VIRUS RESEARCH INSTITUTE INC
10-Q, 1998-08-14
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)
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<PAGE>   1


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                    FORM 10-Q

(Mark One)

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

     For the quarterly period ended  June 30, 1998
- --------------------------------------------------------------------------------

                                       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        0-20711
- --------------------------------------------------------------------------------
                          
                         VIRUS RESEARCH INSTITUTE, INC.
- --------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

  Delaware                                                   22-3098869
- --------------------------------------------------------------------------------
  (State or other jurisdiction of                            (IRS Employer
  incorporation or organization)                             Identification No.)


  61 Moulton Street, Cambridge, MA                           02138
- --------------------------------------------------------------------------------
 (Address of principal executive offices)                    (Zip code)


                                 (617) 864-6232
- --------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

                                 Not Applicable
- --------------------------------------------------------------------------------
      (Former name, address and fiscal year, if changed since last report)

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.

                             (X) Yes       ( ) No

As of July 31, 1998, there were 9,045,217 shares of Common Stock outstanding.


<PAGE>   2


                         VIRUS RESEARCH INSTITUTE, INC.

                                      INDEX

PART I - FINANCIAL INFORMATION                                              Page

  Item 1.  Financial Statements:
             Balance Sheets as of June 30, 1998 and
               December 31, 1997..............................................3

             Statements of Operations for the Three Months
               Ended June 30, 1998 and 1997, for the Six
               Months Ended June 30, 1998 and 1997, and for
               the Period from Inception through June 30, 1998................4

             Statements of Cash Flows for the Six Months
               Ended June 30, 1998 and 1997, and for
               the period from Inception through June 30, 1998................5

             Notes to Financial Statements ...................................6

  Item 2.  Management's Discussion and Analysis of Financial
             Condition and Results of Operations..............................7

PART II - OTHER INFORMATION

  Item 1.  Legal Proceedings.................................................14

  Item 2.  Changes in Securities.............................................14

  Item 3.  Defaults upon Senior Securities...................................14

  Item 4.  Submission of Matters to a Vote of Security Holders...............14

  Item 5.  Other Information.................................................15

  Item 6.  Exhibits and Reports on Form 8-K..................................15

SIGNATURES ..................................................................16


                                       (2)


<PAGE>   3


                         VIRUS RESEARCH INSTITUTE, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                                 BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                   JUNE 30,          DECEMBER 31,
                                                                                     1998                1997
                                                                                 ------------        ------------
<S>                                                                              <C>                 <C>         
Current assets:
  Cash and cash equivalents                                                      $  5,039,879        $  2,488,963
  Marketable securities                                                            10,369,111          15,968,923
  Contract receivable                                                                       0           1,000,000
  Interest receivable                                                                 144,316             352,186
  Prepaid expenses                                                                    542,051             273,224
  Other current assets                                                                 36,694              42,616
                                                                                 ------------        ------------
     Total current assets                                                          16,132,051          20,125,912

Noncurrent assets:
  Leasehold improvements and equipment (net
    of accumulated depreciation and amortization
    of $2,596,446 at June 30, 1998 and
    $2,416,568 at December 31, 1997)                                                  784,847             715,234
  Other assets                                                                         34,473              37,193
                                                                                 ------------        ------------
     Total noncurrent assets                                                          819,320             752,427

                                                                                 ------------        ------------
     Total assets                                                                $ 16,951,371        $ 20,878,339
                                                                                 ============        ============

Current liabilities:
  Accounts payable                                                               $    140,047        $     24,769
  Accrued consulting and research fees                                              1,213,145             709,295
  Accrued employee benefits                                                           121,636              91,636
  Accrued legal                                                                       204,707             192,453
  Other accrued expenses                                                              298,500             377,987
  Current portion of lease obligation payable                                          21,852              72,352
                                                                                 ------------        ------------
      Total current liabilities                                                     1,999,887           1,468,492

Stockholders' equity:

  Preferred stock -- $.001 par value; 5,000,000 shares
    authorized, none issued                                                                --                  --

  Common stock -- $.001 par value; 30,000,000 shares authorized; 9,044,992
    shares issued at June 30, 1998
    and 8,928,314 shares issued at December 31, 1997                                    9,045               8,928

  Additional paid-in capital                                                       52,025,302          51,930,441

  Deficit accumulated during the development stage                                (37,082,863)        (32,529,522)


                                                                                 ------------        ------------
      Total stockholders' equity                                                   14,951,484          19,409,847


                                                                                 ------------        ------------
      Total liabilities and stockholders' equity                                 $ 16,951,371        $ 20,878,339
                                                                                 ============        ============
</TABLE>


                        SEE NOTES TO FINANCIAL STATEMENTS



                                      (3)


<PAGE>   4


                         VIRUS RESEARCH INSTITUTE, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                             STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>

                                                   THREE MONTHS ENDED                    SIX MONTHS ENDED             CUMULATIVE
                                                        JUNE 30,                             JUNE 30,               SINCE INCEPTION
                                                1998               1997              1998               1997             (1991)
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                <C>                <C>                <C>                <C>         
REVENUE:
Licensing and option revenue               $         0        $   250,000        $    51,111        $   250,000        $  6,946,667
Research and development revenue                     0            387,491                  0            774,982           4,165,180
Interest income                                238,089            339,816            502,064            672,596           3,025,453
                                           -----------------------------------------------------------------------------------------
TOTAL REVENUE                                  238,089            977,307            553,175          1,697,578          14,137,300

EXPENSES:
Research and development                     1,788,199          1,672,085          3,642,038          3,372,561          35,208,573
General and administrative                     596,604            634,833          1,260,253          1,346,851          12,569,250
Depreciation                                    87,915             98,140            179,878            228,747           2,698,794
Interest expense                                11,112             17,010             24,347             34,995             743,546
                                           -----------------------------------------------------------------------------------------
TOTAL EXPENSES                               2,483,830          2,422,068          5,106,516          4,983,154          51,220,163
                                           -----------------------------------------------------------------------------------------
NET LOSS                                   ($2,245,741)       ($1,444,761)       ($4,553,341)       ($3,285,576)       ($37,082,863)
                                           ========================================================================================

Basic and diluted net loss per share       ($     0.25)       ($     0.16)       ($     0.51)       ($     0.37)
                                           =====================================================================

Shares used in computing basic and

   diluted net loss per common share         9,024,296          8,892,995          8,983,987          8,877,493
</TABLE>


                        SEE NOTES TO FINANCIAL STATEMENTS




                                      (4)


<PAGE>   5


                         VIRUS RESEARCH INSTITUTE, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                   SIX MONTHS ENDED                 CUMULATIVE
                                                                       JUNE 30,                   SINCE INCEPTION
                                                                1998                1997               (1991)
                                                             ---------------------------------------------------
<S>                                                          <C>                <C>                 <C>          
Cash flows from operating activities:

Net Loss                                                     ($4,553,341)       ($ 3,285,576)       ($37,082,863)

Adjustments to reconcile net loss to net cash
  used in operating activities:
   Depreciation and amortization                                 179,878             232,743           2,749,320
   Conversion of accrued interest to preferred stock                   0                   0              58,373
   Changes in operating assets and liabilities:
     Contract receivable                                       1,000,000                   0                   0
     Increase in prepaid expenses
      and other assets                                           (52,315)           (486,493)           (634,408)
     Increase (decrease) in accounts payable and
      accrued expenses                                           581,894             (18,305)          1,978,034
     Increase in deferred revenue                                      0             150,000                   0

                                                             ---------------------------------------------------
   Net cash used in operating activities                      (2,843,884)         (3,407,631)        (32,931,544)

Cash flows from investing activities:
   Purchases (redemptions)  of marketable
      securities, net                                          5,599,812          (7,537,770)        (10,369,111)
   Capital expenditures                                         (249,491)           (177,968)         (3,398,738)
   Other                                                               0                   0             (46,182)

                                                             ---------------------------------------------------
   Net cash provided by (used in) investing activities         5,350,321          (7,715,738)        (13,814,031)

Cash flows from financing activities:
   Proceeds from notes payable                                         0                   0           7,973,668
   Sale and leaseback related to capital acquisitions                  0                   0             751,311
   Principal payments on lease obligations                       (50,499)            (75,525)           (889,764)
   Sale of common stock                                           94,978              20,602          27,808,181
   Sale of preferred stock                                             0                   0          19,258,613
   Offering costs                                                      0                   0          (3,112,941)
   Founders' shares reacquired                                         0                   0                (846)
   Purchase of treasury stock                                          0                   0              (2,768)

                                                             ---------------------------------------------------
   Net cash provided by (used in) financing activities            44,479             (54,923)         51,785,454

Net increase (decrease) in cash and cash equivalents           2,550,916         (11,178,292)          5,039,879

Cash and cash equivalents, beginning of period                 2,488,963          15,209,180                   0

                                                             ---------------------------------------------------
Cash and cash equivalents, end of period                     $ 5,039,879        $  4,030,888        $  5,039,879
                                                             ===================================================

Supplemental disclosure of cash flow information:
     Interest paid during the period                         $     7,793        $     15,775        $    265,986
</TABLE>


                        SEE NOTES TO FINANCIAL STATEMENTS



                                      (5)


<PAGE>   6


                         VIRUS RESEARCH INSTITUTE, INC.
                          NOTES TO FINANCIAL STATEMENTS
                                  JUNE 30, 1998

(1) FINANCIAL STATEMENT PRESENTATION

     The unaudited financial statements of Virus Research Institute, Inc. (the
"Company") herein have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC) and, in the opinion of management,
reflect all adjustments (consisting of normal recurring accruals) necessary to
present fairly the results of operations for the interim periods presented.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting principals
have been condensed or omitted pursuant to such rules and regulations; however,
management believes that the disclosures are adequate to make the information
presented not misleading. These financial statements and the notes thereto
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997. The results for the interim period presented are not
necessarily indicative of the results for the full fiscal year.

(2)  NET LOSS PER COMMON SHARE

     During 1997, the Company adopted Statement of Financial Accounting Standard
No. 128, "Earnings per Share" requiring certain changes in the calculation of
per share results. As the Company has reported net losses from operations in the
years presented, the computation for basic and diluted earnings per share is
identical.

(3)  RECENT DEVELOPMENTS

     On May 12, 1998, the Company announced that it has signed a definitive
merger agreement with T Cell Sciences, Inc. (T Cell) whereby the Company will be
acquired by T Cell. Under the terms of the merger agreement, which is subject to
shareholder and regulatory approval, T Cell will issue 1.55 shares of its common
stock and 0.2 warrants for each share of the Company's common stock. Each
warrant represents the right to purchase one share of T Cell's common stock for
$6.00 per share and will expire five years from the closing date. It is
anticipated that a significant portion of the purchase price will be written off
as in-process technology.

     T Cell is a biopharmaceutical company engaged in the discovery and
development of innovative drugs using novel applications of immunology to
prevent and treat cardiovascular, pulmonary and immune disorders.

     Consummation of the merger is subject to the fulfillment of certain
conditions, including approval of the merger by the Company's stockholders,
approval of the issuance of T Cell's common stock and warrants by its
stockholders and listing of the shares of T Cell's common stock issuable in
connection with the merger or upon exercise of T Cell's warrant's on the Nasdaq
National Market. It is expected that the consummation of the merger will occur
as soon as practicable after the satisfaction of all such conditions. T Cell has
filed a Registration Statement on Form S-4 covering the shares of T Cell's
common stock to be issued in connection with the merger.


                                      (6)


<PAGE>   7


        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of
the Company for the three and six months ended June 30, 1998 and 1997 should be
read in conjunction with the accompanying unaudited financial statements and the
related notes thereto.

This report may contain certain forward looking statements which involve risks
and uncertainties. Such statements are made in reliance upon safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and are
subject to certain factors which may cause the Company's plans and results to
differ significantly from the plans and results discussed in forward looking
statements. Factors that may cause such differences include, but are not limited
to: (i) the scope and results of preclinical and clinical testing, including the
progress and results of the Phase II rotavirus clinical trial; (ii) the progress
of the Company's research and development programs, including further
development of Therapore(TM) and the Adjumer(TM) delivery system; (iii) changes
in existing and potential relationships with corporate collaborators; (iv) the
Company's ability to compete successfully with larger companies; (v) risks of
failure inherent in product development based on new technologies and novel
delivery systems; (vi) the Company's ability to attract and retain qualified
personnel; (vii) the time and costs of obtaining regulatory approvals, patents,
proprietary rights and licenses; (viii) the ability of the Company to establish
development and commercialization capacities or relationships; (ix) the costs of
manufacturing; (x) the Company's ability to secure future funding; and (xi)
consummation of the proposed merger with T Cell.

OVERVIEW

Virus Research Institute, Inc. (the "Company") is engaged in the discovery and
development of systems for the delivery of vaccines and immunotherapeutics, and
improved and novel vaccines for adults and children. The Company is developing a
portfolio of proprietary vaccine delivery systems designed to improve the
efficacy, lower the cost of administration and improve patient compliance for a
variety of vaccine products. The Company and its collaborators currently are
applying the Company's vaccine delivery systems to develop vaccines for the
prevention of influenza, Lyme disease, respiratory syncytial virus (RSV), and H.
pylori infections. The Company has entered into long-term collaboration
agreements with Pasteur Merieux Connaught


                                       (7)


<PAGE>   8


 (PMC), Pasteur Merieux-OraVax (PM-O) and CSL, Ltd. pursuant to which they may
utilize the Company's vaccine delivery systems in developing a number of
vaccines. During 1997, the Company entered into a collaboration with SmithKline
Beecham (SB) for the development and commercialization of the Company's oral
rotavirus vaccine. The Company is also developing its own proprietary vaccine,
utilizing antigens licensed exclusively by the Company, for the virus causing
genital herpes, HSV2. In addition, the Company has acquired the exclusive
license to Therapore(TM), a novel delivery system for the delivery of
immunotherapeutics for chronic viral infections and cancers.

The Company is in the development stage and has devoted substantially all of its
resources to the research and development of its vaccine and immunotherapeutic
delivery systems and vaccine candidates and general and administrative expenses.
Through June 30, 1998 the Company has not generated any revenue from product
sales, but has received an aggregate of $14,137,000 in revenues from licensing
and option agreements, research and development agreements and grants, and
interest income. There can be no assurance that the Company will receive such
revenue in the future.

The Company has realized losses in every year since inception, principally as a
result of expenditures incurred in its research and development programs. The
Company expects to continue to incur significant operating losses over the next
several years due primarily to expanded research and development efforts,
preclinical and clinical testing of its product candidates, investment in new
technologies, investment in production capabilities for certain product
candidates and expenditures for commercialization activities. The Company's
results of operations may vary significantly from quarter to quarter and year to
year due to the timing of license and milestone payments, development
expenditures and other factors.

NEW DEVELOPMENTS

Results from the Company's Phase I/II clinical trial of its rotavirus vaccine
candidate became available during 1997. Rotavirus infections are a major cause
of acute diarrhea and dehydration in infants. The clinical trial was a
double-blinded, placebo controlled study designed to define the optimal vaccine
dose and optimal age for immunization. The results demonstrated that the vaccine
was generally well tolerated in younger infants and elicited broad immune
responses in all infants. Based on these findings and the results of an earlier
Phase I study, the Company initiated a Phase II efficacy study during the second
quarter of 1997. This trial, which was


                                       (8)


<PAGE>   9


conducted at four U.S. medical centers, was designed to examine the vaccine's
ability to prevent rotavirus disease and to further study the safety of the
vaccine. A total of 215 infants were enrolled in the study and were
immunized with the vaccine. On August 13, 1998, the Company announced the
results of this Phase II efficacy study. The results showed that approximately
90 percent of the vaccinated infants were protected from rotavirus disease.
Examination of the safety data revealed only mild transient symptoms in a small
number of infants.

During 1997, the Company established a collaboration with SB to develop and
commercialize the Company's rotavirus vaccine. Under the terms of the agreement,
SB will assume responsibility for and fund all subsequent clinical and other
development activities. The Company will be entitled to receive milestone
payments and royalties on vaccine sales under the agreement which grants SB
exclusive worldwide marketing rights to the rotavirus vaccine.

Based on the results of an earlier Phase I clinical trial, the Company's
collaborator, PMC, conducted a Phase II safety and immunogenicity clinical trial
of an Adjumer(TM)-formulated influenza vaccine during 1997. In the Phase I study
conducted in France, 48 young and 41 elderly adults were given single injections
of either the vaccine formulated with Adjumer(TM) or the same vaccine without
Adjumer(TM). A total of 430 elderly adults participated in the Phase II study,
which was conducted in Peru. Preliminary results of the Phase II clinical trial
confirmed that the Adjumer(TM)-formulated vaccine was well tolerated. However,
results of the Phase II study appear to be inconsistent in certain respects with
Phase I results. The degree of improvement in immune responses elicited by the
Adjumer(TM) influenza vaccine was less in comparison to the control group than
was elicited in the Phase I study. At the same time, certain control group
results appear to be significantly higher in the Phase II than in the Phase I
clinical trial. The Company and PMC are currently analyzing and assessing the
results of the Phase II study to determine the appropriate next steps to take
with the clinical development of the product. The Adjumer(TM) research and
development program with PMC, which encompasses a number of additional vaccine
products, continues.

During 1997, the Company was granted an exclusive worldwide license by Harvard
University to Therapore(TM), a novel immunotherapeutic delivery system.
Therapore(TM) will initially be evaluated in therapies to deliver products for
the treatment of chronic viral infections and cancers. Under the terms of the
agreement, the Company will be obligated to pay license fees, milestone payments
and royalties to Harvard. In March 1998, the Company received a non-exclusive
license from The


                                       (9)


<PAGE>   10


National Institutes of Health to certain intellectual property related to the
Therapore(TM) system.

In January 1998, the Company entered into a license agreement with Heska
Corporation (Heska) to collaborate on the development and commercialization of a
number of Heska's animal health vaccines through the use of Adjumer(TM). Under
the terms of the agreement, based on progress in development, the Company will
be entitled to receive license fees, milestone payments and royalties.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997

Total revenue declined by $739,000 to $238,000 for the three months ended June
30, 1998 from $977,000 for the same period in 1997. Licensing and option revenue
for the three months ended June 30, 1997 consisted of a $250,000 payment
received in conjunction with a licensing agreement with PM-O. Research and
development revenue for the second quarter of 1997 consisted of revenue
associated with agreements with PMC and Chiron. No licensing and option revenue
or research and development revenue was recorded during the second quarter of
1998. Interest income declined by $102,000 to $238,000 for the second quarter in
1998 from $340,000 in the 1997 quarter due to a reduction in cash, cash
equivalents and investments.

The Company's total expenses increased by $62,000 to $2,484,000 for the three
months ended June 30, 1998 from $2,422,000 in 1997. The increase is attributable
to a $116,000 increase in research and development expenses from $1,672,000 in
1997 to $1,788,000 in the first quarter of 1998. The increase was primarily
attributable to costs associated with the rotavirus Phase II clinical trial and
to increased costs related to the Therapore(TM) research effort. General and
administrative expenses declined by $38,000 to $597,000 for the three months
ended June 30, 1998 from $635,000 for the 1997 quarter due to reduced investor
relations costs and corporate taxes. Depreciation expense declined $10,000 to
$88,000 in the quarter ended June 30, 1998 from $98,000 in the 1997 quarter as a
result of the full depreciation of various equipment and leasehold improvements.
Interest and other expense declined slightly, by $6,000, to $11,000 in the 1998
quarter from $17,000 in 1997.


                                      (10)


<PAGE>   11


SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997

Total revenue for the Company declined $1,145,000 from $1,698,000 for the six
months ended June 30, 1997 to $553,000 for the same period in 1998. Licensing
and option revenue declined $199,000 from $250,000, which represented a payment
in conjunction with a licensing agreement with PM-O, for the 1997 period to
$51,000 for the six months ended June 30, 1998. Research and development revenue
of $775,000 for the year to date period ended June 30, 1997 consisted of
research support funding received pursuant to agreements with PMC and Chiron. No
research and development revenue was earned during the six months ended June 30,
1998.

Expenses increased $123,000 to $5,106,000 for the six months ended June 30, 1998
from $4,983,000 in 1997. The increase is attributable to an increase of $270,000
in research and development expenses, from $3,372,000 for 1997 to $3,642,000 for
the 1998 six month period. The increase is primarily the result of the cost of
conducting the Phase II rotavirus clinical trial and an increase in sponsored
research and other costs associated with the Therapore(TM) research program.
General and administrative expenses declined $87,000 to $1,260,000 for the six
months ended June 30, 1998 from $1,347,000 for the same period in 1997
principally due to a reduction in various corporate taxes. Depreciation expense
declined $49,000 to $180,000 in 1998 from $229,000 in 1997 due to the full
depreciation of various equipment. Interest expense declined slightly, by
$11,000, from $35,000 in 1997 to $24,000 in 1998.

LIQUIDITY AND CAPITAL RESOURCES

From inception (February 11, 1991) through June 30, 1998, the Company's cash
expenditures have exceeded revenues. The Company's operations have been funded
principally through the sale of equity, loans from stockholders, equipment lease
financing and payments under licensing, option and research and development
agreements. Net cash used by the Company's operations since inception was
$32,932,000, primarily to fund research and development efforts and general and
administrative expenses. Since inception the Company has incurred $3,399,000 in
capital expenditures, primarily for leasehold improvements and equipment for the
Company's laboratories. During the six months ended June 30, 1998 the Company
incurred $249,000 in


                                      (11)


<PAGE>   12

capital expenditures primarily on expenditures required for the polyphosphazene
manufacturing process and for the Therapore(TM) research effort. The Company
anticipates incurring approximately $400,000 in capital expenditures during
1998, primarily on equipment necessary for the polyphosphazene manufacturing
process.

From inception through June 30, 1998, the Company raised net proceeds of
approximately $51,924,000 through the sale of equity securities. Included in
this amount are net proceeds of $24,743,000 from the Company's initial public
offering in 1996 and the conversion to common stock of an aggregate of
$7,974,000 in notes payable to certain stockholders. In addition, from inception
the Company has funded $751,000 of capital expenditures through sale and
leaseback transactions.

The Company has undertaken an assessment of the cost and impact on operations of
addressing the Year 2000 issue in connection with its computer systems. As a
result of such assessment, the Company believes that all of its major software
will be Year 2000 compliant and the Company does not believe the Year 2000 issue
will have a material impact on its business, operations or financial condition.
The Company is in the process of soliciting its major suppliers and service
providers to ascertain their Year 2000 status.

The following discussion is applicable to the Company prior to the T Cell
merger.

The Company expects to incur substantial additional costs, including those
related to research and development activities, preclinical studies, clinical
trials, obtaining regulatory approvals, process scale up and manufacture, and
the expansion of its facilities. The Company anticipates that its existing
funds, which include the proceeds from its initial public offering and interest
earned thereon, should be sufficient to fund its operating and capital
requirements as currently planned for at least the next twelve months. However,
the Company's cash requirements may vary materially from those now planned, due
to many factors, including, but not limited to, the progress of the Company's
research and development programs, the scope and results of preclinical and
clinical testing, changes in existing and potential relationships with corporate
collaborators, the time and cost in obtaining regulatory approvals, the costs
involved in obtaining and enforcing patents, proprietary rights and any
necessary licenses, the ability of the Company to establish development and
commercialization capacities or relationships, the costs of manufacturing and
other factors. In the future, the Company may need to raise substantial
additional funds through further financing, including public or private equity
offerings and collaborations with corporate partners. There can


                                      (12)


<PAGE>   13


be no assurance that funds will be available on terms acceptable to the Company,
if at all. If adequate funds are not available, the Company may be required to
delay, scale back, or eliminate certain of its product development programs or
to license to others the right to commercialize products or technologies the
Company would otherwise seek to develop and commercialize itself, any of which
could have a material adverse effect on the Company.


                                      (13)

<PAGE>   14
PART II - OTHER INFORMATION

Item 1. Legal Proceedings

          None

Item 2. Changes in Securities and Use of Proceeds

Item 2 (d) Use of Proceeds from the Company's Initial Public Offering (the
       "IPO")

(1) Effective date of Registration Statement on Form S-1: June 5, 1996;
Commission file number: 333-3378.

(4) (vii) The Company's use of proceeds from its IPO, as reported in its Annual
Report on Form 10-K for the year ended December 31, 1997, is updated as follows:

Purchase and installation of machinery and equipment: $659,000
Repayment of indebtedness: $1,000,000
Working Capital: $13,142,000
Temporary investments (money market account and short-term instruments): 
 $9,942,000

Item 3. Defaults Upon Senior Securities

          Not applicable

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

The Company held its 1998 Annual Meeting of Stockholders on May 7, 1998. At the
meeting, the following six directors were elected by stockholders to serve until
the 1999 Annual Meeting:

                                    Vote For               Vote Withheld
                                    --------               -------------

    Robert J. Hennessey            7,188,632                   2,079
    Frederick W. Kyle              7,188,632                   2,079
    John W. Littlechild            7,188,632                   2,079
    Alan Mendelson                 7,188,632                   2,079
    William A. Packer              7,188,632                   2,079
    J. Barrie Ward                 7,188,632                   2,079

At the record date of March 19, 1998, there were 8,979,029 shares of common
stock outstanding and entitled to vote. More than 4,489,515 shares, constituting
a quorum, were represented at the Meeting either in person or by proxy.


                                      (14)


<PAGE>   15


Item 5. Other Information

On May 12, 1998, the Company entered into a definitive merger agreement with T
Cell Sciences, Inc. (T Cell) whereby the Company will be acquired by T Cell.
Under the terms of the merger agreement, which is subject to shareholder and
regulatory approval, T Cell will issue 1.55 shares of its common stock and 0.2
warrants for each share of the Company's common stock. Each warrant represents
the right to purchase one share of T Cell's common stock for $6.00 per share and
will expire five years from the closing date.

Item 6. Exhibits and Reports on Form 8-K

                (a) Exhibits:

                    11.1 Statement regarding computation of earnings per share

                    27.1 Financial Data Schedule

                (b) No reports on Form 8-K were filed by the Company during the 
                    quarter ended June 30, 1998.


                                      (15)


<PAGE>   16




SIGNATURES



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


Dated: August 13, 1998




                               VIRUS RESEARCH INSTITUTE, INC.
                                  a Delaware Corporation
                                        (Registrant)





                               By: /s/ J. Barrie Ward             
                                  -------------------------------------
                                   J. Barrie Ward
                                   Chief Executive Officer





                               By: /s/ William A. Packer                   
                                  -------------------------------------
                                   William A. Packer
                                   President, Chief Financial Officer










                                      (16)



<PAGE>   1


ITEM 6

EXHIBIT 11.1 STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
  


                         VIRUS RESEARCH INSTITUTE, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                    COMPUTATION OF NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>

                                                                      THREE MONTHS ENDED                    SIX MONTHS ENDED
                                                                           JUNE 30,                             JUNE 30,
                                                                   1998               1997              1998                1997
                                                               ---------------------------------------------------------------------
<S>                                                            <C>                <C>                <C>                <C>         
   Net loss                                                    ($2,245,741)       ($1,444,761)       ($4,553,341)       ($3,285,576)

     Shares used in computing net loss per common share:
        Weighted average common stock
           outstanding during the period                         9,024,296          8,892,995          8,983,987          8,877,493

       Common stock equivalents (1)                                    N/A                N/A                N/A                N/A

                                                               --------------------------------------------------------------------
   Weighted average common shares outstanding                    9,024,296          8,892,995          8,983,987          8,877,493


   Net loss per common share                                   ($     0.25)       ($     0.16)       ($     0.51)       ($     0.37)
                                                               ====================================================================

</TABLE>

(1)  No common stock equivalents have been included in the three and six months
     ended June 30, 1998 and June 30, 1997 as their effect would be
     antidilutive.

<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VIRUS
RESEARCH INSTITUTE 1998 SECOND QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K 12/31/97.
</LEGEND>
<CURRENCY> U.S. DOLLARS
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-START>                             JAN-01-1998
<PERIOD-END>                               JUN-30-1998
<EXCHANGE-RATE>                                      1
<CASH>                                       5,039,879
<SECURITIES>                                10,369,111
<RECEIVABLES>                                        0
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                            16,132,051
<PP&E>                                       3,381,293
<DEPRECIATION>                               2,596,446
<TOTAL-ASSETS>                              16,951,371
<CURRENT-LIABILITIES>                        1,999,887
<BONDS>                                              0
                                0
                                          0
<COMMON>                                         9,045    
<OTHER-SE>                                  14,942,439
<TOTAL-LIABILITY-AND-EQUITY>                16,951,371
<SALES>                                              0
<TOTAL-REVENUES>                               553,175
<CGS>                                                0
<TOTAL-COSTS>                                        0
<OTHER-EXPENSES>                             5,106,516
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                            (4,553,341)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                        (4,553,341)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                               (4,553,341)
<EPS-PRIMARY>                                   (0.51)
<EPS-DILUTED>                                   (0.51)
        

</TABLE>


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