The human immune system protects the body against infection by bacteria, viruses, and fungi predominantly through the action of a group of blood cells collectively called white blood cells or leukocytes. A subset of leukocytes known as T lymphocytes, or T cells, have a surface receptor that recognizes a specific antigen presented to them by other cells of the immune system called antigen presenting cells, or APCs. APCs are found throughout the body and function as sentinels guarding against invasion by pathogenic organisms. APCs continuously sample their surrounding environment for antigens which they process, transport, and present to T cells. When T cells recognize a specific antigen presented by APCs, the APCs also instruct the T cells whether the antigen is dangerous or harmful to the body and should be eliminated through a classical immune response, or whether it is non-threatening and should be preserved through a tolerogenic immune response. In a normal immune system, leukocytes eliminate pathogens and other dangerous antigens without inflicting damage to the body's own healthy cells and tissues.

Therapeutic proteins are increasingly used to treat diseases, including interferon beta for multiple sclerosis, Factor VIII for hemophilia A, and monoclonal antibodies for various disorders. However, these proteins frequently elicit an immune response that can reduce their efficacy or preclude repeat dosing. Betaseron, an interferon beta product marketed by Schering AG and Berlex Laboratories, has been reported to generate an undesirable immune response in approximately 45% of multiple sclerosis patients. Approximately 30% to 40% of patients with severe hemophilia A develop neutralizing antibodies to Factor VIII replacement therapy. The use of Johnson & Johnson's approved monoclonal antibody, Orthoclone OKT3, to treat transplant rejection has been limited by the immune response against it and first dose reactions such as fever, chills, and pulmonary and gastrointestinal symptoms. Despite progress in the use of immunosuppressive drugs and therapeutic proteins, there is still a significant, unmet clinical need for more effective and safer therapies for patients with diseases of the immune system.

The Company’s TRX4 is a humanized monoclonal antibody that binds to a receptor found on all T cells called CD3, which is involved in normal T cell signaling. TRX4 is designed to block the function of T-effector cells that attack the body and cause autoimmune disease. The Company is developing TRX4 to treat patients with Type I diabetes, psoriasis, and psoriatic arthritis. CD3 is a well validated target for monoclonal antibody therapeutics.

The Company’s TRX1 is a humanized monoclonal antibody that binds to the CD4 receptor found on both T-effector cells and T-regulatory cells. Because T-effector cells utilize different signaling pathways upon antigen presentation as compared to T-regulatory cells, some of which are associated with the CD4 receptor, TRX1 is expected to block the activation and function of T-effector cells and to favor the dominance of T-regulatory cells. TRX1 is being developed to induce immunological tolerance in transplantation, autoimmune diseases, and in settings requiring the chronic administration of therapeutic proteins.

The Company’s TRX2 is a humanized monoclonal antibody that binds to the CD8 receptor found on a subset of T cells. TRX2 is currently in preclinical development in a renal transplantation study in nonhuman primates as combination therapy with TRX1. The Company believes that TRX2 could be synergistic with TRX1 for the induction of immunological tolerance in organ transplantation due to the role that T cells bearing the CD8 receptor have in the early rejection of transplants.

The Company’s proprietary TolerMab technology involves attaching two small amino acid sequences, or modifiers, to the antibody. Each modifier can move in and out of an antibody binding site. When a modifier blocks a binding site, the antibody is hindered from binding to target sites. However, binding to the target and antibody function occur when a modifier moves out of the binding site. The immune system recognizes the high concentration of the unbound antibody as non-dangerous and triggers the induction of immunological tolerance to TolerMab antibodies.

The Company’s TolerMab TRX3 is a monoclonal antibody that binds to the CD2 receptor found on T cells and other subsets of lymphocytes. TolerMab TRX3 is in preclinical development for treatment of autoimmune diseases. Activated T cells have elevated levels of CD2 on their surface and have been shown to play an important role in autoimmune and inflammatory diseases such as psoriasis.

Research and development expense increased by $545.0 thousand, or 23%, to $2.9 million for the three months ended March 31, 2004 from $2.4 million for the three months ended March 31, 2003.

General and administrative expense increased $169.0 thousand, or 22%, to $950.0 thousand for the three months ended March 31, 2004 from $781.0 thousand for the three months ended March 31, 2003.

Stock-based compensation expense increased $779.0 thousand, or 692%, to $891.0 thousand for the three months ended March 31, 2004 from $112.0 thousand for the three months ended March 31, 2003.

Interest income decreased $52.0 thousand, or 47%, to $60.0 thousand for the three months ended March 31, 2004 from $112.0 thousand for the three months ended March 31, 2003.