IMMUNE RESPONSE CORP, 10-K405, 1997-03-21

IMMUNE RESPONSE CORP
10-K405, 1997-03-21
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.

For the fiscal year ended DECEMBER 31, 1996 or

/ / 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 (IRS Employee Identification No.)
incorporation or organization)

5935 DARWIN COURT, CARLSBAD, CA 92008
Address of principal executive offices

(619) 431-7080
Registrant's telephone number including area code

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value $.0025
Preferred Stock
Purchase Rights
(Title of Class)

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

Yes X No ____
_____

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based upon the last sale price of the Common Stock reported on the
National Association of Securities Dealers Automated Quotation National Market
System on March 14, 1997, was $155,341,096.

The number of shares of Common Stock outstanding as of March 14, 1997, was
20,288,764.

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DOCUMENTS INCORPORATED BY REFERENCE

(To the Extent Indicated Herein)

Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Registrant's
1997 Annual Meeting of Stockholders to be held on May 22, 1997 is incorporated
by reference in Part III, Items 10 (as to directors), 11, 12 and 13 of this Form
10-K.

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ITEM 1. BUSINESS

GENERAL
Immune Response is a biopharmaceutical company with proprietary technologies in
four core areas: Human Immunodeficiency Virus ("HIV"), autoimmune disease, gene
therapy and cancer. The Company is conducting clinical trials for potential
immune-based therapies for HIV, rheumatoid arthritis, psoriasis, multiple
sclerosis, brain cancer and colon cancer and preclinical studies for prostate
cancer. The Company has potential gene therapies in preclinical studies for
cardiovascular disease, hemophilia and hepatitis. The Company intends to retain
ownership of its core technologies and to license selected applications.

REMUNE-TM- HIV THERAPY
BACKGROUND. The World Health Organization estimates there are approximately 20
million individuals, including 1.5 million children, around the world infected
with HIV, which has been identified as the cause of Acquired Immune Deficiency
Syndrome ("AIDS"). In the United States, the number of HIV-infected individuals
is estimated at 1.5 million. The HIV epidemic represents a significant societal
threat to both developed and developing nations since most of the HIV-infected
individuals are expected to ultimately develop AIDS, creating a significant
burden on healthcare systems and economies around the world.

Shortly after an individual is infected with HIV, the virus multiplies rapidly
and can be detected in the blood. The immune system responds by producing
antibody and cellular immune responses capable of attacking HIV. While these
and other responses are usually sufficient to temporarily arrest progress of the
infection and reduce levels of virus in the blood, the virus continues to
replicate and slowly destroy the immune system by infecting and killing critical
T cells, known as CD4 cells, which are needed to maintain the immune system. As
the infection progresses, the immune system control of HIV levels weakens, the
level of virus in the blood rises and the level of CD4 cells declines to a
fraction of normal levels. These events are followed by progression of the
disease and the collapse of the immune system, leaving the body susceptible to
fatal infections and cancers. AIDS represents the "end stage" of the HIV
infection, and is characterized by pneumonia and other infectious diseases of
the pulmonary system, central nervous system, gastrointestinal tract and skin,
as well as cancers such as Kaposi's sarcoma and lymphoma.

PRODUCT DESCRIPTION. The Company's most advanced therapy in clinical trials,
REMUNE, is based upon an approach first suggested by the late Dr. Jonas Salk, a
co-founder of the Company. REMUNE is composed of inactivated HIV, depleted of
its outer coat (envelope, gp120) ("envelope"), and emulsified in Incomplete
Freund's Adjuvant ("IFA"), an agent which elicits a more potent immune response
by more effectively presenting the inactivated virus to the immune system.
REMUNE is manufactured by first culturing HIV-infected human T cells. The virus
is then purified from this cell culture and inactivated using two separate
procedures. The virus is first inactivated with betapropiolactone, a chemical
agent commonly used for viral inactivation, and then physically inactivated with
irradiation. Each of these procedures alone is capable of inactivating HIV.
During processing and purification, the outer envelope protein of the virus,
known as gp120, is depleted from the inactivated HIV. The final envelope-
depleted HIV is emulsified in IFA and is filled in syringes for intramuscular
administration. When introduced into HIV-infected individuals, REMUNE
stimulates an immune system response, which the Company believes may provide a
safe, effective and long-lasting benefit to these individuals.

The Company believes that REMUNE has certain potential advantages relative to
other HIV therapies approved or in development. In particular, antiviral
therapies (reverse transcriptase inhibitors including AZT, ddI, d4T, ddC and
3TC; and protease inhibitors including Crixivan, Saquinavir, Ritonavir and
Viracept) have been associated with significant toxicity and viral resistance.
There are many HIV-infected individuals in the United States currently not using
antiviral therapies, often due to the side effects associated with these
therapies. The Company believes REMUNE may be an appropriate treatment for HIV-
infected individuals to take alone or in combination with other treatments.

HUMAN CLINICAL TRIALS. The Company has completed several Phase I and Phase II
clinical trials of REMUNE involving over 280 HIV-infected individuals. The
Company believes these clinical trials have indicated that REMUNE had no
significant toxicity or serious side effects and the ability to enhance an
immune system response against HIV.

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Two Phase II clinical trials of REMUNE were conducted to assess the ability of
this therapy to stimulate immune system responses against HIV, to evaluate the
effect of REMUNE on early markers of progression in asymptomatic HIV-infected
individuals and to monitor safety. A double-blind, placebo-controlled Phase II
dose-ranging clinical trial involving 60 asymptomatic HIV-infected individuals
was conducted to determine the ability of REMUNE administered at various doses
to enhance responses to HIV proteins. A second double-blind, placebo-controlled
Phase II clinical trial of REMUNE was conducted on 103 HIV-infected individuals
to evaluate the effect of the therapy on the level of virus in the blood and
other potential surrogate markers for disease progression. The Company believes
the results of these clinical trials indicate that REMUNE is safe and well
tolerated and has a favorable impact on multiple markers of HIV disease
progression including viral burden, CD4 cell count, HIV-specific cell-mediated
immunity, antibody production and weight gain. The results of these clinical
trials were published in the British scientific journal AIDS in October 1994 and
THE JOURNAL OF INFECTIOUS DISEASES in June 1994.

The definitive clinical benefit of these effects is unknown and is being
evaluated in a Phase III clinical trial in up to 2,500 individuals that began in
March 1996. This trial is designed to determine whether treatment with REMUNE
can delay the onset of AIDS in HIV-infected individuals and to provide evidence
of the effectiveness of REMUNE based on clinical endpoints.

To support the Phase III clinical trial, the Company has established
relationships with leading academic and clinical institutions in order to place
control of the design, statistical results, data and laboratory results in the
hands of third parties. The Company has selected 70 clinical sites to
participate in the trial. Physicians from the University of California-San
Francisco, Brown University and Cornell University have assisted in the design
of this trial and are participating in managing the trial as Principal
Investigators. The statistical plans for the trial and data analyses are being
conducted by biostatisticians at Harvard University. Data management and
analysis of patient samples for this trial are being conducted by Quintiles,
Inc., while an independent data monitoring board of clinicians and statisticians
will review the data during the interim and final analyses. The Phase III
clinical trial protocol and implementation plan have been developed with HIV
scientific leaders and HIV community advocates. This trial design has been
reviewed by a Food and Drug Administration ("FDA") Advisory Committee, and the
trial has been designated by the FDA as a pivotal Phase III clinical trial.
Subsequent to the start of the Phase III clinical trial, the FDA granted
expanded access to REMUNE. Expanded access is a procedure whereby patients who
are ineligible to enroll in the Phase III clinical trial are provided treatment
under a separate clinical trial protocol. Under this protocol those additional
patients eligible to receive REMUNE will be monitored primarily for safety.
Expanded access designation may permit third party reimbursement of some of the
costs associated with making REMUNE available to patients in an expanded access
context. The Company expects to dedicate a substantial portion of its resources
to the REMUNE program.

In May 1996, the Company, in conjunction with the National Institutes of Health
("NIH"), initiated a Phase I clinical trial in HIV-infected children. This
pediatric clinical trial is being funded principally by the NIH, and is designed
to investigate the safety of REMUNE, as well as its ability to elicit an HIV-
specific immune response in this patient population. This pediatric clinical
trial will involve up to 32 HIV-infected children, all of whom will receive
REMUNE.

In September 1995, the Company signed an agreement with Trinity Medical Group
Co., Ltd. ("Trinity") of Bangkok, Thailand to license the rights to develop,
market and distribute REMUNE in Thailand and certain other Southeast Asian
countries. This agreement allows Trinity to conduct clinical trials using
REMUNE in up to 10,000 HIV-infected individuals in Thailand. The clinical
program sponsored and funded by Trinity is designed to complement the Company's
clinical trials in the United States. The Phase II clinical trial, which began
in March 1996 and involves up to 300 HIV- infected individuals, is designed to
evaluate whether REMUNE is safe, elicits an

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immune response and has a favorable impact on CD4 cell counts. Other
clinical trials of HIV-infected individuals in Thailand may include a
2,000-person clinical endpoint trial to seek to determine the effectiveness
of REMUNE in delaying the progression of HIV infection to AIDS, and an
open-label safety trial involving up to 7,700 individuals. Clinical trials
conducted in Thailand will be monitored by an independent clinical research
organization, and conducted under the guidelines of the Thailand Ministry of
Public Health.

In April 1996, the Company received a $5 million equity investment from Trinity
in exchange for 333,334 shares of common stock of the Company priced at $15 per
share. In addition to funding development costs of REMUNE in Thailand, Trinity
has agreed to make additional equity investments of up to $10 million in the
Company based on the achievement of certain regulatory and commercial milestones
and governmental approvals. There can be no assurance, though, that any further
milestones or approvals will be achieved or obtained.

In October 1996, the Company entered into an agreement with Viru-Tech Limited
("Viru-Tech") for the development and distribution of REMUNE in South America
and Central America. Under the agreement, Viru-Tech purchased $3 million of
Immune Reponse common stock at a price of $12.77 per share. Viru-Tech will also
be responsible for the cost of any clinical trials that may be required to
facilitate commercialization of REMUNE in its territory. The Company will
provide REMUNE for use in any required clinical trials.

In October 1996, the Company also began, in collaboration with the Ministry of
Health of the Autonomous Government of Madrid, Spain, a Phase II combination
therapy clinical trial using REMUNE and antiviral drugs for the treatment of HIV
infection. The three year trial will be double-blind, placebo-controlled and
involve up to 300 HIV-infected individuals with CD4 cell counts between 300-500.
The Company will provide REMUNE, and the antivirals, AZT and ddI, will be
provided by the clinical sites where the trial is being conducted. Thirteen
clinical centers from Barcelona, Madrid, Murcia, Ovieda and Sevilla are expected
to participate in this clinical trial, with Dr. Eduardo Fernandez-Cruz, from the
Hospital General Universitario Gregorio Maranon in Madrid, as the principal
investigator.

In February 1997, the Company began, in collaboration with Glaxo Wellcome, plc
("Glaxo") and Merck & Co. ("Merck"), a 32-week Phase II combination drug trial
using REMUNE in combination with Glaxo's AZT and 3TC and Merck's protease
inhibitor Crixivan. This clinical trial will be double-blind, placebo-
controlled and involve up to 150 HIV-infected individuals with CD4 cell counts
greater than 400. Since AIDS is a virus induced immune suppression, this trial
is designed to examine the potential synergy between triple antiviral drug
therapy and REMUNE on HIV-1 specific immune responses. The Principal
Investigator of this trial, Dr. Fred Valentine, is Professor of Medicine at New
York University Medical Center and the former Chairman of the Food and Drug
Administration's Antiviral Drugs Advisory Committee. The trial will be
conducted at New York University Medical Center, Johns Hopkins University, Finch
University of Health Sciences at Chicago Medical School, Institute of Human
Virology - University of Maryland, North Shore University Hospital - New York
University, University of California at Davis, University of Hawaii and Harvard
University Medical School.

Since AIDS is a virus-induced immune suppression, the combination drug trials
are designed to determine whether the combination of REMUNE and antiviral drug
therapies will act synergistically (e.g. the antiviral drug therapies lowering
viral load and REMUNE boosting the immune system). Therefore, the primary goal
of the combination approach is to prolong the impact of antiviral drug therapies
on viral load by increasing the immune response to HIV-infected cells. If
successful, a delay in drug resistance and a prolonged duration of low levels of
virus in the blood coupled with an increase in the immune response to HIV could
translate into clinical benefit.

PATENTS. In 1993, the Company received a United States patent relating to
REMUNE. The Company has also received similar patents in Australia, certain
European countries, Japan and Russia. The Company has additional patent
applications relating to REMUNE on file in the United States, as well as in
other countries. The patent applications cover, in part, certain products and
methods of their use for the immunotherapeutic treatment of HIV-infected
patients and/or preventive treatment of uninfected individuals. There can be no
assurance that any additional HIV-related patents will be issued to the Company
Further, there can be no assurance that the issued patents, or any patent that
may be issued in the future, will survive opposition or provide meaningful
proprietary protection.

MANUFACTURING. The Company subleases a 51,000 square foot facility in King of
Prussia, Pennsylvania to manufacture REMUNE for clinical trials and, if the
product is approved by the FDA, initial commercial production.

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The Company assumed full operating control of this facility in March 1995,
and obtained release of the first clinical materials from this facility in
June 1995 for the continued treatment of participants in prior clinical
trials. In February 1996, the Company received clearance from the FDA to
release the product for use in clinical trials. The Company believes the
facility is capable of supplying clinical trial quantities and, if approved
for commercial distribution, initial commercial quantities of REMUNE. The
Company relies on a third party for the final inactivation step of the
manufacturing process. If the proposed 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 the Company can establish other
manufacturing capacity on a timely basis. The Company believes that the raw
materials necessary to produce REMUNE are readily available from various
sources.

COMPETITION. Competition among companies developing treatments for HIV
infection is intense and is expected to increase. In general, this competition
falls into three categories: antiviral drug therapies, prophylactic therapies to
prevent or treat infections associated with AIDS and immune-based therapies
intended to enhance general immune responses or specific responses against HIV.
These three approaches to the treatment of HIV infection may be complementary
and synergistic. The Company's Phase III clinical trial allows the combined use
of REMUNE with antiviral drug therapies.

The first category of competition includes five FDA approved reverse
transcriptase inhibitors and four FDA approved protease inhibitors manufactured
by major pharmaceutical companies. These products have been shown to be
effective at reducing the levels of virus in the blood, but are often associated
with significant toxicity and induction of viral resistance. The second
category includes a number of antibacterial and antifungal agents used in the
treatment of HIV-infected individuals in the later stages of the disease. The
third category, immune-based therapies, includes other agents intended to
stimulate the immune system against HIV, such as the envelope or core protein
therapeutic vaccines, and more general immune stimulants such as interleukin-2
("IL-2") and other cytokines.

Many of the Company's competitors have substantially greater experience,
financial and technical resources and production, marketing and development
capabilities than the Company. There can be no assurance that competitors have
not or will not succeed in developing technologies and products more quickly or
that are more effective than any which have been or are being developed by the
Company or which would render the Company's technology and products obsolete and
noncompetitive.

AUTOIMMUNE DISEASE TECHNOLOGY
BACKGROUND. While the normal immune system is closely regulated, aberrations in
immune response are not uncommon. In some instances, an individual's immune
system functions inappropriately and reacts to a component of the individual's
body as if the component were foreign. Such a response results in an autoimmune
disease, in which the immune system attacks the individual's own tissue. In
certain autoimmune diseases, T cells are believed responsible for the attack and
destruction of the individual's own tissue ("autoreactive T cells"). Current
treatments for these diseases address only symptoms while the diseases continue
to progress, often resulting in severe debilitation or death.

TECHNOLOGY. The Company's proprietary autoimmune treatments are designed to
inhibit the autoreactive T cells that the Company believes cause the tissue
damage in certain autoimmune diseases. The goal of the Company's autoimmune
disease therapies is to induce specific immune responses via unique markers on
the T cell receptors present on autoreactive T cells, such that the immune
response generated will recognize the unique markers and inhibit the
autoreactive T cells. The Company's technical strategy is to isolate
autoreactive T cells, identify their unique T cell receptors and synthesize
immunotherapeutics based on peptides (amino acid sequences) located within these
receptors. The Company is pursuing this approach for the treatment of
rheumatoid arthritis, psoriasis and multiple sclerosis. In preclinical studies
published in the journal SCIENCE in November 1989, Immune Response demonstrated
that vaccination with synthetic peptides containing a portion of the
autoreactive T cell receptor can be used to successfully prevent an autoimmune
disease in a preclinical model.

The Company believes that its approach to the treatment of autoimmune disease
may provide several advantages over existing therapies and competing approaches
based on immune system regulation. In preclinical studies, immune-based
therapies using T cell receptor peptides have demonstrated lack of toxicity and
specific impact on the disease-causing cells. These results, combined with the
ease of administration through periodic intramuscular

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injection and the potential for a long-lasting response of an active immune-
based therapy, may provide a favorable treatment effect.

RHEUMATOID ARTHRITIS THERAPY. Rheumatoid arthritis, a chronic inflammatory
disease is characterized by persistent inflammation of the lining of the joints
accompanied by stiffness and pain or tenderness on motion. It is estimated that
approximately four million individuals in the United States, and 53 million
worldwide, suffer from rheumatoid arthritis. Currently available therapies for
rheumatoid arthritis generally have adverse side effects and address only the
symptoms of the disease. By contrast, the Company's rheumatoid arthritis
therapy is intended to target and inhibit the specific T cells thought to be
involved in the disease process. The Company believes this inhibition may
reduce the series of inflammatory events that occur as the disease progresses.

The Company's rheumatoid arthritis immune-based therapy under development is
based on a combination of three peptides from the VB3, VB14 and VB17 T cell
receptors emulsified in IFA. The Company published, in the PROCEEDINGS OF THE
NATIONAL ACADEMY OF SCIENCES in December 1991, the discovery of these specific T
cell populations that the Company believes may cause rheumatoid arthritis. The
treatment being developed by the Company is designed to stimulate the immune
system of a rheumatoid arthritis patient to control these T cells. The Company
believes that eliminating or inhibiting these T cells may prevent further damage
to the tissue of joints. Several scientific publications since 1991 by research
groups independent of the Company have confirmed the involvement of one or more
of these T cell populations in rheumatoid arthritis.

Since 1992, the Company has conducted three Phase I clinical trials using single
T cell receptor peptides. These trials involved a total of 45 patients and
provided preliminary evidence that this therapeutic approach is safe and well
tolerated by rheumatoid arthritis patients and that the therapy may stimulate
the immune system to recognize key portions of the T cell receptors. Based upon
the results of the Phase I clinical trials, the Company applied for and received
permission from the FDA to begin a Phase II clinical trial using a combination
of peptides.

In August 1995, the Company initiated a Phase II clinical trial to evaluate the
safety and the ability of its rheumatoid arthritis treatment to elicit an immune
response. This double-blind, placebo-controlled trial involved 99 rheumatoid
arthritis patients and was designed to determine the ability of the rheumatoid
arthritis therapy to stimulate responses against the targeted T cells and to
determine an optimal dose of the therapy. Results from this trial indicated
safety and a statistically significant clinical improvement in disease condition
using the American College of Rheumatology guidelines (ACR 20). The ACR 20
criteria require an improvement in tender and swollen joint counts of at least
20% from baseline, along with improvement in three of five other disease-related
criteria.

PSORIASIS THERAPY. Psoriasis is a chronic and recurrent proliferative disease
of the skin characterized by irritating and sometimes painful, defined red
patches covered with silvery-white scales. It afflicts approximately five
million individuals in the United States. A distinguishing feature of the
disease is the rapid sloughing of skin layers. While normal skin cells mature
in 28 to 30 days, skin cells of psoriasis patients move to the surface of the
skin in approximately four days. Current treatments, which range from topical
ointments to phototherapy, address the symptoms of psoriasis rather than the
cause of the disease. By contrast, the Company's psoriasis therapy is intended
to target and inhibit the immune system cells that may be involved in the
initiation of the disease process.

The Company's immune-based therapy under development for psoriasis is based on
a combination of two peptides from the VB3 and VB13.1 T cell receptors
emulsified in IFA. The Company published, in the PROCEEDINGS OF THE NATIONAL
ACADEMY OF SCIENCES in 1994, the discovery of these two T cell populations,
which the Company believes initiate the events that lead to the irritating and
sometimes painful lesions found on the skin of psoriasis sufferers. The
treatment being developed by the Company is designed to stimulate the immune
system of a psoriasis patient to control these T cells. The Company believes
that eliminating or inhibiting these T cells may alleviate the effects of this
disease.

The safety of the Company's T cell receptor therapy approach has been tested
since 1992 in 55 patients treated in the Phase I rheumatoid arthritis and
multiple sclerosis clinical trials. After reviewing the results from these
Phase I clinical trials, the FDA allowed the Company to proceed directly into a
Phase II clinical trial with its combination peptide psoriasis therapy. In
September 1995, the Company initiated a Phase II clinical trial to evaluate the
safety and the ability of its psoriasis treatment to elicit an immune response.
This double-blind, placebo-controlled
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clinical trial involved 93 psoriasis patients and was designed to determine
the ability of the psoriasis therapy to stimulate responses against the
targeted T cells and to determine an optimal dose of the therapy. Results
demonstrated the product was safe. There was no statistically significant
difference between the treated and control groups. The Company is evaluating
a new formulation of T cell receptor derived peptides for a second Phase II
clinical trial in psoriasis expected to begin in 1997.

MULTIPLE SCLEROSIS THERAPY. Multiple sclerosis afflicts approximately 250,000
individuals in the United States and more than 1.1 million individuals
worldwide. Multiple sclerosis is a chronic disease of the central nervous
system and one of the most common causes of chronic neurologic disability in
young adults. The disease is characterized by weakness or paralysis in the
limbs, vertigo and incontinence. In acute stages, muscular wasting, progressive
visual failure, epilepsy and aphasia are common. The chronic progressive form
of the disease may lead to a complete loss of the ability to walk within two
years of onset and total disability after eight to ten years.

The Company's immune-based therapy under development for multiple sclerosis also
uses peptides from amino acid sequences found on T cells, emulsified in IFA.
The T cells from individuals afflicted with multiple sclerosis were found in the
cerebrospinal fluid of individuals afflicted with multiple sclerosis. The
Company believes that these specific T cells initiate the events that lead to
the debilitating and often fatal results. The treatment being developed by the
Company is designed to stimulate the immune system of a multiple sclerosis
patient to control these T cells. The Company believes that eliminating or
inhibiting these T cells may alleviate the effects of this disease.

In January 1995, in collaboration with the Sidney Kimmel Cancer Center ("SKCC"),
the Company completed a Phase I clinical trial in multiple sclerosis patients,
which provided evidence that this therapy is safe and well tolerated and that it
may stimulate the immune system to recognize key portions of the T cell
receptors.

PATENTS. During January 1994, the European Patent Office granted the Company a
patent covering vaccination and methods against diseases resulting from
pathogenic responses by specific T cell populations. In May 1994, the
Australian Industrial Property Organisation accepted a similar application of
the Company, and in March 1997, the United States also granted a patent on this
technology. These patents include composition and method claims for the
prevention or treatment of certain autoimmune diseases, such as rheumatoid
arthritis, psoriasis and multiple sclerosis. The Company also has patent
applications relating to its autoimmune technology on file in other countries,
including members of the European Patent Convention and Japan. These patent
applications cover certain compositions and methods relating to the use of T
cell receptor peptide sequences to vaccinate against autoreactive T cells
involved in autoimmune disease. There can be no assurance that any further
autoimmune disease patents will be issued to the Company or that any issued
patents, or any patent that may be issued in the future, will survive opposition
or provide meaningful proprietary protection. The Company is aware that a group
working with Connective Therapeutics, Inc. has filed patent applications related
to autoimmune disease research which covers technology similar to that used by
the Company.

MANUFACTURING. The Company has established a pilot manufacturing facility at
its headquarters in Carlsbad, California for the production of these therapies.
The Company believes this facility will be adequate to supply clinical trial
quantities of all its autoimmune disease therapies, but that additional
manufacturing capacity will be needed for commercial scale production, if
approved for commercial sale. For the manufacture of the autoimmune disease
therapies, the Company obtains synthetic peptides from third party
manufacturers. The Company believes that the synthetic peptides and other
materials necessary to produce the autoimmune disease therapies are readily
available from various sources and several suppliers may be capable of supplying
the autoimmune disease therapies in both clinical and commercial quantities.

COMPETITION. Several emerging technologies related to immune system regulation,
if successfully developed, could compete with the Company's autoimmune disease
treatments. The Company believes that its principal competition in the
autoimmune disease area will come from companies conducting research in the
areas of T cell receptors, interaction between T cells and the target antigen
and tissue, specific targeting of activated T cell populations, and mechanisms
of tolerance including oral tolerance approaches. Scientific reports on T cell
receptor research have also discussed approaches similar to that of the Company.
The Company is aware that a group working with Connective Therapeutics, Inc. is
researching and developing autoimmune disease treatments through an approach
substantially similar to the Company's approach. This effort, if successful,
could compete with the Company in the development and marketing of autoimmune
disease treatments.
8

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GENE THERAPY TECHNOLOGY
TECHNOLOGY. The Company's proprietary GeneDrug products under development are
based on a patented delivery technology, licensed from The University of
Connecticut Research Foundation ("University of Connecticut"), for intravenous
injection and targeting of genes or drugs directly to liver cells. The Company
believes its proprietary technology covers the targeted delivery of a soluble
molecular complex to any receptor on any mammalian cell, in addition to liver
cells. Also, the soluble molecular complex is not limited to the delivery of
DNA, but may include any polynucleotide, such as RNA, oligonucleotides or
ribozymes. The Company believes this technology may have several advantages
over current therapies including:

- TARGETED DELIVERY: The Company is developing technology designed to
deliver therapeutic genes and other compounds rapidly and specifically to
the liver. Liver hepatocytes provide an effective target for many liver-
related diseases.

- VERSATILITY: This delivery system utilizes a universal targeting agent
capable of delivering genes for intracellular, cell surface and secreted
proteins. Different diseases can be addressed by simply changing the gene
of interest.

- SAFETY: The Company's technology does not use viruses as delivery agents,
and is therefore designed to avoid unwanted immune responses or potentially
cancer causing genetic changes. This may provide a significant safety
advantage over many gene therapy systems under development which use
disabled viruses to carry the gene to the cell nucleus.

- COMMERCIAL POTENTIAL: Each gene therapy product under development by the
Company is intended to be prepared and distributed like a traditional
injectable pharmaceutical. These therapies would not require patient-
specific processing of cells outside the body such as those which may be
required in certain other gene therapy systems under development.

The Company's intravenous injection gene delivery system is a formulated
cassette-system consisting of a targeting protein and a linker protein to which
the gene is attached for delivery of the gene directly to the liver cells. The
Company's current GeneDrug focus is on the treatment of cardiovascular disease
(atherosclerosis), hemophilia and chronic hepatitis.

CHOLESTEROL-LOWERING AGENTS FOR ATHEROSCLEROSIS. Studies indicate that seven
million people in the United States are afflicted with some form of coronary
heart disease. Cardiovascular diseases account for more than half of all deaths
in the United States, and are also the leading cause of death in Europe and
Japan. There are two primary types of cholesterol. The first high-density
lipoprotein ("HDL") is often referred to as the "good cholesterol." The second
type of cholesterol is low-density lipoprotein ("LDL"), often referred to as the
"bad cholesterol." It is generally recommended that individuals with coronary
heart disease lower their LDL levels and raise their HDL levels.

The Company is developing several GeneDrugs designed to help manage cholesterol
levels in individuals at high risk of developing coronary heart disease. The
leading product candidate is a targeted gene complex incorporating the gene
which codes for the production of the LDL receptor protein. This protein is
expressed on the surface of liver cells and regulates removal of LDL from the
blood. Increased levels of the LDL receptor protein on liver cells has been
shown to increase the rate of removal of LDL from the bloodstream and thus lower
serum LDL cholesterol levels.

The Company has completed initial preclinical studies demonstrating a 30%
reduction in serum LDL cholesterol levels in a preclinical model after delivery
of the LDL receptor protein through the Company's proprietary GeneDrug system.
The levels of LDL remained below the baseline levels for more than 20 days
following
9

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administration. If similar effects can be obtained in human clinical
trials with a safe and well tolerated therapy, the Company believes that such a
therapy may provide an effective treatment to lower cholesterol in this patient
population.

The Company is preparing for preclinical toxicology and other studies intended
to support an IND application filing for an LDL cholesterol-lowering agent based
on the targeted delivery of the LDL receptor gene. This targeted gene therapy
product is being developed initially as a treatment for patients with elevated
cholesterol levels due to genetic deficiency of the LDL receptor gene and may be
applicable to broad populations of individuals with elevated cholesterol
levels. The Company is also in active research on other potential targets for
lowering LDL cholesterol or raising HDL cholesterol.

HEMOPHILIA THERAPY. Hemophilia A, a hereditary blood clotting disorder, results
from the dysfunction or absence of the Factor VIII protein. Approximately one
of every 5,000 live male births in the United States results in a child
afflicted with hemophilia A. Treatment for hemophilia A currently consists of
administering the missing Factor VIII protein, either purified from blood or
produced through recombinant DNA technology. Factor VIII therapy is normally
used to treat acute bleeding episodes when they occur. Maintaining therapeutic
blood concentrations of Factor VIII should prevent bleeding episodes and other
complications of hemophilia, but current replacement Factor VIII therapies are
prohibitively expensive for daily infusion.

The Company's GeneDrug technology system is designed to produce therapeutic
concentrations of Factor VIII by delivering the gene that produces this
protein. Once delivered to the liver cells, the Factor VIII gene may express
the desired protein and secrete this protein into the bloodstream on a
continuous basis for several weeks. If successful, this product would
eliminate the regular bleeding episodes associated with hemophilia by allowing
the patient to receive periodic injections in order to maintain therapeutic
levels of Factor VIII.

In July 1996, Immune Response entered into an agreement with Bayer, the United
States affiliate of Bayer AG of Leverkusen, Germany, to develop gene therapy
products for the treatment of hemophilia A. Bayer is a market leader in the
treatment of this hereditary blood coagulation disorder. Bayer made an initial
license payment to Immune Response of $6 million upon signing this agreement.
Bayer made an equity investment of $4 million by participating in the Company's
public offering in October 1996. In addition, during the term of the agreement,
the Company will receive research funding from Bayer for Immune Response's
hemophilia A program and may receive milestone payments and royalties on future
sales, if a product is developed and commercialized. In each of July 1996 and
January 1997, the Company received $1 million in research payments under the
agreement. Under the agreement, Bayer is responsible for all medical and
regulatory activities associated with developing any potential hemophilia A
products, and will also be responsible for commercial-scale manufacturing and
commercialization of any such product developed. The agreement provides Bayer
with a worldwide exclusive license to the Company's GeneDrug technology for the
delivery of the Factor VIII gene and the option to enter into negotiations with
the Company to use this technology to treat other blood coagulation disorders.

HEPATITIS THERAPY. Hepatitis B is a chronic viral infection of the liver. As
many as 300 million individuals are infected with hepatitis B virus ("HBV")
worldwide and in the United States there are approximately 300,000 new cases of
HBV infection each year.

Hepatitis C virus ("HCV") was recently identified as the major cause of non-
A/non-B hepatitis, of which there are at least 75,000 new cases in the United
States each year. Chronic hepatitis C results in a significant number of cases
of liver injury and cirrhosis, and is strongly linked to a high risk of liver
cancer.

Recombinant interferon-alpha ("IFNa") is currently approved for treatment of
both HBV and HCV infection. A preclinical study evaluating delivery of the
IFNagene has demonstrated successful expression of IFNa protein IN VITRO and
IN VIVO for up to six weeks. The Company believes that its GeneDrug system can
significantly enhance interferon therapy by achieving continuous, low-level
expression and secretion of the protein specifically in liver cells. This form
of interferon treatment would concentrate the protein at the site of hepatitis
infection, potentially enhancing the efficacy of the treatment and reducing side
effects normally observed with systemic introduction and distribution of
interferon. In addition, expression of the delivered IFNa gene in liver cells
for several weeks to months would significantly reduce the frequency of
treatments required compared to repeated systemic
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administration. In addition, treatment regimens using higher doses and
lasting for six to 18 months are now being proposed to increase the
effectiveness of interferon treatment and substantially increase the cost of
treatment.

The Company is conducting preclinical studies to determine the toxicity and
potential efficacy of targeted interferon alpha gene delivery. If these
studies are successful, the Company may file an IND application in 1997 for a
hepatitis clinical trial.

PATENTS. In November 1992, the Company obtained the exclusive license to a
U.S. patent, received by the University of Connecticut, covering the
Company's core gene delivery system technology, including methods and
compositions for delivering DNA to the liver via receptors on the surface of
liver cells. In addition, during 1995 and 1996, one additional Australian
patent issued and four patent applications were allowed in the United States,
Europe and Australia, all of which are exclusively licensed by the Company.
If patents from these applications are issued, the Company's patent
protection for its core technology in the United States may be extended to
include the delivery of any polynucleotide to any mammalian cell via any
internalizing cell surface receptor. Thus, the Company's protection in the
United States would no longer be limited to the delivery of genes to liver
cells. In Europe and Australia, the Company would have patent protection for
the targeted delivery of genes encoding immunogenic proteins to any cell type
for the purpose of eliciting an immune response. The Company also
exclusively licenses an Australian patent covering targeted delivery of
viruses or cells for selective internalization by liver cells.

The Company is presently seeking to obtain licenses for certain genes from
several different third parties. There can be no assurance that the Company
will be able to obtain such licenses on commercially favorable terms, if at
all, and if these licenses are not obtained, the Company might be prevented
from using certain of its technologies. The Company's failure to obtain a
license required to continue practicing its own technologies would have a
material adverse effect on the Company.

There can be no assurance that any additional gene therapy patents will be
issued to the Company. Further, there can no assurance that the issued
patents, or any patent that may be issued in the future, will survive
opposition or provide meaningful proprietary protection.

COMPETITION. The Company believes that competition in the treatment of the
diseases targeted by its gene therapy program will be of two types: chronic
treatment with pharmaceutical products; and other gene therapy systems under
development for insertion of the correct gene. There currently exist a
number of approved therapies for treatment of hemophilia, hepatitis B and C,
and atherosclerosis. Both purified and recombinant forms of Factor VIII have
been approved by the FDA for treatment of hemophilia and are effective to
stop bleeding episodes and to prevent bleeding if provided on a regular basis
to maintain serum concentrations. Interferon alpha-2b is currently approved
for treatment of chronic hepatitis B and C. Other interferons are being
tested for the treatment of viral hepatitis. In addition to interferons, a
variety of nucleoside analogs have been tested for treatment of chronic
hepatitis B, including 3TC. There are also approved therapies that reduce
serum LDL for the treatment of atherosclerosis.

Several major pharmaceutical companies are investigating gene therapy
treatments for the delivery of proteins to treat these diseases. If these
prove effective, they may compete with the Company's gene delivery therapies.
Many of the Company's competitors have substantially greater experience,
financial and technical resources and production, marketing and development
capabilities than the Company. There can be no assurance that competitors
have not or will not succeed in developing technologies and products more
quickly or that are more effective than any which have been or are being
developed by the Company or which would render the Company's technology and
products obsolete and noncompetitive.

CANCER TREATMENT TECHNOLOGY
BACKGROUND. Cancer is characterized by the uncontrolled growth of abnormal
cells that spread from the anatomic site of origin. This growth, if
uncontrolled, invades vital organs and may result in death. However, many
cancers can be cured if they are detected early and treated promptly; others
can be controlled for many years with a variety of treatment approaches.
Cancer is most often treated by surgery, radiation, chemotherapy, hormones
and more recently, immunotherapy.

<PAGE>

TECHNOLOGY. Immune Response is utilizing distinct proprietary technologies
for the development of more effective cancer therapies. The Company
initially intends to focus on treatments for colon, brain and prostate
cancers. Each of the technologies being developed uses a combination of
advanced gene therapy techniques with vaccine technology to enable the immune
system to recognize and control tumor growth.

- Technologies to increase immune system recognition of cancers

The first technology is designed to treat cancer patients with irradiated
tumor cells in combination with fibroblasts genetically modified to produce
cytokines such as IL-2. The genetic modification results in immune
stimulating cytokines being present to help the patient's immune system to
recognize and clear tumor cells. This technology is currently in a Phase I
clinical trial for colon cancer.

The second technology utilizes the body's most immunologically powerful
antigen-presenting cell, the dendritic cell, exposed to antigens isolated
from B cell lymphoma to stimulate the immune response system to recognize
and reject lymphoma cells.

- Technology to inhibit cancer evasion of the immune system

This technology is designed to prevent the cytokine known as transforming
growth factor beta ("TGF-B") from helping tumor cells evade detection.
TGF-B is overproduced in many cancer cells and is believed to subvert the
immune response to tumor cells by making them essentially invisible to the
immune system. The technology being developed is designed to introduce a
gene into tumor cells to inhibit the production of TGF-B. A Phase I
clinical trial for brain cancer, using this technology in up to 12
individuals, is currently on-going in collaboration with the University of
California, Los Angeles ("UCLA").

COLON CANCER. It is estimated that nearly 140,000 individuals in the United
States developed colon cancer in 1995 and an estimated 55,000 deaths were
attributable to colon cancer in the United States in 1995.

The Company's therapy under development is comprised of irradiated
fibroblasts from a skin biopsy, genetically modified to produce IL-2,
combined with irradiated tumor cells excised from the patient. In preclinical
studies, immunization with a preparation of the modified fibroblasts and
tumors prevented tumor growth in six out of eight treated mice. The tumors
in all of the control mice continued to grow.

In June 1995, the Company, in conjunction with the Sidney Kimmel Cancer
Center ("SKCC"), initiated a Phase I clinical trial of this potential therapy
in colon cancer patients that have failed conventional therapy. The Phase I
clinical trial 12 in patients involved the preparation of a custom therapy
for each patient. Results from this trial indicated the safety of the
approach. The Company is developing therapies that would alleviate the need
for isolating fibroblasts and tumor cells from each patient with the
objective of creating a universal, non-patient specific, product. Success in
this development program may lead to the application of this technology to
other solid tumors.

BRAIN CANCER. Brain tumors are responsible for significant morbidity and
mortality in both pediatric and adult populations. The most common type of
brain cancer is glioma, a tumor that arises in the supportive tissue of the
brain. Glioma tumor cells are known to overproduce the cytokine TGF-B, which
can suppress the activity of the immune system cells that are needed to
destroy tumors, and it is believed to be one of the mechanisms by which tumor
cells evade immune system recognition.

The initial therapy under development by the Company is intended to consist
of an individual's glioma cells genetically modified to inhibit TGF-B
production and then injected directly under the patient's skin to stimulate
an anti-tumor immune response. Preclinical studies published in the April
1996 edition of the PROCEEDINGS OF THE NATIONAL ACADEMY OF SCIENCES,
indicated that tumor cells modified by this technology to prevent production
of TGF-B may be used to stimulate immune system responses against the tumor
in rats. All 11 of the rats treated in this study showed complete tumor
regression and survived, while all of the untreated rats died. In December
1996, the Company, in collaboration with UCLA, began a 12 patient Phase I
glioma brain cancer trial using technology exclusively licensed from SKCC.
The experimental brain cancer vaccine being evaluated in this clinical trial
consists of irradiated glioblastoma cells modified with an antisense gene
that blocks the expression of TGF-B.
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RECURRENT PROSTATE CANCER. Prostate cancer is the second leading cause of
cancer death among men. According to the American Cancer Society, in 1996
approximately 317,000 American men will be diagnosed with prostate cancer and
an estimated 40,000 are expected to die of the disease. According to recent
articles, recurrent disease will occur in up to 40% of patients who undergo
radical prostatectomy or radiation therapy.

The therapy under development by the Company will combine both the TGF-B
antisense technology and the IL-2 secreting fibroblast approach described
above. Prostate cancer cell lines will be utilized in the vaccine, rather
than tumor cells from each individual patient. The Company is planning to
submit an IND for a Phase I clinical trial in 1997 using this therapy.

PATENTS. Technology to genetically modify fibroblasts with cytokine genes or
genes to inhibit TGF-B production has been exclusively licensed to the
Company from SKCC. The technology to use cytokine modified fibroblasts to
increase sensitivity to chemotherapy was jointly developed by SKCC and the
Company, and the Company retains exclusive rights to develop this technology.
Technology to use IL-3 for radiation sensitization has been licensed from
UCLA. SKCC and UCLA have applied for patent protection in the United States
and Europe related to the technologies licensed exclusively to the Company.
Immune Response has received a patent in Europe, which is being opposed, and
an application has been accepted in Australia related to the B cell lymphoma
technology exclusively licensed from the University of Brussels. There can
be no assurance that the issued patents, or any patent that may be issued in
the future, will survive opposition or provide meaningful proprietary
protection.

COMPETITION. New cancer therapies are being developed by numerous individual
investigators and companies. Some of these approaches involve modification
of tumor cells with a variety of cytokines, which approaches may prove
competitive with the technologies being developed by the Company. Activated
Cell Therapy is developing cancer therapies with technology similar to that
licensed by the Company from the University of Brussels.

Many of the Company's competitors have substantially greater experience,
financial and technical resources and production, marketing and development
capabilities than the Company. There can be no assurance that competitors
have not or will not succeed in developing technologies and products more
quickly or that are more effective than any which have been or are being
developed by the Company or which would render the Company's technology and
products obsolete and noncompetitive.

GOVERNMENT REGULATION
Clinical testing, manufacture, promotion and sale of the Company's drug
products are subject to extensive regulation by numerous governmental
authorities in the United States, principally the FDA, and corresponding
state and foreign regulatory agencies. The Company believes that REMUNE and
most of its other potential immune-based therapies will be regulated by the
FDA as biological drug products under current regulations of the FDA. In
general, the regulatory framework for biological drug products is more
rigorous than that for nonbiological drug products. Under the Food, Drug and
Cosmentic Act ("FDC Act") and the Public Health Service Act ("PHS Act"),
biological drug products must be shown to be safe, pure, potent and
effective. The FDC Act, the PHS Act and other federal and state statutes and
regulations govern or influence the testing, manufacture, safety,
effectiveness, labeling, storage, recordkeeping, approval, advertising,
distribution and promotion of biological prescription drug products.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, seizure of products, total or partial suspension of
product marketing, failure of the government to grant premarket approval,
withdrawal of marketing approvals and criminal prosecution.

The steps required before a biological drug product may be marketed in the
United States generally include preclinical studies and the filing of an
investigational new drug ("IND") application with the FDA, which must become
effective pursuant to FDA regulations before human clinical trials may
commence. Reports of results of preclinical studies and clinical trials for
biological drug products are submitted to the FDA in the form of a product
license application ("PLA") for approval for marketing and commercial
shipment. Submission of a PLA does not assure FDA approval for marketing.
The PLA review process may take a number of years to complete, although
reviews of applications for treatments of AIDS, cancer and other
life-threatening diseases may be accelerated or expedited. Failure of the
Company to receive FDA marketing approval for REMUNE or any of its other
products under development on a timely basis could have a material adverse
effect on the Company's business, financial condition and results of
operations.
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In addition to obtaining approval for each biological drug product, an
establishment license application ("ELA") usually must be filed and approved
by the FDA. Until recently, unless a company performed significant
manufacturing operations, it could not hold a biologics license that would
entitle the company to legally market the manufactured product. The FDA's
regulations, and policy statements regarding such manufacturing constraints,
for biological products recently have been changed. The Company believes
that under these new regulations it will be able to hold licenses for its
biological drug products even if it does not perform significant
manufacturing operations. Thus, the Company believes that it will be able to
utilize contract manufacturers to make its products without sacrificing any
opportunity to be the legal entity entitled to market the biological drug
products.

Among the other requirements for ELA approval is the requirement that
prospective manufacturers conform to the Good Manufacturing Practices ("GMP")
regulations specifically for biological drugs, as well as for other drugs.
In complying with the GMP regulations, manufacturers must continue to expend
time, money and effort in production, recordkeeping and quality control to
assure that the product meets applicable specifications and other
requirements. The FDA periodically inspects biological drug product
manufacturing facilities in order to assure compliance with applicable GMP
requirements. Failure to comply with the GMP regulations subjects the
manufacturer to possible FDA regulatory action, such as the suspension of
manufacturing, product recall or seizure, injunction and criminal
prosecution. There can be no assurance that the Company or its contract
manufacturers, if any, will be able to maintain compliance with the GMP
regulations on a continuing basis. Failure to maintain such compliance could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Another requirement for many biological drug products is lot-by-lot release
approval, which necessitates FDA approval of the release of each lot of a
biologic drug before commercialization. The lot-to-lot release and ELA
requirements may be applied to some or all of the Company's potential
immune-based therapies. Recently, the FDA amended its regulations to permit
certain biotechnology and synthetic biological drug products to be eligible
for approval under a biological product license that does not entail
lot-to-lot release and establishment licensing requirements. The Company
believes that its potential synthetic protein autoimmune disease products
will be subject to those new regulations, because they apply, in relevant
part, to therapeutic synthetic protein products composed of 40 or fewer amino
acids, and are for therapeutic, not prophylactic use. If the synthetic
peptides are subject to the new regulations, it will not necessarily reduce
all of the other regulatory requirements placed upon the Company to assure
and maintain FDA marketing clearances for its autoimmune products. Moreover,
there can be no assurance that REMUNE or any of the Company's other products
will be eligible for approval under a biological drug product license or
otherwise be subject to less rigorous regulation than traditional biological
products.

The Company believes its proprietary GeneDrug and cancer treatment therapies
will likely be regulated more like traditional biological products, subject
to both PLA and ELA requirements. This is because the Company's gene
products are subject to the FDA's Human Somatic Cell Therapy Products and
Gene Therapy Products Notice that the FDA issued in 1993 (the "1993 Notice").
The 1993 Notice defines gene therapy products as biological products subject
to biological licensure requirements. In addition, the 1993 Notice covers
many ancillary products used as part of the manufacturing process for gene
therapy products. The FDA states that such ancillary products may be subject
to medical device requirements or to new drug application or PLA
requirements. No assurance exists that the Company or its suppliers can meet
all the requirements of the 1993 Notice covering gene therapy products. As
with the Company's other potential products, the gene therapy products will
be subject to extensive FDA regulation throughout the product development
process, and there can be no assurance that any of these products will be
successful at securing the requisite FDA marketing approval on a timely
basis, if at all.

The preclinical and clinical testing process to obtain FDA approval of a
biological drug is expensive and time consuming. Preclinical studies are
conducted in animals usually to evaluate the potential safety of a product.
The results of preclinical studies are submitted to the FDA as part of the
IND application, which must become effective pursuant to FDA regulations
before human clinical trials may begin. Human clinical trials typically are
conducted in three phases and are subject to detailed protocols. Each
protocol indicating how the clinical trial will be conducted must usually be
submitted for review to the FDA as part of the IND application. The FDA's
review of a trial protocol does not necessarily mean that, if the trial is
completed, it will constitute proof of safety or efficacy (including
potency). Further, each clinical trial must be conducted under the auspices
of an independent Institutional Review Board ("IRB") established pursuant to
FDA regulations. The IRB considers, among other things, ethical concerns,
informed consent requirements and the possible liability of the institution
conducting the

14
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trials. The FDA or IRB may require changes in a protocol both prior to and
after the commencement of a clinical trial. There is no assurance that the
IRB or FDA will permit a trial to go forward or, once started, to be
completed.

The three phases of clinical trials are generally conducted sequentially, but
they may overlap. In Phase I, the initial introduction of the drug into
humans, the drug is tested for safety, side effects, dosage tolerance,
metabolism and clinical pharmacology. Phase I testing for an indication
typically takes at least one year to complete. Phase II involves controlled
tests in a large but still limited patient population to determine the
preliminary effectiveness of the drug for specific indications, to determine
optimal dosage and to identify possible side effects and safety risks. Phase
II trials typically take at least from one and one-half to two and one-half
years to complete. If preliminary evidence suggesting effectiveness has been
obtained during Phase II evaluations, expanded Phase III trials are
undertaken to gather the additional information about safety and
effectiveness that is needed to evaluate the overall benefit-risk
relationship of the product and to provide an adequate basis for physician
labeling. Phase III trials for an indication generally take from two and
one-half to five years to complete. There can be no assurance that Phase I,
Phase II or Phase III testing will be completed successfully within any
specified time period, if at all, with respect to any of the Company's
products that have not completed any such testing. Nor can there be any
assurance that completion of clinical testing will result in FDA approval.
Furthermore, the FDA may suspend clinical trials at any time if the patients
are believed to be exposed to a significant health risk.

A number of procedures are available to expedite approval or to allow
expanded access to investigational drugs. Certain investigational drugs,
including products for the treatment of AIDS, can be distributed outside of
traditional IND requirements on a "treatment" basis. Generally, the FDA may
permit an investigational drug, including an investigational biological drug,
to be used for "treatment" of patients outside of controlled clinical trials,
if: (1) the drug is intended to treat a serious or immediately
life-threatening disease; (2) there is no comparable or satisfactory
alternative drug or other therapy available to treat that stage of the
disease in the intended patient population; (3) the drug is under
investigation in a controlled clinical trial, or all clinical trials have
been completed; and (4) the sponsor of the controlled clinical trial is
actively pursuing marketing approval of the investigational drug with due
diligence. Although the FDA has granted expanded access to REMUNE for those
patients who are ineligible to enroll in the Phase III clinical trial, the
FDA has to date not designated expanded access protocols for REMUNE as
"treatment" protocols. Either expanded access or a treatment protocol
designation might permit third party reimbursement of some of the costs
associated with making REMUNE available to patients in such an expanded
access context. There can be no assurance that the FDA will determine that
REMUNE meets all of the FDA's criteria for use of an investigational drug for
treatment use or that, even if the product is allowed for treatment use, that
third party payers will provide reimbursement for any of the costs of REMUNE
treatment.

The FDA also has issued regulations to accelerate the approval of or to
expedite the review of new biological drug products for serious or
life-threatening illnesses that provide meaningful therapeutic benefit to
patients over existing treatments (e.g., the ability to treat patients
unresponsive to, or intolerant of, available therapy, or improved patient
response over available therapy). Under the accelerated approval program, the
FDA may grant marketing approval for a biological or nonbiological drug
product earlier than would normally be the case, based on an effect on a
surrogate endpoint or a clinical endpoint other than survival. Under the
program, the sponsor must agree to conduct postmarketing studies to verify
and describe the clinical benefits of the product. In addition to the
accelerated approval process, the FDA has established procedures designed to
expedite the development, evaluation and marketing of new therapies intended
to treat persons with life-threatening and severely-debilitating illnesses,
especially when no satisfactory alternative therapy exists. The term
"life-threatening" is defined by the FDA to mean: (1) disease or conditions
where the likelihood of death is high unless the course of the disease is
interrupted and (2) diseases or conditions with potentially fatal outcomes,
where the endpoint of clinical trial analysis is survival. "Severely
debilitating" is defined by the FDA to mean diseases or conditions that cause
major irreversible morbidity. As a condition of approval, the FDA may
require the sponsor to conduct certain postmarketing studies to delineate
additional information about the drug's risks, benefits and optimal use.
There can be no assurance that the FDA will consider REMUNE, or any other of
the Company's products under development, to be an appropriate candidate for
accelerated approval or expedited review.

The Company also is subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control
Act, the Resource Conservation and Recovery Act and other present and
potential future federal, state or local regulations. Regulations concerning
biotechnology may affect the Company's research and development programs.
Furthermore, existing or additional government regulations may

<PAGE>

be applied that could prevent or delay regulatory approval of the Company's
products, or affect the pricing or distribution of such products.

The Company also is subject to foreign regulatory requirements governing
human clinical trials and pharmaceutical sales that vary widely from country
to country. Whether or not FDA approval has been obtained, approval of a
product by comparable regulatory authorities of foreign countries must be
obtained prior to marketing the product in those countries. The approval
process may be more or less rigorous from country to country and the time
required may be longer or shorter than that required in the United States.
The Company may seek to use foreign marketing partners to assist in obtaining
foreign regulatory approval for REMUNE and other products.

EMPLOYEES
As of March 14, 1997, the Company had 146 full-time employees, of whom 34 hold
Ph.D. or other advanced degrees. Of these employees, 119 are engaged in, or
directly support, research and development. A significant number of the
Company's management and professional employees have had prior experience with
pharmaceutical and biotechnology companies. None of the Company's employees is
covered by a collective bargaining agreement.

RISK FACTORS
UNCERTAINTY OF PRODUCT DEVELOPMENT AND CLINICAL TESTING. The Company has not
completed the development of any products and there can be no assurance any
products will be successfully developed. The Company's potential HIV,
autoimmune disease, gene therapy and cancer products currently under
development will require significant additional research and development
efforts and regulatory approvals prior to potential commercialization.

The Company's potential HIV product, REMUNE, is in a Phase III clinical trial
designed to provide evidence of efficacy based on clinical endpoints; however
there can be no assurance that the results of such clinical trial will
demonstrate that REMUNE is safe and efficacious or, that even if the results
of the clinical trial are considered successful by the Company, that the FDA
will not require the Company to conduct additional large scale clinical
trials with REMUNE before the FDA will consider approving REMUNE for
commercial sale. In addition, REMUNE is being tested in a Phase II clinical
trial in Thailand, in a pediatric Phase I clinical trial in the United States
and in combination trials with approved HIV therapies in the United States
and Spain. Failure of these trials to demonstrate the safety and
effectiveness of REMUNE could have a material adverse effect on the
regulatory approval process for this potential product. The Company's other
potential products and technologies are at a much earlier stage of
development than REMUNE. The Company's gene therapy technology and certain
of its technologies for the treatment of cancer have not yet been tested in
humans and there can be no assurance that human testing of potential products
based on such technologies will be permitted by regulatory authorities or,
that even if human testing is permitted, that products based on such
technologies will be shown to be safe or efficacious. Potential products
based on the Company's autoimmune technology and certain of its cancer
technologies are at an early stage of clinical testing and there can be no
assurance that such products will be shown to be safe or efficacious.

There can be no assurance that the results of the Company's preclinical
studies and clinical trials will 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 the
Company is to develop any products. Delays in planned patient enrollment in
the Company's current clinical trials or future clinical trials may result in
increased costs, program delays or both. There can be no assurance that any
of the Company's potential products will prove to be safe and effective in
clinical trials, that FDA or other regulatory approvals will be obtained or
that such products will achieve market acceptance. Any products resulting
from these programs are not expected to be successfully developed or
commercially available for a number of years, if at all.

There can be no assurance that unacceptable toxicities or side effects will
not 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 the Company's products. The appearance of any such
unacceptable toxicities or side effects could interrupt, limit, delay or
abort the development of any of the Company's products or, if previously
approved, necessitate their withdrawal from the market. Furthermore, there
can be no assurance that disease resistance will not limit the efficacy of
potential products.

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LENGTHY APPROVAL PROCESS AND UNCERTAINTY OF GOVERNMENT REGULATORY
REQUIREMENTS. Clinical testing, manufacture, promotion and sale of the
Company's drug products are subject to extensive regulation by numerous
governmental authorities in the United States, principally the FDA, and
corresponding state and foreign regulatory agencies. The Company believes
that REMUNE and most of its other potential immune-based therapies will be
regulated by the FDA as biological drug products under current regulations of
the FDA. In general, the regulatory framework for biological drug products
is more rigorous than that for nonbiological drug products. The Federal FDC
Act, the PHS Act and other federal and state statutes and regulations govern
or influence the testing, manufacture, safety, effectiveness, labeling,
storage, recordkeeping, approval, advertising, distribution and promotion of
biological prescription drug products. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, seizure
of products, total or partial suspension of product marketing, failure of the
government to grant premarket approval, withdrawal of marketing approvals and
criminal prosecution.

The regulatory process for new therapeutic drug products, including the
required preclinical studies and clinical testing, is lengthy and expensive
and there can be no assurance that necessary FDA clearances will be obtained
in a timely manner, if at all. There can be no assurance as to the length of
the clinical trial period or the number of patients the FDA will require to
be enrolled in the clinical trials in order to establish the safety and
efficacy of the Company's products. The Company may encounter significant
delays or excessive costs in its efforts to secure necessary approvals, and
regulatory requirements are evolving and uncertain. Future United States or
foreign legislative or administrative acts could also prevent or delay
regulatory approval of the Company's products. There can be no assurance
that the Company will be able to obtain the necessary approvals for clinical
trials, manufacturing or marketing of any of its 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. Failure of the Company to obtain
marketing approval for REMUNE or any of its other products under development
on a timely basis, or FDA withdrawal of marketing approval once obtained,
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The steps required before a biological drug product may be marketed in the
United States generally include preclinical studies and the filing of an IND
application with the FDA. Reports of results of preclinical studies and
clinical trials for biological drug products are submitted to the FDA in the
form of a PLA for approval for marketing and commercial shipment. Submission
of a PLA does not assure FDA approval for marketing. The PLA review process
may take a number of years to complete, although reviews of applications for
treatments of AIDS, cancer and other life-threatening diseases may be
accelerated or expedited. Failure of the Company to receive FDA marketing
approval for REMUNE or any of its other products under development on a timely
basis could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition to obtaining approval for
each biological drug product, an ELA usually must be filed and approved by the
FDA.

Among the other requirements for ELA approval is the requirement that
prospective manufacturers conform to the FDA's drug GMP requirements
specifically for biological drugs, as well as for other drugs. In complying
with the FDA's drug GMP requirements, manufacturers must continue to expend
time, money and effort in production, recordkeeping and quality control to
assure that the product meets applicable specifications and other requirements.
Failure to comply with the FDA's drug GMP requirements subjects the
manufacturer to possible FDA regulatory action. There can be no assurance that
the Company or its contract manufacturers, if any, will be able to maintain
compliance with the FDA's drug GMP requirements on a continuing basis. Failure
to maintain such compliance could have a material adverse effect on the
Company's business, financial condition and results of operations.

<PAGE>

will be eligible for approval under a biological drug product license or
otherwise be subject to less rigorous regulation than traditional biological
products.

The Company believes its proprietary GeneDrug and cancer treatment therapies
will likely be regulated more like traditional biological products, subject to
both PLA and ELA requirements. As with the Company's other potential products,
the gene therapy and cancer products will be subject to extensive FDA
regulation throughout the product development process, and there can be no
assurance that any of these products will be successful at securing the
requisite FDA marketing approval on a timely basis, if at all.

A number of procedures are available to expedite approval or to allow expanded
access to investigational drugs. Certain investigational drugs, including
products for the treatment of AIDS, can be distributed outside of traditional
IND requirements on a "treatment IND" basis. Generally, the FDA may permit an
investigational drug, including an investigational biological drug, to be used
under a "treatment IND" for patients outside of controlled clinical trials
under certain conditions. Although the FDA has granted expanded access to
REMUNE for those patients who are ineligible to enroll in the Phase III
clinical trial, the FDA has to date not designated expanded access protocols
for REMUNE as "treatment" protocols. Either expanded access or a treatment
protocol designation might permit third party reimbursement of some of the
costs associated with making REMUNE available to patients in such an expanded
access context. There can be no assurance that the FDA will determine that
REMUNE meets all of the FDA's criteria for use of an investigational drug for
treatment use or that, even if the product is allowed for treatment use, that
third party payers will provide reimbursement for any of the costs of treatment
with REMUNE.

To market any drug products outside of the United States, the Company is also
subject to numerous and varying foreign regulatory requirements, implemented
by foreign health authorities, governing the design and conduct of human
clinical trials and marketing approval. The approval procedure varies among
countries and can involve additional testing, and the time required to obtain
approval may differ from that required to obtain FDA approval. The foreign
regulatory approval process includes 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.

HISTORY OF OPERATING LOSSES. As of December 31, 1996, the Company had an
accumulated deficit of $120 million. The Company has not generated revenues
from the commercialization of any products and expects to incur substantial net
operating losses over the next several years. There can be no assurance that
the Company will be able to generate sufficient product revenue to become
profitable at all or on a sustained basis. The Company expects to have
quarter-to-quarter fluctuations in expenses, some of which could be
significant, due to expanded research, development and clinical trial
activities.

ADDITIONAL FINANCING REQUIREMENTS AND ACCESS TO CAPITAL. The Company may need
to raise additional funds to conduct research and development, preclinical
studies and clinical trials necessary to bring its potential products to market
and establish manufacturing and marketing capabilities. The Company
anticipates that the REMUNE Phase III clinical trial costs will be
approximately $10 million per year, with an additional $10 million cost per
year for manufacturing, research and all other costs associated with the
product for up to three years. The anticipated costs with respect to REMUNE
will depend on many factors, including the successful enrollment of the Phase
III clinical trial, the availability of third party reimbursement for expanded
access protocols for REMUNE, the potential for accelerated approval and certain
other factors which will influence the Company's determination of the
appropriate continued investment of the Company's financial resources in this
program. The Company's future capital requirements will depend on many
factors, including continued scientific progress in its research and
development programs, the scope and results of preclinical studies and clinical
trials, the time and costs involved in obtaining

18
<PAGE>

regulatory approvals, the costs involved in filing, prosecuting and enforcing
patent claims, competing technological and market developments, the cost of
manufacturing scale-up, effective commercialization activities and arrangements
and other factors not within the Company's control. The Company intends to
seek additional funding through public or private financings, arrangements with
corporate collaborations or other sources. Adequate funds may not be available
when needed or on terms acceptable to the Company. Insufficient funds may
require the Company to scale back or eliminate some or all of its research and
development programs or license to third parties products or technologies that
the Company would otherwise seek to develop itself. The Company anticipates
that its existing resources, will enable the Company to maintain its current
and planned operations through mid-1998.

PATENTS AND PROPRIETARY TECHNOLOGY. The Company has filed, or participated as
licensee, in the filing of a number of patent applications in the United States
and many international countries. The Company files applications as
appropriate for patents covering its products and processes. The Company has
been issued patents, or has licensed patents, covering certain aspects of its
proposed HIV, autoimmune disease, gene therapy and cancer technologies. The
Company's success may depend in part on its ability to obtain patent protection
for its products and processes. The Company is aware that a group working with
Connective Therapeutics, Inc. has filed patent applications related to
autoimmune disease research that covers technology similar to that used by the
Company. There can be no assurance that the Company's patent applications will
be issued as patents or that any of its issued patents, or any patent that may
be issued in the future, will provide the Company with adequate protection for
the covered products, processes or technology.

The patent positions of biotechnology and pharmaceutical companies can be
highly uncertain, and involve complex legal and factual questions. Therefore,
the breadth of claims allowed in biotechnology and pharmaceutical patents
cannot be predicted. The Company also relies upon unpatented trade secrets
and know how, and no assurance can be given that others will not independently
develop substantially equivalent trade secrets or know how. In addition,
whether or not the Company's patents are issued, or issued with limited
coverage, others may receive patents which contain claims applicable to the
Company's product. There can be no assurance that any of the Company's
patents, or any patents issued to the Company in the future, will afford
meaningful protection against competitors. Defending any such patent could be
costly to the Company, and there can be no assurance that the patent would be
held valid by a court of competent jurisdiction.

The Company also relies on protecting its proprietary technology in part
through confidentiality agreements with its corporate collaborators, employees,
consultants and certain contractors. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or independently discovered by its competitors.

It is possible that the Company's products or processes will infringe, or will
be found to infringe, patents not owned or controlled by the Company. If any
relevant claims of third-party patents are upheld as valid and enforceable,
the Company could be prevented from practicing the subject matter claimed in
such patents, or would be required to obtain licenses or redesign its products
or processes to avoid infringement. There can be no assurance that such
licenses would be available at all or on terms commercially reasonable to the
Company or that the Company could redesign its products or processes to avoid
infringement. Litigation may be necessary to defend against claims of
infringement, to enforce patents issued to the Company or to protect trade
secrets. Such litigation could result in substantial costs and diversion of
management efforts regardless of the results of such litigation and an adverse
result could subject the Company to significant liabilities to third parties,
require disputed rights to be licensed or require the Company to cease using
such technology.

TECHNOLOGICAL CHANGE AND COMPETITION. The biotechnology industry continues to
undergo rapid change and competition is intense and is expected to increase.
There can be no assurance that competitors have not or will not succeed in
developing technologies and products that are more effective than any which
have been or are being developed by the Company or which would render the
Company's technology and products obsolete and noncompetitive. Many of the
Company's competitors have substantially greater experience, financial and
technical resources and production, marketing and development capabilities
than the Company. Accordingly, certain of the Company's competitors may
succeed in obtaining regulatory approval for products more rapidly or
effectively than the Company. If the Company commences commercial sales of its
products, it will also be competing with respect to manufacturing efficiency
and sales and marketing capabilities, areas in which it currently has no
experience.

<PAGE>

DEPENDENCE ON THIRD PARTIES. The Company's strategy for the research,
development and commercialization of its products requires entering into
various arrangements with corporate collaborators (such as the Company's
agreement with Bayer), licensors, licensees and others, and the Company's
commercial success is dependent upon these outside parties performing their
respective contractual responsibilities. The amount and timing of resources
such third parties will devote to these activities may not be within the
control of the Company. There can be no assurance that such parties will
perform their obligations as expected or that the Company will derive any
revenue from such arrangements. Although the Company has collaborative
agreements with several universities and research institutions, the Company's
agreement with Bayer is the only collaborative agreement that will provide the
Company with contract revenue. There can be no assurance that these
collaborations will result in the development of any commercial products.
Immune Response intends to seek additional collaborative arrangements to
develop and commercialize certain of its products. There can be no assurance
that the Company will be able to negotiate collaborative arrangements on
favorable terms, or at all, in the future, or that its current or future
collaborative arrangements will be successful.

LACK OF COMMERCIAL MANUFACTURING AND MARKETING EXPERIENCE. The Company has a
manufacturing facility for REMUNE located in King of Prussia, Pennsylvania, and
a pilot manufacturing facility in Carlsbad, California for its other products.
The Company has not yet manufactured its product candidates in commercial
quantities. No assurance can be given that the Company, on a timely basis,
will be able to make the transition from manufacturing clinical trial
quantities to commercial production quantities successfully or be able to
arrange for contract manufacturing. The Company believes it will be able to
manufacture REMUNE for initial commercialization, if the product obtains FDA
approval, but it has not yet demonstrated the capability to manufacture REMUNE
in commercial quantities, or its autoimmune disease, gene therapy and cancer
treatments in large-scale clinical or commercial quantities. The Company has
no experience in the sales, marketing and distribution of pharmaceutical
products. There can be no assurance that the Company will be able to establish
sales, marketing and distribution capabilities or make arrangements with its
collaborators, licensees or others to perform such activities or that such
efforts will be successful.

The manufacture of the Company's products involves a number of steps and
requires compliance with stringent quality control specifications imposed by
the Company itself and by the FDA. Moreover, the Company's products can only
be manufactured in a facility that has undergone a satisfactory inspection by
the FDA. For these reasons, the Company would not be able quickly to replace
its manufacturing capacity if it were unable to use its manufacturing
facilities as a result of a fire, natural disaster (including an earthquake),
equipment failure or other difficulty, or if such facilities are deemed not in
compliance with the FDA's drug GMP requirements and the non-compliance could
not be rapidly rectified. The Company's inability or reduced capacity to
manufacture its products would have a material adverse effect on the Company's
business and results of operations.

The Company may enter into arrangements with contract manufacturing companies
to expand its own production capacity in order to meet requirements for its
products, or to attempt to improve manufacturing efficiency. If the Company
chooses to contract for manufacturing services and encounters delays or
difficulties in establishing relationships with manufacturers to produce,
package and distribute its finished products, clinical trials, market
introduction and subsequent sales of such products would be adversely affected.
Further, contract manufacturers must also operate in compliance with the FDA's
drug GMP requirements; failure to do so could result in, among other things,
the disruption of product supplies. Until recently, biologic product licenses
could not be held by any company unless it performed significant manufacturing
operations. The FDA recently amended its regulations in this regard, and the
Company believes that under these new regulations it can now hold licenses for
its biological products without performing significant manufacturing steps.
Nonetheless, the Company's potential dependence upon third parties for the
manufacture of its products may adversely affect the Company's profit margins
and its ability to develop and deliver such products on a timely and
competitive basis.

UNCERTAINTY OF PRODUCT PRICING, REIMBURSEMENT AND RELATED MATTERS. The
Company's ability to earn sufficient returns on its products will depend in
part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health coverage insurers, managed care organizations and
other organizations. Third party payors are increasingly challenging the price
of medical products and services. If purchasers or users of the Company's
products are not able to obtain adequate reimbursement for the cost of using
such products, they may forego or reduce such use.

<PAGE>

Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and there can be no assurance that adequate
third party coverage will be available.

PRODUCT LIABILITY EXPOSURE. The Company faces an inherent business risk of
exposure to product liability and other claims in the event that the development
or use of its technology or prospective products is alleged to have resulted in
adverse effects. While the Company has taken, and will continue to take, what
it believes are appropriate precautions, there can be no assurance that it will
avoid significant liability exposure. Although the Company currently carries
product liability insurance for clinical trials, there can be no assurance that
the Company has sufficient coverage, or can 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 products developed by
the Company. A product liability claim could have a material adverse effect on
the Company's business, financial condition and results of operations.

HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS. Although the Company does not
currently manufacture commercial quantities of its product candidates, it
produces limited quantities of such products for its clinical trials. The
Company's research and development processes involve the controlled storage, use
and disposal of hazardous materials, biological hazardous materials and
radioactive compounds. The Company is subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of such materials and certain waste products. Although the Company believes
that its safety procedures for handling and disposing of such materials comply
with the standards prescribed by such laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result, and any such liability could exceed the resources
of the Company. There can be no assurance that the Company will not be required
to incur significant costs to comply with current or future environmental laws
and regulations nor that the operations, business or assets of the Company will
not be materially or adversely affected by current or future environmental laws
or regulations.

VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS. The market price of Immune
Response's Common Stock, like that of the common stock of many other
biopharmaceutical companies in the development stages, has been and is likely to
be highly volatile. Factors such as the results of preclinical studies and
clinical trials by the Company, its collaborators or its competitors, other
evidence of the safety or efficacy of products of the Company or its
competitors, announcements of technological innovations or new products by the
Company or its competitors, governmental regulatory actions, developments with
the Company's collaborators, developments concerning patent or other proprietary
rights of the Company or its competitors (including litigation), concern as to
the safety of the Company's products, period-to-period fluctuations in the
Company's operating results, changes in estimates of the Company's performance
by securities analysts, market conditions for biopharmaceutical stocks in
general and other factors not within the control of the Company could have a
significant adverse impact on the market price of the Common Stock. The Company
has never paid cash dividends on its Common Stock and does not anticipate paying
any cash dividends in the foreseeable future.

EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS. The Company's Certificate of
Incorporation and Bylaws include provisions that could discourage potential
takeover attempts and make attempts by stockholders to change management more
difficult. The approval of 66 2/3 percent of the Company's 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 contained in the Company's
Certificate of Incorporation. Further, pursuant to the terms of its stockholder
rights plan, the Company has 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 the Company on
terms not approved by the Board of Directors and may have the effect of
deterring hostile takeover attempts.

<PAGE>

EXECUTIVE OFFICERS
The executive officers of the Company are as follows:

DENNIS J. CARLO, PH.D., age 53, a co-founder of the Company, has been President
and Chief Executive Officer since September 1994, and was Chief Operating
Officer from April 1987 to September 1994 and Assistant Corporate Secretary and
a Director since 1987. Dr. Carlo was Chief Scientific Officer from April 1987
to September 1995 and Executive Vice President from October 1987 to September
1994. From January 1982 to May 1987, Dr. Carlo was Vice President of Research
and Development and Vice President of Therapeutic Manufacturing at Hybritech
Incorporated, a biotechnology company that was acquired by Eli Lilly & Company
("Eli Lilly"), a pharmaceutical company, in 1986. From 1971 to 1981, Dr. Carlo
held various positions at Merck & Co., Inc., including Director of Development
and Basic Cellular Immunology and Director of Bacterial Vaccines and Immunology.
Dr. Carlo is also a director of Vyrex Corporation. Dr. Carlo has authored or
co-authored over 100 articles and abstracts in the field of immunology. Dr.
Carlo received his Ph.D., M.S. and B.S. from Ohio State University.

CHARLES J. CASHION, age 45, has been Vice President, Finance and Chief Financial
Officer of the Company since February 1989, Secretary of the Company since
September 1989 and Treasurer of the Company since May 1991. From September 1987
to August 1989, Mr. Cashion was Executive Vice President and Secretary of Smith
Labs and President and Chief Executive Officer of Sutter Corporation, a wholly
owned subsidiary of Smith Labs. From 1980 to 1987, Mr. Cashion was Vice
President, Chief Financial Officer and Treasurer of Smith Laboratories. Mr.
Cashion previously held positions at Baxter International, Inc., and Motorola,
Inc. Mr. Cashion received his M.B.A. and B.S. from Northern Illinois
University.

STEVEN W. BROSTOFF, PH.D., age 54, has been Chief Scientific Officer since
October 1995 and Vice President, Research and Development for the Company since
May 1992, and was Executive Director of Autoimmune Disease Research from July
1988 to May 1992. From 1973 to 1988, Dr. Brostoff held various positions within
the Medical University of South Carolina including: Director, University
Research Development; Director, Medical Scientist Training Program; Director,
Program in Molecular and Cellular Biology and Pathobiology; Professorships in
Microbiology and Immunology, and in Neurology; and served as Associate Dean of
the Graduate School. During his tenure at the University, Dr. Brostoff also
served as a Visiting Scientist at Oxford University in the United Kingdom.
Prior to this, Dr. Brostoff held positions with Albert Einstein College of
Medicine, Merck Institute for Therapeutic Research, the Salk Institute, and the
Eleanor Roosevelt Institute for Cancer Research. Dr. Brostoff received his
Ph.D. and B.S. from the Massachusetts Institute of Technology.

STEVEN P. RICHIERI, R.PH., age 42, has served as Senior Vice President,
Operations since October 1995, and was Vice President, Medical and Regulatory
Affairs from May 1992 to October 1995, and Executive Director, Medical and
Regulatory Affairs from October 1991 to May 1992. From 1984 to 1991, Mr.
Richieri held various positions with Dura Pharmaceuticals, Inc. including Vice
President, Regulatory and Technical Affairs. From 1981 to 1984, Mr. Richieri
worked in Regulatory Affairs with Barnes Hind Inc., a subsidiary of Revlon, Inc.
Prior to joining Barnes Hind Inc., Mr. Richieri worked as a Pharmacist in the
medical community. Mr. Richieri received his M.B.A. from the University of San
Diego and his B.S. from Rutgers College of Pharmacy.

FRED C. JENSEN, D.V.M., age 71, has served as Vice President, Virology Research
and Development since May 1992 and was Executive Director, Virology Research
from March 1988 to May 1992. From 1983 to 1987, Dr. Jensen was the Senior Vice
President of Cytotech, Inc. From 1973 to 1982, Dr. Jensen served as an
Associate Member with Scripps Clinic and Research Foundation in various
scientific disciplines including Immunopathology and Cellular and Development
Immunology. Prior to joining Scripps, Dr. Jensen worked with Wistar Institute
and Microbiological Associates. Dr. Jensen received his D.V.M. from the
University of BRNO, School of Veterinary Medicine in Czechoslovakia after
completion of undergraduate studies.

PAULA B. ATKINS, age 43, has been Vice President, Administration of the Company
since September 1992, and was Executive Director, Administration from June 1991
to September 1992, and Director, Administration from March 1988 to June 1991.
From January 1985 to March 1988, Ms. Atkins was Director of Human Resources and
Administration for Access Research Corporation. Ms. Atkins held positions
previously with Foodmaker, Inc., a wholly owned subsidiary of Ralston Purina,
and Scripps Clinic and Research Foundation. Ms. Atkins received her M.S. and
B.A. from San Diego State University.

<PAGE>

ITEM 2. PROPERTIES

The Company leases a 50,000 square foot laboratory and headquarters facility
located in Carlsbad, California. Under the terms of the lease, which expires on
December 31, 2000, and has two five-year options to extend, current monthly
rental on the facility is approximately $62,000.

The Company subleases a 51,000 square foot manufacturing facility located in
King of Prussia, Pennsylvania. Under the terms of the sublease which expires on
September 30, 1997, the monthly rental on the facility is $25,400. The Company
has exercised an option to extend the sublease for three years, and has
additional options to extend the sublease for up to six additional years, in
three-year increments.

The Company owns 8.6 acres of undeveloped property in an industrial park in
Vista, California. The property is currently for sale by the Company.

ITEM 3. LEGAL PROCEEDINGS

Not applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded in the over-the-counter market on the
Nasdaq National Market under the symbol "IMNR." The following table sets forth
the range of high and low sales prices for the Common Stock on the Nasdaq
National Market for the periods indicated since January 1, 1995.

1995 HIGH LOW
---- ---- ---
January 1 - March 31, 1995 $ 8.00 $ 2.66
April 1 - June 30, 1995 6.75 2.69
July 1 - September 30, 1995 8.44 4.00
October 1 - December 31, 1995 7.63 3.63

1996
----
January 1 - March 31, 1996 8.50 4.75
April 1 - June 30, 1996 15.25 5.94
July 1 - September 30, 1996 11.38 7.13
October 1 - December 31, 1996 9.63 6.52

As of March 14, 1997 the Company's Common Stock was held by 1,017 stockholders
of record. The Company has never paid cash dividends and does not anticipate
paying any cash dividends in the foreseeable future.

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994 1993 1992
----------------------------------------
(In thousands, except per share data)

STATEMENT OF OPERATIONS DATA:
Licensed research revenue $ 6,000 $ --- $ 1,000 $ --- $ ---

Contract research revenue 1,000 1,561 6,035 4,768 4,035

Research and development expenses 27,211 19,489 13,511 11,854 7,620

Acquired in-process research and
development expense --- --- --- --- 29,768

Net loss (21,026) (19,936) (17,399) (15,738) (33,753)

Net loss per common share (1.19) (1.19) (1.05) (.95) (2.19)

Shares used in computing net loss
per share 17,658 16,750 16,614 16,550 15,428

DECEMBER 31,
----------------------------------------
1996 1995 1994 1993 1992
----------------------------------------
(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents, marketable
securities and short-term investments $47,787 $44,610 $59,328 $75,359 $90,362

Working capital 45,684 43,586 59,226 75,691 91,004

Total assets 54,086 50,429 68,483 86,680 103,128

Stockholders' equity 51,304 48,441 67,086 84,915 100,576

25
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW
Immune Response is a biopharmaceutical company engaged in the development of
proprietary products in the areas of HIV, autoimmune disease, gene therapy and
cancer.

This discussion contains forward-looking statements concerning the Company's
operating results and timing of anticipated expenditures. Such statements are
subject to risks and uncertainties which could cause actual results to differ
materially from those projected. Factors that could cause or contribute to such
differences include those discussed under "Risk Factors," as well as those
discussed elsewhere in this Form 10-K. The following should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Form 10-K.

During 1996, several significant transactions occurred that affected the
financial condition of the Company. In April 1996, the Company received $5
million from Trinity for the purchase of the Company's common stock at $15 per
share. Trinity has also agreed to make additional equity investments of up to
$10 million based on the achievement of certain regulatory and commercial
milestones and governmental approvals. There can be no assurance that any such
milestones or approvals will be achieved or obtained.

In July 1996, the Company received a $6 million licensee fee and a $1 million
research payment from Bayer. The Company will also receive additional funding
from Bayer for the Company's hemophilia A research program.

In October 1996, the Company entered into an agreement with Viru-Tech to develop
and distribute REMUNE in South America and Central America. Under the
agreement, Viru-Tech purchased $3 million of the Company's common stock at a
price of $12.77 per share.

Finally, during the fourth quarter of 1996, the Company issued 2,530,000 shares
of common stock at $6.50 per share, in an underwritten public offering. Net
proceeds from this offering were $15.3 million.

The Company has not been profitable since inception and had an accumulated
deficit of $120 million as of December 31, 1996. To date, the Company has not
recorded any revenues from the sale of products. Revenues recorded through
December 31, 1996 were earned in connection with contract research, licensing
agreements and investment income. The Company expects its operating losses to
continue to increase during 1996 and beyond, as well as to have quarter-to-
quarter expense fluctuations, some of which could be significant, due to
expanded research, development and clinical trial activities.

RESULTS OF OPERATIONS
License and contract research revenues of $7 million in 1996 were derived from a
collaboration agreement entered into with Bayer in July 1996. Contract research
revenues of $6.0 million in 1994 and $1.6 million in 1995 were primarily derived
from a research and development agreement with a joint venture with Rhone-
Poulenc Rorer Inc. ("Joint Venture"), which was terminated in March 1995.
Revenues derived from this agreement included reimbursement for research and
development costs and certain administrative expenses. The decrease in revenue
received from the Joint Venture during 1995 was the result of the Joint Venture
incurring costs for only two months in 1995.

Investment income was $2.6 million in 1994, $3.0 million in 1995 and $2.6
million in 1996. The fluctuation in investment income over the past three years
was due to the Company's cash position during that period, as well as to the
fluctuation in interest rates.

The Company's research and development expenses have increased substantially
over the past three years from $13.5 million in 1994, to $19.5 million in 1995
to $27.2 million in 1996. These increases were primarily due to the expansion
of clinical testing and regulatory management of REMUNE, expansion of the
Company's autoimmune disease research programs, including Phase II clinical
trials with a rheumatoid arthritis treatment and a psoriasis treatment, as well
as increased staffing levels and purchases of laboratory materials and supplies
related to the assumption of the manufacturing of REMUNE from the Joint Venture.
In addition, research and development expenditures have increased related to
research using gene therapy and cancer treatments. Research and

26
<PAGE>

development expenses are expected to continue to rise in the foreseeable
future due to expanding preclinical and clinical testing of the proposed
autoimmune disease, gene therapy and cancer treatments. Research and
development expenses are also expected to increase due to the Company's
on-going large scale Phase III clinical trial with REMUNE which began in
March 1996.

The Company's costs incurred for the development of REMUNE during 1994, 1995 and
1996 were $5.3 million, $11.3 million and $17.8 million, respectively. Costs
incurred for the development of potential products in the autoimmune disease
program were $3.7 million, $4.1 million and $4.3 million for the years 1994,
1995 and 1996 respectively. The gene therapy program incurred costs in 1994,
1995 and 1996 of $4.3 million, $3.7 million and $4.3 million, respectively. The
cancer program, which began in 1996, incurred costs of $756,000 through December
31, 1996.

General and administrative expenses were $5.6 million in 1994, $3.7 million in
1995 and $3.4 million in 1996. The decrease in general and administrative
expenses from 1994 to 1995 is primarily attributable to the reduction in costs
attributed to a subsidiary of the Company being relocated to California in the
fourth quarter of 1994, as well as to the reduction of approximately $1.1
million of expenses that were incurred in 1994 related to an arbitration
proceeding with Rhone-Poulenc Rorer related to the management of the research
and development activities of the Joint Venture. General and administrative
expenses decreased in 1996 compared to 1995 primarily due to the additional
costs incurred in 1995 related to the Company's acquisition of Rhone-Poulenc
Rorer's interest in the Joint Venture. General and administrative expenses
necessary to support the expanded research and development activities are
expected to remain consistent with 1996 levels.

The Company's allocable share of the Joint Venture's losses were $7.9 million in
1994 and $1.3 million in 1995. The decrease in expenses from 1994 to 1995 was a
result of the Joint Venture incurring costs for only two months in 1995. Since
acquiring Rhone-Poulenc Rorer's interest in the Joint Venture in March 1995, the
Company ceased receiving allocations of revenues and expenses from the Joint
Venture.

LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception principally through the
sale of equity securities, contract research revenues from the Joint Venture and
by leasing its office and research facilities and laboratory equipment. Due to
the Company acquiring Rhone-Poulenc Rorer's interest in the Joint Venture in
March 1995, the Company will receive no further revenue from the Joint Venture.
In connection with acquiring Rhone-Poulenc Rorer's interest in the Joint
Venture, the Company agreed to pay Rhone-Poulenc Rorer up to $3 million in
royalties on future commercial sales of REMUNE, or upon certain transactions
involving licensing rights for REMUNE to a future corporate partner.

As of December 31, 1996, the Company had working capital of $45.7 million,
including $47.8 million of cash, cash equivalents, marketable securities and
short-term investments. This compares with working capital at December 31, 1995
of $43.6 million, including $44.6 million of cash, cash equivalents and short-
term investments. The increase in working capital, despite the Company's
operating expenses increasing in 1996, was due to the Company's equity
transactions during 1996, as well as to the Company's collaboration with Bayer.

Regardless of whether additional funds are received from Trinity, and despite
the funding to be received from Bayer, the Company will need to raise additional
funds for expanding research and development activities in gene therapy and
cancer, conducting the Phase III clinical trial for REMUNE initiated in March
1996, and enhancing the manufacturing facility to enable production of
commercial quantities of the Company's products. In particular, the Company
anticipates that the Phase III REMUNE clinical trial costs will be approximately
$10 million per year, with an additional $10 million cost per year for
manufacturing, research and other costs associated with the product for up to
three years. The anticipated costs with respect to REMUNE will depend on many
factors, including the successful enrollment of the Phase III clinical trial,
the availability of third party reimbursement for expanded access protocols for
REMUNE, the potential for accelerated approval and certain other factors which
will influence the Company's determination of the appropriate continued
investment of the Company's financial resources in this program. To obtain such
funding, the Company may consider collaborative arrangements and public or
private financings. There can be no assurance that such arrangements or funds
will be available. The Company believes that its current capital resources will
meet its anticipated requirements through mid-1998.
27
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and supplementary data of the Company
required by this item are set forth at the pages indicated in Item 14(a)(1).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On December 16, 1996, the Company filed with the Securities and Exchange
Commission a Form 8-K to report a change in certifying accountants. The Company
dismissed Ernst & Young LLP and replaced them with Arthur Andersen LLP.

<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The information required by this item (with respect to Directors) is
incorporated by reference from the information under the captions "Election of
Directors" and "Other Matters" contained in the Company's Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
solicitation of proxies for the Company's 1997 Annual Meeting of Stockholders to
be held on May 22, 1997 (the "Proxy Statement").

The required information concerning Executive Officers of the Company is
contained in Part I of this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the
information under the caption "Compensation of Executive Officers and Directors"
contained in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference from the
information under the caption "Stock Ownership of Management and Certain
Beneficial Owners" contained in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the
information contained under the caption "Certain Transactions" contained in the
Proxy Statement.

29
<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) (1) Financial Statements

The consolidated financial statements required by this item are submitted in a
separate section beginning on page F-1 of this report.

CONSOLIDATED FINANCIAL STATEMENTS OF THE IMMUNE RESPONSE CORPORATION
Report of Independent Public Accountants F-1
Consolidated Balance Sheets at
December 31, 1996 and 1995 F-2
Consolidated Statements of Operations for the
three years ended December 31, 1996 F-3
Consolidated Statements of Stockholders' Equity
for the three years ended December 31, 1996 F-4
Consolidated Statements of Cash Flows for the
three years ended December 31, 1996 F-5
Notes to Consolidated Financial Statements F-6

(2) Financial Statement Schedules

Schedules have been omitted because of the absence of conditions under which
they are required or because the required information is included in the
financial statements or the notes thereto.

(3) Exhibits with each management contract or compensatory plan or
arrangement required to be filed identified. See paragraph (c) below.

(b) Reports on Form 8-K

3(i)(7) Restated Certificate of Incorporation of The Immune Response
Corporation.
3(ii)(7) Restated Bylaws of The Immune Response Corporation.
10.1(8) Amended and Restated 1989 Stock Plan of The Immune Response
Corporation.
10.3(1) Stock Purchase Agreement, dated August 4, 1988, between the Company
and Rhone-Poulenc Rorer Inc.
10.13(1) Assignment, dated May 27, 1988, by Jonas Salk and Dennis J. Carlo,
assignors, to the Company.
10.14(1) Assignment, dated May 27, 1988 by Jonas Salk to the Company.
10.17(1) Lease, dated as of May 22, 1989, between the Company and BDN
Carlsbad #1 Limited Partnership.
10.18(2) Stock Purchase Agreement, dated March 23, 1990 between the Company
and State Farm Mutual Automobile Insurance Company.
10.28(6)* Form of Indemnification Agreement entered into between the Company
and its officers and directors.

30
<PAGE>

10.36(2) First Amendment, dated February 19, 1990, to Lease between BDN
Carlsbad #1 Limited Partnership and the Company.
10.37* Amended and Restated 1990 Directors' Stock Option Plan of The Immune
Response Corporation.
10.42(3) Second and Third Amendments to the Lease, dated as of May 22, 1989,
between the Company and BDN Carlsbad #1 Limited Partnership.
10.45(4) Side Agreement, dated as of March 23, 1990, between the Company and
State Farm Mutual Automobile Insurance Company, relating to the
Stock Purchase Agreement between them.
10.47(5) Rights Agreement, dated February 26, 1992, between the Company and
First Interstate Bank, Ltd., as Rights Agent.
10.49* Employment Agreement, dated February 18, 1993 and amended September
19, 1994, between the Company and Dennis J. Carlo.
10.53* Form of The Immune Response Corporation Special Nonstatutory Stock
Option Agreement.
10.54* Consulting Agreement, dated November 1, 1994, between the Company
and James B. Glavin.
10.55 Stock Purchase Agreement dated as of September 15, 1995, between The
Immune Response Corporation and Trinity Medical Group Co., Ltd.
10.56 Sublease dated as of March 2, 1995, between Immunization Products
Limited and Rhone-Poulenc Rorer Pharmaceuticals Inc.
10.57 Amendment No. 1 to sublease dated as of June 5, 1995, between
Immunization Products Limited and Rhone-Poulenc Rorer
Pharmaceuticals Inc.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney (see page 32).

(1) Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-1, No. 33-31057.

(2) Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-1, No. 33-34096.

(3) Incorporated by reference to the exhibits of the same number to the
Company's Report on Form 10-K for the Fiscal Year ended December 31, 1990
(Commission File No. 0-18006).

(4) Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-1, No. 33-39789.

(5) Incorporated by reference to Exhibit 5.1 to the Company's Report on Form 8-
K filed March 4, 1992 (Commission File No 0-18006).

(6) Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-1, No. 33-31057.

(7) Exhibits 3(i) and 3(ii) are incorporated by reference to Exhibits 4.1 and
4.2 respectively, to the Company's Registration Statement on Form S-8, No.
33-62940.

(8) Incorporated by reference to the exhibit of the same number to the
Company's Registration Statement on Form S-8, No. 33-80884.

* Indicates management contract or compensatory plan or arrangement.

<PAGE>

SIGNATURES

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

THE IMMUNE RESPONSE CORPORATION

By: s/ Dennis J. Carlo
------------------------------------
Dennis J. Carlo,
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Dennis J. Carlo and Charles J. Cashion his attorneys-
in-fact, each with full power of substitution, for him in any and all
capacities, to sign any amendments to this Report and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact, or their substitute or substitutes, may do or cause to
be done by virtue hereof.

s/ James B. Glavin Chairman of the March 20, 1997
- ------------------------- Board of Directors
James B. Glavin

s/ Dennis J. Carlo President, March 20, 1997
- ------------------------- Chief Executive Officer,
Dennis J. Carlo and Director

s/ Charles J. Cashion Vice President, Finance, March 20, 1997
- -------------------------- Chief Financial Officer
Charles J. Cashion Secretary and Treasurer

s/ Kevin B. Kimberlin Director March 20, 1997
- --------------------------
Kevin B. Kimberlin

s/ Gilbert S. Omenn Director March 20, 1997
- --------------------------
Gilbert S. Omenn

s/ Melvin Perelman Director March 20, 1997
- --------------------------
Melvin Perelman

32
<PAGE>

s/ John Simon Director March 20, 1997
- --------------------------
John Simon

s/ William M. Sullivan Director March 20, 1997
- --------------------------
William M. Sullivan

s/ Philip M. Young Director March 20, 1997
- -------------------------
Philip M. Young

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Immune Response Corporation

We have audited the accompanying consolidated balance sheets of The Immune
Response Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Immune
Response Corporation at December 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

San Diego, California
January 30, 1997

<PAGE>

THE IMMUNE RESPONSE CORPORATION

CONSOLIDATED BALANCE SHEETS

ASSETS December 31,
------------------------
1996 1995
------------ -----------
Current Assets:
Cash and cash equivalents (Note 2) $ 3,785,433 $ 1,462,676
Marketable securities-available-for-sale (Note 2) 42,736,310 43,147,633
Short-term investment 1,265,000 ---
Other current assets 679,847 963,762
----------- -----------
Total current assets 48,466,590 45,574,071

Property and equipment, net (Note 1) 5,570,378 4,806,075
Deposits 49,016 49,016
----------- -----------
$54,085,984 $50,429,162
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable $ 1,870,853 $ 1,158,194
Accrued compensation 497,671 386,311
Deferred rent obligation (Note 3) 413,901 443,853
----------- -----------
Total current liabilities 2,782,425 1,988,358

Commitments (Note 3)

Stockholders' Equity (Note 4):
Common stock, $.0025 par value, 40,000,000 shares
authorized, 20,229,719 and 16,788,704 shares
issued and outstanding at December 31, 1996
and 1995, respectively 50,574 41,972
Additional paid-in capital 171,055,691 146,770,428
Unrealized gain (loss) on marketable
securities (Note 2) 139,976 544,830
Accumulated deficit (119,942,682)(98,916,426)
----------- -----------
Total stockholders' equity 51,303,559 48,440,804
----------- -----------
$54,085,984 $50,429,162
----------- -----------
----------- -----------

See accompanying notes.

F2
<PAGE>

THE IMMUNE RESPONSE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>

Year ended December 31,
----------------------------------------
<S> <C> <C> <C>
1996 1995 1994
------------ ---------- ------------
Revenues:
Licensed research revenue (Note 5) $ 6,000,000 $ --- $ 1,000,000
Contract research revenue (Notes 5 and 6) 1,000,000 1,561,314 6,035,497
------------ ------------ -------------

7,000,000 1,561,314 7,035,497

Expenses:
Research and development 27,210,769 19,488,531 13,511,238
General and administrative 3,420,350 3,684,252 5,608,238
------------ ----------- ------------

30,631,119 23,172,783 19,119,476

Other revenue and expense:
Investment income 2,604,863 2,959,967 2,554,041
Equity in operations of joint venture (Note 6) --- (1,284,020) (7,869,556)
------------ ----------- ------------

2,604,863 1,675,947 (5,315,515)
------------ ----------- -------------

Net loss $(21,026,256) $(19,935,522) $(17,399,494)
------------ ------------ ------------
------------ ------------ ------------

Net loss per share (Note 1) $ (1.19) $ (1.19) $ (1.05)
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of shares
outstanding (Note 1) 17,658,383 16,750,460 16,613,547
------------ ------------ ------------
------------ ------------ -------------
</TABLE>

See accompanying notes.

<PAGE>

THE IMMUNE RESPONSE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>

Unrealized
Gain
Common Stock Additional (Loss) on Total
---------------------- Paid-in Available-for- Accumulated Stockholders'
Shares Amount Capital Sale Securities Deficit Equity
---------- --------- -------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 16,565,475 $ 41,414 $ 146,454,943 $ --- $ (61,581,410) $ 84,914,947

Issuance of common stock from
exercise of options 223,719 559 585,708 --- --- 586,267
Shares redeemed by employee
to exercise options (49,243) (123) (406,127) --- --- (406,250)
Adjustment to beginning
balance for change in
accounting method
(Notes 1 and 2) --- --- --- 95,522 --- 95,522
Change in unrealized gain
(loss) on marketable
securities (Note 2) --- --- --- (705,369) --- (705,369)
Net loss --- --- --- --- (17,399,494) (17,399,494)
---------- --------- -------------- --------------- -------------- ------------

Balance at December 31, 1994 16,739,951 41,850 146,634,524 (609,847) (78,980,904) 67,085,623

Issuance of common stock from
exercise of options 48,753 122 135,904 --- --- 136,026
Change in unrealized gain
(loss) on marketable
securities (Note 2) --- --- --- 1,154,677 --- 1,154,677
Net loss --- --- --- --- (19,935,522) (19,935,522)
---------- --------- -------------- --------------- -------------- ------------

Balance at December 31, 1995 16,788,704 41,972 146,770,428 544,830 (98,916,426) 48,440,804

Issuance of common stock in
stock transactions (Note 4) 568,260 1,421 7,998,579 --- --- 8,000,000
Issuance of common stock from
public offering, net of
issuance costs of
$1,189,000 (Note 4) 2,530,000 6,325 15,249,982 --- --- 15,256,307
Issuance of common stock
from exercise of options 342,755 856 1,036,702 --- --- 1,037,558
Change in unrealized gain
(loss) on marketable
securities (Note 2) --- --- --- (404,854) --- (404,854)
Net loss --- --- --- --- (21,026,256) (21,026,256)
---------- --------- -------------- --------------- -------------- ------------

Balance at December 31, 1996 20,229,719 $ 50,574 $ 171,055,691 $ 139,976 $ (119,942,682) $ 51,303,559
---------- --------- -------------- --------------- -------------- ------------
---------- --------- -------------- --------------- -------------- ------------
</TABLE>

<PAGE>

THE IMMUNE RESPONSE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Operating activities:
Net loss $ (21,026,256) $ (19,935,522) $ (17,399,494)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 848,429 1,038,312 1,266,412
Equity in operations of joint venture (Note 6) --- 1,284,020 7,869,556
Write down of value of land --- 372,044 ---
Deferred rent expense (29,952) (543) 28,867
Changes in operating assets and liabilities:
Research contract receivable from a related party --- (1,199,390) (2,308,776)
Other current assets 283,915 331,388 (373,168)
Accounts payable 712,659 650,816 12,066
Accrued compensation 111,360 72,699 396
-------------- -------------- --------------
Net cash used by operating activities (19,099,845) (17,386,176) (10,904,141)

Investing activities:
Purchase/sale of marketable securities, net 6,469 15,543,026 15,897,397
Purchase of short-term investment (1,265,000) --- ---
Purchase of property and equipment (1,612,732) (442,655) (747,216)
Net proceeds from sale of equipment --- 1,948,305 1,458,628
Investment in joint venture --- --- (5,000,000)
Other assets --- 4,200 ---
-------------- -------------- --------------
Net cash provided from investing activities (2,871,263) 17,052,876 11,608,809

Financing activities:
Net proceeds from sale of common stock through public offering (Note 4) 15,256,307 --- ---
Proceeds from other sales of common stock (Note 4) 8,000,000 --- ---
Net proceeds from exercise of stock options 1,037,558 136,026 180,017
Payments on debt and capital lease obligations --- (132,132) (408,495)
-------------- -------------- --------------
Net cash provided from (used by) financing activities 24,293,865 3,894 (228,478)
-------------- -------------- --------------

Net increase (decrease) in cash and cash equivalents 2,322,757 (329,406) 476,190
Cash and cash equivalents at beginning of year 1,462,676 1,792,082 1,315,892
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 3,785,433 $ 1,462,676 $ 1,792,082
-------------- -------------- --------------
-------------- -------------- --------------

Supplemental disclosure of noncash investing and financing activities:
Equipment received from liquidation of joint venture (Note 6) $ --- $ 2,008,562 $ ---
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>

See accompanying notes.

F5
<PAGE>

THE IMMUNE RESPONSE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS ACTIVITY
The Immune Response Corporation (the "Company"), a Delaware corporation, is
a biopharmaceutical company with proprietary technologies in four core
areas: Human Immunodeficiency Virus ("HIV"), autoimmune disease, gene
therapy and cancer. The Company is conducting clinical trials for
potential immune-based therapies for HIV, psoriasis, rheumatoid
arthritis, multiple sclerosis, colon and brain cancers, and preclinical
studies for prostate cancer. The Company has potential gene therapies in
preclinical studies for cardiovascular disease, hemophilia and hepatitis.
The Company intends to retain ownership of its core technologies and to
license selected applications.

The Company's products are in various stages of development. Prior to
generating product revenues, the Company must complete the development of
its products, including several years of human clinical testing, and
receive regulatory approvals prior to selling these products in the human
health care market. No assurance can be given that the Company's
products will be successfully developed, regulatory approvals will be
granted, or patient and physician acceptance of these products will be
achieved.

The Company faces additional risks associated with biopharmaceutical
companies whose products are in various stages of development. These
risks include, among others, the Company's need for additional financing
to complete its research and development programs and commercialize its
technologies. There is no assurance such financing will be available to
the Company when required or that such financing would be available under
favorable terms.

The Company believes that patents and other proprietary rights are
important to its business. The Company's policy is to file patent
applications to protect technology, inventions and improvements to its
inventions that are considered important to the development of its
business. The patent positions of pharmaceutical and biotechnology
firms, including the Company, are uncertain and involve complex legal and
factual questions for which important legal principles are largely
unresolved.

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.

NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
common shares outstanding during the period. Common equivalent shares
are excluded as the effect would be antidilutive.

NEW ACCOUNTING STANDARD
During the first quarter of 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards ("FAS") No. 123, "Accounting
for Stock-Based Compensation." FAS 123 establishes and encourages the use
of the fair value based method of accounting for stock-based compensation
arrangements, under which compensation is determined using the fair value
of stock-based compensation determined as of the grant date, and is
recognized over the periods in which the related services are rendered.
The statement also permits companies to elect to continue using the
current implicit value accounting method specified in Accounting
Principles Board Opinion ("APB") No. 25 to account for stock-based
compensation and to disclose the effects of the fair value based method
on a pro forma basis. The Company has elected to continue to account for
stock-based compensation arrangement using the current implicit value
method specified in APB No. 25.

F6
<PAGE>

THE IMMUNE RESPONSE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in U.S. Government securities and
money market accounts. The Company has established guidelines relative
to diversification and maturities that maintain safety and liquidity.
These guidelines are periodically reviewed and modified to take advantage
of trends in yields and interest rates.

PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is depreciated or amortized
over the estimated useful lives of the assets (five to seven years) or
the lease term using the straight-line method. During 1995, the Company
adopted Statement of Financial Accounting Standards (FAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." In 1995, the Company decreased the value of a
parcel of land by $372,044, to its estimated net realizable value. In
accordance with FAS 121, prior period financial statements have not been
restated to reflect the change in accounting principle. Property and
equipment consists of the following:

DECEMBER 31,
----------------------
1996 1995
---------- ----------
Furniture and fixtures $1,078,533 $ 889,843
Equipment 1,063,986 778,120
Leasehold improvements 6,343,607 5,205,431
---------- ----------
8,486,126 6,873,394

Less accumulated depreciation
and amortization (3,935,748) (3,087,319)
---------- ----------
4,550,378 3,786,075
Land held for sale 1,020,000 1,020,000
---------- ----------
$5,570,378 $4,806,075
---------- ----------
---------- ----------

INCOME TAXES
All income tax amounts have been computed in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Under this statement, the asset and liability method is used to account for
deferred income taxes. Deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax base of assets
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences reverse.

2. CASH EQUIVALENTS AND MARKETABLE SECURITIES

Cash and cash equivalents consist of cash and time deposits with original
maturities of less than three months. Short-term investments are stated at
market.

Marketable securities consist of treasury securities with maturities of
more than three months. The Company has classified all of its marketable
securities as available-for-sale securities. The following table
summarizes available-for-sale securities:

AVAILABLE-FOR-SALE SECURITIES
----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- --------- --------- -----------
DECEMBER 31, 1996
U.S. Government Securities $42,596,334 $ 197,999 $ 58,023 $42,736,310
----------- --------- --------- -----------
DECEMBER 31, 1995
U.S. Government Securities $42,602,803 $ 544,830 $ -- $43,147,633
----------- --------- --------- -----------

The net realized gains on sales of available-for-sale securities totaled
$113,000 for the year ended December 31, 1996.

<PAGE>

THE IMMUNE RESPONSE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1996

2. CASH EQUIVALENTS AND MARKETABLE SECURITIES (CONTINUED)

The amortized cost and estimated fair value of available-for-sale securities
at December 31, 1996, by contractual maturity, are shown below:

ESTIMATED
COST FAIR VALUE
----------- -------------
Due in one year or less $18,812,654 $ 18,786,966
Due after one year through three years 23,783,680 23,949,344
----------- -------------
$42,596,334 $ 42,736,310
----------- -------------

3. COMMITMENTS

The Company leases its offices, research facility, manufacturing facility
and certain office and laboratory equipment under operating lease
agreements. The equipment lease agreements require monthly payments through
September 1999. The office and research facility lease agreement, which
commenced in January 1991, is for a term of ten years, with two five-year
options to extend. In connection with this lease, the Company received
certain deferred payment terms and the minimum annual rent is subject to
certain annual increases. Rent is being expensed on a straight-line basis
over the term of the lease. Deferred rent reflected in the accompanying
balance sheets represents the difference between rent expense accrued and
amounts actually paid under the terms of the lease. The manufacturing
facility lease expires in September 1997, but the Company has the option to
extend the lease an additional three years. The Company expects to exercise
the option.

At December 31, 1996, future minimum rental payments due under the Company's
noncancellable operating leases are as follows:

YEAR ENDING
DECEMBER 31,
------------------
1997 $ 2,344,247
1998 1,524,926
1999 1,252,636
2000 1,082,883
2001 ---
------------
$ 6,204,692
------------

Total rent expense for the years ended December 31, 1996, 1995 and 1994 was
$3.2 million, $2.5 million and $1.3 million, respectively.

Additionally, in the ordinary course of business, the Company is subject to
claims and, from time to time, is named in various legal proceedings. In
the opinion of management, the amount of ultimate liability, if any, with
respect to any pending actions will not materially affect the financial
position or results of operations of the Company.

4. STOCKHOLDERS' EQUITY

STOCK TRANSACTIONS
In April 1996, the Company received $5 million from Trinity Medical Group
Co., Ltd. ("Trinity") of Bangkok, Thailand for the purchase of the Company's
common stock at $15 per share. Trinity has also agreed to make additional
equity investments of up to $10 million based on the achievement of certain
regulatory and commercial milestones and governmental approvals.

<PAGE>

THE IMMUNE RESPONSE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1996

4. STOCKHOLDERS' EQUITY (CONTINUED)

In October 1996, the Company entered into an agreement with Viru-Tech
Limited to develop and distribute REMUNE-TM- in South America and Central
America. Under the agreement, Viru-Tech Limited agreed to purchase
$3 million of the Company's Common Stock.

Also in October 1996, the Company issued 2,530,000 shares, at $6.50 per
share, in an underwritten public offering. Net proceeds from this offering
were $15.3 million.

STOCK OPTIONS
The Company has established various stock option plans to grant options to
purchase common stock to employees and non-employee directors of the Company
and certain other individuals. The plans authorize the Company to issue or
grant qualified and non-qualified options to purchase up to 4,773,794 shares
of its common stock.

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. These options primarily become
exercisable over a four year period from the date of grant.

The 1990 Directors' Stock Option Plan provides for the Company to issue or
grant non-qualified options to purchase up to 650,000 common shares to its
non-employee directors. Under the terms of the plan, options will be
granted 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. Additionally, the 1990 Directors'
Stock Option Plan provides that upon each date of the Company's Annual
Meeting of the Stockholders, non-employee directors are eligible to receive
a grant of 6,250 shares at the fair market value on date of grant, with a
one-year vesting schedule.

Activity with respect to the various stock plans is summarized as follows:

SHARES STOCK WEIGHTED
AVAILABLE OPTIONS AVERAGE
FOR GRANT OUTSTANDING PRICE
------------ ------------- ---------
Balance at December 31, 1993 747,193 2,736,915 $14.50
Additional authorization 800,000 --- ---
Granted (1,668,950) 1,668,950 8.60
Exercised --- (223,469) 2.63
Cancelled 984,117 (984,117) 17.12
------------ -------------
Balance at December 31, 1994 862,360 3,198,279 11.45
Additional authorization 200,000 --- ---
Granted (2,851,159) 2,851,159 3.38
Exercised --- (48,303) 2.82
Cancelled 2,399,354 (2,399,354) 13.39
------------ -------------
Balance at December 31, 1995 610,555 3,601,781 3.91
Additional authorization 500,000 --- ---
Granted (901,655) 901,655 7.29
Exercised --- (342,405) 3.03
Cancelled 111,285 (111,285) 4.69
------------ -------------
Balance at December 31, 1996 320,185 4,049,746 4.71
------------ -------------
------------ -------------

At December 31, 1996, 2,913,709 options were exercisable and 4,369,931
shares of common stock were reserved for the exercise of stock options.

<PAGE>

THE IMMUNE RESPONSE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1996

4. STOCKHOLDERS' EQUITY (CONTINUED)

The Company has adopted the disclosure-only provisions of FAS 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1996
consistent with the provisions of FAS 123, the Company's net loss and loss
per share would have been increased to the pro forma amounts indicated
below:

1996 1995
----------- -----------
Net loss - as reported $21,026,256 $19,935,522
Net loss - pro forma $30,078,189 $25,480,149
Net loss per share - as reported $1.19 $1.19
Net loss per share - pro forma $1.70 $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 1996: risk free interest rate of 6.57%,
expected option life of 5 years, expected volatility of .8472 and a dividend
rate of zero.

Because FAS 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.

PREFERRED STOCK
The Company is authorized to issue up to 5 million shares of preferred
stock. No shares of preferred stock were outstanding at December 31, 1996 or
1995.

STOCKHOLDER RIGHTS PLAN
The Company has a Stockholder Rights Plan that provides for the distribution
of a preferred stock purchase right (a "Right") as a dividend for each share
of the Company's common stock of record held at the close of business on
March 12, 1992, as well as all future stock issuances. Under certain
conditions involving an acquisition by any person or group of 15% or more of
the common stock, the Rights permit the holders (other than the 15% holder)
to purchase the Company's common stock at a 50% discount upon payment of an
exercise price of $150 per Right. In addition, in the event of certain
business combinations, the Rights permit the purchase of the common stock of
an acquiror at a 50% discount. Under certain conditions, the Rights may be
redeemed by the Board of Directors in whole, but not in part, at a price of
$.01 per Right. The Rights have no voting privileges and are attached to
and automatically trade with the Company's common stock. The Rights expire
February 26, 2002.

5. LICENSE AGREEMENT

In July 1996, Immune Response entered into an agreement with Bayer
Corporation ("Bayer"), the United States affiliate of Bayer AG of
Leverkusen, Germany, to develop gene therapy products for the treatment of
hemophilia A, a hereditary blood clotting disorder. Bayer made an initial
license payment of $6 million upon signing this agreement. Bayer also
purchased $4 million of Immune Response Common Stock in the Company's public
stock offering completed in October 1996 (see Note 4). In addition, during
the term of the agreement, the Company will receive research funding from
Bayer for Immune Response's hemophilia A program and may receive milestone
payments and royalties on future sales, if a product is developed and
commercialized. In July 1996, the Company received $1 million as its first
research payment under the agreement. Under the agreement, Bayer is
responsible for all medical and regulatory activities associated with
developing any potential hemophilia A products, and will also be responsible
for commerical-scale manufacturing and commercialization of any such product
developed. The agreement provides Bayer with a worldwide license to the
Company's GeneDrugTM technology for the delivery of the Factor VIII gene and
the option to enter into negotiations with the Company to use this
technology to treat other blood coagulation disorders.

F10

<PAGE>

THE IMMUNE RESPONSE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996

6. INVESTMENT IN JOINT VENTURE

Immunization Products Limited (the "Joint Venture"), a joint venture
between the Company and Rhone-Poulenc Rorer Inc., was formed to
develop, manufacture and market certain products related to the
diagnosis and treatment of human immunodeficiency virus infection.

In March 1995, the Company regained all manufacturing, marketing and
distribution rights for REMUNE from Rhone-Poulenc Rorer Inc. The
Company also assumed control and responsibility for the Joint Venture's
manufacturing facility. The Company agreed to pay Rhone-Poulenc Rorer
Inc. up to $3 million in royalties on future commercial sales of
REMUNE, or upon certain transactions involving licensing rights to
REMUNE to a future corporate partner.

7. INCOME TAXES

At December 31, 1996, the Company had federal and California tax net
operating loss carryforwards of approximately $92.8 million and $17
million, respectively. The difference between the federal and
California tax loss carryforwards is primarily attributable to
capitalized research and development expenses for California and the
50% limitation of California loss carryforwards. The federal tax loss
carryforwards will begin expiring in 2002, unless previously utilized,
while the California tax loss carryforwards will begin expiring in
1997. The Company also has federal and California research and
development tax credit carryforwards of $3.7 million and $1.4 million,
respectively, which begin expiring in 2002 unless previously utilized.

Pursuant to Internal Revenue Code Sections 382 and 383, annual use of
the Company's net operating loss and credit carryforwards will be
limited because of a cumulative change in ownership of more than 50%
which occurred during 1992. However, the Company does not believe such
change will have a material impact upon the utilization of these
carryforwards. Included in the federal loss carryforwards are
approximately $2.7 million of acquired net operating loss carryforwards
that can only be used to the extent of the separate taxable income of
the acquired company.

The components of the Company's deferred tax assets as of December 31,
1996 and 1995 are as follows:

DECEMBER 31,
1996 1995
------------ ------------
Net operating loss carryforwards $ 32,776,000 $ 26,500,000
Unused research and development credits 5,100,000 4,500,000
Capitalized research and development 3,200,000 1,100,000
Other 803,000 1,500,000
------------ ------------
41,879,000 33,600,000
Valuation allowance (41,879,000) (33,600,000)
------------ ------------
$ --- $ ---
------------ ------------
------------ ------------

Approximately $2.8 million of the valuation allowance at December 31,
1996 relates to benefits of stock options which, when recognized, will
be allocated directly to stockholders' equity.

F11

<PAGE>

THE IMMUNE RESPONSE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996

8. QUARTERLY RESULTS (UNAUDITED)

The following unaudited quarterly financial information includes, in
management's opinion, all normal and recurring adjustments necessary to
fairly state the Company's consolidated results of operations and
related information for the periods presented. Net loss per share has
been computed using the weighted average shares outstanding during each
quarter.

<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Licensed research revenue $ --- $ --- $ 6,000 $ ---
Contract research revenue --- --- 1,000 ---
------- ------- ------- -------
--- --- 7,000 ---
Operating expenses (6,245) (8,310) (7,719) (8,357)
------- ------- ------- -------
Loss from operations (6,245) (8,310) (719) (8,357)
Other income 744 579 585 697
------- ------- ------- -------
Net loss $(5,501) $(7,731) $ (134) $(7,660)
------- ------- ------- -------
------- ------- ------- -------
Net loss per share $ (0.33) $ (0.45) $ (0.01) $ (0.40)
------- ------- ------- -------
------- ------- ------- -------
1995
Contract research revenue $ 1,311 $ 125 $ --- $ 125
Operating expenses (5,184) (5,288) (5,982) (6,719)
------- ------- ------- -------
Loss from operations (3,873) (5,163) (5,982) (6,594)
Other income (expense) (628) 811 785 708
------- ------- ------- -------
Net loss $(4,501) $(4,352) $(5,197) $(5,886)
------- ------- ------- -------
------- ------- ------- -------
Net loss per share $ (0.27) $ (0.26) $ (0.31) $ (0.35)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>

F12

<PAGE>

Exhibit 21.1

SUBSIDIARIES OF THE REGISTRANT

I.R.C. Inc., a Delaware corporation

TargeTech, Inc., a Delaware corporation

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report in this Form 10-K into The Immune Response Corporation's
previously filed Registration Statements on Form S-8 pertaining to the 1989
Stock Plan, the Amended and Restated 1990 Directors' Stock Option Plan and
the Special Nonstatutory Stock Option Agreement of The Immune Response
Corporation.

Arthur Andersen, LLP

San Diego, California
March 18, 1997

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRATED FROM ITEM 1 OF
FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,785,433
<SECURITIES> 44,001,310
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 48,466,590
<PP&E> 9,506,126
<DEPRECIATION> 3,935,748
<TOTAL-ASSETS> 54,085,984
<CURRENT-LIABILITIES> 2,782,425
<BONDS> 0
0
0
<COMMON> 50,574
<OTHER-SE> 51,252,985
<TOTAL-LIABILITY-AND-EQUITY> 51,303,559
<SALES> 0
<TOTAL-REVENUES> 9,604,863
<CGS> 0
<TOTAL-COSTS> 30,631,119
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (21,026,256)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,026,256)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,026,256)
<EPS-PRIMARY> (1.19)
<EPS-DILUTED> 0

</TABLE>