GENERAL

We are a clinical stage biotechnology company engaged in the discovery and development of novel synthetic DNA- and RNA- based drug candidates. We are developing drug candidates that are designed to modulate immune responses mediated through Toll-like Receptors, or TLRs. We believe that the modulation of immune responses through TLRs provides a rationale for the development of drug candidates to treat a broad range of diseases. We are also evaluating gene silencing oligonucleotides, or GSOs, which inhibit the production of disease-associated proteins by targeting RNA. We believe that our GSO technology provides us with a platform from which drug candidates for diverse disease indications can be developed.

TLRs are specific receptors present in immune system cells. Using a chemistry-based approach, we have created synthetic DNA- and RNA-based compounds that are targeted to TLRs 3, 7, 8, and 9. A TLR agonist is a compound that stimulates an immune response through the targeted TLR. A TLR antagonist is a compound that blocks activation of an immune response through the targeted TLR. Drug candidates are compounds that we are developing and that have not been approved for any commercial use.

We are focusing our internal development efforts on TLR-targeted clinical candidates for autoimmune and inflammatory diseases and on the advancement of our GSO technology platform. We currently are collaborating with Merck Sharp & Dohme Corp. (formerly Merck & Co., Inc.), which is referred to herein as Merck, for the use of agonists of TLRs 7, 8, and 9 as vaccine adjuvants for cancer, infectious diseases, and Alzheimer's disease.

Autoimmune and Inflammatory Disease Program. We are developing IMO-3100, an antagonist of TLR7 and TLR9, for the treatment of psoriasis. We are conducting a Phase 2 clinical trial of IMO-3100 in adult patients with moderate to severe plaque psoriasis, which we initiated in the second quarter of 2012. In addition, we have selected IMO-8400, an antagonist of TLRs 7, 8, and 9, for development in the treatment of lupus. We are conducting nonclinical studies of IMO-8400 to support the submission of an Investigational New Drug Application, or IND, for IMO-8400. We expect to submit this IND to the United States Food and Drug Administration, or FDA, in the fourth quarter of 2012. We have evaluated IMO-3100 and IMO-8400 in preclinical models of several autoimmune diseases including psoriasis, lupus, rheumatoid arthritis, and multiple sclerosis. In these models, treatment with IMO-3100 or IMO-8400 was associated with improvement in a number of disease parameters.

Cancer Program. In November 2011, we reacquired rights to IMO-2055, an agonist of TLR9 in clinical development for the treatment of cancer, from Merck KGaA, Darmstadt, Germany, our former collaborator. We believe that IMO-2055 can be developed for use as an immune modifier in combination with targeted anticancer agents in certain cancer indications and intend to seek to enter into collaborations with pharmaceutical companies to advance the use of IMO-2055 in the treatment of cancer.

At the time we reacquired the rights from Merck KGaA, Merck KGaA was conducting three clinical trials of IMO-2055. As part of our agreement with Merck KGaA, Merck KGaA agreed to continue to conduct and complete the trials. In January 2012, we announced favorable data from a Phase 1b clinical trial of IMO-2055 being conducted by Merck KGaA in combination with erlotinib and bevacizumab in patients with advanced non-small cell lung cancer. Progression-free survival in the non-small cell lung cancer Phase 1b clinical trial was 5.6 months, with a median overall survival of 16 months. In April 2012, we received from Merck KGaA results from a Phase 1b clinical trial of IMO-2055 in combination with cetuximab and the chemotherapy regimen FOLFIRI being conducted by Merck KGaA in patients with advanced or metastatic colorectal cancer. The Phase 1b colorectal cancer trial was designed to determine a recommended dose level to be evaluated in a Phase 2 trial of IMO-2055 in combination with chemotherapy and cetuximab. In May 2012 we announced top-line results from a randomized Phase 2 clinical trial of IMO-2055 being conducted by Merck KGaA in combination with cetuximab in second-line patients with squamous cell carcinoma of the head and neck (SCCHN). The Phase 2 SCCHN trial did not meet its primary endpoint of improved progression-free survival following treatment with IMO-2055 in combination with cetuximab compared to treatment with cetuximab alone.

Gene Silencing Oligonucleotide Technology Platform. Our GSOs are single-stranded RNA or DNA constructs that are complementary to targeted mRNA sequences of therapeutic interest. In preclinical studies, our GSOs have inhibited in vivo gene expression without requiring a delivery enhancement technology.

Additional Programs. In addition to our clinical programs in autoimmune and inflammatory diseases and in cancer, we have identified TLR drug candidates for applications in the treatment of infectious diseases, respiratory diseases and hematological malignancies, and TLR3 agonists for use as vaccine adjuvants. We are seeking to enter into collaborations with pharmaceutical companies to advance these applications.

At March 31, 2012, we had an accumulated deficit of $382.3 million. We expect to incur substantial operating losses in future periods. We do not expect to generate significant product revenue, sales-based milestones or royalties until we successfully complete development and obtain marketing approval for drug candidates, either alone or in collaborations with third parties, which we expect will take a number of years. In order to commercialize our drug candidates, we need to complete clinical development and to comply with comprehensive regulatory requirements. In 2012, we expect that our research and development expenses will be comparable to our research and development expenses in 2011.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, stock-based compensation and our Series D redeemable convertible preferred stock and related warrants. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We regard an accounting estimate or assumption underlying our financial statements as a "critical accounting estimate" where:

• the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and

• the impact of the estimates and assumptions on financial condition or operating performance is material.

Our significant accounting policies are described in Note 2 of the notes to our financial statements in our Annual Report on Form 10-K for the year ended December 31, 2011. Not all of these significant policies, however, fit the definition of critical accounting policies and estimates. We believe that our accounting policies relating to revenue recognition, stock-based compensation and our Series D redeemable convertible preferred stock and related warrants, as described under the caption "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2011, fit the description of critical accounting estimates and judgments. There were no changes in these policies during the three months ended March 31, 2012.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2012 and 2011

Alliance Revenue

Alliance revenue consisted of reimbursement by licensees of costs associated with patent maintenance, amounting to $9,000 and $8,000 in the three months ended March 31, 2012 and 2011, respectively.

We did not recognize any revenue under our collaboration with Merck KGaA, which terminated in November 2011, or our collaboration with Merck, in the three months ended March 31, 2012 and 2011.

Research and Development Expenses

Research and development expenses decreased by $740,000, or 16%, from $4,553,000
for the three months ended March 31, 2011, to $3,813,000 for the three months
ended March 31, 2012. In the following table, research and development expense
is set forth in the following five categories which are discussed beneath the
table:



                                                 Three Months Ended March 31,             Percentage
                                                        (in thousands)                     Increase
                                                  2012                  2011              (Decrease)
IMO-3100 external development expense         $         239         $         254                  (6 )%
IMO-2055 external development expense                     2                    -                   -
IMO-2125 external development expense                   125                 1,231                 (90 )%
Other drug development expense                        1,897                 1,024                  85 %
Basic discovery expense                               1,550                 2,044                 (24 )%


                                              $       3,813         $       4,553                 (16 )%

IMO-3100 External Development Expenses. These expenses include external expenses that we have incurred in connection with IMO-3100 since November 2009, when we commenced clinical development of IMO-3100. These external expenses include payments to independent contractors and vendors for drug development activities conducted after the initiation of IMO-3100 clinical development but exclude internal costs such as payroll and overhead expenses. We incurred approximately $7,671,000 in external development expenses from November 2009 through March 31, 2012, including costs associated with our clinical trials in healthy subjects we initiated in 2010, manufacturing and process development activities related to the production of IMO-3100, and additional nonclinical toxicology studies.

The decrease in IMO-3100 expenses in the three months ended March 31, 2012, as compared to the three months ended March 31, 2011, was primarily attributable to lower costs associated with nonclinical studies during the 2012 period and costs incurred during the 2011 period for the manufacture of IMO-3100 drug supply for the Phase 2 clinical trial we initiated in April 2012, partially offset by costs incurred in the 2012 period in connection with the preparation for our Phase 2 clinical trial of IMO-3100.

In the three months ended March 31, 2011, we completed the additional nonclinical toxicology studies and drug supply manufacturing activities for IMO-3100 that we had begun in 2010. In the three months ended March 31, 2012, we were preparing for the initiation of our ongoing Phase 2 clinical trial to evaluate IMO-3100 in patients with psoriasis over a four-week treatment period.

The ongoing Phase 2 trial of IMO-3100 is a randomized, double-blind, and placebo-controlled study in patients with psoriasis. The trial is designed to evaluate the safety and markers of efficacy of IMO-3100 as a monotherapy. In the study, 45 patients with moderate to severe plaque psoriasis will receive IMO-3100 at 0.16 or 0.32 mg/kg or placebo (saline) by

subcutaneous injection once weekly for four weeks. Assessments of safety will be performed throughout the treatment and follow-up periods. Psoriasis intensity will be monitored throughout the study. Skin biopsies of an active psoriasis plaque will be obtained prior to treatment and one week after the last treatment, and will be analyzed by immunohistologic staining for changes in epidermal thickness, immune cell infiltrates and cytokine expression. This trial is being conducted at multiple sites in the United States, and skin biopsies will be analyzed at a central laboratory. We expect to complete the Phase 2 study for IMO-3100 in patients with psoriasis during the first half of 2013.

IMO-2055 External Development Expenses. These expenses include external expenses that we have incurred in connection with IMO-2055. These external expenses include payments to independent contractors and vendors for drug development activities conducted after the initiation of IMO-2055 clinical development, but exclude internal costs such as payroll and overhead expenses. We commenced clinical development of IMO-2055 in 2003 and from 2003 through March 31, 2012 we incurred approximately $19,875,000 in external development expenses, including costs associated with our clinical trials, manufacturing, process development activities related to the production of IMO-2055, additional nonclinical toxicology studies, and the cost of regaining our rights to IMO-2055 and follow-on compounds for use in the treatment of cancer, excluding cancer vaccines, under the termination agreement discussed below.

Under our collaboration with Merck KGaA, Merck KGaA was responsible for developing IMO-2055 for the treatment of cancer excluding vaccines. Merck KGaA refers to IMO-2055 as EMD 1201081. Prior to March 2010, we conducted clinical trials of IMO-2055 under the collaboration and Merck KGaA reimbursed us. As of March 2010, Merck KGaA assumed sponsorship of all ongoing clinical trials of IMO-2055 for the treatment of cancer and responsibility for all further clinical development of IMO-2055 in the treatment of cancer. As a result of Merck KGaA's assumption of sponsorship of the trials, we did not incur significant expenses for IMO-2055 development during the three months ended March 31, 2011.

On November 30, 2011, we entered into an agreement to terminate our collaboration with Merck KGaA and to regain rights for developing TLR9 agonists for the treatment of cancer. In connection with the termination agreement, we agreed to reimburse Merck KGaA for up to €1,816,000 ($2,423,000 at March 31, 2012) of Merck KGaA's costs for the third party contract research organization that is coordinating the Phase 2 trial of IMO-2055 in combination with cetuximab, payable in eleven installments commencing on March 1, 2012 including a final payment payable upon Merck KGaA's completion of certain specified activities. We also agreed to pay to Merck KGaA one-time €1,000,000 ($1,334,000 at March 31, 2012) milestone payments upon occurrence of each of the following milestones: (i) partnering of IMO-2055 with any third party, (ii) initiation of any Phase 2 or Phase 3 clinical trial for IMO-2055 and (iii) regulatory submission of IMO-2055 in any country. We recorded, in research and development expense during the three months ended December 31, 2011, €1,816,000 ($2,423,000 at November 30, 2011) in installment payments which represents the cost of regaining our rights to IMO-2055 and follow-on compounds for use in the treatment of cancer, excluding cancer vaccines. Under the agreement, Merck KGaA agreed to continue to conduct the Phase 2 trial of IMO-2055 in combination with cetuximab and other specified related activities and to complete and analyze all clinical trials that Merck KGaA had initiated or for which Merck KGaA had assumed sponsorship and to finalize clinical study reports. As a result, we did not incur significant expenses for IMO-2055 development during the three months ended March 31, 2012. Any milestone payments will be recorded at the time that any milestones are achieved.

In January 2012, we announced favorable top-line data from a Phase 1b clinical trial of IMO-2055 in combination with erlotinib and bevacizumab in patients with advanced non-small cell lung cancer. In the trial, progression-free survival was 5.6 months, median overall survival was 16 months, and the disease control rate, which is the percentage of patients who experience a response of stable disease or better, was 79%. We expect to present the detailed data from this trial at a scientific conference.

In April 2012, we received from Merck KGaA results from a Phase 1b clinical trial of IMO-2055 in combination with cetuximab and the chemotherapy regimen FOLFIRI in patients with advanced or metastatic colorectal cancer. The primary objective of this study was to determine the recommended Phase 2 dose of IMO-2055 when combined with cetuximab and FOLFIRI. Fifteen patients were enrolled in the dose escalation portion of the study and received IMO-2055 at 0.16, 0.32, or 0.48 mg/kg/week in combination with weekly cetuximab and FOLFIRI once every two weeks. The combination of IMO-2055, cetuximab, and FOLFIRI was generally well tolerated, and 0.48 mg/kg/week was identified as the recommended Phase 2 dose of IMO-2055 in this setting.

In May 2012, we announced top-line results from a Phase 2 clinical trial conducted by Merck KGaA of IMO-2055 in combination with cetuximab in second-line cetuximab-naïve patients with recurrent or metastatic SCCHN who previously progressed on chemotherapy. In this study, 106 patients with SCCHN were randomized into two arms of 53 patients each. In one arm, patients were treated with IMO-2055 at a dose of 0.32 mg/kg given subcutaneously once weekly in combination with weekly cetuximab. In the other arm of the study, patients were treated with cetuximab alone. Crossover of the patients who progressed on cetuximab alone was permitted to the combination arm of IMO-2055 and cetuximab. The trial was conducted at multiple centers in Europe and the United States. The primary endpoint of the study was progression-free survival. Secondary outcome measures included overall response rate (by RECIST), disease control rate, overall survival, and safety and tolerability in subjects treated with IMO-2055 plus cetuximab compared to cetuximab alone. In the study, the combination of IMO-2055 and cetuximab did not meet the primary endpoint. The median progression-free survival based on investigator assessments was 2.9 months in both arms; based on independent radiology review it was 1.9 months in the cetuximab arm and 1.5 months in the combination arm. The hazard ratio in both evaluations was 1.1 with no statistical difference between the treatment arms. The relative dose intensity was 96% for IMO-2055 and 99% for cetuximab in the combination arm, and was 96% for cetuximab in the cetuximab-alone arm. We expect to present the detailed data from this trial at a scientific conference.

We intend to seek to enter into collaborations with pharmaceutical companies to advance the use of IMO-2055 in the treatment of cancer.

IMO-2125 External Development Expenses. These expenses include external expenses that we have incurred in connection with IMO-2125. These external expenses include payments to independent contractors and vendors for drug development activities conducted after the initiation of IMO-2125 clinical development, but exclude internal costs such as payroll and overhead expenses. We commenced clinical development of IMO-2125 in May 2007 and from May 2007 through March 31, 2012 we have incurred approximately $16,480,000 in external development, including costs associated with our clinical trials manufacturing, process development activities related to the production of IMO-2125, and additional nonclinical toxicology studies.

The decrease in IMO-2125 external development expenses in the three months ended March 31, 2012, as compared to the corresponding 2011 period, reflects our determination to discontinue further development of IMO-2125 in the treatment of chronic hepatitis C virus infection, or HCV, in the third quarter of 2011. IMO-2125 external development expenses during the first three months of 2011 included costs associated with preparation for the Phase 2 clinical trial of IMO-2125 we planned to initiate in the second quarter of 2011, conduct of additional nonclinical toxicology studies of IMO-2125 and costs associated with the two Phase 1 clinical trials for which we completed all patient activities prior to the end of 2010. IMO-2125 external development expenses during the first three months of 2012 were related primarily to costs associated with the completion of nonclinical studies and costs associated with the maintenance of the clinical drug supply. We expect that IMO-2125 external development expenses will be significantly lower in future periods.

Other Drug Development Expenses. These expenses include external expenses associated with preclinical development of identified compounds in anticipation of advancing these compounds into clinical development. In addition, these expenses include internal costs, such as payroll and overhead expenses, associated with preclinical development and products in clinical development. The external expenses associated with preclinical compounds include payments to contract vendors for manufacturing and the related stability studies, preclinical studies, including animal toxicology and pharmacology studies, and professional fees. Expenses associated with products in clinical development include costs associated with our Autoimmune Disease Scientific Advisory Board.

The increase in other drug development expenses in the three months ended March 31, 2012, as compared to the corresponding 2011 period, was primarily due to costs of preclinical studies and manufacturing activities to support the planned submission of an IND for IMO-8400 during the fourth quarter of 2012, and were partially offset by lower employee expenses in the first three months of 2012.

Basic Discovery Expenses. These expenses include our internal and external expenses relating to our discovery efforts with respect to our TLR-targeted programs, including agonists and antagonists of TLRs 3, 7, 8 and 9, TLR antisense, and GSOs. These expenses reflect payments for laboratory supplies, external research, and professional fees, as well as payroll and overhead expenses. The decrease in basic discovery expenses in the three months ended March 31, 2012, as compared to the corresponding 2011 period, was primarily due to decreases in the cost of laboratory supplies and employee compensation.

We do not know if we will be successful in developing any drug candidate from our research and development programs. At this time, without knowing the results of the ongoing Phase 2 clinical trial of IMO-3100, and without an established plan for future clinical tests of drug candidates, we cannot reasonably estimate or know the nature, timing, and costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from, any drug candidate from our research and development programs. Moreover, the clinical development of any drug candidate from our research and development programs is subject to numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of unanticipated events arising during clinical development.

General and Administrative Expenses

General and administrative expenses decreased by $597,000, or 26%, from $2,286,000 in the three months ended March 31, 2011, to $1,689,000 in the three months ended March 31, 2012. General and administrative expenses consist primarily of salary expense, stock compensation expense, consulting fees and professional legal fees associated with our patent applications and maintenance, our corporate regulatory filing requirements, our corporate legal matters, and our business development initiatives. The decrease in general and administration expenses during the three months ended March 31, 2012, as compared to the corresponding 2011 period, was primarily due to lower legal costs associated with patent matters and lower employee compensation during the 2012 period.

Increase in Fair Value of Warrant Liability

During November 2011 we recorded a warrant liability reflecting the fair value of the warrants issued in our November 2011 financing. We determined the warrant to be a derivative instrument because it contains a specified anti-dilution provision that does not meet the "indexed to the company's own stock" exemption requirements in ASC 815-40, "Derivatives and Hedging - Contracts in an Entity's own Stock." The warrant was classified as a liability, recorded at fair value as of the transaction date and is being marked to fair value through earnings each quarter. The fair value of the warrants increased from $1,178,000 at December 31, 2011 to $2,499,000 at March 31, 2012 primarily due to an increase in the market price of our common stock. The increase in the fair value of the warrant liability resulted in the recognition of a $1,321,000 non-operating expense in the three months ended March 31, 2012. We expect that the fair value of the warrant liability will vary significantly in the future resulting in material non-operating charges and credits in future periods.

Investment Income, net

Investment income, net, decreased by approximately $17,000, or 81%, from $21,000 in the three months ended March 31, 2011 to $4,000 in the three months ended March 31, 2012 because all of our invested funds were deposited in a money market fund which pays minimal interest.

Foreign Currency Exchange Loss

Our foreign currency exchange loss amounted to $76,000 in the three months ended March 31, 2012 primarily due to the impact that the decreasing value of the U.S. dollar had on our Euro-denominated accrued liabilities associated with the cost of re-gaining the rights to our cancer program and our clinical trial obligations. Our foreign currency exchange loss amounted to $35,000 in the three months ended March 31, 2011 primarily due to the impact that the decreasing value of the U.S. dollar had on our Euro-denominated accrued liabilities associated with our clinical trial obligations.

Preferred Stock Dividends

The $160,000 in preferred stock dividends in the three months ended March 31, 2012 consists of dividends payable on shares of our Series D preferred stock that we issued in November 2011.

Net Loss Applicable to Common Stockholders

As a result of the factors discussed above, our net loss applicable to common stockholders was $7,046,000 for the three months ended March 31, 2012, compared to $6,845,000 for the three months ended March 31, 2011. Since January 1, 2001, we have primarily been involved in the development of our TLR pipeline. From January 1, 2001 through March 31, 2012, we incurred losses of $122,111,000. We also incurred net losses of $260,193,000 prior to December 31, 2000 during which time we were primarily involved in the development of non-TLR targeted antisense . . .