercialization of any product.  We expect to continue to incur substantial net operating losses over the next several years, which would imperil our ability to continue operations.  We may not be able to generate sufficient product revenue to become profitable on a sustained basis, or at all, and do not expect to generate product revenue before the first quarter of 2007, if at all.  We have operating and liquidity concerns due to our significant net losses, negative cash flows from operations and substantial working capital deficit.  Additionally, it may take a significant length of time before we can raise capital from any subsequent financing.  As a result of these and other factors, our independent auditors, BDO Seidman, LLP, indicated that there is substantial doubt about our ability to continue as a going concern.

Our Stock May Become Delisted And Subject To Penny Stock Rules, Which May Make It More Difficult For You To Sell Your Securities

On March 12, 2002, our common stock commenced trading below $1.00 per share on The Nasdaq National Market. The National Association of Securities Dealers Automated Quotation System, or Nasdaq, listing rules provide that if the closing bid price of a company’s stock is below $1.00 for more than 30 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 our common stock would be delisted from the Nasdaq National Market if we could not demonstrate compliance with NASD rules by July 24, 2002.

On September 4, 2002, the NASD approved our application to transfer our common stock to The Nasdaq SmallCap Market and consequently extended, until October 22, 2002, the period for us to comply with the minimum $1.00 bid per share requirement. Our common stock was moved to The Nasdaq SmallCap Market, effective September 9, 2002. On September 29, 2002, we submitted to Nasdaq a request to grant us an additional 180 calendar-day grace period to demonstrate compliance with Nasdaq continued listing requirements. On October 24, 2002, Nasdaq granted us the 180 day extension or until April 21, 2003. Subsequently, Nasdaq informed us that we met the listing requirements.  However as of June 30, 2003, we have fallen below the minimum stockholders’ equity requirement of $2.5 million for the Nasdaq SmallCap Market’s continued listing requirement. However, we meet an alternative test of having the market value of our securities exceed $35 million. See “— We Implemented A 1-For-4 Reverse Stock Split. The Effect Of A Reverse Split On The Trading Price Of Our Common Stock Is Unpredictable.”

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

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

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

We are unable to predict whether an active trading market will be sustained for the Class A and Class B warrants.  If no active trading market is sustained, holders of the warrants may not be able to resell their warrants at their fair market value or at all.

Any securities firm that acts as a market maker could cease its market making at any time. In addition, the liquidity of the trading market in the warrants, and the market prices quoted for the warrants, may be adversely affected by changes in the overall market conditions and by changes in our financial performance or prospects in the prospects for companies in our industry generally. See “—There Are Limits On Your Ability To Exercise The Warrants And Adverse Effects May Result From The Possible Redemption Of The Warrants.”

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We Implemented A 1-For-4 Reverse Stock Split. The Effect Of A Reverse Split On The Trading Price Of Our Common Stock Is Unpredictable

At our Annual Meeting of Stockholders held on June 17, 2002, our stockholders granted to our Board of Directors the discretion to effect a 1-for-4 reverse stock split. On October 9, 2002, we announced that our Board of Directors had formally declared a 1-for-4 reverse stock split of issued and outstanding shares of our common stock effective as of the open of trading on October 9, 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. There is historical evidence and academic research relating to reverse stock splits which indicates that shares of listed companies do not perform well subsequent to a reverse stock split. It is possible that the post-split trading price of our stock could fall below the level one would expect based on the proportional effect of the split alone.

An Existing Stockholder Directly Owns Approximately 20.3% Of Our Common Stock And Has The Rights To Acquire An Additional 26,772,329 Shares, Of Our Common Stock Which Could Result In Ownership Of Up To Approximately 64.4% Of Our Outstanding Shares And Could Allow Him To Influence Stockholder Votes

Kevin B. Kimberlin, a member of our Board of Directors, together his affiliates and/or related parties currently own of record approximately 20.3% of our outstanding shares of common stock and have the right to acquire through the conversion of notes and exercise of options and warrants beneficially owned by them 26,772,329 additional shares. If the notes, options and warrants were to be converted and exercised in full, Mr. Kimberlin and his affiliates and/or related parties would own approximately 64.4% of our outstanding shares of common stock on a post-conversion/exercised basis. As a result of his ownership of our common stock and the ability to acquire additional shares, Mr. Kimberlin and his affiliates and/or related persons could have the ability to control or influence substantially all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. If your interests as a stockholder are different from his interests, you may not agree with his decisions and you might be adversely affected thereby.

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

The Warrant Terms Were Arbitrarily Determined

The exercise and redemption prices and other terms of the Class A and Class B warrants sold as part of our private offering completed on December 10, 2002, were determined through negotiations between us and our placement agent and do not necessarily bear any relationship to our assets, book value, revenues or financial condition, or to any other recognized criterion of value. Such prices and other terms of the warrants should not be construed to indicate or predict future trading prices of our warrants or common stock in the public markets.

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

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

On July 7, 2003, we raised $9.3 million in gross proceeds through the voluntary exercise of 6,992,236 of our Class A warrants.  The proceeds included $6.9 million in cash and the cancellation of $2.4 million of convertible notes previously issued to Cheshire. We issued an additional 3,496,118 shares equal to one half share of common stock for each Class A warrant exercised as an incentive to induce holders of the Class A warrants to exercise their Class A warrants and to allow us to obtain a “lock-up” on the shares of common stock issued to the holders of such exercised Class A warrants in the December 2002 unit offering and the shares of the common stock issued upon the exercise of the Class A warrants (including the additional one half share of common stock), prohibiting the sale of such common stock for 270 days, with the “lock-up” period expiring on April 4, 2004.

On July 30, 2003, we exercised our option to redeem the remaining outstanding Class A warrants on September 3, 2003. If all the outstanding Class A warrants are exercised, we would receive gross proceeds of approximately

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$3.4 million. We anticipate that the aggregate proceeds from the exercise of the Class A warrants, together with the exercise of the Class A warrants on July 7, 2003, will be sufficient to fund our planned operations, including necessary capital expenditures and new clinical trials, into the first quarter of 2004.

In addition, the Class B warrants are subject to redemption by us, at a price of $0.01 per warrant, following the effectiveness of the Form S-1 and upon at least 30 days prior written notice to the holders of the warrants if the average of the closing bid prices of common stock for any 10 consecutive trading days ending within 30 days prior to the date of the notice of redemption is greater than or equal to $3.32. If the warrants are redeemed, holders of warrants will lose their right to exercise the warrants, except during such 30-day notice of redemption period. Upon the receipt of a notice of redemption of the warrants, the holders will be required to: exercise the warrants and pay the exercise price at a time when it may be disadvantageous or difficult for them to do so; sell the warrants at the then market price when they might otherwise wish to hold the warrants; or accept the redemption price, which is equal to $0.01 per warrant.

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, one of our directors, one of our officers, Agouron Pharmaceuticals, Inc., or Agouron, and one of its officers, as defendants. 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 and a consolidated amended complaint has been filed. We have not yet formally responded to the consolidated amended complaint. 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.

On July 23, 2003 Respimun Associates Ltd., our landlord, filed a complaint against us in Superior Court of California.  The complaint alleges a breach of contract for the payment of rent at our former headquarters facility in Carlsbad, California ($79,385 per month plus late charges and other amounts).  We intend to defend the claim.  However, we have accrued approximately $700,000 to cover a potential settlement.

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

We have had numerous equity transactions that have more likely than not resulted in several changes in ownership of us as defined by Section 382 of the Internal Revenue Code of 1986, as amended, or the Code. Pursuant to Sections 382 and 383 of the Code, the annual use of our net operating losses, or NOLs would be limited if there is a cumulative change of ownership (as that term is defined in Section 382(g) of the Code) of greater than 50% in the past three years. If such Section 382 ownership change occurs, there would be a substantial limitation on our ability to utilize our NOLs to offset future taxable income. As reported in Note 15 to our 2002 Annual Consolidated Financial Statements, we had approximately $218.0 million of NOL carryforwards at such time. We have not completed our analysis if and when change(s) of ownership have occurred, thus, there is uncertainty as to the realizability of our NOL’s. Furthermore, we cannot assure you, however, that we will generate taxable income in the future against which the NOLs could be applied.

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

Pfizer Has Terminated Its Collaboration With Us And We Have Had To Delay Or Abandon The Continued Development And Commercialization Of REMUNE®

We received in July 2001, a letter from Pfizer which indicated that Pfizer had elected to immediately terminate, in their entirety, all of its rights and obligations under our agreement with them. Our agreement with Pfizer permitted this termination and the letter we received from Pfizer provided no explanation as to why Pfizer had elected to exercise its termination right.  In addition, no explanation has been provided to us by Pfizer at any time after the July 2001 termination letter. Although we retained all rights relating to REMUNE® upon Pfizer’s termination, we lost a significant source of funding. Following the termination of our agreement with Pfizer, we decided not to proceed

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with one of our clinical trials of REMUNE® developed by Agouron (subsequently acquired by Pfizer). The termination of this agreement has had, and may continue to have, a material adverse effect on our stock price and, consequently, our ability to successfully raise additional capital.

We May Be Unable To Enter Into Additional Collaborations 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 in the future, or at all, and our current or future collaborative arrangements may not be successful or continue. We also are contemplating a renegotiation of our License and Collaboration Agreement with Trinity. However, we have not yet entered into any significant discussions with Trinity regarding such renegotiation.

Cheshire Associates (an affiliate and/or related person of Mr. Kimberlin) has a perfected security interest in our intellectual property as collateral for the May 2002, November 2002, December 2002, March 2003, May 2003, June 2003 and July 2003 convertible notes. Pursuant to an agreement with Cheshire Associates, we must comply with certain covenants with respect to our intellectual property. The security interests and covenants could impair our ability to enter into collaborative and licensing arrangements.

Our Failure To Develop And Commercialize Products Successfully May Cause Us To Cease Operations

We have not completed the development of any product and, as part of our restructuring program announced in September 2002, have ceased development of all products other than REMUNE®. Our failure to develop and commercialize products successfully may cause us to cease operations. Our potential therapies which were under development prior to September 2002 will require significant additional research and development efforts and regulatory approvals prior to potential commercialization should these development efforts be continued in the future.

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

Prior to the cessation of the development efforts in September 2002, our other therapies and technologies are at earlier stages of development than REMUNE® and may not be shown to be safe or effective and may never 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 shown to be safe or 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 or effective in clinical trials. Approval of the Food and Drug Administration, the FDA, or other regulatory approvals, including export license permissions, may not be obtained and even if successfully developed and approved, our products may not achieve market acceptance. Any products resulting from our programs may not be successfully developed or commercially available for a number of years, if at all.

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

Our Patents And Proprietary Technology May Not Be Enforceable And The Patents And Proprietary Technology Of Others May Prevent Us From Commercializing Products

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

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Cheshire Associates, an entity related to Mr. Kimberlin, has a perfected security interest in our intellectual property as collateral for the May 2002, November 2002, December 2002, March 2003, May 2003, June 2003 and July 2003 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. Also, our patents related to HIV therapy have expiration dates that range from 2010 to 2015 and our patents related to autoimmune diseases have expiration dates that range from 2010 to 2018. The limited duration of our patents could diminish the value of our potential products and processes.

The patent positions of biotechnology and pharmaceutical companies are often highly uncertain and involve complex legal and factual questions. Therefore, the breadth of claims allowed in biotechnology and pharmaceutical patents cannot be predicted. We also rely upon non-patented trade secrets and know how, and others may independently develop substantially equivalent trade secrets or know how. We also rely on protecting our proprietary technology in part through confidentiality agreements with our current and former corporate collaborators, employees, consultants and certain contractors. These agreements may be breached, and we may not have adequate remedies for any such breaches. In addition, our trade secrets may otherwise become known or independently discovered by our competitors. Litigation may be necessary to defend against claims of infringement, to enforce our patents 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 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.

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.  This regulation may delay or prevent us from commercializing products. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, seizure or recall of products, total or partial suspension of product manufacturing and marketing, failure of the government to grant 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, requirements. In complying with the FDA’s GMP requirements, manufacturers must continue to expend time, money and effort in production, record keeping and quality control to assure that products meet applicable specifications and other requirements. Failure to comply and maintain compliance with the FDA’s GMP requirements subjects manufacturers to possible FDA regulatory action and as a result, may have a material adverse effect on us. We, or our contract manufacturers, if any, may not be able to maintain compliance with the FDA’s GMP requirements on a continuing basis. Failure to maintain compliance could have a material adverse effect on us.

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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 also 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 from the FDA of export permission, which may not be available on a timely basis, if at all. Approval procedures vary among countries and can involve additional testing, and the time required to obtain approval may 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.

Specifically, in order for us to export REMUNE® to Thailand for clinical use in that country, we need to meet a number of regulatory requirements. One of those requirements is that we must ensure that we can manufacture REMUNE® at our United States manufacturing facility in a manner that is in “substantial compliance” with current United States GMP requirements. We must provide the FDA with “credible scientific evidence” that REMUNE® would be safe and effective under the conditions of proposed use in Thailand. Furthermore, the Thai FDA must (i) formally request the FDA to approve export of REMUNE® to Thailand, (ii) certify to the FDA that it is aware that REMUNE® is not approved in the United States or in any of several other countries with comprehensive drug review and approval systems and (iii) concur that the scientific evidence presented to the FDA is “credible scientific evidence that REMUNE® will be reasonably safe and effective” for use in Thailand. There can be no assurance, however, that we will successfully meet any or all of these requirements for the export of REMUNE®, and if we are unable to successfully meet all regulatory requirements, we will not be permitted by the FDA to export REMUNE® to Thailand for clinical use, even if the Thai government were to approve REMUNE® for such use. There can be no assurance that Trinity, our collaborative partner, will be successful in its capacity or efforts to obtain regulatory approval from the Thai FDA.

Technological Change And Competition May Render Our Potential Products Obsolete

The pharmaceutical and biotechnology industries continue to undergo rapid change, and competition is intense and 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 or 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, or technologies and products that are more effective and affordable than any that we are developing.

Our Lack Of Commercial Manufacturing And Marketing Experience May Prevent Us From Successfully Commercializing Products

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

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

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

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Our inability or reduced capacity to manufacture our products would prevent us from successfully commercializing our products.

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

Our Other Therapies And Technologies Have Been Halted At Early Stages Of Development, Thus We Are Dependent Upon The Success Of REMUNE®

In September 2002, we announced a restructuring program which includes focusing our core competencies and financial resources on REMUNE®. As part of the restructuring, the development of our other therapies and technologies, which were at earlier stages of development than REMUNE® and have not yet been shown to be safe or effective, has been halted. Our other therapies and technologies might never be fully developed and if they are they might never receive regulatory approval.  Thus, we are completely dependent upon the success of REMUNE® and there can be no assurance that we will be successful in developing or commercializing this product.

Adverse Determinations Concerning Product Pricing, Reimbursement and Related Matters Could Prevent Us From Successfully Commercializing REMUNE® Or Any Of Our Other Products

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

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

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

Product Liability Exposure May Expose Us To Significant Liability

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

If We Lose Our Key Personnel Or Are Unable To Attract And Retain Additional Personnel, We May Be Unable To Successfully Develop Our Technology

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

Additionally, our ability to conduct business, raise additional financing and commercialize REMUNE® or our other products may be hindered if we lose additional executive officers or experienced personnel with historical

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knowledge of our business, transactions, science and technology.  Currently, our most experienced executive officer has been with us for less than one year.

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

Hazardous Materials And Environmental Matters Could Expose Us To Significant Costs

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

Volatility Of Our Stock Price And Absence Of Dividends May Hurt Our Security Holders

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

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

• our financial position and results of operations;

• 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;

• U.S. and foreign governmental regulatory actions;

• actual or anticipated changes in drug reimbursement policies;

• developments with our collaborators;

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

• status of litigation;

A • period-to-period fluctuation in our operating results;

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

• new regulatory requirements and changes in the existing regulatory environment;

• 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 in conformity with accounting principles generally accepted in the United States, or GAAP. GAAP are subject to interpretation by the American Institute of Certified Public Accountants, the SEC 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 the carrying value of long-lived assets, 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. Additionally, certain provisions of the Sarbanes-Oxley Act of 2002 will impact our business. In

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particular, the creation by the SEC of an independent accounting oversight board to oversee and regulate audits will affect us and all public companies.

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. Further, pursuant to the terms of our stockholder rights plan, we have distributed a dividend of one right for each outstanding share of common stock. These rights will cause substantial dilution to the ownership of a person or group that attempts to acquire us on terms not approved by our Board of Directors and may have the effect of deterring hostile takeover attempts. The substantial aggregate equity positions of Mr. Kimberlin and his affiliates and/or related parties would make such hostile takeover attempts very unlikely. The practical effect of these provisions is to require a party seeking control of us to negotiate with our Board of Directors, which could delay or prevent a change in control. These provisions could limit the price that investors might be willing to pay in the future for our securities and make attempts by stockholders to change management more difficult.

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

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

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

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

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 accepting financial statements from a prior period audited by Arthur Andersen for which Arthur Andersen will not reissue an audit report. In that case, we would not be able to access the public capital markets unless another independent accounting firm is able to audit the financial statements originally audited by Arthur Andersen. Any delay or inability to access the public capital markets caused by these circumstances would be disruptive and adversely affect the price and liquidity of our securities and would have a material adverse effect on our business and financial condition.

Item3.Quantitative and Qualitative Disclosures about Market Risk

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

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Item 4.Controls and Procedures

Evaluation of disclosure controls and procedures.  We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.  Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.  The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

Changes in internal control over financial reporting. There were no significant changes in our internal control over financial reporting or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

41

PART II.  OTHER INFORMATION

Item 1.Legal Proceedings

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 by order of the Court and a consolidated amended complaint has been filed. We have not yet formally responded to the consolidated amended complaint.  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.  These proceedings also might require substantial attention of our management team and therefore divert their time and attention from our business and operations.

On July 23, 2003 Respimun Associates Ltd., our landlord, filed a complaint against us in Superior Court of California.  The complaint alleges a breach of contract for the payment of rent at our former headquarters facility in Carlsbad, California ($79,385 per month plus late charges and other amounts).  We intend to defend the claim.  However, we have accrued approximately $700,000 to cover a potential settlement.

Item 2.Changes in Securities and Use of Proceeds

On March 17, 2003, we issued to a consultant for services rendered warrants to purchase up to an aggregate of 50,000 shares of our common stock.  The warrants have an exercise price of $2.50 per share as to 25,000 shares and an exercise price of $3.50 per share as to the remaining 25,000 shares.

On May 9, May 15 and June 6, 2003, we issued to Cheshire Associates LLC, an affiliate of one of our directors and principal stockholder, Mr. Kevin Kimberlin, short-term convertible promissory notes in the aggregate amount of $1.9 million, bearing interest at the rate of 8% per annum.   The notes are convertible into such other securities that we may offer in the future by means of a private placement to accredited investors.  At a special meeting of our stockholders held on July 7, 2003, we received stockholder approval to conduct a private offering of up to $5.0 million of Series A Convertible Preferred Stock.  The holders of shares of our Series A Convertible Preferred Stock will have the right to convert each share of Series A Convertible Preferred Stock into shares of our common stock.  Cheshire Associates may convert all of the convertible promissory notes issued to them between January 1, 2003 and July 7, 2003 into shares of Series A Convertible Preferred Stock.  The Series A Convertible Preferred Stock will receive dividends in preference to any dividend issued to holders of shares of our common stock.  Additionally, the holders of shares of our Series A Convertible Preferred Stock are entitled to liquidation preference.  As of July 31, 2003, we have not commenced the offering.

On June 3, 2003, we issued to Cheshire Associates LLC, 1,613,572 shares of our common stock on conversion of an aggregate of $4.2 million of convertible promissory notes plus interest which were issued to them on November 9, 2001, February 14, 2002 and May 3, 2002, respectively.  Two convertible promissory notes dated as of July 7, 2003 in the amounts of approximately $2.4 million and $1.4 million were issued to Cheshire Associates LLC for the remaining debt and interest owed under the partially converted May 3, 2002 note.  The $2.4 million note was subsequently surrendered for cancellation as payment for the exercise of certain Class A Warrants.   The $1.4 million note bears interest at the rate of 8% per annum and is convertible into 1,006,986 shares of our common stock at a price of $1.457 per share (which was the closing price of our common stock on  May 2, 2003).

On June 23, 2003, we issued 166,665 shares of our common stock as a discount on the loan in connection with a private placement with accredited investors of $1.0 million of short-term unsecured promissory notes. In connection with the private placement, we issued to our placement agents warrants to purchase up to 8,933 shares of our common stock with an exercise price of $2.00 per share.

The issuances of these securities shares were completed in reliance upon the safe harbors provided by Section 4(2) of the Securities Act of 1933.

42

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

On May 20, 2003, the Company held its Annual Meeting of Stockholders.  There were issued and outstanding on April 21, 2003, the record date, 19,670,729 shares of common stock.  There were present at the meeting in person or by proxy, stockholders of the Company who were the holders of 12,603,146 shares of common stock entitled to vote, constituting a quorum.  The following actions were taken at the meeting:

1.The following Class II director was elected:
Alan S. Rosenthal, M.D. 12,488,905 shares were voted in favor of the nominee, 113,742 shares withheld their vote.

2.The adoption of the Company’s 2003 Stock Plan was approved and ratified.  Shares voted for the proposal were 12,282,758, with 281,054 shares voted against, 39,334 shares abstained.

3.The proposal to issue Convertible Notes and Warrants in connection with the Company’s proposed private placement was approved.  Shares voted for the proposal were 6,333,681, with 212,391 shares voted against, 23,780 shares abstained and 6,033,294 were broker non-votes.

4.The selection of BDO Seidman, LLP as the Company’s independent auditors was ratified. Shares voted for the proposal were 12,557,160, with 31,336 shares voted against, 14,650 shares abstained.

On July 7, 2003, the Company held a special meeting of Stockholders.  There were issued and outstanding on June 12, 2003, the record date, 21,284,301 shares of common stock.  There were present at the meeting in person or by proxy, stockholders of the Company who were the holders of 10,858,467 shares of common stock entitled to vote, constituting a quorum.  The following actions were taken at the meeting:

1.An amendment to the Company’s restated Certificate of Incorporation to increase the number of authorized shares of preferred stock was approved. Shares voted for the amendment were 10,674,663, with 164,787 shares voted against, 18,917 shares abstained and 282,586 were broker non-votes.

2.The proposal to revise terms and conditions for certain holders of shares of common stock and Class A warrants of the Company in connection with the Company’s private placement completed in December 2002 was approved. Shares voted for the proposal were 10,701,168, with 132,509 shares against, 24,490 shares abstained and 300 were broker non-votes.

3.The proposal to issue up to $5.0 million shares of Series A Convertible Preferred Stock in connection with the Company’s proposed private placement was approved. The holders will have the right to convert each share into shares of common stock. Shares voted for the proposal were 10,699,904, with 142,273 shares voted against, 16,190 shares abstained and 100 were broker non-votes.

Item 5.Other Information

The Chief Executive Officer and Chief Financial Officer of the Company have certified that the Quarterly Report of the Company and Form 10-Q for the quarterly period ended June 30, 2003 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.

43

Item 6.Exhibits and Reports on Form 8-K

a)Exhibits

Exhibit Number	Description of Document
10.137		Consulting Agreement dated May 30, 2003 by and between the Company,Randall Letcavage and Rosemary Nguyen (1)
10.138		Consultant Agreement dated June 4, 2003 by and between the Company and CEO Cast, Inc. (2)
10.139		8% Convertible Promissory Note dated as of May 9, 2003
10.140		8% Convertible Promissory Note dated as of May 15, 2003
10.141		8% Convertible Promissory Note dated as of June 6, 2003
10.142		Purchase Agreement dated June 23, 2003 by and among the Company and the Investors listed on Exhibit A thereto.
10.143		Registration Rights Agreement dated June 23, 2003 by and among the Company and the Investors listed on Exhibit A to the Purchase Agreement dated June 23, 2003.
10.144		Form of 12% Promissory Note dated June 23, 2003 issued to Investors listed on Exhibit A to the Purchase Agreement dated June 23, 2003.
31.1	Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1	Certification furnished pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification furnished pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)  Incorporated by reference to exhibit 10.1 to the Company’s Registration Statement on Form S-8 filed July 7, 2003

(2)  Incorporated by reference to exhibit 10.2 to the Company’s Registration Statement on Form S-8 filed July 7, 2003

b)Reports on Form 8-K

None

44

SIGNATURE

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

	THE IMMUNE RESPONSE CORPORATION
Date:  August 19, 2003	/s/ Michael L. Jeub
	Michael L. Jeub
	Vice President of Finance and Chief Financial Officer

45

EX-10.139

Exhibit 10.139

THE IMMUNE RESPONSE CORPORATION
8% CONVERTIBLE SECURED PROMISSORY NOTE

$80,000	New York, New York
	May 9, 2003

In consideration of the receipt of $80,000, the undersigned, The Immune Response Corporation, a Delaware corporation (the “Issuer”), hereby unconditionally promises to pay to the order of Cheshire Associates LLC (the “Purchaser”), at the office of the Purchaser located at 535 Madison Avenue, 18^th Floor, New York, New York 10022, or such other address designated by the Purchaser, in lawful money of the United States of America and in immediately available funds, on May 9, 2004 (the “Note Maturity Date”) the principal amount of Eighty Thousand Dollars ($80,000) and accrued interest at the rate of eight (8%) percent per annum based on a 365-day year (“Interest Rate”).

Interest (other than interest accruing as a result of a failure by Issuer to pay any amount when due as set forth below) in respect of the Note shall accrue until all amounts remaining owed under such Note shall be fully repaid, and shall be due and payable in full on the Note Maturity Date.  If all or a portion of the principal amount of the Note or any interest payable thereon shall not be repaid when due whether on the applicable repayment date, by acceleration or otherwise, such overdue amounts on such Note shall bear interest at a rate per annum that is three (3%) percent above the Interest Rate (i.e., 11%) from the date of such non-payment until such amount is paid in full (after as well as before judgment).  All payments to be made by Issuer hereunder or pursuant to the Notes shall be made in lawful money of the United States by certified check or wire transfer in immediately available funds. Any interest accruing on overdue amounts shall be payable on demand.

The obligation to make the payments provided for in this Note are absolute and unconditional, and are not subject to any defense, set-off, counterclaim, rescission, recoupment or adjustment whatsoever.

The obligations under this Note shall be secured by that certain Intellectual Property Security Agreement, dated November 9, 2001, by and between the Issuer and Kevin Kimberlin Partners, L.P., a Delaware limited partnership (“KKP”), as amended by Amendment No. 1, dated February 26, 2002, by and between the Issuer, KKP and Oshkim Limited Partnership (“Oshkim”), and as further amended by Amendment No. 2, dated July 11, 2002, by and between the Issuer, KKP, Oshkim and The Kimberlin Family 1998 Irrevocable Trust (the “Kimberlin Trust”).

This Note (including all accrued and unpaid interest) shall be convertible, at the sole option of the Purchaser, in whole or in part, into shares of the Issuer’s common stock, par value $0.0025 per share (the “Common Stock”), at the closing price of the Common Stock on the date immediately preceding the date hereof (i.e., $1.35).

Upon the occurrence of any one or more of the Events of Default specified on Exhibit A, attached hereto, all amounts then remaining unpaid on this Note and all other promissory notes issued by the Issuer to Purchaser or to any related party of the Purchaser shall become, or may be declared by the Purchaser to be, immediately due and payable.

This Note is freely transferable and assignable, in whole or in part, by the Purchaser, and such transferee or assignee shall have the same rights hereunder as the Purchaser.  The Issuer may not assign or delegate any of its obligations under this Note without the prior written consent of the Purchaser (or its successor, transferee or assignee).

All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind.

The Issuer agrees to pay all of the Purchaser’s expenses, including reasonable attorneys’ costs and fees, incurred in collecting sums due under this Note.

All or part of the Note may be prepaid by Issuer upon at least five (5) days’ prior written notice to the Purchaser thereof; provided, however, that any such prepayment on such Note shall be first applied to accrued and unpaid interest of the outstanding Note and then against its outstanding principal.

This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York.

THE IMMUNE RESPONSE CORPORATION
By:
	Name:
	Title:

2

Exhibit A

Events of Default.

If any of the following events (each, an “Event of Default”) shall occur:

(i)Issuer shall fail to pay any principal or interest on the Note, or on any other promissory note issued by the Issuer to the Purchaser or to any related party of the Purchaser, within three (3) business days after such payment becomes due in accordance with the terms thereof or hereof;

(ii)Any representation or warranty made or deemed made by Issuer herein or in any other agreement, certificate or instrument contemplated by the Note Purchase Agreement, dated as of November 9, 2001, by and between the Issuer and KKP, as amended by Amendment No. 1, dated as of February 14, 2002 and Amendment No. 2, dated as of May 3, 2002, each by and between the Issuer, KKP, and Oshkim and as further amended by Amendment No. 3, dated as of July 11, 2002, by and between the Issuer, KKP, Oshkim and the Kimberlin Trust (the “Agreement”) or that is contained in any certificate, document or financial or other statement furnished by Issuer at any time under or in connection with the Agreement shall have been incorrect in any material respect on or as of the date made or deemed made;

(iii)Issuer shall default, in any material respect, in the observance or performance of any other agreement contained in the Agreement or any other agreement or instrument contemplated by the Agreement (including the Notes, Warrant Agreements, and the Intellectual Property Security Agreement, each as defined in the Agreement), and such default shall continue unremedied for a period of ten (10) days after written notice to Issuer of such default;

(iv)(a)  Issuer shall commence any case, proceeding or other action (x) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, conservatorship or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts or (y) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or Issuer shall make a general assignment for the benefit of its creditors; or (b) there shall be commenced against Issuer any case, proceeding or other action of a nature referred to in clause (a) above that (A) results in the entry of an order for relief of any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of sixty (60) days; or (c) there shall be commenced against Issuer any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distrait or similar process against all or any substantial part of its assets that results in the entry of an order for any such relief that shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof; or (d) Issuer shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clauses (a), (b) or (c) above; or (e) Issuer shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due;

(v) Issuer shall default in the payment of principal on any indebtedness (to any party other than Purchaser) in excess of $200,000 beyond the period of grace, if any, provided in the instrument or agreement under which such indebtedness was created; or

(vi) Issuer shall have been unable to obtain by June 28, 2003 stockholder approval of the Next Issuer Offering and the Purchaser’s participation therein in accordance with Rule 4350(i) of the National Association of Securities Dealers, Inc.;

then, and in any such event, (x) if such event is an Event of Default specified in clause (iv) above of with respect to Issuer, the Note (with all accrued and unpaid interest thereon) and all other amounts owing under the Agreement or under any of the promissory notes issued by the Issuer to the Purchaser or any related party of the Purchaser shall automatically and immediately become due and payable and (y) if such event is any other Event of Default, Purchaser may, by written notice to Issuer, immediately declare the Note (with all accrued and unpaid interest thereon) and all other promissory notes (with all accrued and unpaid interest thereon) issued by the Issuer to the Purchaser or any related party of the Purchaser to be due and payable forthwith, whereupon the same shall immediately become due and payable.  Except as expressly provided above, presentation, demand, protest and all other notices of any kind are hereby expressly waived by Issuer.

EX-10.140

Exhibit 10.140

THE IMMUNE RESPONSE CORPORATION
8% CONVERTIBLE SECURED PROMISSORY NOTE

$1,000,000	New York, New York
	May 15, 2003

In consideration of the receipt of $1,000,000, The Immune Response Corporation, a Delaware corporation (the “Issuer”), hereby unconditionally promises to pay to the order of Cheshire Associates LLC (the “Purchaser”), at the office of the Purchaser located at 535 Madison Avenue, 18^th Floor, New York, New York 10022, or such other address designated by the Purchaser, in lawful money of the United States of America and in immediately available funds, on September 15, 2003 (the “Note Maturity Date”) the principal amount of One Million Dollars ($1,000,000) and all accrued interest at the rate of eight (8%) percent per annum based on a 365-day year (“Interest Rate”).

Interest (other than interest accruing as a result of a failure by Issuer to pay any amount when due as set forth below) in respect of this Note shall accrue until all amounts remaining owed under such Note shall be fully repaid, and shall be due and payable in full on the Note Maturity Date.  If all or a portion of the principal amount of the Note or any interest payable thereon shall not be repaid when due whether on the applicable repayment date, by acceleration or otherwise, such overdue amounts on such Note shall bear interest at a rate per annum that is three (3%) percent above the Interest Rate (i.e., 11%) from the date of such non-payment until such amount is paid in full (after as well as before judgment).  All payments to be made by the Issuer hereunder or pursuant to the Notes shall be made in lawful money of the United States by certified check or wire transfer in immediately available funds. Any interest owing on overdue amounts shall be payable on demand.

The obligation to make the payments provided for in this Note is absolute and unconditional, and is not subject to any defense, set-off, counterclaim, rescission, recoupment or adjustment whatsoever.

The obligations under this Note shall be secured by that certain Intellectual Property Security Agreement, dated November 9, 2001 (the “Security Agreement”), by and between the Issuer and Kevin Kimberlin Partners, L.P., a Delaware limited partnership (“KKP”), as amended by Amendment No. 1, dated February 26, 2002, by and between the Issuer, KKP and Oshkim Limited Partnership (“Oshkim”), and as further amended by Amendment No. 2, dated July 11, 2002, by and between the Issuer, KKP, Oshkim and The Kimberlin Family 1998 Irrevocable Trust.

This Note (including all accrued and unpaid interest) shall become convertible on the terms to be reasonably negotiated in good faith by the Purchaser and the Issuer.

Upon the occurrence of any one or more of the Events of Default specified on Exhibit A attached hereto, all amounts then remaining unpaid on this Note may be declared by the Purchaser to be immediately due and payable.

This Note is freely transferable and assignable, in whole or in part, by the Purchaser, and such transferee or assignee shall have the same rights hereunder as the Purchaser.  The Issuer may not assign or delegate any of its obligations under this Note without the prior written consent of the Purchaser (or its successor, transferee or assignee).

All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind.

The Issuer agrees to pay all of the Purchaser’s expenses, including reasonable attorneys’ costs and fees, incurred in collecting sums due under this Note.

All or part of the Note may be prepaid by Issuer upon at least five (5) days’ prior written notice to the Purchaser thereof; provided, however, that any such prepayment on such Note shall be first applied to accrued and unpaid interest of the outstanding Note and then against its outstanding principal.

This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York.

THE IMMUNE RESPONSE CORPORATION
By:
	Name:
	Title:

2

Exhibit A

Events of Default.

If any of the following events (each, an “Event of Default”) shall occur:

(i)Issuer shall fail to pay any principal or interest on the Note within three (3) business days after such payment becomes due in accordance with the terms thereof or hereof;

(ii)Issuer shall default, in any material respect, in the observance or performance of any other agreement contained in the Security Agreement and such default shall continue unremedied for a period of ten (10) days after written notice to Issuer of such default; or

(iii)(a)  Issuer shall commence any case, proceeding or other action (x) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, conservatorship or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts or (y) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or Issuer shall make a general assignment for the benefit of its creditors; or (b) there shall be commenced against Issuer any case, proceeding or other action of a nature referred to in clause (a) above that (A) results in the entry of an order for relief of any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of sixty (60) days; or (c) there shall be commenced against Issuer any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distrait or similar process against all or any substantial part of its assets that results in the entry of an order for any such relief that shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof; or (d) Issuer shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clauses (a), (b) or (c) above; or (e) Issuer shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due;

then, and in any such event, (x) if such event is an Event of Default specified in clause (iii) above of with respect to Issuer, the Note (with all accrued and unpaid interest thereon) and all other amounts owing under any of the promissory notes issued by the Issuer to the Purchaser or any related party of the Purchaser shall automatically and immediately become due and payable and (y) if such event is any other Event of Default, Purchaser may, by written notice to Issuer, immediately declare the Note (with all accrued and unpaid interest thereon) to be due and payable forthwith, whereupon the same shall immediately become due and payable.  Except as expressly provided above, presentation, demand, protest and all other notices of any kind are hereby expressly waived by Issuer.

EX-10.141

THE IMMUNE RESPONSE CORPORATION

8% CONVERTIBLE SECURED PROMISSORY NOTE

$819,000                                                                                                                 New York, New York

June 6, 2003

In consideration of the receipt of $819,000, The Immune Response Corporation, a Delaware corporation (the “Issuer”), hereby unconditionally promises to pay to the order of Cheshire Associates LLC (the “Purchaser”), at the office of the Purchaser located at 535 Madison Avenue, 18^th Floor, New York, New York 10022, or such other address designated by the Purchaser, in lawful money of the United States of America and in immediately available funds, on October 6, 2003 (the “Note Maturity Date”) the principal amount of $819,000 and all accrued interest at the rate of eight (8%) percent per annum based on a 365-day year (“Interest Rate”).

Interest (other than interest accruing as a result of a failure by Issuer to pay any amount when due as set forth below) in respect of this Note shall accrue until all amounts remaining owed under such Note shall be fully repaid, and shall be due and payable in full on the Note Maturity Date.  If all or a portion of the principal amount of the Note or any interest payable thereon shall not be repaid when due whether on the applicable repayment date, by acceleration or otherwise, such overdue amounts on such Note shall bear interest at a rate per annum that is three (3%) percent above the Interest Rate (i.e., 11%) from the date of such non-payment until such amount is paid in full (after as well as before judgment).  All payments to be made by the Issuer hereunder or pursuant to the Notes shall be made in lawful money of the United States by certified check or wire transfer in immediately available funds. Any interest owing on overdue amounts shall be payable on demand.

The obligation to make the payments provided for in this Note is absolute and unconditional, and is not subject to any defense, set-off, counterclaim, rescission, recoupment or adjustment whatsoever.

The obligations under this Note shall be secured by that certain Intellectual Property Security Agreement, dated November 9, 2001 (the “Security Agreement”), by and between the Issuer and Kevin Kimberlin Partners, L.P., a Delaware limited partnership (“KKP”), as amended by Amendment No. 1, dated February 26, 2002, by and between the Issuer, KKP and Oshkim Limited Partnership (“Oshkim”), and as further amended by Amendment No. 2, dated July 11, 2002, by and between the Issuer, KKP, Oshkim and The Kimberlin Family 1998 Irrevocable Trust.

This Note (including all accrued and unpaid interest) shall become convertible on the terms to be reasonably negotiated in good faith by the Purchaser and the Issuer.

Upon the occurrence of any one or more of the Events of Default specified on Exhibit A attached hereto, all amounts then remaining unpaid on this Note may be declared by the Purchaser to be immediately due and payable.

This Note is freely transferable and assignable, in whole or in part, by the Purchaser, and such transferee or assignee shall have the same rights hereunder as the Purchaser.  The Issuer may not assign or delegate any of its obligations under this Note without the prior written consent of the Purchaser (or its successor, transferee or assignee).

All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind.

The Issuer agrees to pay all of the Purchaser’s expenses, including reasonable attorneys’ costs and fees, incurred in collecting sums due under this Note.

All or part of the Note may be prepaid by Issuer upon at least five (5) days’ prior written notice to the Purchaser thereof; provided, however, that any such prepayment on such Note shall be first applied to accrued and unpaid interest of the outstanding Note and then against its outstanding principal.

This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York.

THE IMMUNE RESPONSE CORPORATION
By:
	Name:
	Title:

2

Exhibit A

Events of Default.

                If any of the following events (each, an “Event of Default”) shall occur:

(i)            Issuer shall fail to pay any principal or interest on the Note within three (3) business days after such payment becomes due in accordance with the terms thereof or hereof;

(ii)           Issuer shall default, in any material respect, in the observance or performance of any other agreement contained in the Security Agreement and such default shall continue unremedied for a period of ten (10) days after written notice to Issuer of such default; or

(iii)          (a)  Issuer shall commence any case, proceeding or other action (x) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, conservatorship or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts or (y) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or Issuer shall make a general assignment for the benefit of its creditors; or (b) there shall be commenced against Issuer any case, proceeding or other action of a nature referred to in clause (a) above that (A) results in the entry of an order for relief of any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of sixty (60) days; or (c) there shall be commenced against Issuer any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distrait or similar process against all or any substantial part of its assets that results in the entry of an order for any such relief that shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof; or (d) Issuer shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clauses (a), (b) or (c) above; or (e) Issuer shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due;

then, and in any such event, (x) if such event is an Event of Default specified in clause (iii) above of with respect to Issuer, the Note (with all accrued and unpaid interest thereon) and all other amounts owing under any of the promissory notes issued by the Issuer to the Purchaser or any related party of the Purchaser shall automatically and immediately become due and payable and (y) if such event is any other Event of Default, Purchaser may, by written notice to Issuer, immediately declare the Note (with all accrued and unpaid interest thereon) to be due and payable forthwith, whereupon the same shall immediately become due and payable.  Except as expressly provided above, presentation, demand, protest and all other notices of any kind are hereby expressly waived by Issuer.

EX-10.142

Exhibit 10.142

PURCHASE AGREEMENT

PURCHASE AGREEMENT (this “Agreement”) is made as of the 23rd day of June 2003, by and between The Immune Response Corporation, a corporation organized under the laws of the State of Delaware (the “Company”), with its principal offices at 5931 Darwin Court, Carlsbad, California 92008, and individuals and entities listed on Exhibit A (the “Purchasers”) who become parties to this Agreement by executing and delivering a financing signature page in the form attached hereto as Exhibit B (the “Financing Signature Page”).

W I T N E S S E T H :

WHEREAS, the Company and each Purchaser are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the provisions of Regulation D (“Regulation D”), as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”) and Section 4(2) of the Securities Act; and

WHEREAS,the Company desires to issue and sell to the Purchasers and the Purchasers desire to purchase, severally and not jointly, 12% promissory notes in the aggregate principal amount of One Million Dollars ($1,000,000), substantially in the form attached to this Agreement as Exhibit C (“Note(s)”) and 166,665 shares of the Company’s common stock (“Common Stock”), par value $0.0025 per share (“Shares”).  The amount of Notes and Shares purchased by each Purchaser is set forth on Exhibit A;

WHEREAS, contemporaneous with the execution and delivery of this Agreement, the Company and the Purchasers are executing and delivering a Registration Rights Agreement, in the form attached hereto as Exhibit D (the “Registration Rights Agreement”), pursuant to which the Company has agreed to provide certain “piggyback” registration rights for the Shares and Contingent Shares (as hereinafter defined) under the Securities Act and the rules and regulations promulgated thereunder, and applicable state securities laws; and

WHEREAS, contemporaneous with the execution and delivery of this Agreement, the Company shall execute an Escrow Agreement, in the form attached hereto as Exhibit E (the “Escrow Agreement”), pursuant to which the Company shall deposit 166,665 shares of its Common Stock representing the number of Pre-Payment Penalty Shares (as hereinafter defined) which may be issued to Purchasers in accordance with the terms of this Agreement.

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows:

SECTION 1. Purchase and Sale of Notes and Shares

1.01Issuance and Sale of the Notes and Shares.  Subject to the terms and conditions of this Agreement, the Purchasers agree to purchase at the Closing (as hereafter defined), and the Company agrees to issue and sell to the Purchasers at the Closing, the Notes and 166,665 Shares,

in the aggregate, of Common Stock for an aggregate purchase price of One Million Dollars ($1,000,000) (the “Purchase Price”).

1.02Terms of the Notes.  The principal of each Note shall bear interest at a rate of twelve (12%) percent per annum (the “Principal Amount”).  The Principal Amount and any accrued but unpaid interest shall become due and payable in one equal payment upon the earlier of: (i) September 30, 2003 or (ii) upon the closing of a sale (or series of related sales) by the Company of its equity securities or warrant exercise resulting in net proceeds to the Company of not less than One Million Three Hundred Thousand Dollars ($1,300,000)(“Maturity Date”).  Interest on the Notes shall be paid monthly.  The Company shall have the right to pre-pay the Principal Amount and any accrued and unpaid interest thereon at any time.  In the event the Notes and any accrued and unpaid interest thereon are not pre-paid on or before July 31, 2003, an additional 166,665 shares, in the aggregate, of Common Stock shall be issued and delivered to the Purchasers on a pro rata basis (“Pre-Payment Penalty Shares”).  If the Principal Amount and/or the interest on the Notes is not paid by the Maturity Date, then the Principal Amount shall bear interest at the annual rate of 18% and all payments of the Principal Amount, accrued interest thereon, and other amounts payable under the Notes, shall be immediately due and payable.  Furthermore, upon such default, an additional 333,330 shares, in the aggregate, of Common Stock shall be issued and delivered to the Purchasers, on a pro rata basis, on the date of default (“Default Shares,” and together with the Pre-Payment Penalty Shares, the “Contingent Shares”).

SECTION 2.    Closing.     At the Closing (as defined in Section 3 hereof), the Company will sell to the Purchasers, and the Purchasers will purchase from the Company, upon the terms and conditions hereinafter set forth, the Notes in the Principal Amounts and the number of Shares set forth on Exhibit A.  The issuance, sale and purchase of the Notes and Shares shall occur at a closing (the “Closing”) to be held at the offices of Littman Krooks LLP, 655 Third Avenue, New York, New York 10016, at such time as may be mutually agreed upon by the Company and the Purchasers, but no later than June 23, 2003.  The date of Closing is hereinafter referred to as the “Closing Date.”

SECTION 3.    Delivery of the Notes and Shares at the Closing. On the Closing Date, the Company shall issue and sell to each Purchaser, and each Purchaser severally (but not jointly) agrees to purchase from the Company, such Notes and Shares for the Purchase Price.  Each Purchaser’s obligation to purchase a Note and Shares hereunder is distinct and separate from each other Purchaser’s obligation to purchase, and no Purchaser shall be required to purchase hereunder more than the amount set forth opposite such Purchaser’s name on Exhibit A hereto, notwithstanding any failure by any other Purchaser to purchase Notes and Shares hereunder, nor shall any Purchaser have any liability by reason of any such failure by any other Purchaser.

At the Closing, the Company shall deliver to each Purchasers one or more stock certificates and a Note registered in the name of such Purchaser, or in such nominee name(s) as designated by such Purchaser in writing, representing the number of Shares and Principal Amount of the Note set forth opposite such Purchaser’s name on Exhibit A hereto and each bearing an appropriate legend indicating that the Notes and Shares were sold in reliance upon the exemptions from registration under the Securities provided by Section 4(2) thereof and Rule 506 thereunder.  The name(s) in which the certificates are to be registered are set forth in the Stock

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Certificate Questionnaire attached hereto as part of Appendix I.  The Company’s obligation to complete the sale of the Notes and Shares and deliver such stock certificate(s) and Notes to the Purchasers at the Closing shall be subject to the following conditions only, any one or more of which may be waived in writing by the Company: (a) the receipt by the Company of same-day funds in the full amount of the purchase price for the Notes and Shares being purchased hereunder and (b) the accuracy of the representations and warranties made herein by the Purchasers as of the date hereof and the fulfillment of the undertakings of the Purchasers set forth in this Agreement to be fulfilled by them prior to the Closing.  The Purchaser’s obligation to accept delivery of such stock and certificate(s) and Notes and to pay for the Notes and Shares evidenced thereby shall be subject to the following conditions only: (a) the accuracy of the representations and warranties made herein by the Company as of the date hereof and as of the Closing Date as if made on such date and (b) the fulfillment of the undertakings of the Company set forth in this Agreement to be fulfilled by it prior to Closing.

SECTION 4.  Representations, Warranties and Covenants of the Company.  The Company hereby represents and warrants to, and covenants with, the Purchasers as follows that, except as disclosed or incorporated by reference in, (i) the SEC Reports (as defined in Section 4.014 hereof) or (ii) the Disclosure Schedule to be delivered by the Company prior to the execution and delivery of this Agreement (the “Disclosure Schedule”):

4.01Organization and Qualification.The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware.  The Company is qualified to do business as a foreign corporation in each jurisdiction in which qualification is required, except where failure to so qualify could not reasonably be expected to have a material adverse effect upon the business, financial condition, properties or operations of the Company taken as a whole (a “Material Adverse Effect”).  The only subsidiaries of the Company are as set forth on Section 4.01 of the Disclosure Schedule.

Section 4.01 of the Disclosure Schedule discloses all Special Purpose Entities (as defined below) owned directly or indirectly, in whole or in part, by the Company or any of its affiliates or in or with respect to which the Company or its affiliates have a direct or indirect business relationship or interest of any kind, in whole or in part, including any equity interest, any leasing relationship, any loan or other financing relationship, any other contractual relationship or any other economic interest, relationship or arrangement of any kind, where such interest or interests are directly or indirectly related to, or part of, the business or the assets owned by or the liabilities of the Company.  Section 4.01 of the Disclosure Schedule hereto separately discloses any guarantees by the Company, its subsidiaries or other affiliates of the liabilities of or with respect to any Special Purpose Entities.  “Special Purpose Entities” has the meaning given that term under U.S. accounting rules governing consolidation, including proposed rules and interpretations of the FASB, such as those contained in guidance (as proposed or as finally adopted) interpreting Statement of Financial Accounting Standard 94, Consolidation of all Majority-Owned Subsidiaries and Accounting Research Bulletin No. 51, Consolidated Financial Statements.

4.02Authorized Capital Stock.     The capitalization of the Company as of March 31, 2003, including the authorized capital stock, the number of shares issued and outstanding, the number of shares issuable and reserved for issuance pursuant to stock option plans, the number

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of shares issuable and reserved for issuance pursuant to securities exercisable for, or convertible into or exchangeable for any shares of capital stock, is set forth in Section 4.02 of the Disclosure Schedule.  All of such outstanding shares of capital stock have been, or upon issuance will be, validly issued, fully paid and nonassessable.  No shares of capital stock of the Company are subject to preemptive rights or any other similar rights of the stockholders of the Company or any liens or encumbrances, pursuant to the Company’s Certificate of Incorporation or bylaws or any agreement to which the Company is a party.  Except as set forth in Section 4.02 of the Disclosure Schedule, as of the date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exercisable or exchangeable for, any shares of capital stock of the Company or any of its subsidiaries, or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries, and (ii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of its or their securities under the Securities Act (except the Registration Rights Agreement).  There are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Shares and/or Contingent Shares, if applicable, in accordance with the terms of this Agreement.  The Company has furnished to each Purchaser or made available to each Purchaser true and correct copies of the Company’s Certificate of Incorporation as in effect on the date hereof, the Company’s By-laws as in effect on the date hereof, and all other instruments and agreements governing securities convertible into or exercisable or exchangeable for capital stock of the Company.  As of the date hereof, 166,665 shares of Common Stock representing the Pre-Payment Penalty Shares shall have been deposited into and held in an escrow account and subject to and in accordance with the terms of that certain Escrow Agreement.  The Pre-Payment Penalty Shares have been duly authorized and, upon release from the escrow account in accordance with the terms of the Escrow Agreement, shall be validly issued, fully paid and nonassessable.

4.03No Other Registration Rights.Except (a) as set forth in Section 4.03 of the Disclosure Schedule and (b) as contemplated by Registration Rights Agreement, no holder of any security of the Company has any demand, “piggy-back” or other right to require the Company to register the sale of any security owned by such holder under the Securities Act or any right to join or participate in any such registration of the Company’s securities (including such registrations contemplated by the Registration Rights Agreement).

4.04Authority.The Company has all requisite corporate power and authority and has all necessary approvals, licenses, permits and authorizations to own, operate or lease its properties and to carry its business as now conducted, except where the failure to have any such approval, license, permit or authorization could not reasonably be expected to have a Material Adverse Effect.

4.05Due Execution, Delivery and Performance of Agreements.The Company has all requisite corporate power and authority to enter into this Agreement and the Notes, the Registration Rights Agreement and the Escrow Agreement (hereinafter collectively referred to as the “Transaction Documents”) and to perform the transactions contemplated hereby and thereby.  As of the date hereof, this Agreement and the Transaction Documents have been duly authorized, executed and delivered by the Company.  The execution, delivery and performance of this

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Agreement and the Transaction Documents by the Company and the consummation of the transactions contemplated hereby and thereby will not (i) violate any provision of the organizational documents of the Company or (ii) result in the creation of any lien, charge, security interest, adverse claim or encumbrance upon any assets or properties of the Company pursuant to the terms or provisions of, or conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under (A) any material agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other material instrument to which the Company is a party or by which the Company or any of its assets or properties may be otherwise bound or affected or (B) any statute or any judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to the Company or any of its properties.  No material consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery of this Agreement or the Transaction Documents or the consummation of the transactions contemplated by this Agreement or the Transaction Documents, except for compliance with the “blue sky” laws and Federal securities laws applicable to the (i) Offering, (ii) resale of the Shares and (iii) the issuance of the Contingency Shares.  Upon the execution and delivery by the Company of this Agreement and the Transaction Documents, and assuming the valid execution and delivery thereof by the Purchasers, this Agreement and the Transaction Documents constitute valid and binding obligations of the Company, enforceable in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ and contracting parties’ rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and except as the indemnification agreements of the Company in Section 7.02 hereof may be held violative of public policy and therefore legally unenforceable.

4.06Accountants.BDO Seidman, LLP, the Company’s independent accountants, are independent accountants as required by the Securities Act and the rules and regulations promulgated thereunder (the “Rules and Regulations”).

4.07No Defaults.Except as set forth in Section 4.07 of the Disclosure Schedule, the Company is not in violation or default of any provision of its Certificate of Incorporation or any provision of its bylaws, and, except for defaults, violations and breaches which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect, it is not in breach of or default with respect to any provision of any agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which it is a party or by which it or any of its assets or properties are bound; and there does not exist any state of fact known to the Company which, with notice or lapse of time or both, would constitute an event of default or breach on the part of the Company as provided in such documents, except such defaults which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

4.08No Actions.Except as set forth in Section 4.08 of the Disclosure Schedule, there are no legal or governmental actions, suits or proceedings pending or threatened in writing to which the Company is a party or of which any property owned or leased by the Company is the subject, which actions, suits or proceedings, individually or in the aggregate, prevent or could

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reasonably be expected to materially and adversely affect the transactions contemplated by this Agreement or the Transaction Documents or to have a Material Adverse Effect; no material labor disturbance by the employees of the Company exists or, to the best knowledge of the Company, is imminent; and the Company is not party to or subject to the provisions of any material injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body.

4.09No Material Change.Except as set forth on Section 4.09 of the Disclosure Schedule, since March 31, 2003, (i) the Company has not incurred any known material liabilities or obligations, indirect or contingent, or entered into any material verbal or written agreement or other transaction which was not in the ordinary course of business or which could reasonably be expected to have a Material Adverse Effect; (ii) the Company has not sustained any material loss or interference with its businesses or properties from fire, flood, windstorm, accident or other calamity not covered by insurance; (iii) the Company has not paid, made or declared any dividends or other distribution with respect to its capital stock; (iv) there has not been any change in the capital stock of the Company or increase in indebtedness material to the Company; and (v) the Company has not incurred or sustained any other event or change that could reasonably be expected to have a Material Adverse Effect.

4.010Intellectual Property.

(a)Except as set forth on Section 4.010 of the Disclosure Schedule, the Company has ownership, license or legal right to use all material patent, copyright, trade secret and trademark rights necessary to the conduct of the business of the Company as now conducted (collectively, “Intellectual Property”), other than intellectual property generally available on commercial terms from other sources.

(b)All material licenses or other material agreements under which (i) the Company is granted rights in Intellectual Property, other than intellectual property generally available on commercial terms from other sources, or (ii) the Company has granted rights to others in Intellectual Property owned or licensed by the Company, are in full force and effect and there is no material default or breach thereof by the Company or, to the best knowledge of the Company, any other party thereto.

(c)The Company has taken all steps reasonably required in accordance with sound business practice and business judgment to establish and preserve its ownership of all material patent, copyright, trade secret and other proprietary rights with respect to its operations, product developments, projects and technology.

(d)The business, activities and products of the Company do not materially infringe any intellectual property of any other person. The Company is not, to its best knowledge, making unauthorized use of any confidential information or trade secrets of any other person. The activities of the Company and, to its best knowledge, any of its employees on behalf of the Company do not violate any material agreements or material arrangements which the Company has with other persons.

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(e)There is not pending or, to the Company’s best knowledge, threatened any claim, suit or action against the Company contesting or challenging the rights of the Company in or to any Intellectual Property or the validity of any of the Intellectual Property.

(f)To the Company’s best knowledge, there is no infringement upon or unauthorized use by any third party of any of the Intellectual Property.

4.011Compliance.The Company is in compliance in all material respects with all applicable laws, rules and regulations of the jurisdictions in which it is conducting its business. Except as set forth in Section 4.011 of the Disclosure Schedule, the business, activities and operations of the Company are in compliance in all material respects with the Good Manufacturing Practice regulations issued by the United States Food and Drug Administration.

4.012Transaction Documents.The Company has not distributed and will not distribute prior to the Closing Date any material in connection with the sale of the Notes and Shares.  The Company has not in the past nor will it hereafter take any action to sell, offer for sale or solicit offers to buy any securities of the Company which cause the offer, issuance or sale of the Notes or Shares, as contemplated by this Agreement and the Transaction Documents to fail to qualify for the exemptions of Section 4 of the Securities Act.

4.013Contributions.The Company has not at any time, directly or indirectly, (i) made any unlawful contribution to any candidate for public office or made and/or failed to disclose any contribution in violation of law or (ii) made any payment to any Federal or State governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof or any foreign country.

4.014SEC Reports; Financial Statements.   The Company has filed all reports required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law to file such material) (the foregoing materials being collectively referred to herein as the “SEC Reports” and, together with the Disclosure Schedule the “Disclosure Materials”) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension.  As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.  All material agreements to which the Company is a party or to which the property or assets of the Company are subject have been filed as exhibits to the SEC Reports to the extent required.  The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing.  Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements or the notes thereto, and fairly present in all material respects the financial position of

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the Company and its consolidated subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.  Except as set forth on Disclosure Schedule or except as specifically disclosed in the SEC Reports, since March 31, 2003 (a) there has been no event, occurrence or development that has had or that could reasonably be expected to have or result in a Material Adverse Effect, (b) the Company has not incurred any liabilities (contingent or otherwise) other than (x) liabilities incurred in the ordinary course of business consistent with past practice and (y) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (c) the Company has not altered its method of accounting or the identity of its auditors and (d) the Company has not declared or made any payment or distribution of cash or other property to its stockholders or officers or directors (other than in compliance with existing Company stock or stock option plans) with respect to its capital stock, or purchased, redeemed (or made any agreements to purchase or redeem) any shares of its capital stock.

4.015Legal Opinion.The Company shall have used its best efforts to deliver to the Purchasers a signed opinion of counsel to the Company, dated as of the Closing Date, in form and substance reasonably satisfactory to the Lenders.

4.016Certificate.At the Closing, the Company will deliver to the Purchasers a certificate executed by the Chairman of the Board or President and the chief financial or accounting officer of the Company (solely in their respective capacities as such), dated the Closing Date, in form and substance reasonably satisfactory to the Purchasers, to the effect that the representations and warranties of the Company set forth in this Section 4 were true and correct in all material respects (other than representations and warranties that contain materiality or knowledge standards or qualifications, which representations and warranties shall be true and correct in all respects), as of the date of this Agreement and that the Company has complied in all material respects with all the agreements and satisfied all the conditions herein on its part to be performed or satisfied on or prior to such Closing Date.

4.017Escrow Agreement. At the Closing, the Company shall have executed and delivered the Escrow Agreement and made a copy thereof available to the Purchaser.

4.018No Material, Non-public Information.At the time of the announcement of the transaction contemplated by the Transaction Documents, as it may be amended will include no material non-public information with respect to the Company.

SECTION 5.    Representations, Warranties and Covenants of the Purchasers.

(a)Each Purchaser represents and warrants to, and covenants with, the Company that: (i) such Purchaser is knowledgeable, sophisticated and experienced in making, and is qualified to make, decisions with respect to investments representing an investment decision like that involved in the purchase of the Notes and Shares and has requested, received, reviewed and considered all information it deems relevant in making an informed decision to purchase the Notes and Shares; (ii) such Purchaser is acquiring the Notes and Shares as set forth in Section 2 above in the ordinary course of its business and for its own account for investment only and with no present intention of distributing any Notes or Shares or any arrangement or understanding

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with any other persons regarding the distribution of such Notes and Shares (this representation and warranty not limiting each Purchaser’s right to resell pursuant to the Registration Statement or, other than with respect to any claims arising out of a breach of this representation and warranty, such Purchaser’s right to indemnification under Section 7.02 hereof); (iii) each Purchaser will not, directly or indirectly, offer, sell, pledge, sell short, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Shares or Contingent Shares, if applicable, except in compliance with each of the Securities Act, the Exchange Act, the Rules and Regulations and the provisions hereof and all other applicable laws; (iv) each Purchaser has completed or caused to be completed the Registration Statement Questionnaire attached hereto as part of Appendix I for use in preparation of the Registration Statement, and the answers thereto are true and correct as of the date hereof and will be true and correct as of the effective date of the Registration Statement and the Purchasers will notify the Company immediately of any material change in any such information provided in the Registration Statement Questionnaire occurring prior to the sale by it of all of the Shares and/or Contingent Shares, if any; and (v) each Purchaser has, in connection with its decision to purchase the Notes and Shares as set forth in Section 2 above, relied solely upon the representations and warranties of the Company contained herein.

(b)Each Purchaser understands that the Shares are being offered and sold to it in reliance upon specific exemptions from the registration requirements of the Securities Act, the Rules and Regulations and state securities laws and that the Company is relying upon the truth and accuracy of, and each Purchaser’s compliance with, the representations, warranties, agreements, acknowledgments and agreements of the Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of the Purchaser to acquire the Shares.

(c)Until the Company publicly announces that this Agreement and the Transaction Documents have been entered into, each Purchaser agrees with the Company to keep strictly confidential all information concerning this Agreement, the Transaction Documents and the transactions contemplated hereby and thereby.  Each Purchaser understands that the information contained in the Transaction Documents is strictly confidential and proprietary to the Company and has been prepared, in large part, from the Company’s publicly available documents and other information and is being submitted to each Purchaser solely for such Purchaser’s confidential use.  Each Purchaser hereby acknowledges that it is prohibited from reproducing and/or distributing the Transaction Documents, or any other offering materials or other information provided by the Company in connection with such Purchaser’s consideration of its investment in the Company, in whole or in part, or divulging or discussing any of their contents to third parties.  Further, each Purchaser understands that the existence and nature of all conversations and presentations, if any, regarding the Company and the Transaction Documents must be kept strictly confidential.  Each Purchaser understands that Federal securities laws impose restrictions on trading based on information regarding the transactions contemplated by the Transaction Documents.  In particular, each Purchaser hereby acknowledges that disclosure of information regarding the transaction contemplated in the Transaction Documents may cause the Company to violate Regulation FD and agrees not to engage in any such unauthorized disclosure.  The restrictions in this subsection shall cease upon the Company’s public announcement that the Transaction Documents have been entered into.

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(d)Each Purchaser understands that its investment in the Notes and Shares involves a significant degree of risk and uncertainty and that the market price of the Common Stock has been and may continue to be volatile and that no representation or warranty is being made as to the future value or trading volume of the Common Stock.  In addition, each Purchaser understands that there is no assurance that the Company will satisfy the criteria for continued quotation of the Common Stock on The Nasdaq Stock Market.  Each Purchaser has the knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Notes and Shares and has the ability to bear the full economic risks of an investment in the Notes and Shares.  Each Purchaser is not relying on the Company or any of its employees, representatives or agents with respect to the legal, tax, economic and related considerations as to an investment in the Notes and Shares, and each Purchaser has relied on the advice of, or has consulted with, only its own advisors.

(e)Each Purchaser understands that no United States Federal or state agency or any other governmental agency has passed upon or made any recommendation or endorsement of any of the Notes, Shares and/or Contingent Shares, if any.

(f)Each Purchaser understands that, until such time as a Registration Statement (as defined in the Registration Rights Agreement) has been declared effective or the Shares and/or Contingent Shares, if any, may be sold pursuant to Rule 144(k) under the Securities Act without any restriction as to the number of securities as of a particular date that can then be immediately resold, the Shares and/or Contingent Shares, if any, shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for the securities comprising the Shares and/or Contingent Shares, if applicable):

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144(K) UNDER SAID ACT.

The Purchasers also understand that, until such time as the shares of Common Stock comprising the Shares and/or Contingent Shares, if any, may be sold in accordance with Section 5(h) below, such shares of Common Stock also shall bear an additional restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for the shares of Common Stock comprising the Shares and/or Contingent Shares, if any):

THE TRANSFER OR SALE OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS OF A PURCHASE AGREEMENT, INCLUDING SECTION 5(H) THEREOF, DATED AS OF JUNE 23, 2003, A COPY OF WHICH IS ON FILE AT THE OFFICE OF THE COMPANY.

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(g)Each Purchaser’s principal executive office or residence is in the jurisdiction set forth immediately below such Purchaser’s name on the signature page hereto.

(h)Each Purchaser hereby covenants with the Company not to make any resale or other disposition of any of the Shares and/or Contingent Shares, if any, without complying with the provisions of this Agreement and the Transaction Documents and without effectively causing any prospectus delivery requirement under the Securities Act to be satisfied, and each Purchaser acknowledges and agrees that such Shares and/or Contingent Shares, if any, are not transferable on the books of the Company unless the certificate submitted to the transfer agent evidencing the Shares and or Contingent Shares, if applicable, is accompanied by a separate Purchaser’s Certificate of Subsequent Sale: (i) in the form of Appendix III hereto, (ii) executed by each Purchaser (if a natural person) or, if not, by an officer of, or other authorized person expressly designated by, such Purchaser and (iii) to the effect that (A) the Shares and/or Contingent Shares, if any, have been sold in accordance with the Registration Statement or a valid exemption from registration under the Securities Act and any applicable State securities or “blue sky” laws and (B), if applicable, the requirement of delivering a current prospectus has been satisfied.

Subject, and in addition, to the preceding paragraph, each Purchaser hereby covenants with the Company not to make any resale or other disposition of any Shares and/or Contingent Shares, if any, prior to such time that a Registration Statement may become effective under the Securities Act unless (i) such sale is made pursuant to a valid exemption from registration under the Securities Act, (ii) the transferee or assignee thereof shall agree in writing also to be bound by all of the provisions of this Agreement, (iii) each Purchaser agrees in writing with the transferee or assignee to assign its rights under this Agreement and copies of such agreements are furnished to the Company after such assignment, (iv) the Company is furnished with written notice of the name and address of such transferee or assignee, (v) the certificate submitted to the transfer agent evidencing the Shares and/or Contingent Shares, if any, is accompanied by a separate Purchaser’s Certificate of Subsequent Sale: (a) in the form of Appendix III hereto, (b) executed by such Purchaser (if a natural person) or, if not, by an officer of, or other authorized person expressly designated by, such Purchaser and (c) to the effect that the Shares and/or Contingent Shares, if any, have been sold in accordance with a valid exemption from registration under the Securities Act and any applicable State securities or “blue sky” laws, (vi) each Purchaser shall have complied with all applicable provisions of this Agreement and Transaction Documents relating to any resale of any Shares and/or Contingent Shares, if any, (vii) following such transfer or assignment, the further disposition of such securities by the transferee or assignee is restricted under the Securities Act and applicable state securities laws and (viii) if reasonably requested by the Company, each Purchaser shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of the Shares and/or Contingent Shares, if applicable, under the Securities Act.

Each Purchaser acknowledges that there may occasionally be times when the Company must suspend the use of the prospectus forming a part of either of the Registration Statement (a “Suspension”) until such time as an amendment to the Registration Statement has been filed by the Company and declared effective by the Commission, or until such time as the Company has filed an appropriate report with the Commission pursuant to the Exchange Act or appropriately supplemented the prospectus forming a part of the Registration Statement. Each Purchaser

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hereby covenants that it will not sell any Shares and/or Contingent Share, if any, pursuant to said prospectus during the period commencing at the time at which the Company gives each Purchaser written notice of the Suspension of the use of said prospectus and ending at the time the Company gives the Purchaser written notice that the Purchaser may thereafter effect sales pursuant to said prospectus, except as permitted in Section 7.02(c) hereof; provided, however, that the Purchaser shall be in compliance with the provisions contained in Section 7.02(b) hereof, and provided further that the Company will use its commercially reasonable efforts to cause the prospectus so suspended to be promptly resumed.

(i)Each Purchaser further represents and warrants to, and covenants with, the Company that (i) each Purchaser has full right, power, authority and capacity to enter into this Agreement and to consummate the transactions contemplated hereby and thereby and has taken all necessary action to authorize the execution, delivery and performance of this Agreement and the Transaction Documents, and (ii) upon the execution and delivery by each Purchaser of this Agreement, this Agreement shall constitute legal, valid and binding obligations of each Purchaser, enforceable in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ and contracting parties’ rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and except as the indemnification agreements of such Purchaser contained in Section 7.03 hereof may be held violative of public policy and legally unenforceable.

(j) Each Purchaser: (i) if a natural person, represents that such Purchaser has reached the age of 21 and has full power and authority to execute and deliver this Agreement and all other related agreements or certificates and to carry out the provisions hereof and thereof; (ii) if a corporation, partnership, limited liability company or partnership, association, joint stock company, trust, unincorporated organization or other entity, represents that such entity was not formed for the specific purpose of acquiring the Notes and Shares, such entity is duly organized, validly existing and in good standing under the laws of the state of its organization, the consummation of the transactions contemplated hereby is authorized by, and will not result in a violation of state law or its charter or other organizational documents, such entity has full power and authority to execute and deliver this Agreement and all other related agreements or certificates and to carry out the provisions hereof and thereof and to purchase and hold the securities constituting the Notes and Shares, the execution and delivery of this Agreement has been duly authorized by all necessary action, this Agreement has been duly executed and delivered on behalf of such entity and is a legal, valid and binding obligation of such entity; or (iii) if executing this Agreement in a representative or fiduciary capacity, represents that it has full power and authority to execute and deliver this Agreement in such capacity and on behalf of the subscribing individual, ward, partnership, trust, estate, corporation, limited liability company or limited liability partnership, or other entity for whom the Purchaser is executing this Agreement, which execution shall not result in a violation of any document creating Purchaser’s representative or fiduciary capacity, and such individual, ward, partnership, trust, estate, corporation, limited liability company or partnership, or other entity has full right and power to perform pursuant to this Agreement and make an investment in the Company, and that this Agreement constitutes a legal, valid and binding obligation of such entity. The execution, delivery and performance of this Agreement will not violate or be in conflict with any order,

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judgment, injunction, law, rule, regulation, agreement or controlling document to which each Purchaser is a party or by which it is otherwise bound.

(j)Such Purchaser is unaware of, is no way relying on, and did not become aware of the investment contemplated by the Notes or the Agreement through or as a result of, any form of general solicitation or general advertising including, without limitation, any article, notice, advertisement or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, in connection with the investment contemplated by the notes or the Agreement and is not purchasing the Notes, Shares or Contingency Shares, and did not become aware of the investment contemplated by the notes or the Agreement, through or as a result of any seminar or meeting to which the Purchaser was invited by, or any solicitation of a subscription by, a person not previously known to the Purchaser in connection with investments in securities generally.

(k) Such Purchaser is not an affiliate (as such term is defined in Rule 12(b)(ii) under the Exchange Act) of any director or officer of the Company for purposes of Rule 4350(i)(1)(A) of the NASD, Inc. Marketplace Rules.

SECTION 6. Survival of Representations, Warranties and Agreements.Notwithstanding any investigation made by any party to this Agreement, all covenants, agreements, representations and warranties made by the Company and the Purchaser herein and in the certificates delivered pursuant hereto shall survive the Closing, the delivery to the Purchaser of the Notes and Shares being purchased and the payment therefor; provided, however, that the representations and warranties of the Company contained in Section 4 hereof (other than Section 4.012, which shall survive indefinitely) shall terminate on June 23, 2004.

SECTION 7.Registration of the Shares and/or Contingent Shares; Compliance with the Securities Act. The Purchasers are entitled to certain “piggy-back” registration rights for the Shares and/or Contingent Shares, if applicable, which are more fully set forth in that certain registration rights agreement between the Company and the Purchasers of even date herewith (the “Registration Rights Agreement”).

7.01 Transfer of Shares and/or Contingent Shares Before and After Effectiveness of a Registration Statement.

(a)Each Purchaser agrees that it will not effect any resale or other disposition of any Shares or Contingent Shares, if applicable, or its right to purchase Shares and/or Contingent Shares, if any, that would constitute a sale within the meaning of the Securities Act unless the Purchaser effects such resale or other disposition in accordance with Section 5(h) hereof.  If each Purchaser continues to hold any of the Shares and/or Contingent Shares, if any, after a Registration Statement shall become effective, such Purchaser will promptly notify the Company in writing of any changes or additions to the information set forth in such Registration Statement regarding such Purchaser or its plan of distribution or disposition.  The foregoing obligation shall cease when for each Purchaser when such Purchaser shall have disposed of all of its Shares and/or Contingent Shares, if any.

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(b)  Notwithstanding any other provisions of this Agreement, the Purchasers shall not be prohibited from selling securities under the Registration Statement as a result of Suspensions on more than two occasions of not more than 20 days each in any 12-month period, unless, in the good faith judgment of the Company’s Board of Directors, upon advice of counsel, the sale of Shares and/or Contingent Shares, if any, under the Registration Statement in reliance on this paragraph would be likely to cause a violation of the Securities Act or the Exchange Act and result in liability to the Company.

7.02Indemnification. For the purpose of this Section 7.02:

(i) the term “Purchaser/Affiliate” shall mean any affiliate of the Purchasers and any person who controls any Purchaser or any affiliate of any Purchaser within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act; and

(ii) the term “Registration Statement” shall include any final prospectus, exhibit, supplement or amendment included in or relating to, and any document incorporated by reference in, the Registration Statement.

(a)The Company agrees to indemnify and hold harmless, and pay and/or reimburse, each of the Purchasers and each Purchaser/Affiliate, against any losses, claims, damages, liabilities or expenses, to which such Purchasers or such Purchaser/Affiliates may become subject, under the Securities Act, the Exchange Act, or any other Federal or state law or regulation, at common law or otherwise (including in settlement of any claims or litigation, if such settlement is effected with the written consent of the Company), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in either of the Registration Statement, as amended at the time of effectiveness of the Registration Statement, including any information deemed to be a part thereof as of the time of effectiveness pursuant to paragraph (b) of Rule 430A, or pursuant to Rule 434, of the Rules and Regulations, or the prospectus, in the form first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations, or filed as part of either of the Registration Statement at the time of effectiveness if no Rule 424(b) filing is required (the “Prospectus”), or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state in any of them a material fact required to be stated therein or necessary to make the statements in the Registration Statement or any amendment or supplement thereto not misleading or in the Prospectus or any amendment or supplement thereto not misleading in the light of the circumstances under which they were made, or arise out of or are based in whole or in part on any material inaccuracy in the representations and warranties of the Company contained in this Agreement or the Transaction Documents, or any failure of the Company to perform in all material respects its obligations hereunder or under law, and will reimburse each Purchaser and each such Purchaser/Affiliate for any legal and other expenses as such expenses are reasonably incurred by such Purchaser or such Purchaser/Affiliate in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon (i) an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, the Prospectus or any amendment or supplement thereto in reliance

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upon and in conformity with written information furnished to the Company by or on behalf of the Purchaser expressly for use therein, (ii) the failure of such Purchaser to comply with the covenants and agreements contained in this Agreement (including, without limitation, Section 5(h) hereof and the Registration Rights Agreement hereof in respect of the resale of Shares and/or Contingent Shares, if any) or to perform its obligations under law, (iii) the inaccuracy of any representations or warranties made by such Purchaser in this Agreement or (iv) any statement or omission in any Prospectus or any amendment or supplement thereto that is corrected in any subsequent Prospectus or any amendment or supplement thereto that was delivered to the Purchaser reasonably prior to the pertinent sale or sales by the Purchaser.

(b)Each Purchaser will severally, but not jointly, indemnify and hold harmless, and pay and/or reimburse, the Company, each of its directors, each of its officers who signed a Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, claims, damages, liabilities or expenses to which the Company, each of its directors, each of its officers who signed a Registration Statement or controlling person may become subject, under the Securities Act, the Exchange Act, or any other Federal or state law or regulation, at common law or otherwise (including in settlement of any claim or litigation, if such settlement is effected with the written consent of such Purchaser), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon (i) any failure by the Purchaser to comply with the covenants and agreements contained in this Agreement (including Section 5(h) hereof in respect of the resale of Shares and/or Contingent Shares, if any) or the Registration Rights Agreement or to perform its obligations under law, (ii) the inaccuracy of any representations or warranties made by such Purchaser herein or (iii) any untrue or alleged untrue statement of any material fact contained in a Registration Statement, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements in a Registration Statement or any amendment or supplement thereto not misleading or in the Prospectus or any amendment or supplement thereto not misleading in the light of the circumstances under which they were made, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in a Registration Statement, the Prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by the Purchaser expressly for use therein, and will reimburse the Company, each of its directors, each of its officers who signed a Registration Statement or controlling person for any legal and other expense reasonably incurred by the Company, each of its directors, each of its officers who signed the Registration Statement or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. Notwithstanding any other provisions of this Section 7.02(b), no Purchaser shall be required to indemnify any party in excess of the gross proceeds paid by such Purchaser for Notes and Shares purchased pursuant to its respective Agreement or if the Purchaser shall resell Shares and/or Contingent Shares, if any, pursuant to a Registration Statement, if greater, the net proceeds received by the Purchaser from those resales.

(c)  Promptly after receipt by an indemnified party under this Section 7.02 of notice of the threat or commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 7.02, promptly notify the

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indemnifying party in writing thereof; however, the failure to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise under this Section 7.02 to the extent the indemnifying party is not prejudiced as a result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party and, after notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense thereof, the Indemnifying Party shall not be liable to such Indemnified Party for any fees of counsel or any other expenses, in each case subsequently incurred by such Indemnified Party in connection with the defense thereof; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and, based upon the advice of such indemnified party’s counsel, the indemnified party shall have reasonably concluded that there may be a conflict of interest between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties.

If the indemnifying party elects to compromise or defend an asserted liability, it shall promptly, but in any event within ten (10) days (or sooner, if the nature of the asserted liability so requires), notify the indemnified party of its intent to do so, and the indemnified party shall reasonably cooperate, at the request and reasonable expense of the indemnifying party, in the compromise of, or defense against, such asserted liability. The indemnifying party will not be released from any obligation to indemnify the indemnified party hereunder with respect to a claim without the prior written consent of the indemnified party, unless the indemnifying party delivers to the indemnified party a duly executed agreement settling or compromising such claim with no monetary liability to or injunctive relief against the indemnified party and a complete release of the indemnified party with respect thereto. The indemnifying party shall have the right, except as provided below in this subsection, to conduct and control the defense of any third-party claim made for which it has been provided notice hereunder. Upon receipt of written notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and reasonable approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 7.02 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso to the preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel, representing the indemnified parties who are parties to such action, plus local counsel, if appropriate) or (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of action, in each of which cases the reasonable fees and expenses of counsel shall be at the expense of the indemnifying party.

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(d)If the indemnification provided for in this Section 7.02 is required by its terms but is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party under subsections (a) or (b) of this Section 7.02 in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each applicable indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of any losses, claims, damages, liabilities or expenses referred to herein (i) in such proportion as is appropriate to reflect the relative economic benefits received by the Company and the Purchaser from the placement of the Notes and Shares contemplated by this Agreement or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but the relative fault of the Company and the Purchaser in connection with the statements or omissions or inaccuracies in the representations and warranties in this Agreement or the Transaction Documents that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations.  The relative benefits received by the Company, on the one hand, and each Purchaser, on the other, shall be deemed to be in the same proportion as the amount paid by such Purchaser to the Company pursuant to this Agreement for the Shares purchased by such Purchasers that are resold pursuant to the Registration Statement bears to the difference (the “Difference”), if any, between the amount such Purchaser paid for the Shares, that are sold pursuant to a Registration Statement and the amount received by such Purchaser from such resale.  The relative fault of the Company, on the one hand, and each Purchaser, on the other, shall be determined by reference to, among other things, whether the untrue or alleged statement of a material fact or the omission or alleged omission to state a material fact or the inaccurate or the alleged inaccurate representation and/or warranty relates to information supplied by the Company or by such Purchaser and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission and/or its distribution. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in subsection (c) of this Section 7.02, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in subsection (c) of this Section 7.02 with respect to the notice of the threat or commencement of any action shall apply if a claim for contribution is to be made under this subsection (d); provided, however, that no additional notice shall be required with respect to any threat or action for which notice has been given under subsection (c) for purposes of indemnification. The Company and the Purchaser agree that it would not be just and equitable if contribution pursuant to this Section 7.02 were determined solely by pro rata allocation (even if the Purchaser were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this paragraph. Notwithstanding the provisions of this Section 7.02, no Purchaser shall be required to contribute any amount in excess of the amount by which the Difference exceeds the amount of any damages that such Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Purchasers’ obligations to contribute pursuant to this Section 7.02 are several and not joint.

7.03Termination of Conditions and Obligations.    The restrictions imposed by Section 5(h) hereof and this Section 7 upon the transferability of the Shares and/or Contingent

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Shares, if any, shall cease and terminate as to any particular number of the Shares and/or Contingent Shares, if any, upon (i) the passage of two (2) years from the date of their issuances, (ii) such time as they become eligible for sale pursuant to Rule 144(k) under the Securities Act or another similar exemption under the Securities Act or (iii) or at such time as an opinion of counsel reasonably satisfactory in form and substance to the Company shall have been rendered to the effect that such conditions are not necessary in order to comply with the Securities Act.

7.04Information Available.So long as a Registration Statement is effective covering the resale of Shares and/or Contingent Shares, if any, owned by the Purchaser, the Company will furnish or otherwise make available to the Purchasers:

(a)as soon as practicable after available one copy of (i) its Annual Report to Stockholders (which Annual Report shall contain financial statements audited in accordance with U.S. generally accepted accounting principles by a national firm of certified public accountants), (ii) if not included in substance in the Annual Report to Stockholders, upon the request of the Purchaser, its Annual Report on Form 10-K, (iii) upon the request of the Purchaser, its Quarterly Reports on Form 10-Q, (iv) upon the request of the Purchaser, its Current Reports on Form 8-K, (v) upon the request of the Purchaser, its Notice of Annual Meeting of Shareholders and proxy statement for the Company’s annual meeting and (vi) a full copy of the particular Registration Statement covering the Shares and/or Contingent Shares, if any, (the foregoing, in each case, excluding exhibits);

(b)upon the request of the Purchaser, all exhibits in the form filed with the Commission excluded by the parenthetical to Section 7.04(a)(vi); and

(c)upon the request of the Purchaser, a reasonable number of copies of the prospectuses to supply to any other party requiring such prospectuses;

and the Company, upon the reasonable request of the Purchaser, will meet with the Purchaser or a representative thereof at the Company’s headquarters to discuss information relevant for disclosure in such Registration Statement covering the Shares and/or Contingent Shares, if any, and will otherwise reasonably cooperate with any Purchaser conducting an investigation for the purpose of reducing such Purchaser’s exposure to liability under the Securities Act, including the reasonable production of information at the Company’s headquarters during normal business hours, subject to appropriate confidentiality limitations.

7.5Compliance with the Sarbanes-Oxley Act of 2002.The Company shall comply with all applicable requirements and prohibitions under the Sarbanes-Oxley Act of 2002.

SECTION 8.The Company and the Purchasers appoint Computershare Trust Company, Inc. to act as the as their escrow agent to hold and to release the Pre-Payment Penalty Shares on the terms and conditions set forth in the Escrow Agreement.

SECTION 9.   Notices.      All notices, requests, consents and other communications hereunder shall be in writing, shall be mailed by first-class registered or certified mail, confirmed facsimile or nationally recognized overnight express courier postage prepaid, and shall be deemed given when so mailed and shall be delivered as addressed as follows:

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	if to the Company, to:
(a)
	The Immune Response Corporation 5931 Darwin Court Carlsbad, California 92008 Attention: President Facsimile: (760) 431-8636
	with a copy to:
	Pillsbury Winthrop LLP 50 Fremont Street San Francisco, CA 94105-2228 Attention: Thomas E. Sparks, Jr., Esq. Facsimile: (415) 983-1200

or to such other person at such other place as the Company shall designate to the Purchasers in writing; and

(b)if to the Purchasers, at addresses as set forth at the end of this Agreement, or at such other address or addresses as may have been furnished to the Company in writing.

SECTION 10.Changes.This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and holders of a majority in interest of the outstanding Notes.

SECTION 11.Headings.The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement.

SECTION 12.Severability.In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.

SECTION 13.Governing Law.This Agreement shall be governed by and construed in accordance with the laws of the State of New York.

SECTION 14.Counterparts.This Agreement may be executed in two or more counterparts, each of which shall constitute an original, and all of which, when taken together, shall constitute one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. Facsimile signatures shall be deemed original signatures.

SECTION 15.Entire Agreement.This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the

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Company nor the Purchaser makes any representation, warranty, covenant or undertaking with respect to any such matters.

SECTION 16.Third Party Beneficiaries.Subject to Section 7.03 hereof, this Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

SECTION 17.Interpretation.  The use herein of the masculine, feminine or neuter forms shall also denote the other forms, as in each case the context may require.

SECTION 18.Confidential Disclosure Agreement.  Notwithstanding any provision of this Agreement to the contrary, any confidential disclosure agreement previously executed by the Company and the Purchaser in connection with the transactions contemplated by this Agreement shall remain in full force and effect in accordance with its terms following the execution of this Agreement and the consummation of the transactions contemplated hereby.

SECTION 19.Assignment.This Agreement and rights of the Purchaser hereunder may be assigned by the Purchaser only with the prior written consent of the Company except such consent shall not be required in cases of assignments (x) by operation of the law; (y) by the Purchaser to a wholly-owned subsidiary; or (z) by an investment adviser to a fund for which it is the adviser or by or among funds that are under common control; provided, that, in any such case, such assignee agrees in writing to be bound by the terms of this Agreement.

SECTION 20.Publicity.The Company will not issue any public statement, press release or any other public disclosure, that includes the Purchasers’ names, without the Purchasers’ prior written consent, subject to the next sentence. If the Company is required by an applicable law, resolution, or Exchange Act rule to disclose the Purchasers’ names, the Company will give the Purchasers reasonable notice of the required disclosure.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written.

THE IMMUNE RESPONSE CORPORATION
By:
	Name:
	Title:

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EXHIBIT A

LIST OF PURCHASERS AND NOTES AND SHARES PURCHASED

Name and Address of Initial Purchasers	No. of Shares of Common Stock	Principal Amount of Notes		Aggregate Purchase Price
Capital Growth Equity Fund I, LLC 225 NE Mizner Boulevard Suite 750 Boca Raton, Florida 33432 Attn: Monique MacLaren	50,000	$	300,000	$	300,000
Edward A. Haymes 7108 Queenferry Circle Boca Raton, Florida 33496	6,000	$	36,000	$	36,000
Gerald & Seena Sperling 17899 Aberdeen Way Boca Raton, Florida 33496	8,333	$	50,000	$	50,000
Steve Oliveira 18 Fieldstone Court New City, New York 10956	58,333	$	350,000	$	350,000
Lincoln Associates LLC 535 Madison Avenue New York, New York 10022 Attn: William P. Dioguardi	9,500	$	57,000	$	57,000
Garfield Associates LLC 535 Madison Avenue New York, New York 10022 Attn: William P. Dioguardi	9,500	$	57,000	$	57,000
Alex Tringas 29 Eigin Parkway Ft. Walton Beach, Florida 32548	8,333	$	50,000	$	50,000
Ark Venture Capital, Inc. 6400 NW 6th Way Suite 300 Ft. Lauderdale, Florida 33309 Attn: Robert D. Keyser, Jr.	16,666	$	100,000	$	100,000
Total	166,665	$	1,000,000	$	1,000,000

22

EXHIBIT B

FINANCING SIGNATURE PAGE

By execution and delivery of this signature page, the undersigned hereby agrees to become a Purchaser, as defined in that certain Purchase Agreement (the “Purchase Agreement”) by and among The Immune Response Corporation, a Delaware corporation (the “Company”), and the Purchasers (as defined in the Purchase Agreement), dated as of the Closing Date (as defined in the Purchase Agreement), acknowledges having read the representations in the Purchase Agreement section entitled “Representations of the Purchasers,” and hereby represents that the statements contained therein are complete and accurate with respect to the undersigned as a Purchaser.  The undersigned further hereby agrees to be bound by the terms and conditions of (i) the Purchase Agreement as a “Purchaser” thereunder and (ii) the Registration Rights Agreement (as defined in the Purchase Agreement) as a “Purchaser” thereunder, and authorizes this signature page to be attached to the Purchase Agreement and the Registration Rights Agreement, or counterparts thereof.

Executed, in counterpart, as of the date set forth below.

PURCHASER:
By:
	Name of Purchaser
By:
Title:
Date:
Contact Person:
Telephone No.:
Fax No.:
E-mail Address:

23

APPENDIX I

THE IMMUNE RESPONSE CORPORATION

STOCK CERTIFICATE QUESTIONNAIRE

Pursuant to Section 3 of the Agreement, please provide us with the following information:

1.	The exact name that your Notes, Shares and/or Contingent Shares, if applicable, are to be registered in (this is the name that will appear on your stock certificate(s)). You may use a nominee name if appropriate:
2.	The relationship between the Purchaser of the Notes, Shares and/or Contingent Shares, if applicable and the Registered Holder listed in response to item 1 above:
3.	The mailing address of the Registered Holder listed in response to item 1 above:
4.	The Social Security Number or Tax Identification Number of the Registered Holder listed in response to item 1 above:

24

Appendix I-1

THE IMMUNE RESPONSE CORPORATION

REGISTRATION STATEMENT QUESTIONNAIRE

In connection with the preparation of the Registration Statement, please provide us with the following information:

1. In connection with the Registration Statement, please state your or your organization’s name exactly as it should appear in the Registration Statement:

2. Please provide the number of Shares that you or your organization will own immediately after Closing, including those Shares purchased by you or your organization pursuant to this Purchase Agreement and those shares purchased by you or your organization through other transactions:

3. Have you or your organization had any position, office or other material relationship within the past three years with the Company or its affiliates?

o Yes     o No

If yes, please indicate the nature of any such relationships below:

4. Are you (i) an NASD Member (see definition below), (ii) a Controlling (see definition below) shareholder of an NASD Member, (iii) a Person Associated with a Member of the NASD (see definition below), or (iv) an Underwriter or a Related Person (see definition below) with respect to the proposed Offering; or (b) do you own any shares or other securities of any NASD Member not purchased in the open market; or (c) have you made any outstanding subordinated loans to any NASD Member?

o Yes     o No

If “yes,” please below:

25

Appendix I-2

THE IMMUNE RESPONSE CORPORATION

GLOSSARY OF TERMS

NASD Member. The term “NASD member” means either any broker or dealer admitted to membership in the National Association of Securities Dealers, Inc. (“NASD”). (NASD Manual, By-laws Article I, Definitions)

Control. The term “control” (including the terms “controlling,” “controlled by” and “under common control with”) means the possession, direct or indirect, of the power, either individually or with others, to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. (Rule 405 under the Securities Act of 1933, as amended)

Person Associated with a member of the NASD. The term “person associated with a member of the NASD” means every sole proprietor, partner, officer, director, branch manager or executive representative of any NASD Member, or any natural person occupying a similar status or performing similar functions, or any natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a NASD Member, whether or not such person is registered or exempt from registration with the NASD pursuant to its bylaws. (NASD Manual, By-laws Article I, Definitions)

Underwriter or a Related Person. The term “underwriter or a related person” means, with respect to a proposed offering, underwriters, underwriters’ counsel, financial consultants and advisors, finders, members of the selling or distribution group, and any and all other persons associated with or related to any of such persons. (NASD Interpretation)

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APPENDIX II

Accredited Investor Certification
Initial the appropriate item(s)

The undersigned further represents and warrants as indicated below by the undersigned’s initials:

A.    Individual investors:    (Please initial one or more of the following five statements)

1.              I certify that I am an accredited investor because I have had individual income (exclusive of any income earned by my spouse) in excess of $200,000 in each of the most recent two years and I reasonably expect to have an individual income in excess of $200,000 for the current year.

2.              I certify that I am an accredited investor because I have had joint income with my spouse in excess of $300,000 in each of the most recent two years and I reasonably expect to have joint income with my spouse in excess of $300,000 for the current year.

3.              I certify that I am an accredited investor because I have an individual net worth, or my spouse and I have a joint net worth, in excess of $1,000,000.

4.              I am a director or executive officer of The Immune Response Corporation

5.              I have individual net worth or my spouse and I have joint net worth of over $5,000,000.

B.    Partnerships, corporations, trusts or other entities:    (Please initial one of the following seven statements). The undersigned hereby certifies that it is an accredited investor because it is:

1.              an employee benefit plan whose total assets exceed $5,000,000;

2.              an employee benefit plan whose investments decisions are made by a plan fiduciary which is either a bank, savings and loan association or an insurance company (as defined in Section 3(a) of the Securities Act) or an investment adviser registered as such under the Investment Advisers Act of 1940;

3.              a self-directed employee benefit plan, including an Individual Retirement Account, with investment decisions made solely by persons that are accredited investors;

4.              an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, not formed for the specific purpose of acquiring the Notes and Shares, whose total assets are in excess of $5,000,000;

5.              a corporation, partnership or Massachusetts or similar business trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Notes and Shares and whose purchase is directed by a sophisticated person as described in Rule 506(b)(ii) of Regulation D and who has such knowledge and experience in financial and business matters that he is capable of evaluating the risks and merits of an investment in the Notes and Shares;

6.              a trust, not formed for the specific purpose of acquiring the Notes and Shares, with total assets in excess of $5,000,000, whose purchase is directed by a person who has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of an investment in the Notes and Shares; or

7.              an entity (including a revocable grantor trust but other than a conventional trust) in which each of the above equity owners qualifies as an accredited investor under items A(1), (2) or (3) or item B(1) above.

Appendix II-1

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APPENDIX III

Attention:

PURCHASER’S CERTIFICATE OF SUBSEQUENT SALE

The undersigned, [an officer of, or other person duly authorized by]

				hereby certifies
[fill in official name of individual or institution]
that he/she [said institution] is the Purchaser of the shares or warrants evidenced by the attached certificate,
and as such, sold such shares on			in accordance with [Registration Statement
	[date]
number 333-		] [a valid exemption (i.e.,			) from
registration under the Securities Act of 1933, as amended, and any applicable State securities or “blue sky” laws] and any requirement of delivering a current prospectus by the Company has been complied with in connection with such sale.

Print or Type:

Name of
Purchaser
(Individual or
Institution):

Name of
Individual
Representing
Purchaser (if
an Institution):

Title of
Individual
Representing
Purchaser (if
an Institution):

Signature by
Individual
Purchaser, or
Representative
of Purchaser:

28

EX-10.143

Exhibit 10.143

THE IMMUNE RESPONSE CORPORATION

REGISTRATION RIGHTS AGREEMENT

This REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is made as of the 23rd day of June 2003, by and between The Immune Response Corporation, a corporation organized under the laws of the State of Delaware (the “Company”), with its principal offices at 5931 Darwin Court, Carlsbad, California 92008, and individuals and entities listed on Exhibit A of that certain Purchase Agreement (as hereinafter defined) (the “Investors”).

WHEREAS, in connection with that certain Purchase Agreement by and among the Company and the Investors of even date herewith (the “Purchase Agreement”), the Company desires to sell to the Investors, and the Investors desire to purchase from the Company, severally and not jointly, 12% promissory notes (“Note(s)”) and 166,665 shares of the Company’s common stock (“Common Stock”), par value $0.0025 per share (“Shares”), in the aggregate, for an aggregate purchase price of One Million Dollars ($1,000,000); and

WHEREAS, to induce the Investors to purchase the Note and Shares, the Company has agreed to register the Shares and Contingent Shares (as defined in the Purchase Agreement) pursuant to the terms of this Agreement;

NOW, THEREFORE, the Company and the Investors hereby covenant and agree as follows:

1.Certain Definitions.  As used in this Agreement, the following terms shall have the following respective meanings:

“Commission” shall mean the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act.

“Eligible Securities” shall mean all Registrable Securities other than Excluded Securities.

“Exchange Act” shall mean the Securities Exchange Act of 1934 and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.

“Excluded Securities” shall mean Registrable Securities that are free of restriction on resale under the Securities Act (by removal of all restrictive legends, instructions to transfer agent or otherwise) pursuant to Rule 144(k).

“Register,” “registered” and “registration” each shall refer to a registration effected by preparing and filing a registration statement or statements or similar documents in compliance with the Securities Act and the declaration or ordering of effectiveness of such registration statement or document by the Commission.

“Registrable Securities” shall mean the Shares and Contingent Shares held by the Investors, but excluding any Shares and Contingent Shares held by the Investors which (x) are

eligible for resale under Rule 144(k) or (y) are sold by the Investors in a transaction in which the Investors’ registration rights under this Agreement have not been assigned.

“Securities Act” shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the applicable time.

Capitalized terms used but not defined herein shall have the meanings set forth in the Purchase Agreement.

2.Piggyback Registration.

(a)If the Company, at any time during the two (2) year period commencing on the date hereof, proposes to register any of its securities under the Securities Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to registration statements on Forms S-4, S-8 and any successor forms thereto as well as registrations that do not permit resales) (a “Piggyback Registration”), each such time it will give written notice to such effect to all holders of outstanding Registrable Securities at least thirty (30) days prior to such filing.  Upon the written request of any such holder received by the Company within twenty (20) days after the giving of any such notice by the Company to register any of its Eligible Securities, the Company will cause the Eligible Securities as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent required to permit the sale or other disposition by the holder of such Eligible Securities so registered.

(b) If the registration for which the Company gives notice pursuant to Section 2(a) above is a registered public offering involving an underwriting, the Company shall so advise the holders as a part of the written notice given pursuant to Section 2(a) above.  In such event, (i) the right of any holder to include its Registrable Shares in such registration pursuant to this Section 2 shall be conditioned upon such holder’s participation in such underwriting on the terms set forth herein and (ii) all holders including Registrable Shares in such registration shall enter into an underwriting agreement with the underwriter or underwriters selected for the underwriting by the Company.  If any holder who has requested inclusion of its Registrable Shares in such registration as provided above disapproves of the terms of the underwriting, such holder may elect, by written notice to the Company, to withdraw its shares from such registration statement and underwriting.  If the managing underwriter advises the Company in writing that in its good faith determination marketing factors require a limitation on the number of shares to be underwritten, the shares to be included in the underwriting shall be allocated, first to the Company, and second, to each of the holders requesting inclusion of their Registrable Securities in such registration statement; provided, however, that the right of the underwriters to exclude the Registrable Shares from the registration and underwriting as described above shall be restricted so that (i) the aggregate number of Registrable Shares included in any such registration for all Investors is not  reduced below twenty-five percent (25%) of the shares included in the registration, from which all Registrable Shares may be excluded and (ii) all shares that are not Registrable Shares and are held by persons who are employees or directors of the Company (or

2

any subsidiary of the Company) shall first be excluded from such registration and underwriting before any Registrable Shares are so excluded. The number of shares that may be included in such registration statement and underwriting shall be allocated among all holders requesting registration in proportion, as nearly as practicable, to the respective number of shares of Common Stock held by them on the date the Company gives the notice specified in Section 2(a) above.  If any holder would thus be entitled to include more shares than such holder requested to be registered, the excess shall be allocated among other requesting holders pro rata in the manner described in the preceding sentence.

3.Registration Procedures.  If and whenever the Company is required by the provisions of Section 2 hereof to use its reasonable commercial efforts to effect the registration of any Registrable Securities under the Securities Act, the Company will, as promptly as practicable:

(a)prepare and file with the Commission a registration statement with respect to such securities and use its reasonable commercial efforts to cause such registration statement to become effective not later than 60 days from the date of its filing;

(b)prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement in accordance with the intended method of disposition set forth in such registration statement for such period;

(c)furnish to each seller of Registrable Securities and to each underwriter such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such persons reasonably may request in order to facilitate the intended disposition of the Registrable Securities covered by such registration statement;

(d)use its reasonable commercial efforts (i) to register or qualify the Registrable Securities covered by such registration statement under the securities or “blue sky” laws of such jurisdictions as the sellers of Registrable Securities or, in the case of an underwritten public offering, the managing underwriter, reasonably shall request, (ii) to prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements, and take such other actions, as may be reasonably necessary to maintain such registration and qualification in effect at all times for the period of distribution contemplated thereby and (iii) to take such further action as may be reasonably necessary or advisable to enable the disposition of the Registrable Securities in such jurisdictions, provided, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction;

3

(e)use its reasonable commercial efforts to list the Registrable Securities covered by such registration statement with any securities exchange on which the Common Stock of the Company is then listed;

(f)notify, as promptly as practicable, each seller of Registrable Securities and each underwriter under such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event of which the Company has knowledge as a result of which the prospectus contained in such registration statement, as then in effect, includes any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing and promptly amend or supplement such registration statement to correct any such untrue statement or omission;

(g)notify each seller of Registrable Securities of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose and make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible time;

(h)if the offering is an underwritten offering, enter into a written agreement with the managing underwriter selected in the manner herein provided in such form and containing such provisions as are usual and customary in the securities business for such an arrangement between such underwriter and companies of the Company’s size and investment stature, including, without limitation, customary indemnification and contribution provisions;

(i)if the offering is an underwritten offering, at the request of any seller of Registrable Securities, use its reasonable commercial efforts to furnish to such seller on the date that Registrable Securities are delivered to the underwriters for sale pursuant to such registration: (i) a copy of an opinion dated such date of counsel representing the Company for the purposes of such registration, addressed to the underwriters, stating that such registration statement has become effective under the Securities Act and that (A) to the best knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act, (B) the registration statement, the related prospectus and each amendment or supplement thereof comply as to form in all material respects with the requirements of the Securities Act (except that such counsel need not express any opinion as to financial statements or other financial or statistical information contained therein) and (C) to such other effects as reasonably may be requested by counsel for the underwriters; and (ii) a copy of a letter dated such date from the independent public accountants retained by the Company, addressed to the underwriters, stating that they are independent public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements of the Company included in the registration statement or the prospectus, or any amendment or supplement thereof, comply as to form in all material respects with the applicable accounting requirements of the Securities Act, and such letter shall additionally cover such other financial matters (including information as to the period ending no more than five business days prior to the date of such letter) with respect to such registration as such underwriters reasonably may request;

4

(j)take all actions reasonably necessary to facilitate the timely preparation and delivery of certificates (not bearing any legend restricting the sale or transfer of such securities) representing the Registrable Securities to be sold pursuant to the Registration Statement and to enable such certificates to be in such denominations and registered in such names as the Investors or any underwriters may reasonably request; and

(k)take all other reasonable actions necessary to expedite and facilitate the registration of the Registrable Securities pursuant to the Registration Statement.

4.Obligations of Holders.

Each holder of Registrable Securities shall furnish to the Company such information regarding such holder, the number of Registrable Securities owned and proposed to be sold by it, the intended method of disposition of such securities and any other information as shall be required to effect the registration of the Registrable Securities, and cooperate with the Company in preparing the registration statement and in complying with the requirements of the Securities Act.

5.Expenses.All expenses incurred by the Company in complying with Sections 2 and 3 including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including counsel fees) incurred in connection with complying with state securities or “blue sky” laws, fees of the NASD, Inc., fees of transfer agents and registrars and fees and disbursements of one counsel for the sellers of Registrable Securities, but excluding any Selling Expenses, are called “Registration Expenses.”  All underwriting discounts and selling commissions applicable to the sale of Registrable Securities are called “Selling Expenses.”

The Company will pay all Registration Expenses in connection with any registration statement filed hereunder, and the Selling Expenses in connection with each such registration statement shall be borne by the participating sellers in proportion to the number of Registrable Securities sold by each or as they may otherwise agree.

6.Indemnification and Contribution.

(a)In the event of a registration of any of the Registrable Securities under the Securities Act pursuant to the terms of this Agreement, the Company will indemnify and hold harmless and pay and reimburse, each seller of such Registrable Securities thereunder, each underwriter of such Registrable Securities thereunder and each other person, if any, who controls such seller or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such seller, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act pursuant hereto or any preliminary prospectus or final prospectus contained therein, or any amendment or

5

supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation or alleged violation of the Securities Act or any state securities or “blue sky” laws and will reimburse each such seller, each such underwriter and each such controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon the Company’s reliance on an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by any such seller, any such underwriter or any such controlling person in writing specifically for use in such registration statement or prospectus.

(b)In the event of a registration of any of the Registrable Securities under the Securities Act pursuant hereto each seller of such Registrable Securities thereunder, severally and not jointly, will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of the Securities Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter and each person who controls any underwriter within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such officer, director, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon reliance on any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Registrable Securities were registered under the Securities Act pursuant hereto or any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such officer, director, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, that such seller will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such seller, as such, furnished in writing to the Company by such seller specifically for use in such registration statement or prospectus, and provided, that the liability of each seller hereunder shall be limited to the proceeds received by such seller from the sale of Registrable Securities covered by such registration statement. Notwithstanding the foregoing, the indemnity provided in this Section 6(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or expense if such settlement is effected without the consent of such indemnified party and provided further, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability (or action in respect thereof) arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in such registration statement, which untrue statement or alleged untrue statement or omission or alleged omission is completely corrected in an amendment or supplement to the registration statement and the undersigned indemnitees thereafter fail to deliver or cause to be delivered such registration statement as so amended or supplemented prior to or concurrently with the sale of the Registrable Shares to the

6

person asserting such loss, claim, damage or liability (or actions in respect thereof) or expense after the Company has furnished the undersigned with the same.

(c)Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 6 and shall only relieve it from any liability which it may have to such indemnified party under this Section 6 if and to the extent the indemnifying party is materially prejudiced by such omission.  In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 6 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected, provided, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded based upon written advise of its counsel that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred.

(d)In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any holder of Registrable Securities exercising rights under this Agreement, or any controlling person of any such holder, makes a claim for indemnification pursuant to this Section 6 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 6 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any such selling holder or any such controlling person in circumstances for which indemnification is provided under this Section 6; then, and in each such case, the Company and such holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such holder is responsible for the portion represented by the percentage that the public offering price of its Registrable Securities offered by the registration statement bears to the public offering price of all securities offered by such registration statement, and the Company is responsible for the remaining portion; provided, that, in any such case, (A) no such holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered by it pursuant to such registration statement and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning

7

of Section 12(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation.

7.Changes in Capital Stock. If, and as often as, there is any change in the capital stock of the Company by way of a stock split, stock dividend, combination or reclassification, or through a merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions hereof so that the rights and privileges granted hereby shall continue as so changed.

8.Representations and Warranties of the Company. The Company represents and warrants to the Investor as follows:

(a)The execution, delivery and performance of this Agreement by the Company have been duly authorized by all requisite corporate action and will not violate any provision of law, any order of any court or other agency of government, the Certificate of Incorporation or By-laws of the Company or any provision of any indenture, agreement or other instrument to which it or any or its properties or assets is bound, conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Company or its subsidiaries.

(b)This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, subject to any applicable bankruptcy, insolvency or other laws affecting the rights of creditors generally and to general equitable principles and the availability of specific performance.

9.Miscellaneous.

(a)All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including without limitation transferees of any Registrable Securities), whether so expressed or not.

(b)All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered in person, mailed by certified or registered mail, return receipt requested, or sent by telecopier or telex, addressed (i) if to the Company, to The Immune Response Corporation, at 5931 Darwin Court, Carlsbad, California 92008, or (b) if to the Investors at addresses as set forth at in the Purchase Agreement, or at such other address or addresses as may have been furnished to the Company in writing; and (ii) if to any subsequent holder of Registrable Securities, to it at such address as may have been furnished to the Company in writing by such holder; or, in any case, at such other address or addresses as shall have been furnished in writing to the Company (in the case of a holder of Registrable Securities) or to the holders of Registrable Securities (in the case of the Company) in accordance with the provisions of this paragraph.

8

(c)This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts entered into and to be performed wholly within said State.

(d)All controversies which may arise between the parties concerning this Agreement shall be determined by arbitration pursuant to the rules then pertaining to the American Arbitration Association in New York, New York.  Judgment on any award of any such arbitration may be entered in the Supreme Court of the State of New York or in any other court having jurisdiction of the Person or Persons against whom such award is rendered.  Any notice of such arbitration or for the confirmation of any award in any arbitration shall be sufficient if given in accordance with the provisions of this Agreement.  The parties agree that the determination of the arbitrators shall be binding and conclusive upon them.

(e)This Agreement may not be amended or modified without the written consent of the Company and the holders of at least a majority of the Registrable Securities.

(f)Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.  No waiver shall be effective unless and until it is in writing and signed by the party granting the waiver.

(g)This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

(h)If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render illegal, invalid or unenforceable any other provision of this Agreement, and this Agreement shall be carried out as if any such illegal, invalid or unenforceable provision were not contained herein.

(i)This Agreement constitutes the entire contract among the Company and the Purchasers relative to the subject matter hereof and supersedes in its entirety any and all prior agreements, understandings and discussions with respect thereto.

(j) The headings of the Sections of this Agreement are for convenience and shall not by themselves determine the interpretation of this Agreement.

[Signature Page to Follow]

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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above.

THE IMMUNE RESPONSE CORPORATION
By
	Name:
	Title:
INVESTORS:
By:
	Name:
	Title:

10

EX-10.144

Exhibit 10.144

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144(K) UNDER SAID ACT.

THE TRANSFER OR SALE OF THIS NOTE IS SUBJECT TO THE TERMS OF A PURCHASE AGREEMENT, INCLUDING SECTION 5(H) THEREOF, DATED AS OF JUNE 23, 2003, A COPY OF WHICH IS ON FILE AT THE OFFICE OF THE COMPANY.

12% PROMISSORY NOTE

U.S. $              June 23, 2003

FOR VALUE RECEIVED, The Immune Response Corporation, a Delaware corporation (the “Company”), hereby promises to pay to the order of [                     ] (the “Lender”) the principal amount of                     ($        ) Dollars(the “Principal Amount”), together with interest on the Principal Amount under this promissory note (this “Note”) at the per annum rate of twelve (12%) percent (calculated on actual calendar days elapsed and a 360-day year basis). The Principal Amount on this Note shall become due and payable in one installment on the earlier of: (i) September 30, 2003or (ii) upon the closing of a sale (or series of related sales) by the Company of its equity securities or warrant exercise resulting in net proceeds to the Company of not less than One Million Three Hundred Thousand Dollars ($1,300,000) (“Maturity Date”).  Interest on this Note shall be due and payable monthly (“Monthly Interest”), commencing on July 23, 2003.

Both the Principal Amount and Monthly Interest shall be paid in lawful money of the United States of America to the Lender at                             , or at such other address as the Lender may designate by notice in writing to the Company, in immediately available funds.

If any payment hereunder falls due on a Saturday, Sunday or legal holiday, it shall be payable on the next succeeding business day and such additional time shall be included in the computation of interest.

This Note is one of a series of promissory notes of like tenor and ranking (collectively, the “Notes”) made by the Company in favor of certain investors (the “Lenders”) dated of even date herewith which have been issued by the Company, and is issued pursuant to that certain Purchase Agreement by and between the Company and the Lender of even date herewith (the “Purchase Agreement”).  Notwithstanding any provision to the contrary contained herein, this Note is subject and entitled to certain terms, conditions, covenants and agreements contained in the Purchase Agreement.  Any transferee or transferees of this Note, by their acceptance hereof, assume the obligations of the Company in the Purchase Agreement with respect to the conditions

1

and procedures for transfer of this Note.  Reference to the Purchase Agreement shall in no way impair the absolute and unconditional obligation of the Company to pay both the Principal Amount and Monthly Interest hereon as provided herein.

The shares of the Company’s common stock, $ 0.0025 par value per share (the “Common Stock”) issuable upon Pre-Payment (as hereinafter defined) and Default (as hereinafter defined), are referred to in, and entitled to the benefits of, that certain registration rights agreement between the Company and the Lender of even date herewith (the “Registration Rights Agreement”).

1.Prepayment.  This Note may be prepaid, at the option of the Company at any time on any date on or after the date of issuance and prior to the Maturity Date, at a redemption price equal to 100% of the Principal Amount that is being pre-paid, together with accrued and unpaid interest through the date of pre-payment (“Pre-Payment”); provided, however, in the event this Note is not pre-paid on or before July 31, 2003,          shares of Common Stock shall be issued and delivered to the Lender (“Pre-Payment Penalty Shares”).

2.Events of Default.  Upon the occurrence of any of the following events (herein called “Events of Default”) which shall have occurred and be continuing:

(a)The Company shall default in the payment of the Principal Amount or interest of this Note on or before the date such payment is due;

(b)Failure by the Company to perform or observe, in any material respects, any other covenant or agreement of the Company contained in this Note or any material covenant or material agreement contained in the Purchase Agreement and the Registration Rights Agreement which remains uncured for the period and after the notice specified below and the Lender notifies the Company of the default, and the Company does not cure the default within 30 days after receipt of the written notice, which notice must specify the default, demand that it be remedied and the state that the written notice is a “Notice of Default;”

(c)Failure by the Company to pay the principal on the maturity date (or otherwise when due), or interest on, or the occurrence and continuation of an event of default under any loan agreement, arrangement, mortgage, indenture or other instruments under which there is issued (other than the Notes) or by which there is secured or evidenced any indebtedness of the Company, whether such indebtedness exists on the date of the issuance of this Note or is created thereafter;

(d)A custodian, receiver, liquidator or trustee of the Company, or of any of its property, is appointed or takes possession of the Company or its property and such appointment or possession remains in effect for more than 30 days; or an order for relief is entered under the Federal Bankruptcy Code against the Company; or any of the property of the Company is sequestered by court order and the order remains in effect for more than 30 days; or a petition or other proceeding is filed against the Company under any bankruptcy, reorganization, arrangement, insolvency, readjustment of indebtedness, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, and is not dismissed within 60 days after filing;

2

(e)The Company files a petition in voluntary bankruptcy or seeking relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of indebtedness, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any petition against it under any such law;

(f)The Company makes an assignment for the benefit of its creditors, or generally fails to pay its obligations as they become due, or consents to the appointment of or taking possession by a custodian, receiver, liquidator or trustee of the Company or all or any part of its property;

(g)The rendering of one or more final judgments, orders or decrees against the Company (including for seizure, forfeiture, garnishment or abatement) in an aggregate amount equal to or in excess of $250,000 which are not vacated, satisfied, discharged or execution thereof stayed within a period of 30 days from the entry thereof;

(h)The violation by the Company of any law or regulation, whether with respect to the conduct of its business or otherwise, which has a Material Adverse Effect (as defined in the Purchase Agreement);

(i)If the Company shall suspend its operations and such suspension would reasonably be expected to have a Material Adverse Effect on the Company;

(j)Any representation or warranty made by the Company to the Holder under the Purchase Agreement or the Registration Rights Agreement was, when made, untrue or misleading and such breach has a Material Adverse Effect on the Company; or

(k)The failure of the Company to timely deliver the information required by Section 7.04 of the Purchase Agreement,

then, and in any such event, a rate (the “Late Rate”) equal to eighteen percent (18%) per annum shall immediately and automatically thereafter begin to accrue on the then Principal Amount and, the lender may then, by written notice to the Company, declare the entire unpaid principal amount of this Note outstanding, together with accrued and unpaid interest thereon at the Late Rate and the same shall, unless such default be cured within three (3) days after such notice, forthwith be immediately due and payable upon the expiration of such three (3) day period, without presentment, demand, protest or other notice of any kind, all of which are expressly waived.  Notwithstanding anything to the contrary herein, if at any time the Late Rate exceeds interest payable under the highest rate of interest permissible under applicable law (the “Maximum Lawful Rate”), then in such event, the Late Rate will be reduced to the Maximum Lawful Rate.  Additionally, the Lender shall have all rights and remedies available under the Purchase Agreement and the Registration Rights Agreement, as well as all rights and remedies available at law or in equity.

In the case of an Event of Default described in paragraph (a) above occurs (“Default”),           shares (in addition to the Pre-Payment Penalty Shares) of Common Stock shall be

3

issued and delivered to the Lender on the date of Default (“Default Shares,” and together with the Pre-Payment Penalty Shares, sometimes hereinafter referred to as “Contingent Shares”).

(b)No course of dealing or delay or failure on the part of the Lender to exercise any right under this Section 2 shall operate as a waiver of such right or otherwise prejudice such Lender’s rights, powers and remedies.  The Company will pay or reimburse the Lender, to the extent permitted by law, for all costs and expenses, including but not limited to reasonable attorneys’ fees, incurred by it in collecting any sums due on the Note or in otherwise enforcing any of its rights.

3.Change of Control.  In the event of (i) any transaction or series of related transactions (including any reorganization, merger or consolidation) that results in the transfer of 50% or more of the outstanding voting power of the Company, and (ii) a sale of all or substantially all of the assets of the Company to another person, this Note shall be automatically due and payable.  The Company will give the Lender not less than ten (10) business days prior written notice of the occurrence of any events referred to in this Section 3.

4.Certain Adjustments.  The number and class or series of shares issuable upon Pre-Payment and/or Default under Sections 1 and 2 hereof shall be subject to adjustment in accordance with the following provisions:

(a)Adjustment for Reorganization or Recapitalization.  If, while this Note remains outstanding there shall be a reorganization or recapitalization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), all necessary or appropriate lawful provisions shall be made so that the Lender shall thereafter be entitled to receive upon Pre-Payment or Default, that number of shares of stock or other securities or property that a holder of the class of securities deliverable upon Pre-Payment or Default, respectively, would have been entitled to receive in such reorganization or recapitalization if the Contingent Shares had been issued immediately prior to such reorganization or recapitalization, all subject to further adjustment as provided in this Section 4.  If the per share consideration payable to the Lender for such class of securities in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Company’s Board of Directors.  The foregoing provisions of this paragraph shall similarly apply to successive reorganizations or recapitalizations and to the stock or securities of any other corporation that are at the time receivable upon the Pre-Payment or Default, respectively.  In all events, appropriate adjustment shall be made in the application of the provisions of this Note with respect to the rights and interests of the Lender after the transaction, to the end that the provisions of this Note shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable or issuable after such reorganization or recapitalization upon Pre-Payment or Default, respectively.

(b)Adjustments for Split, Subdivision or Combination of Shares.  If the Company at any time while this Note remains outstanding, shall split or subdivide any class of securities issuable upon Pre-Payment or Default, respectively, into a different number of securities of the same class, the number of shares of such class issuable upon Pre-Payment or Default, respectively, immediately prior to such split or subdivision shall be proportionately

4

increased.  If the Company at any time while this Note, or any portion hereof, remains outstanding shall combine any class of securities issuable upon Pre-Payment or Default, respectively, into a different number of securities of the same class, the number of shares of such class issuable immediately prior to such combination shall be proportionately decreased.

(c)Adjustments for Dividends in Stock or Other Securities or Property.  If, while this Note remains outstanding, the Lenders shall have received, or, on or after the record date fixed for the determination of eligible stockholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Company by way of dividend, then and in each case, this Note shall represent the right to acquire, in addition to the number of shares of such class of security receivable upon the Pre-Payment or Default, if any, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (other than cash) of the Company that such holder would hold on the date of Pre-Payment or Default had it been the holder of record of the class of security receivable upon Pre-Payment or Default, retained such shares and/or all other additional stock available by it as aforesaid during said period, giving effect to all adjustments called for during such period by the provisions of this Section 4.

5.Further Adjustments.  In case at any time or, from time to time, the Company shall take any action that affects the class of securities issuable upon Pre-Payment or Default, other than an action described herein, then, unless such action will not have a materially adverse effect upon the rights of the Lender, the number of shares of such class of securities (or other securities) issuable upon Pre-Payment or Default shall be adjusted in such a manner and at such time as shall be equitable in the circumstances.

6.Certificate as to Adjustments.  Upon the occurrence of each adjustment or readjustment pursuant to Section 4 or Section 5, the Company at its sole expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Lender a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based.  The Company shall, upon the written request at any time of the Lender, furnish or cause to be furnished to Lender a like certificate setting forth (i) such adjustments and readjustments, and (ii) the number and class of securities and the amount, if any, of other property which at the time would be received upon Pre-Payment or Default, respectively, under Section 1 or Section 2 hereof, respectively.

7.  Affirmative Covenants.  The Company covenants and agrees that, while any amounts under this Note are outstanding, it shall:

(a)  Perform, within all required time periods (after giving effect to any applicable grace periods), all of its obligations and enforce all of its rights under each material agreement to which it is a party.  The Company shall not terminate or modify in any manner materially adverse to the Company any provision of any such material agreement to which it is a party except in the ordinary course of business, consistent with past practice;

(b) Use reasonable commercial efforts to preserve and keep in full force and effect its corporate existence, including, without limitation, all licenses or similar qualifications

5

required by it to engage in its business in all jurisdictions in which it is at the time so engaged at all times maintain, preserve and protect all of its trademarks and tradenames (if any), and preserve all the remainder of its material property, in use or useful in the conduct of its business and keep the same in good repair, working order and condition (taking into consideration ordinary wear and tear);

(c)  Pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property before the same shall become delinquent or in default, which, if unpaid, might reasonably be expected to give rise to liens or charges upon such properties or any part thereof, unless, in each case, the validity or amount thereof is being contested in good faith by appropriate proceedings and the Company has maintained adequate reserves with respect thereto in accordance with generally accepted accounting principals (“GAAP”);

(d)  Comply in all material respects with all federal, state and local laws and regulations, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations and requirements applicable to it (collectively, “Requirements”) of all governmental bodies, departments, commissions, boards, companies or associations insuring the premises, courts, authorities, officials or officers which are applicable to the Company or any of its properties, except where the failure to so comply would not have Material Adverse Effect; provided, however, that nothing provided herein shall prevent the Company from contesting the validity or the application of any Requirements;

(e)  Keep proper records and books of account with respect to its business activities, in which proper entries, reflecting all of their financial transactions, are made in accordance with GAAP; and

(f)  Notify the Lender in writing, promptly upon learning thereof, of any material litigation or administrative proceeding commenced or threatened, in writing, against the Company.

8.Negative Covenants.  The Company covenants and agrees that while any amount of this Note is outstanding it will not directly or indirectly:

(a)  Declare or pay, directly and indirectly, any dividends or make any distributions, whether in cash, property, securities or a combination thereof, with respect to (whether by reduction of capital or otherwise) any shares of its capital stock (including without limitation any preferred stock) or directly or indirectly redeem, purchase, retire or otherwise acquire for value any shares of any class of its capital stock or set aside any amount for any such purpose;

(b)Consolidate with or merge into any other person, or sell, lease, transfer or assign to any persons or otherwise dispose of (whether in one transaction or a related series of transactions) 15% or more of its consolidated properties or assets (whether now owned or hereafter acquired), or permit another person to merge into it, except as contemplated herein;

6

(c)Own, purchase or acquire any stock, obligations, assets or securities of, or any interest in, or make any capital contribution or loan or advance of money, credit or property to, any other person, or make any other investments, except that the Company may own, purchase or acquire (i) existing subsidiaries or subsidiaries formed for the purposes of facilitating acquisitions or carrying out the ordinary business of the Company; (ii) certificates of deposits of any commercial banks registered to do business in any state of the United States having capital and surplus in excess of $50,000,000; (iii) readily marketable, direct obligations of the United States government or any agency thereof which are backed by the full faith and credit of the United States; and (iv) investments in prime commercial paper; provided, however, that in each case mentioned in (ii), (iii) or (iv) above, such obligations shall mature not more than 180 days from the date of acquisition thereof;

(d)  Sell, transfer, discount or otherwise dispose of any claim or debt owing to it, including, without limitation, any notes, accounts receivable or other rights to receive payment, except for reasonable consideration and in the ordinary course of business;

(e) (i) Engage in any transaction in connection with which the Company could be subject to either a material civil penalty assessed pursuant to the provisions of Section 502 of ERISA or a material tax imposed under the provisions of Section 4975 of the Tax Code; (ii) terminate any pension plan in a “distress termination” under Section 4041 of ERISA; or (iii) fail to make payment when due of all amounts which, under the provisions of any employee or pension plan, the Company or any ERISA affiliate are required to pay as contributions thereto, or, with respect to any pension plan, permit to exist any material “accumulated funding deficiency” (within the meaning of Section 302 of ERISA and Section 412 of the Tax Code), whether or not waived, with respect thereto;

9.Representations and Warranties of the Lender.  The Lender represents and warrants to the Company as follows:

(i)Such Lender can bear the economic risk of this investment and can afford a complete loss thereof.  Such Lender (A) has sufficient liquid assets to pay the full Principal Amount of this Note, (B) has adequate means of providing for such Lender’s current and presently foreseeable future needs, and (C) has no present need for liquidity of the investment in this Note;

(ii)Such Lender has full power and authority to enter into and to perform this Note in accordance with its terms.  Any Lender that is a corporation, partnership or trust represents that it has not been organized, reorganized or recapitalized specifically for the purpose of investing in the Company;

(iii)Such Lender qualifies as an “accredited investor” as defined in Rule 501 of Regulation D, promulgated under the Securities Act of 1933, as amended (the “Act”);

(iv)Such Lender has reviewed or has had an opportunity to ask questions of, and to receive answers from, the Company and its representatives, with respect to the Company and the terms and conditions of this transaction.  All materials and information requested by such

7

Lender and such Lender’s representatives, if any, including any information requested to verify any information furnished, have been made available;

(v)Such Lender understands that the Note has not been registered under the Act, nor pursuant to the provisions of the securities or other laws of any other applicable jurisdiction, and as such, the certificates representing such Note may contain applicable restrictive legends;

(vi)Such Lender is making the investment hereunder for such Lender’s own account and not for the account of others and for investment purposes only and not with a present view to the distribution or resale thereof; and

(vii) Such Lender is unaware of, is no way relying on, and did not become aware of the investment contemplated by the Note or the Purchase Agreement through or as a result of, any form of general solicitation or general advertising including, without limitation, any article, notice, advertisement or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, in connection with the investment contemplated by the Note or the Purchase Agreement and is not purchasing the Note, and did not become aware of the investment contemplated by the Note or the Purchase Agreement, through or as a result of any seminar or meeting to which the Lender was invited by, or any solicitation of a subscription by, a person not previously known to the Lender in connection with investments in securities generally.

(viii)Such Lender is not an affiliate (as such term is defined in Rule 12(b)(ii) under the Exchange Act) of any director or officer of the Company for purposes of Rule 4350(i)(1)(A) of the NASD, Inc. Marketplace Rules.

10.Amendments and Waivers.  Any term of this Note may be amended and the observance of any term of this Note may be waived (either generally or in a particular instance and either retroactively or prospectively) with the written consent of the Company and the Lender.

11.Notices. All notices, requests, consents, and other communications under this Note shall be in writing and shall be deemed delivered (i) three (3) business days after being sent by registered or certified mail, return receipt requested, postage prepaid or (ii) one (1) business day after being sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, in each case to the intended recipient as set forth below:

If to the Company:

The Immune Response Corporation
5931 Darwin Court
Carlsbad, California 92008
Attention: President
Facsimile: (760) 431-8636

8

with a copy to:

Pillsbury Winthrop LLP
50 Fremont Street
San Francisco, CA 94105-2228
Attention: Thomas E. Sparks, Jr., Esq.
Facsimile: (415) 983-1200

If to the Lender:

With a copy to:

(ii)Any party may give any notice, request, consent or other communication under this Note using any other means (including, without limitation, personal delivery, messenger service, telecopy, first class mail or electronic mail), but no such notice, request, consent or other communication shall be deemed to have been duly given unless and until it is actually received by the party for whom it is intended.  Any party may change the address to which notices, requests, consents or other communications hereunder are to be delivered by giving the other parties notice in the manner set forth in this Section 11.

12.Conflicting Agreements.  In the event of any inconsistencies between the terms of this Note and the terms of any other document related to the loan evidenced by this Note, the terms of this Note shall prevail.

13.Severability.  The unenforceability or invalidity of any provision or provisions of this Note as to any persons or circumstances shall not render that provision or those provisions unenforceable or invalid as to any other provisions or circumstances, and all provisions hereof, in all other respects, shall remain valid and enforceable.

14.Governing Law.  This Note shall be governed by and construed under the laws of the State of New York, without giving effect to the principles of conflicts of laws.

15.Waivers.  The nonexercise by either party of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance.

16. Lost Documents.  Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Note or any Note exchanged for it, and (in the case of loss, theft or destruction) of indemnity satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Note, if mutilated, the Company will make and deliver in lieu of such Note a new Note of like tenor and unpaid principal amount and dated as of the original date of this Note.

9

IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Note as of the date first written above.

		THE IMMUNE RESPONSE CORPORATION
		By
			Name:
			Title:
Acknowledged and Accepted:
[LENDER]
By
	Name:
	Title:

10

EX-31.1

Exhibit 31.1

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

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

2.     Based on my knowledge, this 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 report;

3.     Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.     The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 19, 2003	By:	/s/ John N. Bonfiglio
		John N. Bonfiglio, Ph.D. Chief Executive Officer

EX-31.2

Exhibit 31.2

I, Michael L. Jeub, certify that:

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

2.     Based on my knowledge, this 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 report;

3.     Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.     The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date August 19, 2003	By:	/s/ Michael L. Jeub
		Michael L. Jeub Vice President of Finance and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 1350 OF CHAPTER 63 OF 18 U.S.C.

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of The Immune Response Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission, accompanied by this written statement (the “Report”), I, John N. Bonfiglio, Chief Executive Officer of the Company, certify pursuant to § 1350 of Chapter 63 of 18 U.S.C., as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 /s/ John N. Bonfiglio

John N. Bonfiglio, Ph.D.

Chief Executive Officer

August 19, 2003

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

SECTION 1350 OF CHAPTER 63 OF 18 U.S.C.

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of The Immune Response Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission, accompanied by this written statement (the “Report”), I, Michael L. Jeub, Chief Financial Officer of the Company, certify pursuant to § 1350 of Chapter 63 of 18 U.S.C., as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 /s/ Michael L. Jeub

Michael L. Jeub

Chief Financial Officer

August 19, 2003