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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2005

For the transition period from                  to                 

Commission File Number 0-23155

TRIMERIS, INC.

(Exact name of registrant as specified in its charter)

3500 Paramount Parkway

Morrisville, North Carolina 27560

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (919) 419-6050

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  ¨

The number of shares outstanding of the registrant’s common stock as of August 1, 2005 was 21,958,650.

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TR IMERIS, INC.

FORM 10-Q

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TRIMERIS, INC.

BALANCE SHEETS

(in thousands, except par value)

See accompanying notes to financial statements.

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TRIMERIS, INC.

STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

See accompanying notes to financial statements.

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TRIMERIS, INC.

STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

See accompanying notes to financial statements

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TRIMERIS, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

1. BASIS OF PRESENTATION

Trimeris, Inc. (the “Company”) was incorporated on January 7, 1993 in Delaware, to discover and develop novel therapeutic agents that block viral infection by inhibiting viral fusion with host cells. Prior to April 1, 2003, the financial statements were prepared in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises,” to recognize the fact that the Company was devoting substantially all of its efforts to establishing a new business. Principal operations commenced with the commercial launch of Fuzeon^® on March 27, 2003, and revenue was recognized from the sale of Fuzeon during the year ended December 31, 2003. As a result, beginning on April 1, 2003, the Company no longer prepares its financial statements in accordance with SFAS No. 7.

The Company has a worldwide agreement with F. Hoffmann-La Roche Ltd., or Roche, to develop and market T-20, marketed as Fuzeon, whose generic name is enfuvirtide, and T-1249, or a replacement compound. Fuzeon is manufactured and distributed by Roche through Roche’s sales and distribution network throughout the world in countries where regulatory approval has been received. The Company shares gross profits equally from the sale of Fuzeon in the United States and Canada with Roche, and receives a royalty based on net sales of Fuzeon outside the United States and Canada.

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and applicable Securities and Exchange Commission (the “SEC”) regulations for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the SEC rules and regulations. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial position and results of operations have been made. Operating results for interim periods are not necessarily indicative of results, which may be expected for a full year. The information included in this Form 10-Q should be read in conjunction with the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and the 2004 financial statements and notes thereto included in the Company’s 2004 Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 11, 2005.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company has a collaboration agreement with Roche, which accounted for 100% of the Company’s royalty revenue for the six months ended June 30, 2005 and 2004. This agreement with Roche also provides the basis for substantially all of the Company’s results from the collaboration.

Certain prior year amounts have been reclassified to conform to current year presentation. These reclassifications had no impact on net loss or stockholders’ equity as previously reported. The Company reclassified $24.8 million of auction rate securities from cash and cash equivalents to investment securities-available-for-sale, as of June 30, 2004. Accordingly, the Company reflected additional purchases of investment securities – available-for-sale and additional maturities of investment securities-available-for-sale for the six months ended June 30, 2004. The Company also reclassified $3.7 million of accrued marketing costs from financing activities to operating activities in the statement of cash flows for the six months ended June 30, 2004.

2. BASIC NET INCOME (LOSS) PER SHARE

In accordance with SFAS No. 128, “Earnings Per Share,” basic loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period after certain adjustments described below. Diluted net income per common share reflects the maximum dilutive effect of common stock issuable upon exercise of stock options, restricted stock, stock warrants, and conversion of preferred stock. Diluted net loss per common share is not shown, as common equivalent shares from stock options, restricted stock grants and stock warrants, would have an anti-dilutive effect. At June 30, 2005, there were 3,377,000 options to purchase common stock, 169,000 restricted stock grants, which become fully vested in 2007, 50,000 restricted stock grants, which become fully vested in 2008 and 362,000 warrants to purchase common stock outstanding. At June 30, 2004, there were 2,996,000 options to purchase common stock, 191,500 restricted stock grants which become fully vested in 2007 and 362,000 warrants to purchase common stock outstanding.

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3. STATEMENTS OF CASH FLOWS

No interest expense was paid during the six months ended June 30, 2005. Interest of approximately $5,000 was paid during the six months ended June 30, 2004.

For the six months ended June 30, 2005, approximately $368,000 was charged to interest expense for the accretion of the liability resulting from the Company’s share of estimated selling and marketing expenses under the collaboration agreement with Roche. The Company recorded a liability of $15.6 million during 2004, as part of collaboration loss, which represents the net present value of the Company’s estimated share of these expenses, based on the expected timing and terms of payment under the amendment to the collaboration agreement dated July 12, 2004.

No capital leases were incurred for the six months ended June 30, 2005 or 2004.

Net unrealized gains on investments securities-available-for-sale totaled approximately $5,000 during the six months ended June 30, 2005 and net unrealized losses on investment securities available-for-sale totaled $22,000 during the six month period ended June 30, 2004. Unrealized gains/losses are reported on the balance sheet as accumulated other comprehensive gain / (loss).

4. STOCKHOLDERS’ EQUITY

Changes in Additional Paid-In Capital

In June 2004, a grant of 191,500 shares of restricted stock was made to substantially all employees. A $2.7 million charge, equal to the market value of these shares on the grant date, was made to deferred compensation and credited to additional paid-in capital. This deferred compensation will be charged to expense ratably over the three-year vesting period of the restricted stock. In September 2004, a grant of 50,000 shares of restricted stock was made to the newly appointed Chief Executive Officer. A $575,000 charge, equal to the market value of these shares on the grant date, was made to deferred compensation and credited to additional paid-in capital. This deferred compensation will be charged to expense ratably over the four-year vesting period of the restricted stock. Amortization expense, related to these restricted stock grants, in the amount of $449,000 and $20,000 was charged to non-cash compensation expense for the six months ended June 30, 2005 and 2004, respectively.

A change in additional paid-in capital during the six months ended June 30, 2005 was $18,000 related to expense reversal of non-cash compensation charges. A change in additional paid-in capital during the six months ended June 30, 2004 was $61,000 related to expense reversal of non-cash compensation charges. This decrease in the expense resulted primarily due to the decrease in the market price of our stock from December 31, 2004 to June 30, 2005 and from December 31, 2003 to June 30, 2004, respectively.

5. ROCHE COLLABORATION

Collaboration Agreement

In July 1999, the Company entered into a worldwide agreement with F. Hoffman-La Roche Ltd., or Roche, to develop and commercialize T-20, currently marketed as Fuzeon, whose generic name is enfuvirtide, and T-1249, or a replacement compound. Research, or the discovery of compounds is generally distinct from the advanced testing of these compounds, a process referred to herein as development. Development expenses typically include certain clinical and pre-clinical studies performed on a clinical candidate compound, as well as post-marketing commitments related to approved drugs. In the Company’s collaboration with Roche, the discovery of compounds that may become clinical candidates is governed by a separate research agreement and the work by the parties is performed according to an agreed upon research plan. The research agreement itself does not require that a specific amount be spent on any annual research plan. Either party has the option to supplement the budgeted research plan at their own expense. At present the Company is still in discussions with Roche to finalize the specific activities to be carried out under the research plan and the associated budget for 2005, together with the relative obligations of the parties with respect to expenses incurred in 2005 under the research plan. While the Company’s development agreement with Roche covers the commercialization of Fuzeon, T-1249 or a replacement product, to date only Fuzeon is commercially available. At present, the Company and Roche contribute towards the selling and marketing of Fuzeon in the United States and Canada, with each party bearing certain costs according to terms of our agreement. Gross profits from the sale of Fuzeon are shared equally. Outside of these two countries, Roche will fund all development and commercialization costs for Fuzeon and pay the Company royalties on net sales of Fuzeon products.

Roche made a nonrefundable initial cash payment to the Company of $10 million during 1999, and a milestone payment of $2 million in 2000. The Company recorded an $8 million milestone in March 2003, a $5 million milestone in

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May 2003, a $2.5 million milestone in June 2003 and a $750,000 milestone in June 2004. The June 2004 milestone has been recorded as the parties have agreed that certain performance has been met and that payment is appropriate. We have recorded the June 2004 milestone on the basis that we will reach a final agreement with terms substantially the same as those we have agreed to in principle. Roche will provide up to an additional $33 million in cash upon achievement of developmental, regulatory and commercial milestones. This agreement with Roche grants them an exclusive, worldwide license for Fuzeon and T-1249, and certain other compounds. Under this agreement with Roche, a joint management committee consisting of members from Trimeris and Roche oversees the strategy for the collaboration. Roche may terminate its license for a particular country in its sole discretion with advance notice. This agreement with Roche gives Roche significant control over important aspects of the commercialization of Fuzeon and our other drug candidates, including but not limited to pricing, sales force activities, and promotional activities.

In July 1999, the Company granted Roche a warrant to purchase 362,000 shares of common stock at a purchase price of $20.72 per share. The warrant is exercisable prior to the tenth annual anniversary of the grant date and was not exercised as of June 30, 2005. The fair value of the warrant of $5.4 million was credited to additional paid-in capital in 1999, and as a reduction of the $10 million up-front payment received from Roche. The Company deferred $4.6 million, the net of the $10 million up-front payment and the $5.4 million in warrants, over the research and development period. The value was calculated using the Black-Scholes option-pricing model using the following assumptions: estimated dividend yield of 0%; expected stock price volatility of 86.00%; risk-free interest rate of 5.20%; and expected option life of ten years.

Roche is manufacturing Fuzeon bulk drug substance in its Boulder, Colorado facility. Roche’s manufacturing facility in Basel, Switzerland is producing the finished drug product from such bulk drug substance. Fuzeon is distributed and sold by Roche through Roche’s sales and distribution network throughout the world in countries where regulatory approval has been received.

Product sales of Fuzeon began in the United States on March 27, 2003 and are recorded by Roche. Under the collaboration agreement with Roche, the Company shares gross profits equally from the sale of Fuzeon in the United States and Canada with Roche, which is reported as collaboration income (loss) in the Statements of Operations as a component of revenue. Collaboration income (loss) is calculated as follows: Total gross sales of Fuzeon in the United States and Canada is reduced by any discounts, returns or rebates resulting in total net sales. Net sales are reduced by costs of goods sold resulting in gross profit. Gross profit is reduced by selling, marketing and other expenses related to the sale of Fuzeon, resulting in operating income or loss. The Company’s share of the operating income or loss is reported as collaboration income or loss as a component of revenue. Total net sales of Fuzeon in the United States and Canada were $48.5 million and $40.4 million during the six months ended June 30, 2005 and 2004, respectively. During the six months ended June 30, 2005 the gross profit from the sale of Fuzeon exceeded sales, marketing and other expenses resulting in the Company’s share of operating income from the sale of Fuzeon in the United States and Canada of $1.3 million. During the six months ended June 30, 2004, sales, marketing and other expenses exceeded the gross profit from the sale of Fuzeon resulting in the Company’s share of operating loss of $12.4 million. Roche previously had an exclusive distribution arrangement with Bioscrip, Inc. (“Bioscrip”) formerly known as Chronimed, Inc. to distribute Fuzeon in the United States during 2003. This exclusive arrangement terminated on April 26, 2004. Effective April 26, 2004, Fuzeon became available through retail and specialty pharmacies across the U.S. Prior to April 26, 2004, revenue from product sales had been recognized when title and risk of loss had passed to Bioscrip, which was when Bioscrip allocated drug for shipment to a patient. Beginning April 26, 2004, revenue is recognized when Roche ships drug and title and risk of loss passes to wholesalers.

The Company and Roche agreed to limit the Company’s actual cash contribution to the Fuzeon selling and marketing expenses in 2004 to approximately $10 million, even though Roche spent significantly more on these expenses. If certain cumulative levels of sales for Fuzeon in the United States and Canada are achieved, the Company’s share of the additional expenses incurred by Roche during 2004 will be payable to Roche beginning at a future date over several years from that future date. The Company currently estimates this date to be in 2011. During the year ended December 31, 2004, the Company’s share of selling and marketing expenses exceeded $10 million. As a result the Company included an additional charge under collaboration loss to reflect the repayment of this excess according to the terms of the agreement with Roche. During 2004 the Company recorded $15.6 million as part of collaboration loss, which represented the net present value of the Company’s estimated share of the expenses that were in excess of (approximately) $10 million. This amount was arrived at taking into account the expected timing and terms of payment under the agreement. For the six months ended June 30, 2005, Trimeris has recorded its anticipated share of selling and marketing expenses in accordance with terms and conditions of an agreement we executed with Roche in May of 2005.

Under the collaboration agreement with Roche, the Company contributes towards a share of the capital invested in Roche’s manufacturing facility through the depreciation charged to cost of goods sold as the products are sold. Through a series of negotiations, the Company has reached an understanding in principle with Roche whereby the Company will pay

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Roche for its share of the capital invested in Roche’s manufacturing facility over a seven-year period. The Company is in the process of formalizing these terms in a written agreement. Trimeris’ anticipated share of this capital investment is approximately $14 million. As a result, we accrued an initial payment of $4 million at June 2004 and expect to pay approximately $500,000 per quarter through June 2009. As a result, Roche will no longer include the depreciation related to the manufacturing facility in the cost of goods sold. In the event our collaboration agreement is terminated, we would not be obligated for any unpaid amounts for capital investment.

These payments, net of the portion allocated to cost of goods sold, are recorded as an asset presented as “Advanced payment – Roche.” This asset will be amortized based on the units of Fuzeon sold during the collaboration period, in order to properly allocate the capital investment to cost of goods sold in future periods. Assuming all payments are made and sales of Fuzeon continue, the Company estimates that this asset has a remaining useful life of approximately 11 years. In addition, other peptide drug candidates discovered under our collaboration with Roche can be manufactured using the same Roche facility. The carrying value of this asset will be evaluated annually for impairment or if a triggering event occurs.

The Company’s share of the collaboration income for the six months ended June 30, 2005 includes approximately $1.0 million in inventory write-offs and adjustments for the carrying value of impaired equipment charged to the Company by Roche at the Boulder manufacturing facility.

Research Agreement

Research, or the discovery of compounds is generally distinct from the advanced testing of these compounds, a process referred to herein as development. Development expenses typically include certain clinical and pre-clinical studies performed on a clinical candidate compound, as well as post-marketing commitments related to approved drugs. In the Company’s collaboration with Roche, the discovery of compounds that may become clinical candidates is governed by a separate research agreement and the work by the parties is performed according to an agreed upon research plan. In 2001, the Company entered into the research agreement with Roche to discover, develop and commercialize novel generations of HIV fusion inhibitor peptides. Roche and Trimeris will fund worldwide research, development and commercialization costs, and will share equally in gross profits from worldwide sales of new HIV fusion inhibitor peptides discovered after July 1, 1999. The joint research obligations under the agreement are renewable thereafter on an annual basis. The research term of this agreement was extended to December 2005 during 2003. The research agreement itself does not require that a specific amount be spent on any annual research plan. Either party has the option to supplement the budgeted research plan at their own expense. At present, the Company is still in discussions with Roche to finalize the specific activities to be carried out under the research plan and the associated budget for 2005, together with the relative obligations of the parties with respect to expenses incurred in 2005 under the research plan.

6. COMPREHENSIVE LOSS

SFAS No. 130, “Reporting Comprehensive Income”, establishes rules for the reporting and display of comprehensive income or loss and its components. SFAS No. 130 requires that unrealized gains or losses on the Company’s available-to-sale securities be included in other comprehensive income. Comprehensive income (loss) totaled ($8.57 million) for the six months ended June 30, 2005, and ($26.12 million) for the six months ended June 30, 2004. For the Company, other comprehensive income (loss) for the six months ended June 30, 2005 consists of our net loss of $8.58 million and unrealized gains on investment securities available-for-sale of $5,000.

7. STOCK BASED COMPENSATION

SFAS No. 123, “Accounting for Stock-Based Compensation” encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for employee stock-based compensation using the method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock.

Compensation costs for stock options granted to non-employees are accounted for in accordance with SFAS No. 123 and EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” which requires that compensation be measured at the end of each reporting period for changes in the fair value of the Company’s common stock until the options are vested.

SFAS No. 123 permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion

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No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25. Had the Company determined compensation expense based on the fair value at the grant date for its stock-based plans under SFAS No. 123, the Company’s net loss and basic loss per share would have been increased to the pro forma amounts indicated below for the three months and six months ended June 30 (in thousands, except per share data):

The fair value of common stock options is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for each year, 2005 and 2004:

In December 2004, SFAS No. 123 (revised), “Share-Based Payment,” was issued. SFAS No. 123 (revised) requires that the cost resulting from all share-based payment transactions be recognized as a charge in the financial statements. This statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans. This statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in share-based payment transactions. This statement amends FASB Statement No. 95, Statement of Cash Flows, to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. This Statement replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123 (revised) was initially effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. In April 2005, the SEC announced an amendment to the compliance date from the next reporting period beginning after June 15, 2005 to the next fiscal year beginning after June 15, 2005. The Company is assessing the impact of this statement on its financial statements.

8. POST-RETIREMENT HEALTH INSURANCE CONTINUATION PLAN

In June 2001, the Company adopted a post-retirement health insurance continuation plan (“the Plan”). Employees who have achieved the eligibility requirements of 60 years of age and 10 years of service are eligible to participate in the Plan. The Plan provides participants the opportunity to continue participating in the Company’s group health plan after their date of retirement. Participants will pay the cost of health insurance premiums for this coverage, less any contributions by the Company.

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The components of net periodic post-retirement benefits cost of the Plan for the six months ended June 30, consisted of the following (in thousands):

The accumulated post-retirement benefit obligation, or APBO, was determined using a discount rate of 6.00% and 6.25% at December 31, 2004 and 2003, respectively. A 1% increase in the assumed medical care cost trend rate increases the accumulated post-retirement benefit obligation by approximately $160,000 and would increase the service and interest cost components by approximately $56,000. A 1% decrease in the trend factors would decrease the projected APBO by approximately $120,000 and would decrease the service and interest cost components by approximately $42,000.

The expected future benefit payments under the plan (in thousands) are as follows:

The expected future benefit payments under the plan (in thousands) are as follows:

9. COMMITMENTS AND CONTINGENCIES

The Company is involved in certain claims arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the financial position or results of operations of the Company.

As of June 30, 2005, the Company had commitments of approximately $940,000 to purchase product candidate materials and fund various clinical studies over the next twenty-four months contingent on delivery of the materials or performance of the services. Substantially all of these expenditures will be shared equally by Roche under the Company’s collaboration agreement with Roche. Under the collaboration agreement, Trimeris and Roche are obligated to share equally the future development expenses for Fuzeon and T-1249 or a follow on compound for the United States and Canada. We also expect to have capital expenditures of approximately $800,000 during the remainder of 2005 that will not be shared with Roche. We may finance these expenditures with capital or operating leases, debt or working capital.

In 2004, the Company entered into a sublease agreement for its office and laboratory space in Morrisville, North Carolina. The sublease calls for the payment of a security deposit of $754,000, accrued for at June 30, 2005.

The minimum payments under this lease are as follows (in thousands):

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

This discussion of our financial condition and the results of operations should be read together with the financial statements and notes contained elsewhere in this Form 10-Q. Certain statements in this section and other sections of this Form 10-Q are forward-looking. While we believe these statements are accurate, our business is dependent on many factors, some of which are discussed in the “Risk Factors” and “Business” sections of our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 11, 2005. These factors include, but are not limited to:

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Many of these factors are beyond our control and any of these and other factors could cause actual clinical and financial results to differ materially from the forward-looking statements made in this Form 10-Q. The results of our previous clinical trials are not necessarily indicative of the results of future clinical trials. Please read the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 11, 2005. We undertake no obligation to release publicly the results of any revisions to the statements contained in this Form 10-Q to reflect events or circumstances that occur subsequent to the date hereof.

OVERVIEW

Trimeris is a biopharmaceutical company engaged in the discovery, development and commercialization of novel therapeutic agents for the treatment of viral disease. The core technology platform of fusion inhibition is based on blocking viral entry into host cells. FUZEON, approved in the U.S., Canada and European Union, is the first in a new class of anti-HIV drugs called fusion inhibitors. Trimeris is developing FUZEON and future generations of peptide fusion inhibitors in collaboration with F. Hoffmann-La Roche Ltd, or “Roche.”

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In order to enhance our performance, management is addressing several critical success factors. These critical success factors are broken down into short-term and mid-to long-term.

Short – Term Critical Success Factors and Initiatives:

Work to increase the market acceptance of Fuzeon: Fuzeon is delivered twice daily through subcutaneous injections. Injection site reactions are the most common adverse event associated with the use of Fuzeon. Management believes that aversion to twice daily injections and the potential for injection site reactions are the primary impediments to increasing the market acceptance of Fuzeon. We, together with Roche, are working on several initiatives to increase the market penetration of Fuzeon including:

Focusing our research and development efforts: We, together with our partner Roche, are currently researching several promising HIV gp41 peptide inhibitors, with the hope of selecting one of these peptides for advanced pre-clinical studies. We have identified a lead candidate and back-up candidate that will proceed to advanced formulation studies and preliminary toxicology studies. The results of these studies will determine how rapidly we move towards naming a clinical candidate.

Managing our resources and liquidity: We ended the second quarter with $43.1 million in cash, cash equivalents and investment securities—available-for-sale. Under the current operating environment, excluding any extraordinary items, based on current sales levels of Fuzeon, we believe that this will be sufficient to support our operations through 2006. We will continue to evaluate opportunities to increase our liquidity. We will also continue to look for opportunities to increase our operational effectiveness.

Our people: Our people are very important to the operations of our business. Our success depends on the continued services and on the performance of our senior management and staff. In 2005, we will continue to create a culture of trust that values employee contributions and recognizes and rewards open communication, accountability and achievement.

Mid– to Long - Term Critical Success Factors and Initiatives

Enhance development of our product pipeline: The focus on our next generation peptide, as mentioned above, is one aspect to the development of our pipeline. We will also look to business development to strengthen our pipeline primarily through acquisitions and in licensing of research programs and clinical stage products.

Overview of Roche Relationship

In July 1999, the Company entered into a worldwide agreement with F. Hoffman-La Roche Ltd., or Roche, to develop and commercialize T-20, currently marketed as Fuzeon, whose generic name is enfuvirtide, and T-1249, or a replacement compound. Research, or the discovery of compounds is generally distinct from the advanced testing of these compounds, a process referred to herein as development. Development expenses typically include certain clinical and pre-clinical studies performed on a clinical candidate compound, as well as post-marketing commitments related to approved drugs. In the Company’s collaboration with Roche, the discovery of compounds that may become clinical candidates is governed by a research agreement and the work by the parties is performed according to an agreed upon research plan. The research agreement itself does not require that a specific amount be spent on any annual research plan. Either party has the option to supplement the budgeted research plan at their own expense.

At present, the Company is in on-going discussions with Roche to finalize the specific activities to be carried out under the research plan and the associated budget for 2005, together with the relative obligations of the parties with respect to expenses incurred in 2005 under the research plan. While the Company’s development agreement with Roche covers the commercialization of Fuzeon, T-1249 or a replacement product, to date only Fuzeon is commercially available. The Company and Roche contribute towards the selling and marketing of Fuzeon in the United States and Canada, with each party bearing certain costs according to terms of our agreement. Gross profits from the sale of Fuzeon are shared equally. Outside of these two countries, Roche funds all development and commercialization costs for Fuzeon and pays the Company royalties on net sales of Fuzeon products.

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Development costs for these compounds are incurred by both Roche and Trimeris. Quarterly, the Companies reconcile the amounts expended and one party pays the other party on a 50/50 basis. Roche holds the Investigational New Drug Application, or IND, for Fuzeon and is responsible for all regulatory issues and communications with the Food and Drug Administration or FDA. Roche also holds the New Drug Application (NDA) and is responsible for appropriate maintenance activities there as well.

Fuzeon was approved for commercialization in the United States in March 2003 and sales began in March 2003. It is important to recognize that Roche is responsible for the manufacture, sales, marketing and distribution of Fuzeon. Roche is manufacturing bulk quantities of Fuzeon drug substance in its Boulder, Colorado facility and is producing finished drug product from bulk drug substance at another Roche facility. The finished drug product is then shipped to a Roche facility for distribution. Roche’s sales force is responsible for selling Fuzeon. Under our collaboration agreement, we do not have the ability or rights to co-market this drug or field our own Fuzeon sales force. All third party contracts for manufacturing, distribution, sale, and reimbursement are between Roche and the third party. We are not a party to any of the material contracts in these areas. Roche provides us with information on manufacturing, sales and distribution of Fuzeon. Roche is responsible for estimating reductions to gross sales for expected returns of expired products, government rebate programs, such as Medicaid reimbursements, and customer incentives, such as cash discounts for prompt payment. We review these items for accuracy and reasonableness. We receive 50% of the product gross profits for the United States and Canada.

We receive royalties on sales of Fuzeon in countries outside of the United States and Canada. Roche is responsible for all activities related to Fuzeon outside of the United States and Canada, including regulatory, manufacturing, sales and distribution. We receive a quarterly royalty report from Roche that summarizes these sales and the royalty amounts due to Trimeris.

Currently, our only significant source of revenue is from the sale of Fuzeon. Gross profit and royalty revenue from the sale of Fuzeon exceeded the selling, marketing and other charges during the quarter ended June 30, 2005 resulting in positive cash flow from the collaboration agreement. Selling, marketing and other charges in the United States and Canada exceeded the gross profit and royalty revenue from the sale of Fuzeon during the quarter ended June 30, 2004 resulting in negative cash flow.

We are in the process of finalizing an amendment to our collaboration agreement with Roche. This amendment will clarify certain responsibilities of the parties under the collaboration agreement related to manufacturing. To date, we have reached an agreement in principle regarding certain key terms of this amendment. With respect to the understanding we have with Roche pertaining to amounts owed for capital contributions and manufacturing milestones, we have recorded these amounts as of June 30, 2005 on the basis that we will execute an agreement in the near future with terms substantially the same as those we have agreed to in principle.

The Company and Roche agreed to limit the Company’s actual cash contribution to the Fuzeon selling and marketing expenses in 2004 to approximately $10 million, even though Roche has spent significantly more on these expenses. If certain cumulative levels of sales for Fuzeon in the United States and Canada are achieved, our share of any additional expenses incurred by Roche during 2004 will be payable to Roche beginning at a future date over several years from that future date. We currently estimate this date to be in 2011. During the year ended December 31, 2004, the Company’s share of selling and marketing expenses exceeded $10 million. As a result the Company included an additional charge under collaboration loss to reflect the payment of this excess according to the terms of our agreement with Roche. During 2004 the Company recorded $15.6 million as part of collaboration loss, which represented the net present value of the Company’s estimated share of the expenses that were in excess of (approximately) $10 million. This amount was arrived at taking into account the expected timing and terms of payment under the agreement. For 2005, Trimeris will contribute to selling and marketing expenses in accordance with the terms of an agreement we reached with Roche in May of 2005.

Historical Information Necessary to Understand our Business

We began our operations in January 1993 and, prior to April 1, 2003, we were a development stage company. Accordingly, we have a limited operating history. Since our inception, substantially all of our resources have been dedicated to:

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We have lost money since inception and, as of June 30, 2005, had an accumulated deficit of approximately $378.9 million. We may never generate significant revenue from product sales or royalties.

Development of current and future drug candidates will require additional, time-consuming and costly research and development, preclinical testing and extensive clinical trials prior to submission of any regulatory application for commercial use. We expect to incur losses for the foreseeable future and these losses may increase if our research and development, preclinical testing, drug production and clinical trial efforts expand. The amount and timing of our operating expenses will depend on many factors, including:

As a result, we believe that period-to-period comparisons of our financial results are not necessarily meaningful. The past results of operations and results of previous clinical trials should not be relied on as an indication of future performance. If we fail to meet the clinical and financial expectations of securities analysts and investors, it could have a material adverse effect on the market price of our common stock. Our ability to achieve profitability will depend, in part, on our own or Roche’s ability to successfully develop and obtain and maintain regulatory approval for Fuzeon or other drug candidates, and our ability to develop the capacity, either internally or through relationships with third parties, to manufacture, sell, market and distribute approved products, if any. We may never achieve profitable operations, even if Roche achieves increased Fuzeon sales levels.

Research and Development

The following discussion highlights certain aspects of our on-going and planned research and development programs and commercialization efforts. The results of our previous clinical trials are not necessarily indicative of the results of future clinical trials.

Fuzeon^®, enfuvirtide (formerly known as T-20)

Anti-HIV drugs are referred to as antiretroviral agents. Fuzeon is our first-generation HIV fusion inhibitor, a new class of anti-HIV drugs. The FDA has approved the use of Fuzeon in combination with other anti-HIV drugs for the treatment of HIV-1 infection in treatment-experienced patients with evidence of HIV-1 replication despite ongoing antiretroviral therapy. FUZEON works differently than other approved antiretroviral agents, by blocking the HIV virus from entering the human immune system cells (CD4+’s) and thus preventing viral replication, reducing quantities of circulating virus measured in the blood (viral load) and preserving or improving immune system functions. Prior to the availability of FUZEON, the only approach available to treat HIV infection was to lower viral loads by using a combination of drugs that inhibit one of two of

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the viral enzymes that are necessary for the virus to replicate once inside the CD+4 cell: reverse transcriptase and protease. There are three classes of drugs that inhibit these two enzymes: nucleoside reverse transcriptase inhibitors, or NRTIs, non-nucleoside reverse transcriptase inhibitors, or NNRTIs, and protease inhibitors, or PIs. We refer to NRTIs and NNRTIs collectively as RTIs. There are fifteen FDA-approved RTIs and ten FDA-approved PIs.

In March 2003, the FDA granted accelerated approval for the commercial sale of Fuzeon, and commercial sales of Fuzeon began in March 2003. Roche received accelerated FDA approval of Fuzeon based on 24-week clinical data from two Phase III pivotal trials for Fuzeon. In October 2004, the FDA granted full approval based on results from Phase III clinical trials over 48 weeks.

Roche filed an application for European marketing approval in September 2002. Roche received marketing approval under exceptional circumstances from the European Medicines Evaluation Agency, or EMEA, for use of Fuzeon in the European Union in May 2003. Roche submitted a full analysis of 48-week clinical data to the Committee for Human Medicinal Products, or CHMP, in December 2003 seeking a label change for Fuzeon. In April 2004, the CHMP recommended inclusion of the 48-week data in the label. This was followed by approval by the EMEA for this label change in June 2004. Outside the United States and the European Union, Roche has received approval and reimbursement for Fuzeon in over thirty-five countries, and is in the process of negotiating reimbursement from additional countries in which they plan to market Fuzeon.

Manufacturing

Roche manufactures the bulk drug substance of Fuzeon. Based on our progress and experience to date, we believe that Roche will be able to produce a supply of Fuzeon sufficient to meet anticipated demand. If Fuzeon sales levels do not meet Roche and our expectations, the resulting production volumes may not allow Roche to achieve their anticipated economies of scale for Fuzeon. If Roche does not achieve these economies of scale, the costs of goods for Fuzeon could be higher than our current expectations.

Distribution

On April 26, 2004, Fuzeon became available through retail and specialty pharmacies across the U.S. This development enhanced and simplified access to Fuzeon for patients and their healthcare providers. Physicians can write prescriptions for Fuzeon in the same manner as for any other prescription medication and patients can get Fuzeon from the pharmacy of their choice, including Bioscrip. Prior to April 26, 2004, Fuzeon was only available in the U.S. through Bioscrip.

Alternative injection systems

It is generally recognized that the chief impediment to the broader adoption of Fuzeon in clinical practice is related to the route of administration and the incidence of injection site reactions. We have undertaken to ameliorate these issues by developing alternative administration options for Fuzeon. One such effort involves the Biojector 2000, or B2000, injection system, manufactured by Bioject Medical Technologies Inc. The B2000 system is a needle-free CO2-powered injector that disperses liquid medication through the skin. In May 2005, the Company and Roche filed a supplemental new drug application, or sNDA, with the U.S. Food and Drug Administration for inclusion of B2000 information about the needle-free injection device in the FUZEON labeling. In July 2005, the FDA notified Roche and Trimeris that it had accepted the filing of their sNDA to consider the label change. The filing is based on data from the T20-405 study, a single-dose, comparative pharmacokinetic study of FUZEON administered via the needle-free device compared to standard needle-syringe administration. Results from this study were presented at the HIV DART meeting in December 2004. Roche and Trimeris anticipate that the FDA will provide feedback and a decision on the sNDA later this year.

Trimeris and Roche plan to begin enrollment of a new trial — the FUZEON WAND (FUZEON With A Needle-free Device) study, assessing patient acceptance and experience in administration of FUZEON via the B2000 needle-free device compared to standard needle and syringe administration. Anticipated to start in August 2005, this study will enroll 40 patients, in a month-long, cross-over design evaluation. Endpoints include tolerability, injection site reactions and pharmacokinetics.

Next Generation Peptides and T-1249

We, together with our partner Roche, are currently researching several promising HIV gp41 peptide inhibitors, with the hope of selecting one of these peptides for advanced pre-clinical studies. We have identified a lead candidate and back-up candidate that will proceed to advanced formulation studies and preliminary toxicology studies. The results of these studies will determine how rapidly we move towards naming a clinical candidate.

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T-1249 is a second-generation HIV fusion inhibitor that has been investigated successfully in four separate clinical trials. Phase I/II trials of T-1249 demonstrated satisfactory efficacy and safety, including in patients who had previously failed on and had developed resistance to Fuzeon. In January 2004, Roche and Trimeris announced that further clinical development of T-1249 was being put on hold due to technical challenges in achieving a formulation capable of delivering a once daily injection. The compound’s safety, efficacy and tolerability were not factors affecting the decision. The clinical trial, T1249-105, was on-going when the decision was made to put the development of T-1249 on hold. T1249-105 is now a compassionate use protocol for patients that were already receiving T-1249, as these patients have exhausted all treatment options. To date, 29 patients have completed 96 weeks of treatment with T-1249.

Other Research Programs

In June 2004, we announced the renewal of an agreement with Array Biopharma Inc., or Array, to discover small molecule entry inhibitors directed against HIV. The terms of the agreement are substantially similar to those of the initial agreement, signed in August 2001. Over the course of the agreement, Array has received research funding and the right to receive milestone payments and royalties based on the success of this program. In connection with the agreement, as amended, Trimeris has screened a library of small molecule compounds created by Array against HIV entry inhibitor targets. We have completed screening of these compounds for activity in our assays and are in the process of evaluating the most promising compounds for possible further development as a clinical candidate. In the event that no candidates are identified as a result of our analysis, the collaboration agreement will terminate on December 31, 2005 unless terminated earlier according to its terms.

In 2002, we entered into an agreement with Neokimia Inc., or Neokimia, to discover and develop small molecule HIV fusion inhibitors. We have initially screened a library of small molecule compounds provided by Neokimia and Neokimia will use its proprietary drug discovery platform to optimize any lead compounds with the goal of identifying one or more preclinical drug candidates. Neokimia has provided the initial library of compounds on a nonexclusive basis but will work exclusively with us on the HIV gp41 fusion protein target during the term of the collaboration. In 2003, we exercised our option to select an additional target related to HIV fusion to add to the collaboration. The research performed under the collaboration has been performed in pursuant to a research plan that has been mutually agreed upon by the parties. The term of this research plan has concluded. The Company and Neokimia are in discussions concerning possible additional research in furtherance of the work already performed under the research plan. In December 2003, Neokimia merged with Tranzyme, Inc., or Tranzyme, and Tranzyme acquired Neokimia’s rights and obligations under the 2002 agreement.

In June 2005, we entered into a drug discovery and development agreement with ChemBridge Research Laboratories, Inc., or CRL. Under the terms of the agreement, Trimeris and CRL will work together to discover and develop small molecule inhibitors of HIV. Specifically, pursuant to the agreement, we will work with CRL to identify small molecule inhibitor compounds against two HIV entry targets, gp41 and gp120. Trimeris and CRL will collaborate to identify orally active lead compounds and then optimize preclinical candidates. Trimeris will be responsible for preclinical and clinical development, manufacturing, regulatory and commercial activities on a worldwide basis for all compounds and products resulting from the collaboration. Trimeris will provide funding to CRL to support medicinal chemistry efforts, and CRL will work exclusively with us on these programs. CRL will be eligible to receive milestone payments based on the achievement of specific development and commercial events, and may also be eligible to receive royalties on net product sales.

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RESULTS OF OPERATIONS

Comparison Of Three Months Ended June 30, 2005 and 2004

Revenues

The table below presents our revenue sources for the three months ended June 30, 2005 compared to the three months ended June 30, 2004.

Milestone revenue: Total milestone revenue represents the amortization of achieved milestones under our collaboration with Roche.

The table below presents our achieved milestones from Roche as of June 30, 2005. We are recognizing these milestones on a straight-line basis over the estimated development period, or estimated commercial period, as appropriate.

In January 2005, based on our current evaluation of our research and development programs, we placed further clinical development of T-1249 on hold indefinitely due to challenges in achieving an extended release formulation that would allow significantly less dosing frequency. Our recent research and development efforts have focused on the identification of a lead candidate and a back-up candidate that will proceed to advanced formulation studies and preliminary toxicology studies. Taking into account the additional research that will be required to achieve these new formulation goals, in 2005 we changed our estimate of the end of the research and development period from December 2010 to December 2012; as a result we will recognize approximately $500,000 less revenue in 2005 compared to 2004.

Royalty revenue: Royalty revenue represents the royalty payment earned from Roche based on total net sales of Fuzeon outside the United States and Canada. Sales of Fuzeon outside the United States and Canada began in June 2003. To calculate the royalty revenue, an 8% distribution charge is deducted from net sales, as reported by Roche, from which Trimeris receives a 10% royalty.

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Collaboration Income (Loss): The table below presents our collaboration income (loss) (United States and Canada) for the three months ended June 30, 2005 compared to the three months ended June 30, 2004. Collaboration income (loss) is reported on our Statement of Operations as a component of revenue. Under our collaboration agreement with Roche, we share gross profits equally from the sale of Fuzeon in the United States and Canada. Fuzeon was launched in March 2003.

Gross Fuzeon sales by Roche: Gross Fuzeon sales are recorded by Roche. Prior to April 26, 2004, Roche had an exclusive distribution arrangement with Bioscrip to distribute Fuzeon in the United States during the initial commercial launch in 2003, which terminated on April 26, 2004. Effective April 26, 2004, Fuzeon became available through retail and specialty pharmacies across the U.S. Prior to April 26, 2004, revenue from product sales was recognized when title and risk of loss had passed to Bioscrip, which was when Bioscrip allocated drug for shipment to a patient. Beginning April 26, 2004, revenue is recognized when Roche ships drug and title and risk of loss passes to wholesalers.

The table below presents the number of kits shipped to wholesalers in the U.S. and Canada during 2005 and 2004.

Sales adjustments: Sales adjustments are recorded by Roche based on their experience with selling Fuzeon and other HIV drugs. Sales adjustments increased for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 primarily due to changes in sales volumes, rebates, discounts and returns. There were no material revisions to Roche’s methodology for recording sales adjustments between the periods.

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Cost of goods sold: Cost of goods sold decreased for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 primarily due to a decrease in production variances. Roche began billing Trimeris for production variances in the second quarter of 2004.

Cost of goods sold for the three months ended June 30, 2004 also includes approximately $6.6 million relating to unabsorbed costs that were the result of unexpectedly low initial manufacturing volumes when Fuzeon was launched and various costs associated with the development of the Fuzeon manufacturing process. Also included in the three months ended June 30, 2004 is approximately $4.3 million in production variances from the first quarter of 2004.

These costs were disclosed to us during the second quarter of 2004 by Roche. Previously, we inquired about manufacturing variances and were provided amounts by Roche which we previously recorded. After a series of discussions and negotiations during the second quarter with Roche and notwithstanding our contractual agreement, we agreed in principle on these amounts subject to some additional due diligence. We recorded both the $6.6 million and the $4.3 million during the second quarter of 2004. We are currently in the process of formalizing an amendment to our collaboration agreement with respect to the variance calculation.

Gross profit: Gross profit as a percentage of net sales for the three months ended June 30, 2005 was 53% compared to 6% for the three months ended June 30, 2004. The increase in gross profit is primarily a result of unabsorbed manufacturing costs described in the immediately preceding two paragraphs.

Selling and marketing expenses: We have negotiated an agreement with Roche related to our contribution to selling and marketing expenses for 2005. Under a separate agreement with Roche for 2004, our selling and marketing expenses were limited to approximately $10 million which we reached in the second quarter of 2004.

Other costs: Other costs for the three months ended June 30, 2005 and June 30, 2004 includes general and administrative costs and distribution charges for which Trimeris is 50% responsible under the collaboration agreement. The three months ended June 30, 2004 also includes inventory write-offs.

Costs exclusive to Trimeris: For the three months ended June 30, 2005 and 2004, costs exclusive to Trimeris includes license fees, based on net sales of Fuzeon, for certain technology paid to a third party. Also included in the three months ended June 30, 2004 is the net present value of the Company’s estimated share of certain marketing expenses in excess of approximately $10 million based on expected timing and terms of payment under the agreement. The marketing limit for 2004 is discussed above.

Research And Development Expenses

The table below presents our research and development expenses for the three months ended June 30, 2005 compared to the three months ended June 30, 2004.

Total research and development expenses include gross research and development expenses less Roche’s share of such costs for Fuzeon and T-1249. Under our collaboration agreement, Roche and we shared equally the development costs incurred during the period from July 1, 1999 to June 30, 2005 for Fuzeon and T-1249. Research, or the discovery of compounds is generally distinct from the advanced testing of these compounds, a process referred to herein as development. Development expenses typically include certain clinical and pre-clinical studies performed on a clinical candidate compound, as well as post-marketing commitments related to approved drugs. In our collaboration with Roche, the discovery of compounds that may become clinical candidates is governed by a separate research agreement and the work by the parties is performed according to an agreed upon research plan. The research agreement itself does not require that a specific amount be spent on any annual research plan. Either party has the option to supplement the budgeted research plan at their own expense. At present the Company is still in discussions with Roche to finalize the specific activities to be carried out under the research plan and the associated budget for 2005, together with the relative obligations of the parties with respect to expenses incurred in 2005 under the research plan.

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Non-cash compensation: Non-cash compensation expense for the three months ended June 30, 2005 is primarily comprised of amortization expense for restricted stock issued to employees in June 2004 in the amount of $105,000 offset, in part, by the expense reversal calculated under EITF 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” in the amount of $6,000. The restricted stock grant vests 100% after the third year of service and is being amortized on a straight-line basis over the three-year period. Non-cash compensation expense reversal for the three months ended June 30, 2004 is comprised of expense calculated under EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” for stock options previously granted to non-employees at the end of the period as compared to this amount at the beginning of the period. The primary factor affecting this calculation is the change in the market price of our stock. The closing market price per share of our stock was $9.98, $11.26, $14.43, and $14.75, on June 30, 2005, March 31, 2005, June 30, 2004, and March 31, 2004. The expense reversal resulted because the cumulative expenses calculated under EITF 96-18 for stock options previously granted to non-employees was less at June 30, 2005, compared to March 31, 2005 and less at June 30, 2004 compared to March 31, 2004. This decrease in the expense resulted primarily due to the decrease in the market price of our stock from March 31, 2005 to June 30, 2005 and from March 31, 2004 to June 30, 2004. EITF 96-18 requires that compensation costs related to stock options granted to non-employees be measured at the end of each reporting period to account for changes in the fair value of our common stock until the options are vested.

Other research and development expense: Total other research and development expense decreased during the three months ended June 30, 2005 compared to the three months ended June 30, 2004, primarily as a result of decreased costs related to our clinical trials and post marketing commitments to the FDA for Fuzeon offset, in part, by decreases in our research and development funding from Roche.

We believe research and development expenses, net of the reimbursements for Fuzeon and T-1249 development costs from Roche, will be approximately equal to or less than that of 2004 as a result of the continued reduction in post marketing commitment expenses for Fuzeon.

General and Administrative Expenses

The table below presents our general and administrative expenses for the three months ended June 30, 2005 compared to the three months ended June 30, 2004.

Non-cash compensation: Non-cash compensation expense for the three months ended June 30, 2005 and June 30, 2004 is comprised of amortization expense for restricted stock issued to employees in June 2004 and to our Chief Executive Officer in September of 2004.

Other general and administrative expense: Other general and administrative expense decreased for the three months ended June 30, 2005 compared to the three months ended June 30, 2004, as a result of decreased premiums for directors and officers’ insurance, and in the three months ended June 30, 2004 we accrued severance costs for an executive who ceased employment in June 2004, offset in part by increases in our facilities costs.

Barring unforeseen circumstances, we expect general and administrative expenses to be equal to or less than that of 2004.

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Other Income (Expense): The table below presents our other income (expense) for the three months ending June 30, 2005 and 2004.