IMUGENE LIMITED — Interim / Quarterly Report 2004

Feb 25, 2004

LIMITED

ABN 99 009 179 551

FINANCIAL REPORT

FOR THE HALF-YEAR ENDED

31 DECEMBER 2003

LIMITED

26 February 2004

REPORT FOR HALF YEAR ENDED 31 DECEMBER 2003

Dear Shareholders

The second half of 2003 resulted in several significant advancements in the development of Imugene's animal health products. In addition, consistent and anticipated progress was achieved with our existing product development and research projects.

Our previously stated aims for 2004 are on-track, particularly as the outcomes achieved in the second half of 2003 with Imugene's biological production animal treatments exceeded expectations.

Production Animal Vaccines

The consequences of the recent outbreak of Avian Influenza demonstrate the importance of effective vaccines for infectious disease control in production animals. Imugene's range of 'next generation' biological vaccines is uniquely suited to meet this market need. Our technologically advanced vaccines can be manufactured and delivered efficiently to large populations of pigs and chickens.

One of our primary objectives is the continued commercialisation of the pig and poultry biological products. Recent progress towards this goal includes:

• Major scientific improvement of the platform delivery systems the Adenoviral Delivery Vectors - significantly improving both the pig and poultry vectors efficacy. This improvement has a positive impact on all of our production animal products.
• Merial's continued commitment to the commercial arrangements for $\bullet$ the three products under their evaluation. Merial and Imugene will increase their collaboration with the first large scale commercial trials of the poultry productivity enhancer likely to be conducted in Australia in 2004. New constructs for the other products under option will also proceed to the next stage of testing. This commitment to partnering with Imugene followed initial validation and other trials conducted by Merial, and the added benefits of the scientific improvement in the Adenoviral Delivery Vector.

• CSIRO and Imugene commenced collaboration to develop a vaccine using the Adenoviral Delivery Vector to prevent disease caused by the current devastating strain of Avian Influenza occurring throughout South East Asia.

• In December 2003, Imugene's applications for 'Intentional Release' of both the pig and poultry Adenoviral Delivery Vectors were lodged and accepted by the Office of Gene Technology Regulator (OGTR) in Australia. The OGTR is progressing these applications. Following the grant of Intentional Release, we will be able to undertake large-scale trials of our advanced production animal products. These trials will be conducted within commercial-like operating production facilities and are critical to both the regulatory process and the independent verification of the superior efficacy of our products under commercial conditions

• Short-listing of sites suitable for sub-contract manufacturing of the production animal vaccines.
• Initial testing to determine the most commercially viable methods of $\bullet$ storing and transporting our production animal products for commercial end use.
• Evaluation of the Chinese pig and poultry vaccine market opportunities. As a result two additional pig vaccines against major diseases in China are under construction.
• Continued interest in our technologically advanced production animal delivery systems from major Animal Health companies in addition to the arrangements that exist with Merial.

Due to the significant improvement made to the Adenoviral Delivery Vectors through the adoption of the new 'promoter", much of the 'lab activity' during the half year revolved around upgrading our product range to install the new promoter in each vaccine product. The early stage testing of the promoter indicated a 50-fold increase in the 'expression' of the gene or protein included in our vaccines.

Animal trialing of the improved product range has recently begun and will continue during the year. Large-scale commercial based trials will commence upon receipt of the Intentional Release permission from the OGTR. The information gathered from these large-scale trials commercial will be included in the 'regulatory dossier' for each product's registration. On completion of this process, each product will be ready for final manufacture and distribution within Australia. The information generated from these trials is also suitable for the European Regulatory Dossier and is expected to exceed the requirements for the US regulatory process.

Poultry Productivity Enhancer

The biological poultry productivity enhancer, one of our most important products, will be the first product to enter this final phase of development. The potential global market for this product is extremely large with 40 billion chickens produced each year. The product improves flock health and therefore growth rates, delivering major productivity gains to producers.

These gains are achieved by naturally enhancing the immune status of the individual birds, thereby reducing or eliminating the need for in-feed antibiotics, drugs and chemicals.

Due to its anticipated low costs of production and the resultant increased productivity gains, the product will be applicable to all major chicken producing areas of the world.

In addition to the support of Merial, Imugene has obtained Federal government funding enabling the final development phase of this product to be fast tracked within Australia and overseas. Activity to be carried and finalised this year includes manufacture, safety and potency testing of the 'Master Seed Stock', from which all commercial product will be made.

Flea Vaccine Research

Research continues with our collaboration partner, Murdoch University, into the development of a biological vaccine to protect pets from flea infestation. Our first vaccine candidates are in final preparation for initial screening trials. Additional vaccine candidates are in preparation and will also progress to screening trials. These initial trials, depending upon availability of facilities, should commence within the second quarter of this year.

New Projects

We have and continue to assess new animal health projects that fit within our strategic plans and meet the fundamental requirements of large global markets and products driven by market pull and not technology push.

We have several prospects that are under consideration.

Financial position

In addition to our closing cash reserves of \$1.9m, Imugene and its projects have received the support of two government grants (totaling in excess of \$500,000) and the R & D tax rebate that, in total, is anticipated to contribute in excess of \$600,000 this calendar year. Our collaboration and partnering arrangements will also deliver additional funds as a contribution to product development.

Graham Dowland Executive Chairman

ABOUT IMUGENE:

Imugene Limited (ASX Code: IMU) is an Australian biopharmaceutical company specialising in the development and commercialisation of animal health products for production animals (pigs and poultry) and companion (pet) animals.

Imugene's products safely prevent disease and parasites in animals, reduce or eliminate the use of antibiotics, harmful chemicals and drugs and, in production animals, reduce the level of antibiotic and chemical residue entering the human food chain

Imugene's poultry and pig product portfolio is aiming to exploit market segments worth US\$3 billion of the existing US\$8 billion global spend on existing treatments per year. The majority of the existing treatments are chemical and antibiotic products that are becoming less effective for disease treatment and productivity enhancement. Compounding the problem of diminishing efficacy, governments and health organizations, internationally, are lobbying and legislating against the use of antibiotics in favour of non-chemical treatments.

Imugene's biological chicken productivity enhancer has no competitor in the market place that can achieve the modification of the immune system, which results in increased resistance to a range of diseases. As Imugene's biological productivity enhancer boosts the immune system by using a substance occurring naturally in chickens, there is no residue or risk of contributing to the development of antibiotic resistance.

Imugene's flea control vaccine research is targeting the global market for flea control products worth in excess of US\$1.5 billion per annum. An efficient biological vaccine has the potential to immediately gain a large share of this market from the current 'over the counter' chemical treatments.

website: www.imugene.com

For further information, contact:

IMUGENE:

MR GRAHAM DOWLAND	$\sim$ EXECUTIVE CHAIRMAN Tel: +61 8 9322 9189
DR WARWICK LAMB	- MANAGING DIRECTOR	Tel: +61 2 9870 7330

IMUGENE LIMITED HALF-YEAR FINANCIAL STATEMENTS

CORPORATE DIRECTORY

Directors

Mr Graham Dowland - Executive Chairman Dr Warwick Lamb - Managing Director Mr Roger Steinepreis - Non Executive Director

Secretary

Mr Mark Pearce

Registered and Principal Office

Level 1 14 - 20 Delhi Road North Ryde NSW 2113 Australia Telephone: (61 2) 9870 7330 Facsimile: (61 2) 9888 9338

Perth Office

Level 9 28 The Esplanade Perth WA 6000 Australia Telephone: (61 8) 9322 9189 Facsimile: (61 8) 9322 6558

Share Register

Computershare Investor Services Pty Ltd Level 2, Reserve Bank Building 45 St Georges Terrace Perth WA 6000 Australia Telephone: 1300 557 010 Facsimile: (61 8) 9323 2033

Solicitors

Steinepreis Paganin Level 14 37 St Georges Terrace Perth WA 6000 Australia

Auditor Deloitte Touche Tohmatsu Level 16, Central Park 152-158 St Georges Terrace Perth WA 6000 Australia

Bankers

Australia and New Zealand Banking Group Limited 77 St Georges Terrace Perth WA 6000 Australia

Stock Exchange Listing Imugene Limited shares are listed on the Australian Stock Exchange (Symbol: IMU).

DIRECTORS' REPORT

The Directors of Imugene Limited present their report on the consolidated entity consisting of Imagene Limited ("the Company" or "Imagene") and the entities it controlled during the half-year ended 31 December 2003 ("Consolidated Entity" or "Group").

DIRECTORS

The names of the Directors of Imugene Limited in office during the half-year and until the date of this report are:

Mr Graham Dowland Dr Warwick Lamb Mr Roger Steinepreis

Unless otherwise shown, all Directors were in office from the beginning of the half-year until the date of this report.

REVIEW AND RESULTS OF OPERATIONS

Operating Results

The Company recorded a net after tax loss of \$776,538 (2002: net loss of \$740,024) for the half-year ended 31 December 2003.

A review of the Company's operations during the half-year ended 31 December 2003 is disclosed in the letter to shareholders that is attached to this half yearly report.

Signed in accordance with a resolution of Directors.

GRAHAM DOWLAND Director Perth, 26 February 2004

DIRECTORS' DECLARATION

The directors of Imugene Limited declare that:

• $(a)$ the financial statements and notes thereto comply with Accounting Standards;
• $(b)$ the attached financial statements and notes thereto give a true and fair view of the financial position and performance of the Consolidated Entity;
• in the directors' opinion, the attached financial statements and notes thereto are in $(c)$ accordance with the Corporations Act, 2001; and
• in the directors' opinion, there are reasonable grounds to believe that the $(d)$ Consolidated Entity will be able to pay its debts as and when they become due and payable.

Signed in accordance with a resolution of the directors made pursuant to s303(5) of the Corporations Act 2001.

On behalf of the Board

GRAHAM DOWLAND Director

Perth, 26 February 2004

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL PERFORMANCE

FOR THE HALF-YEAR ENDED 31 DECEMBER 2003

	Note	Consolidated 31 Dec 2003 \$	Consolidated 31 Dec 2002 \$
Revenue from ordinary activities	$\mathbf{2}$	44,465	526,079
Research and development expense upon
acquisition		(380, 836)	(487,936)
Research and development expenses Commercialisation expenses		(469, 355)	(151, 836) (352, 325)
VosTech Business - restructure expenses			(250, 871)
Business development expenses		(141, 187)
Corporate and administrative expenses		(186, 517)	(256, 334)
Other expenses from ordinary activities		(1,660)	(94, 131)
Loss from ordinary activities before income tax benefit		(1, 135, 090)	(1,067,354)
Income tax benefit relating to ordinary activities		358,552
Loss from ordinary activities after income tax benefit		(776, 538)	(1,067,354)
Net Loss attributable to outside equity interests			327,330
Net Loss attributable to members of Imugene
Limited		(776, 538)	(740, 024)
Total changes in equity other than those resulting from transactions with owners as
Owners attributable to members of Imugene		(776, 538)	(740, 024)
Earnings Per Share
Basic earnings per share (cents per share)		$(0.7)$ cents	$(1.2)$ cents
Dilutive earnings per share (cents per share)		$(0.7)$ cents	$(1.2)$ cents

The above Statement of Financial Performance should be read in conjunction with the accompanying notes.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AT 31 DECEMBER 2003

	Note	Consolidated 31 Dec 2003 \$	Consolidated 30 Jun 2003 \$
Current Assets
Cash assets		1,974,319	2,617,829
Other		69,473	44,927
Total Current Assets		2,043,792	2,662,756
Non-current Assets
Other financial assets		475,496	475,496
Property, plant and equipment		20,281	19,045
Intangible assets		4,816,285	4,986,792
Total Non-current Assets		5,312,062	5,481,333
TOTAL ASSETS		7,355,854	8,144,089
Current Liabilities
Payables		597,511	456,202
Provisions		19,851	10,264
Other			234,300
TOTAL LIABILITIES		617,362	700,766
NET ASSETS		6,738,492	7,443,323
Equity
Contributed equity	4	8, 132, 529	36,751,241
Accumulated losses	5	(1, 394, 037)	(29, 307, 918)
TOTAL EQUITY		6,738,492	7,443,323

The above Statement of Financial Position should be read in conjunction with the accompanying notes.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE HALF-YEAR ENDED 31 DECEMBER 2003

	Note	Consolidated 31 Dec 2003 S	Consolidated 31 Dec 2002 S
CASH FLOWS FROM OPERATING ACTIVITIES
Receipts from customers Payments to suppliers and employees Research and development rebate Interest received		(879, 593) 358,552 44,465	547,419 (1,299,510) 16,994
Net cash flows used in operating activities		(476, 576)	(735,097)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment Acquisition of property, plant and equipment Purchase of shares in unlisted company Payment for business acquisition	6	(4,273) (234, 300)	5,391 (15,366) (259,778) (30, 170)
Net cash flows used in investing activities		(238, 573)	(299, 923)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issues of securities (shares, options etc.) Share issue expenses		71,639	1,673,961 (97, 932)
Net cash flows from financing activities		71,639	1,576,029
NET INCREASE/(DECREASE) IN CASH HELD		(643,510)	541,009
Add opening cash brought forward		2,617,829	782,962
CLOSING CASH CARRIED FORWARD		1,974,319	1,323,971

The above Statement of Cash Flows should be read in conjunction with the accompanying notes.

FOR THE HALF-YEAR ENDED 31 DECEMBER 2003

BASIS OF PREPARATION $\mathbf{1}$ .

The half-year financial report does not include all notes of the type normally included within the annual financial report and therefore cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the economic entity as the full financial report.

The half year report should be read in conjunction with the Annual Financial Report of Imugene Limited as at 30 June 2003. It is also recommended that the half-year report be considered together with any public announcements made by Imugene Limited and its controlled entities during the half-year ended 31 December 2003 in accordance with the continuous disclosure obligations arising under the Corporations Act 2001.

$(a)$ Basis of Accounting

The half-year financial report is a general purpose financial report which has been prepared in accordance with the requirements of the Corporations Act 2001, applicable Accounting Standards including AASB 1029 "Interim Financial Reporting" and other mandatory professional reporting requirements (Urgent Issues Group Consensus Views).

The half-year financial report has been prepared in accordance with the historical cost convention. The accounting policies adopted in the preparation of the half year financial report are consistent with those adopted and disclosed in the 2003 annual financial report.

For the purposes of preparing the half-year financial report, the half-year has been treated as a discrete reporting period.

2.	REVENUE FROM ORDINARY ACTIVITIES	Consolidated 31 Dec 2003 S	Consolidated 31 Dec 2002 S
	Revenue from operating activities
	Licensing fees		503,664
	Revenue from non-operating activities
	Interest received/receivable	44,465	16,994
	Proceeds on disposal of investments		5,391
	Other		30
		44,465	22,415
		44,465	526,079

DIVIDENDS PAID OR PROVIDED FOR 3.

No dividends have been paid or provided for during the half-year.

FOR THE HALF-YEAR ENDED 31 DECEMBER 2003

4. CONTRIBUTED EQUITY

	Consolidated 31 Dec 2003	Consolidated 30 Jun 2003
(a) Issued and paid up capital: $107,809,206$
$(30 \text{ Jun } 03: 107, 172, 416)$ fully paid ordinary shares	8,132,529	36,751,241

(b) Movements in contributed equity during the past six months were as follows:-

Date	Details	Notes	Number of Shares	Number of convertible preference shares	Number of Performance Options	Number of 11.25 cent Options	Issue Price \$	$\mathbb{S}$
1 Jul 2003	Balance	(i)	107,172,416	8,872	4,633,333	3,398,277		36,751,241
Variou s	Option conversion	(ii)	636,790		$\blacksquare$	(636,790)	0.1125	71,639
$27$ Nov 2003	Grant of incentive
$27$ Nov	option	(iii)		w	6,000,000
2003	Capital reduction	(iv)					$\omega$ .	(28,690,419)
			Over-accrual of share issue expenses					68
31 Dec 2003	Closing Balance		107,809,206	8,872	10,633,333	2,761,487		8,132,529

Notes

• All Performance Options on issue at 1 July 2003 have an exercise price of \$0.225 $(i)$ each and expire on 31 October 2007. Vesting conditions apply to some of these options.
• $(ii)$ Exercise of unlisted options at \$0.1125 per option.
• Pursuant to a resolution approved by shareholders at the annual general meeting, $(iii)$ 6,000,000 performance options were issued to executives. These options expire on 31 December 2006. 50% of the options are exercisable at \$0.30 each, with the exercise price of the remaining 50% to be determined by reference to the Company's average share price over two specified periods. Vesting conditions apply to these options.
• Pursuant to a resolution approved by shareholders at the annual general meeting, $(iv)$ the Company's share capital was reduced by applying the amount of cancelled paid up capital of \$28,690,419 against the carried forward accumulated losses of the Company.

FOR THE HALF-YEAR ENDED 31 DECEMBER 2003

5. ACCUMULATED LOSSES

	Consolidated 31 Dec 2003 Ж	Consolidated 30 Jun 2003 S
Opening balance of accumulated losses	29,307,918	27,962,860
Capital reduction (see note $4(b)(ii)$ )	(28,690,419)
Current year losses	776,538	1,345,058
Closing balance of accumulated losses	1,394,037	29,307,918

6. NON CASH FLOW ITEMS - Acquisition of Controlled Entities

During the half year ended 31 December 2002, the Company acquired a 100% interest in Brightsun Investments Pty Ltd, an unlisted Australian company that holds a 40% controlling interest in VectoGen Limited and a 23% interest in Paragen Pty Ltd ("Brightsun Group"). Both VectoGen and Paragen are companies involved in the research and development of animal health products.

	2002
	S.
Consideration
- Shares issued	1,600,000
- Cash paid	1,010,293
	2,610,293
Net assets acquired at 30 August 2002
	\$
Cash	980,123
Other financial assets	241,195
Other	37,941
	1,259,259
Payables	(288, 590)
Fair value of net assets	970,669
Outside equity interest in net assets	(585, 578)
Parent interest in net assets	385,091
Goodwill arising on acquisition	2,225,202
	2,610,293

FOR THE HALF-YEAR ENDED 31 DECEMBER 2003

6. NON CASH FLOW ITEMS - Acquisition of Controlled Entities (continued)

Net cash effect
Cash consideration paid	1,010,293
Cash included in net assets acquired	(980, 123)
Cash paid for purchase of controlled entity as
reflected in the consolidated financial report	30,170

e.

There were no acquisitions or disposals in the half-year ended 31 December 2003.

7. SUBSEQUENT EVENTS AFTER BALANCE DATE

There were no significant events occurring after balance date requiring disclosure

FOR THE HALF-YEAR ENDED 31 DECEMBER 2003

8. SEGMENT INFORMATION

Business Segment	Animal Health		VosTech			Unallocated		Eliminations		Consolidated
	2003	2002	2003	2002	2003	2002	2003	2002	2003	2002
	S	\$	S	\$	\$	S	\$		\$	ъ
Operating revenue
Research and development
rebate
Licence fees from outside
of the Consolidated Entity
		503,664								503,664
Other revenues from outside the Consolidated
Entity			$\blacksquare$	5,391						5,391
Unallocated revenue			$\blacksquare$		44,465	17,024		$\blacksquare$	44,465	17,024
Segment revenue		503,664		5,391	44,465	17,024			44,465	526,079
Segment result	(993, 038)	(582, 564)	$\blacksquare$	(245, 480)	44,465	17,024		$\blacksquare$	(948, 573)	(811,020)
Unallocated expenses									(186, 517)	(256, 334)
Income tax benefit									358,552
Consolidated Entity operating loss after income
tax benefit									(776, 538)	(1,067,354)

INDEPENDENT REVIEW REPORT TO THE MEMBERS OF IMUGENE LIMITED

Scope

We have reviewed the financial report of Imugene Limited for the half-year ended 31 December 2003 as set out on pages 7 to 15. The financial report includes the consolidated financial statements of the consolidated entity comprising the disclosing entity and the entities it controlled at the end of the half-year or from time to time during the half-year. The disclosing entity's directors are responsible for the financial report. We have performed an independent review of the financial report in order to state whether, on the basis of the procedures described, anything has come to our attention that would indicate that the financial report is not presented fairly in accordance with Accounting Standard AASB 1029 "Interim Financial Reporting" and other mandatory professional reporting requirements in Australia and statutory requirements, so as to present a view which is consistent with our understanding of the consolidated entity's financial position, and performance as represented by the results of its operations and its cash flows, and in order for the disclosing entity to Iodge the financial report with the Australian Securities and Investments Commission.

Our review has been conducted in accordance with Australian Auditing Standards applicable to review engagements. A review is limited primarily to inquiries of the entity's personnel and analytical procedures applied to the financial data. These procedures do not provide all the evidence that would be required in an audit, thus the level of assurance provided is less than given in an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.

Statement

Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the half-year financial report of Imagene Limited is not in accordance with:

• the Corporations Act 2001, including: $(a)$
• giving a true and fair view of the consolidated entity's financial position as at 31 December 2003 and of $(i)$ its performance for the half-year ended on that date; and
• complying with Accounting Standard AASB 1029 "Interim Financial Reporting" and the Corporations $(ii)$ Regulations 2001; and
• $(b)$ other mandatory professional reporting requirements in Australia.

DELOITTE TOUCHE TOHMATSU

Peter McIver Partner Chartered Accountants

Perth, WA, 26 February 2004

The liability of Deloitte Touche Tohmatsu, is limited by, and to the extent of, the Accountants' Scheme under the Professional Standards Act 1994 (NSW).