**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**

| **x           ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **For the  Fiscal Year Ended December 31, 2006**                                                                                                                       |
| **or**                                                                                                                                                                      |
| **o            TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| **Commission  file number 0-19612**                                                                                                                                         |

**IMCLONESYSTEMS INCORPORATED**

(Exact name of registrant as specified in its charter)

| **DELAWARE**                                                     |   | **04-2834797**                     |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (IRS Employer  Identification No.) |
| **180  Varick Street,  New York, NY**                            |   | **10014**                          |
| (Address of  principal executive offices)                        |   | (Zip Code)                         |

**(212) 645-1405**

(Registrant’s telephone number, including area code)

**Securities registered pursuant to Section 12(b) ofthe Act:**None

Securities registered pursuant to Section 12(g) ofthe Act:

**Commonstock, par value $0.001 and the associated preferred stock purchase rights.**

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act Yes  x  No  o

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act  Yes  o  No  x

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  x  No  o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

Large AcceleratedFiler  x         AcceleratedFiler  o         Non-AcceleratedFiler  x

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act)Yes   ̈  No  x

The aggregate market value of the voting andnon-voting Common Stock held by non-affiliates of the registrant as of June 30,2006 was $3,195,312,505.

Number of shares of Common Stock; par value $0.001, asof February 23, 2007: **85,234,361**

**DOCUMENTS INCORPORATED BY REFERENCE**

Portionsof the registrant’s definitive proxy statement to be delivered in connectionwith its 2007 Annual Meeting of Stockholders are incorporated by reference inParts II and III of this report.

 

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**IMCLONE SYSTEMSINCORPORATED**

**2006 Annual Reporton Form 10-K**

**TABLE OF CONTENTS**

|            | ** ** | ** **                                                                                                             | ** ** | **Page** |
|------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|----------|
| ** ** | ** ** | **PART I**                                                                                                        |       |     |
| Item 1.    |       | Business                                                                                                               |       | 4        |
| Item 1A.   |       | Risk Factors                                                                                                           |       | 37       |
| Item 1B.   |       | Unresolved Staff Comments                                                                                              |       | 46       |
| Item 2.    |       | Properties                                                                                                             |       | 46       |
| Item 3.    |       | Legal Proceedings                                                                                                      |       | 48       |
| Item 4.    |       | Submission of Matters to a Vote of Security Holders                                                                    |       | 53       |
| ** ** | ** ** | **PART II**                                                                                                       |       |     |
| Item 5.    |       | Market for the Registrant’s Common Equity, Related Stockholder  Matters and Issuer Purchases of Equity Securities |       | 54       |
| Item 6.    |       | Selected Financial Data                                                                                                |       | 56       |
| Item 7.    |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operation                             |       | 57       |
| Item 7A.   |       | Quantitative and Qualitative Disclosures About Market  Risk                                                            |       | 74       |
| Item 8.    |       | Financial Statements and Supplementary Data                                                                            |       | 74       |
| Item 9.    |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                                  |       | 74       |
| Item 9A.   |       | Controls and Procedures                                                                                                |       | 74       |
| Item  9B.  |       | Other  Information                                                                                                     |       | 77       |
| ** ** | ** ** | **PART III**                                                                                                      |       |     |
| Item 10.   |       | Directors, Executive Officers and Corporate Governace                                                                  |       | 77       |
| Item 11.   |       | Executive Compensation                                                                                                 |       | 77       |
| Item 12.   |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                        |       | 77       |
| Item 13.   |       | Certain Relationships and Related Transactions, and  Director Independence                                             |       | 77       |
| Item 14.   |       | Principal Accounting Fees and Services                                                                                 |       | 77       |
| ** ** | ** ** | **PART IV**                                                                                                       |       |     |
| Item 15.   |       | Exhibits and Financial Statement Schedules                                                                             |       | 78       |

 

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As used in this AnnualReport on Form 10-K, “ImClone Systems,” “ImClone,” “Company,” “we,” “ours,”and “us” refer to ImClone Systems Incorporated, except where the contextotherwise requires or as otherwise indicated.

**DISCLOSUREREGARDING FORWARD-LOOKING STATEMENTS**

The Company considers portions of the information inthis Annual Report on Form 10-K to be “forward-looking statements”within the meaning of Section 21E of the Securities Exchange Act of 1934(the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995.The Company intends such forward-looking statements to be covered by the safeharbor provisions for forward-looking statements contained in Section 21Eof the Exchange Act and the Private Securities Litigation Reform Act of 1995. Suchforward-looking statements relate to, without limitation, the Company’s futureeconomic performance, plans and objectives for future operations andprojections of revenue and other financial items. Forward-looking statementscan be identified by the use of words such as “may,” “will,” “should,” “expect,”“anticipate,” “estimate,” “continue” or comparable terminology. Forward-lookingstatements are inherently subject to risks, trends and uncertainties, many ofwhich are beyond the Company’s ability to control or predict and some of whichthe Company might not even anticipate. Although the Company believes that theexpectations reflected in such forward-looking statements are based uponreasonable assumptions at the time made, it can give no assurance that itsexpectations will be achieved. Future events and actual results, financial andotherwise, may differ materially from the results discussed in theforward-looking statements. Readers are cautioned not to place undue relianceon these forward-looking statements.

Important factors that may cause actual results todiffer materially from forward-looking statements include, but are not limitedto, risks and uncertainties associated with the development of market demandfor, and continued market acceptance of, ERBITUX® (cetuximab); fluctuations inour royalty, collaborative agreement and manufacturing revenues; our dependenceon Bristol-Myers Squibb and Merck KGaA to co-promote, market and sell ERBITUX;our ability to compete effectively with other pharmaceutical andbiotechnological companies and products; obtaining and maintaining regulatoryapproval for our compounds and complying with other governmental regulationsapplicable to our business; obtaining adequate reimbursement from third-partypayers; expending resources on, and completing pre-clinical and clinicalstudies of, our compounds that demonstrate such compounds’ safety and efficacy;difficulties or delays in product manufacturing and finishing, and the receiptof raw materials, that may cause shortfalls in the supply of ERBITUX or ourproduct candidates; pressure to lower the price of ERBITUX because of newand/or proposed federal legislation or competition; the importation of productsfrom overseas; attracting and retaining key personnel; changes in law or theUnited States Food and Drug Administration policy that expose us to competitionfrom “generic” or “follow-on” versions of our products; protecting ourproprietary rights and obtaining patent protection for new discoveries;commercial limitations imposed by patents owned or controlled by third-parties;the use of hazardous materials in our operations; our exposure to materialproduct liability claims that could prevent or interfere with thecommercialization of products; legal costs and the duration and outcome oflegal proceedings and investigations; provisions of Delaware law, our charter,bylaws and stockholder rights plan that could hinder, delay or prevent changesin our control; volatility in our stock price; compliance with covenants in theindenture for our convertible notes and with the terms of other contractualobligations; and those other factors set forth in this report in Item 1- “Business,”Item 1A- “Risk Factors” and Item 7- “Management’s Discussion and Analysisof Financial Condition and Results of Operations.” The Company assumes noobligation to update and supplement any forward-looking statements that maybecome untrue because of subsequent events whether as a result of newinformation, future events or otherwise.

We do not undertake todiscuss matters relating to certain completed clinical studies or ourregulatory strategies beyond those which have already been made public ordiscussed herein.

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**PART I**

**ITEM 1.**                BUSINESS

**OVERVIEW**

We are a biopharmaceutical company whose mission is toadvance oncology care by developing and commercializing a portfolio of targetedtreatments designed to address the medical needs of patients with cancer. Wefocus on what we believe are two promising strategies for treating cancer:growth factor blockers and angiogenesis inhibitors.

We were incorporated under the laws of the State ofDelaware on April 26, 1984. Our corporate headquarters and researchfacility are located at 180 Varick Street, New York, New York 10014 and ourtelephone number is (212) 645-1405. We make available free of chargeon our Internet website (http://www.imclone.com) our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) ofthe Exchange Act as soon as reasonably practicable after we electronically filesuch material with, or furnish it to, the Securities and Exchange Commission.In addition, our Internet website includes other items related to corporategovernance matters, including among other things, our corporate governanceguidelines, charters of the various committees of the Board of Directors, andour corporate compliance program (including our code of business conduct andethics).

Our commercially available product, ERBITUX®(cetuximab), is a first-of-its-kind antibody approved by the United States Foodand Drug Administration (“FDA”) on February 12, 2004 for use incombination with irinotecan in the treatment of patients with EGFR-expressing,metastatic colorectal cancer who are refractory to irinotecan-basedchemotherapy and for use as a single agent in the treatment of patients withEGFR-expressing, metastatic colorectal cancer who are intolerant toirinotecan-based chemotherapy. On March 1, 2006, the FDA approved ERBITUXfor use in combination with radiation therapy for the treatment of locally orregionally advanced squamous cell carcinoma of the head and neck (“SCCHN”) andas a single agent in recurrent or metastatic SCCHN where prior platinum-based chemotherapyhas failed. Please see full prescribing information, available atwww.ERBITUX.com, for important safety information relating to ERBITUX,including boxed warnings. ERBITUX binds specifically to the epidermal growthfactor receptor (EGFR; also referred to as HER1 and c-ErbB-1) on bothnormal and tumor cells, and competitively inhibits the binding of the epidermalgrowth factor (EGF) and other growth stimulatory ligands, such as transforminggrowth factor-alpha. The EGFR is constitutively expressed in many normalepithelial tissues, including the skin and hair follicle. Expression of EGFR isalso detected in many human cancers, particularly carcinomas, including thoseof the head and neck, colon and rectum, pancreas, stomach, lung, and breast. Weare conducting, and in some cases have completed, clinical studies evaluatingERBITUX for broader use in colorectal and head and neck cancers, lung andpancreatic cancers, as well as other potential indications.

In September 2005, Health Canada approved ERBITUXfor use in combination with irinotecan for the treatment of EGFR-expressingmetastatic colorectal carcinoma in patients who are refractory to otheririnotecan-based chemotherapy regimens and for use as a single agent for thetreatment of EGFR expressing, metastatic colorectal carcinoma in patients whoare intolerant to irinotecan-based chemotherapy. However, ERBITUX is notcurrently being actively promoted in Canada.

On December 1, 2003, Swissmedic, the Swiss agencyfor therapeutic products, approved ERBITUX in Switzerland for the treatment ofpatients with colorectal cancer who no longer respond to standard chemotherapytreatment with irinotecan. Merck KGaA licensed the right to market ERBITUXoutside the United States and Canada from the Company in 1998. In Japan, MerckKGaA has marketing rights to ERBITUX, which are co-exclusive to theco-development rights of the Company and BMS. On June 30, 2004, Merck KGaAreceived marketing approval by the European Commission to sell ERBITUX for use 

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in combination withirinotecan for the treatment of patients with EGFR-expressing metastaticcolorectal cancer after failure of irinotecan including cytotoxic therapy. On December 22,2005,  Swissmedic approved ERBITUX inSwitzerland in combination with radiation in the treatment of patients withpreviously untreated, advanced SCCHN.

In February 2007, an application was submittedwith the Japanese Pharmaceuticals and Medical Devices Agency for the use ofERBITUX in treating patients with advanced colorectal cancer. ERBITUX is thefirst IgG1 monoclonal antibody that inhibits EGFR to be submitted for marketingauthorization in Japan.

We co-promote and otherwise support the sale ofERBITUX in North America together with our development, promotion anddistribution partner Bristol-Myers Squibb Company (“BMS”) through itswholly-owned subsidiary E.R. Squibb & Sons, L.L.C. (“E.R. Squibb”). Wemanufacture ERBITUX for clinical studies and for commercial sales. According toour agreements with BMS and Merck KGaA, each is obligated to pay us certainroyalties on their sales of ERBITUX.

In addition to achieving approval in the aboveindications, we also have undertaken a comprehensive clinical developmentprogram to evaluate the broader use of ERBITUX in colorectal cancer, includingthree Phase III randomized studies known as EMR-013 (also known asCRYSTAL; first-line metastatic setting), BMS-006 (also known as EPIC;second-line metastatic setting) and BMS-025 (refractory metastaticsetting). We have reported topline results for these randomized studies. Thefirst-line metastatic study EMR-013 met its primary endpoint bysignificantly improving progression-free survival. The National CancerInstitute of Canada’s BMS-025 study met its primary endpoint bysignificantly improving overall survival. In the Phase III randomized study BMS-006,the primary endpoint, overall survival, was not met, possibly because a highproportion of patients in the control (irinotecan only) arm received treatmentwith ERBITUX following development of progressive cancer, potentiallyconfounding the interpretation of this endpoint. However, the secondaryendpoints strongly favor the ERBITUX combination arm.

In collaboration with the National Cancer Institute(NCI) Cooperative groups, studies in first line colorectal cancer (CALGB 80203)and first line pancreatic cancer (SWOG 0205) enrolled patients in 2004.Subsequently CALGB 80203 was closed to enrollment after accruing 238 patientsand a new first line colorectal cancer protocol that incorporates both ERBITUXand Avastin® (bevacizumab) developed by CALGB (80405) began enrolling patientsin late 2005 by all of the NCI Cooperative groups (Intergroup). Furthermore,the NCI Cooperative groups began a Phase III randomized study to evaluate themerits of adding ERBITUX in the adjuvant setting following definitive surgicaltreatment of Stage C (locoregional) colorectal cancer. A similar adjuvant study(PETACC-8) was also begun in Europe and other regions outside the UnitedStates. Numerous registration-directed studies of ERBITUX are underway invarious other locoregional and advanced disease settings (colorectal cancer,non-small cell lung cancer, head and neck cancer and pancreatic cancer) andpilot studies are either underway or planned to further evaluate the developmentof ERBITUX for other indications and tumor types.

In addition to our work developing and commercializingERBITUX, we have also advanced a number of investigational agents to variousstages of clinical development and we are developing monoclonal antibodies thatinhibit angiogenesis, which can be used to treat various kinds of cancer andother diseases.

We continue to conductresearch, both independently and in collaboration with academic, community andcorporate partners, in a number of areas related to our core focus of tumorcell growth factor inhibitors and angiogenesis inhibitors. We also havedeveloped diagnostic products and vaccines for certain infectious diseases, andwe have licensed the rights to these products and vaccines to corporatepartners. However, we are no longer actively developing product candidates inthe areas of diagnostic and infectious diseases.

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**CLINICALDEVELOPMENT PROGRAMS**

***ERBITUX Cancer Therapeutic***

ERBITUX is an IgG1chimerized (part human, part mouse) monoclonal antibody that selectively bindsto the EGFR and thereby inhibits growth of tumors dependent upon activation ofthe EGFR for cell division and survival. The activation of the EGFR is believedto play a critical role in the growth and survival of certain types of tumor cellsand select normal cells and *in vitro* hasbeen shown to be a mediator of antibody-dependent cellular cytotoxicity (ADCC).Certain cancer types are characterized by the expression of the EGFR. Forexample, IMCL-9923 and other studies conducted by us have indicated thatapproximately 75% of advanced stage refractory colorectal cancer cases havebeen shown by immunohistochemistry (IHC) to have detectable EGFR in tumor cellsas assessed by IHC, although it appears that nearly all colorectal cancer havethe genetic machinery for EGFR and manufacture EGFR mRNA. Similarly, accordingto the literature in this area, nearly all patients diagnosed with SCCHN havebeen shown to express the EGFR on the surface of the tumor cells, as assessedby IHC. Other types of cancer are also characterized, in certain patients, byexpression of the EGFR, including non-small cell lung, renal, and pancreaticcancers. By preventing the binding of critical growth factors to the EGFR, webelieve it is possible to inhibit the growth and survival of these and othercancers.

***ERBITUX Clinical Studies***

The charts presented belowreflect potentially pivotal studies in selected tumor types that we and ourpartners, Merck KGaA and BMS, are developing or collaborating on with theNational Cancer Institute and various European cooperative groups, and aredesigned both for registration purposes and exploratory development in theseindications. It should be noted that a large number of other clinicalevaluations of ERBITUX, including investigator-initiated studies and studiessponsored by ImClone, BMS, and Merck KGaA, are progressing in a broad array oftumor types.

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***Colorectal Cancer***

| **Study**                                             | ** ** | **Description**                                                                                                               | ** ** | **Population**                                               | ** ** | **Target  Enrollment** |
|-------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------|
| CALGB 80203 (Discontinued)                            |       | Phase III Randomized Study  (FOLFOX +/- ERBITUX)  (Saltz +/- ERBITUX)                                     |       | First-line                                                   |       | 2,200                  |
| CALGB 80405  (Intergroup)  (Ongoing)                  |       | Phase III Randomized study of  chemotherapy (FOLFOX or  FOLFIRI) plus Avastin® vs.  ERBITUX vs. Avastin® +  ERBITUX |       | First-line                                                   |       | 2,289                  |
| EMR-013 (CRYSTAL)  (Primary endpoint result reported) |       | Phase III Randomized Study of  FOLFIRI +/ ERBITUX                                                                             |       | First-line                                                   |       | 1,220                  |
| OPUS (Enrollment complete)                            |       | Phase III Randomized Study of  FOLFOX +/- ERBITUX                                                                        |       | First-line                                                   |       | 300                    |
| 680 CAIRO II  (Ongoing)                               |       | Phase III Randomized Study  (XELOX/Avastin®  +/- ERBITUX)                                                      |       | First-line                                                   |       | 750                    |
| 608 COIN (Clinical Research  Council, UK)  (Ongoing)  |       | Phase III Randomized Study  (FOLFOX [regimen 1] vs.  FOLFOX [regimen 2] vs.  FOLFOX + ERBITUX)                                |       | First-line                                                   |       | 2,400                  |
| BMS-014 (EXPLORE) (Discontinued)                      |       | Phase III Randomized Study    (FOLFOX +/- ERBITUX)                                                             |       | Second-line (previously treated with irinotecan)             |       | 1,100                  |
| BMS-006 (EPIC) (Primary endpoint result  reported)    |       | Phase III Randomized Study of Irinotecan +/- ERBITUX                                                                          |       | Second-line                                                  |       | 1,300                  |
| SWOG (Intergroup)  (approved by NCI; to  begin 1Q07)  |       | Phase III Study of FOLFIRI +  ERBITUX +/- Avastin®                                                                       |       | Second-line (previously  treated with FOLFOX/ Avastin®) |       | 650                    |
| BMS-025  (Primary endpoint result reported)           |       | Phase III Randomized Study of  ERBITUX vs. Best Supportive Care                                                               |       | Refractory                                                   |       | 572                    |
| NCCTG 147 (Intergroup)  (Ongoing)                     |       | Phase III Randomized Study  (FOLFOX +/- ERBITUX)                                                                         |       | Adjuvant                                                     |       | 2,300                  |
| PETACC-8 (Europe)  (Ongoing)                          |       | Phase III Randomized Study (FOLFOX +/- ERBITUX)                                                                               |       | Adjuvant                                                     |       | 2,000                  |

 

As part of our confirmatory obligation to the FDA inregard to the approval of ERBITUX for colorectal cancer, we initiated a PhaseII study enrolling 80 patients with refractory, EGFR-non-detectable (by IHC),metastatic colorectal cancer. This study is designed to estimate the overallresponse rate and duration obtained with single agent ERBITUX use and istargeted to complete accrual in 2007.

In conjunction with our U.S. partner, BMS, and ourpartner in the rest of the world, Merck KGaA, we have opened or expect to openadditional studies in colorectal cancer, including randomized studies in 

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first-line, second-line,and refractory settings for metastatic colorectal cancer, as well as in theadjuvant setting involving patients with locoregionally advanced diseasefollowing definitive surgical resection. Upon the approval of ERBITUX forcolorectal cancer under the accelerated approval mechanism, studies BMS-006(EPIC) and BMS-014 (EXPLORE) were designated as studies in thesecond-line metastatic setting to confirm the clinical benefit of ERBITUX. BMS-006,which opened for patient enrollment in May 2003, evaluated the merits ofadding ERBITUX to irinotecan in patients who have failed oxaliplatin, 5-fluorouracil,and leucovorin in the first-line of therapy. BMS-006, which was conductedin collaboration with Merck KGaA, finished patient accrual in February 2006.Preliminary toxicity data, substantiating the safety of the regimen, waspresented at the annual American Society of Clinical Oncology (ASCO) meeting in2005, and the results of efficacy evaluations will be reported at the AmericanAssociation  of Cancer Research (AACR)meeting in 2007. In November 2006, we reported that the primary endpoint,overall survival was not met, possibly due to a high proportion of patients inthe control (irinotecan only) arm receiving treatment with ERBITUX followingdisease progression on the study, potentially confounding the interpretation ofthis endpoint. However, the secondary endpoints strongly favor the ERBITUXcombination arm.

BMS-014 (EXPLORE), a second-line randomizedstudy opened for patient enrollment and treatment in March 2003, wasclosed with FDA approval due to decreased feasibility of the study and wasremoved from the list of post-approval commitments. EXPLORE tested the additionof ERBITUX and the combination of oxaliplatin, 5-fluorouracil, and leucovorin(FOLFOX-4) in patients who have failed irinotecan, 5-fluorouracil,and leucovorin. A pooled analysis of the preliminary results of this study waspresented at the annual ASCO meeting in 2005. In the pooled analysis, theincidence of the characteristic ERBITUX and FOLFOX-4 toxicities does notseem to be increased as compared to the reported incidences in the ERBITUX andEloxatin package inserts. Based on our limited investigational experience thecombination of FOLFOX-4 and ERBITUX appears to be a feasible regimen.

EMR-013 (CRYSTAL), a randomized Phase III studythat evaluates the merits of adding ERBITUX to irinotecan and infusional 5-fluorouracil(FOLFIRI) as first-line therapy in patients with metastatic disease, completedpatient accrual in December 2005. In January 2007, we announced thatEMR-013 met its primary endpoint by significantly improvingprogression-free survival, and that the results of the study were to bepresented at the annual meeting of ASCO in June 2007. In November 2006,we also announced that BMS-025, a randomized Phase III study of ERBITUXversus best supportive care that completed patient enrollment in August 2005,met its primary endpoint of overall survival, with the results presented at theannual meeting of the AACR in April 2007. Many other randomized Phase IIItrials sponsored by either Merck KGaA, ImClone, and/or BMS and/or variousnational cooperative oncology groups in US and Europe are evaluating the meritsof adding ERBITUX to many different chemotherapy regimens plus or minusAvastin® in the first- and second-line metastatic and adjuvant treatmentsettings. Many other Phase I, II and pilot studies are evaluatingalternate administration schedules (e.g. every 2-weeks) and utilizingERBITUX in novel therapeutic regimens in various clinically relevant settings.

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***Head and NeckCancer***

| **Study**                                | ** ** | **Description**                                                                                                       | ** ** | **Population**                                                             | ** ** | **Target  Enrollment** |
|------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|------------------------|
| IMCL-9815  (Completed)                   |       | Phase III Randomized  Study (Radiation +/- ERBITUX)                                                         |       | First-line                                                                 |       | 424                    |
| EMR-001 (Enrollment completed)           |       | Phase II Study  (Platinum + ERBITUX)                                                                        |       | Recurrent/  Refractory or Metastatic                                       |       | 96                     |
| EMR-008 (Enrollment completed)           |       | Phase I/II Study  ERBITUX + Platinum (Carboplatin or Cisplatin) + 5FU (Low,  Medium or High Dose) |       | Recurrent or  Metastatic                                                   |       | 53                     |
| ECOG-5397 (Enrollment completed)         |       | Phase III  Randomized Study (Cisplatin + Placebo vs.  Cisplatin + ERBITUX)                        |       | Recurrent or  Metastatic                                                   |       | 123                    |
| EMR-002 (EXTREME) (Enrollment completed) |       | Phase III  Randomized Study (Cisplatin + 5-Fluorouracil  +/-  ERBITUX)                                      |       | Recurrent or  Metastatic (no prior chemotherapy in the metastatic setting) |       | 420                    |
| RTOG 0522 (Ongoing)                      |       | Phase III Randomized  Study (Cisplatin Radiation +/- ERBITUX)                                               |       | Locally Advanced                                                           |       | 720                    |

 

The final results of IMCL-9815, a Phase IIIlocally advanced head and neck cancer study, conducted in cooperation withMerck KGaA, that were published in the New England Journal of Medicine in February 2006,demonstrate that ERBITUX, when added to definitive radiation therapy,significantly improves the duration of both locoregional disease control andoverall survival. IMCL-9815 was the principal clinical trial supportingthe regulatory approval of ERBITUX. On March 1, 2006, the FDA approvedERBITUX for use in combination with radiation therapy for the treatment oflocally or regionally advanced SCCHN, and regulatory approval was grantedsubsequently in Europe and other regions worldwide. In addition, based on theresults of single agent ERBITUX studies in patients with metastatic SCCHNrefractory to platinum therapy, particularly EMR-016, the FDA alsoapproved ERBITUX as a single agent in recurrent or metastatic SCCHN where priorplatinum-based chemotherapy has failed.

RTOG 0522, which opened to patient enrollment in November 2005,was designed to extend the positive results with ERBITUX reported from studyIMCL-9815. In this Phase III study, patients with locally advanced headand neck cancer are being randomized to treatment with either radiation pluschemotherapy or radiation plus chemotherapy plus ERBITUX.

The Eastern Cooperative Oncology Group (ECOG)published the final results of ECOG-5397, a randomized Phase III study ofcisplatin plus ERBITUX versus cisplatin in the Journal of Clinical Oncology. Inthis study, the objective response rate was significantly higher for theERBITUX arm (26.3% versus 9.8%). Both overall survival and progression-freesurvival were higher in patients receiving ERBITUX plus cisplatin, but thestudy lacked sufficient statistical power (i.e. too few patients) todemonstrate clinically relevant differences in these endpoints. Based on theresults of ECOG-5397, as well as non-randomized studies demonstrating theactivity of ERBITUX in patients with recurrent and metastatic head and neckcancer following treatment with platinum-based regimens, Merck KGaA developedEMR-002 (EXTREME), a randomized Phase III study of platinum(cisplatin  or carboplatin) plus 5-fluorouracilversus a platinum agent plus 5-fluorouracil plus ERBITUX. The study,which was 

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completely accrued in February 2006,may support registering ERBITUX in this indication in both the US andworldwide. The availability of top-line results of the trial is anticipated inthe second quarter of 2007.

ImClone and its partners,BMS and Merck KGaA, have also begun a large number of Phase I and II studies,some of which are randomized, to evaluate the merits of adding ERBITUX to awide variety of chemotherapies, radiation and chemoradiation regimens in manydifferent settings of  SCCHN includingthe neoadjuvant, adjuvant, metastatic, locoregional settings.

***Non-Small Cell Lung Cancer***

| **Study**                             | ** ** | **Description**                                                                                                                                     | ** ** | **Population**                        | ** ** | **Target  Enrollment** |
|---------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------|
| CP02-0452 (SELECT) (Ongoing)          |       | Phase III, randomized study of ERBITUX in  combination with docetaxel or pemetrexed compared to docetaxel or pemetrexed  alone                      |       | Second-line  Metastatic or  Recurrent |       | 800                    |
| EMR-011 (LUCAS) Enrollment completed) |       | Phase II randomized, chemotherapy-naïve, advanced  non-small cell lung cancer (ERBITUX + Cisplatin + Vinorelbine vs. Cisplatin +  Vinorelbine) |       | First-line  Stage IIIb or IV          |       | 86                     |
| BMS-012 (Enrollment completed)        |       | Phase II single-arm study (ERBITUX)                                                                                                                 |       | Recurrent or  progressive             |       | 100                    |
| EMR-046 (FLEX) (Enrollment completed) |       | Phase III Cisplatin/Vinorelbine  +/– ERBITUX                                                                                              |       | First-line  Stage IIIb or IV          |       | 1,100                  |
| BMS-099 (Enrollment completed)        |       | Phase II Taxane/Carbo or Cisplatin +/– ERBITUX                                                                                                 |       | First-line  Stage IIIb or IV          |       | 660                    |
| BMS-100 (Enrollment completed)        |       | Phase II Gemcitabine/Carbo or Cisplatin +/– ERBITUX                                                                                            |       | First-line  Stage IIIb or IV          |       | 131                    |
| IMCL-0554 (Ongoing)                   |       | Phase II randomized, Taxol/Carbo two different  schedules + ERBITUX/Avastin®                                                                   |       | First-line  Stage IIIb or IV          |       | 120                    |
| RTOG-0324 (Completed)                 |       | Phase II Radiation + Taxol/Carbopatin + ERBITUX                                                                                                     |       | First-line  Stage IIIa                |       | 84                     |
| SWOG-0342 (Completed)                 |       | Phase II Randomized Study of Taxol/Carboplatin/ERBITUX  or Taxol/Carbopatin followed by ERBITUX                                                     |       | First-line  Stage IIIb or IV          |       | 236                    |

 

Based on the findings of a Phase II randomized trial,EMR-011 (LUCAS), involving 61 evaluable patients with chemotherapy-naïveadvanced non-small cell lung cancer, which showed that the addition of ERBITUXto cisplatin and vinorelbine significantly increased tumor response rates(53.3% versus 32.3%) and median survival (8.3 vs. 7.0 months), Merck KGaA begana Phase III randomized clinical trial (FLEX), which finished target patientaccrual in the first quarter of 2006. Although this trial may be used tosupport the registration of ERBITUX, BMS-099 and BMS-100 wereinitiated to provide further support for ERBITUX in the first-line treatmentsetting of patients with advanced non-small cell lung cancer. In 2005, the sizeof BMS-099 was increased from 300 to 660 patients and the principalendpoint was modified 

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from response rate toprogression-free survival, whereas the size of BMS-100 was decreased from300 to 131. FLEX, BMS-099, and BMS-100 met accrual targets in 2005-2006.

At ASCO 2005, the Radiation Therapy Oncology Group(RTOG) presented preliminary toxicity and feasibility data on RTOG-0324which evaluated the feasibility, safety and efficacy of ERBITUX combined withTaxol/Carboplatin and radiation, in patients with locoregionally-advanced stageIIIa non-small lung cancer. The RTOG reported that the regimen was both safeand feasible. In addition, the Southwest Oncology Group (SWOG) completedaccrual to SWOG-0342, a randomized Phase II study evaluating combinedtherapy with ERBITUX/paclitaxel/carboplatin (combined) versuspaclitaxel/carboplatin followed by ERBITUX (sequential) in patients with stagesIIIb or IV non-small cell lung cancer. Both treatment arms of the study,especially the combined treatment arm, met endpoints that were predetermined bySWOG for levels for further development of ERBITUX.

Furthermore, IMCL-0452(SELECT), which began in 2004, is actively accruing patients to evaluate themerits of adding ERBITUX to chemotherapy in the second-line metastatic setting.The trial is currently undergoing an amendment through the Special ProtocolAssessment process to modify the randomization between docetaxel and pemetrexedto physician’s choice, adapting to changes in standard therapy. The secondrandomization is between ERBITUX and no ERBITUX. The principal focus of thestudy will be on the merits of ERBITUX in patients receiving pemetrexed, andthe study will also generate useful information on the merits of ERBITUX inpatients receiving docetaxel. A wide range of both randomized andnon-randomized Phase I and Phase II studies, sponsored by ImClone, BMS, andMerck KGaA, are also evaluating ERBITUX in combination with many chemotherapyand chemoradiation regimens in neoadjuvant, adjuvant, locoregionally-advanced,and advanced non-small cell lung cancer disease settings.

***Pancreatic Cancer***

| **Study**                         | ** ** | **Description**                                                                                                   | ** ** | **Population**                              | ** ** | **Target  Enrollment** |
|-----------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|------------------------|
| SWOG-0205  (Enrollment completed) |       | Phase III  Randomized Study (ERBITUX + Gemcitabine vs. Gemcitabine)                                          |       | First-line Stage IV  Pancreatic Cancer |       | 720                    |
| ECOG-8200  (Enrollment completed) |       | Phase II  Randomized Study of Irinotecan + Docetaxel +/- ERBITUX                                             |       | First-line  Stage IV Pancreatic Cancer |       | 92                     |
| NCI-6580  (Enrollment completed)  |       | Phase II  Randomized Study Gemcitabine + Avastin® + ERBITUX or Gemcitabine + Avastin® +  Erlotinib |       | First-line  Stage IV Pancreatic Cancer |       | 54-126                 |
| IMCL-0555  (Ongoing)              |       | Phase II Randomized  Study Gemcitabine + Avastin® + ERBITUX or Avastin® + ERBITUX                  |       | First-line Stage IV  Pancreatic Cancer |       | 120                    |

 

Based on the encouragingresponse rate, survival rates, and survival reported from a Phase I/II study ofERBITUX plus gemcitabine, as well as the tolerability of the regimen inpatients with advanced pancreatic cancer, the Southwest Oncology Group activatedSWOG-0205, a first-line study in pancreatic cancer in January 2004.This study is a randomized comparative study comparing ERBITUX plus gemcitabineversus gemcitabine alone in first-line, stage IV, pancreatic cancer patients.Accrual completed in 2006, with top-line data available sometime during thefirst half of 2007. A number of Phase II randomized studies sponsored byImClone and BMS or the NCI cooperative oncology groups were 

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initiatedin 2006. These studies are designed to evaluate the merits of adding ERBITUX tovarious chemotherapy regimens consisting of either gemcitabine or irinotecanplus docetaxel, and several of these studies will evaluate ERBITUX combinedwith chemotherapy as well as the VEGF inhibitor Avastin®. Further, we, incollaboration with our partners BMS and Merck KGaA, as well as the NCIcooperative oncology groups are evaluating the feasibility and activity ofadministering ERBITUX with several other gemcitabine-based chemotherapyregimens in patients with advanced pancreatic cancer, as well as evaluating thefeasibility of administering ERBITUX with chemotherapy and/or radiotherapy inearlier stages of the diseases, particularly in the neoadjuvant and adjuvantsettings.

***Other Cancers***

In collaboration with our partners BMS and Merck KGaA,we are in the process of supporting a wide array and large number of Phase Iand II evaluations of ERBITUX administered alone or combined with othertherapeutic modalities in adult malignancies that express EGFR, includingcarcinomas of the brain, esophagus, stomach, rectum, cervix, endometrium,ovary, bladder, prostate, and breast, as well as pediatric malignancies. In2007, ImClone will sponsor a series of multicenter randomized Phase II studiesto evaluate the merits of adding ERBITUX to standard therapy used to treatpatients with bladder, prostate, esophageal, and ovarian cancers. Bothnon-randomized and randomized Phase II studies are and will also explore themerits of alternate ERBITUX administration schedules, particularly every-2-weekdosing.

We and BMS also presentedpreliminary results from study BMS-045, in which tumor biopsies wereperformed on approximately 100 patients with refractory colorectal cancer priorto treatment with ERBITUX to ascertain biomarker and/or pharmacogenomicpredictors of drug activity. A wide variety of genomic markers, signalingproteins, and relevant ligands are being assessed by our scientists and ourcollaborators, BMS and Genomic Health, Inc.

***ERBITUX Safety Information***

Grade 3/4 infusion reactions, rarely with fataloutcome (<1 in 1000), occurred in approximately 3% (46/1,485) of patientsreceiving ERBITUX (cetuximab) therapy. These reactions are characterized byrapid onset of airway obstruction (bronchospasm, stridor, hoarseness),urticaria, hypotension, and/or cardiac arrest. Severe infusion reactionsrequire immediate and permanent discontinuation of ERBITUX therapy.

Most reactions (90%) were associated with the firstinfusion of ERBITUX despite the use of prophylactic antihistamines. Cautionmust be exercised with every ERBITUX infusion as there were patients whoexperienced their first severe infusion reaction during later infusions. A 1-hourobservation period is recommended following the ERBITUX infusion. Longerobservation periods may be required in patients who experience infusionreactions.

Cardiopulmonary arrest and/or sudden death occurred in2% (4/208) of patients with squamous cell carcinoma of the head and necktreated with radiation therapy and ERBITUX as compared to none of212 patients treated with radiotherapy alone. Fatal events occurred within1 to 43 days after the last ERBITUX treatment. ERBITUX in combination withradiation therapy should be used with caution in patients with known coronaryartery disease, congestive heart failure and arrhythmias. Close monitoring ofserum electrolytes, including serum magnesium, potassium, and calcium duringand after ERBITUX therapy is recommended.

Severe cases of interstitial lung disease (ILD), whichwas fatal in one case, occurred in less than 0.5% of 774 patients with advancedcolorectal cancer (mCRC) receiving ERBITUX. There was one case of ILD reportedin 796 patients with head and neck cancer receiving ERBITUX in clinical studies.

In clinical studies of ERBITUX, dermatologictoxicities, including acneform rash, skin drying and fissuring, andinflammatory and infectious sequelae (e.g., blepharitis, cheilitis, cellulitis,cyst) were 

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reported. In 208 patientsreceiving ERBITUX plus radiation therapy, acneform rash was reported in 87%(17% severe) as compared to 10% in 212 patients treated with radiation therapyalone (1% severe). In patients receiving ERBITUX alone, 76% (n=103) experiencedacneform rash (1% severe). In patients with mCRC, acneform rash was reported in89% (686/774) of all treated patients, and was severe in 11% (84/774).Subsequent to the development of severe dermatologic toxicities, complicationsincluding S.aureus sepsis and abscesses requiring incision and drainage werereported. Sun exposure may exacerbate these effects. A related nail disorder,occurring in 12% (0.4% Grade 3) of patients, was characterized as a paronychialinflammation.

The safety of ERBITUX in combination with radiationtherapy and cisplatin has not been established. Death and seriouscardiotoxicity were observed in a single-arm trial with ERBITUX, delayed,accelerated (concomitant boost) fractionation radiation therapy, and cisplatin(100 mg/m2)conducted in patients with locally advanced squamous cell carcinoma of the headand neck. Two of 21 patients died, one as a result of pneumonia and one of anunknown cause. Four patients discontinued treatment due to adverse events. Twoof these discontinuations were due to cardiac events (myocardial infarction inone patient and arrhythmia, diminished cardiac output, and hypotension in theother patient).

The incidence of hypomagnesemia (both overall andsevere [NCI CTC Grades 3 & 4]) was increased in patients receivingERBITUX alone or in combination with chemotherapy as compared to thosereceiving best supportive care or chemotherapy alone based on ongoing,controlled clinical trials in 244 patients. Approximately one-half of thesepatients receiving ERBITUX experienced hypomagnesemia and 10-15%experienced severe hypomagnesemia. Electrolyte repletion was necessary in somepatients and in severe cases, intravenous replacement was required. Patientsreceiving ERBITUX therapy should be periodically monitored for hypomagnesemia,and accompanying hyocalcermia and hypokalemia during, and up to 8 weeksfollowing the completion of, ERBITUX therapy.

The most serious adverse reactions associated withERBITUX in combination with radiation therapy in 208 patients with head andneck cancer were infusion reaction (3%), cardiopulmonary arrest (2%),dermatologic toxicity (2.5%), mucositis (6%), radiation dermatitis (3%),confusion (2%) and diarrhea (2%).

The most serious adverse reactions associated withERBITUX in mCRC clinical trials (N=774) were infusion reaction (3%),dermatoloic toxicity (1%), interstitial lung disease (0.4%), fever (5%), sepsis(3%), kidney failure (2%), pulmonary embolus (1%), dehydration (5% in patientsreceiving ERBITUX with irinotecan, 2% in patients receiving ERBITUX as a singleagent) and diarrhea (6% in patients receiving ERBITUX with irinotecan, 0.2% inpatients receiving ERBITUX as a single agent).

The overall incidence of late radiation toxicities(any grade) was higher with ERBITUX in combination with radiation therapycompared with radiation therapy alone. The following sites were affected:salivary glands (65%/56%), larynx (52%/36%), subcutaneous tissue (49%/45%),mucous membranes (48%/39%), esophagus (44%/35%), skin (42%/33%), brain(11%/9%), lung (11%/8%), spinal cord (4%/3%), and bone (4%/5%) in the ERBITUXand radiation versus radiation alone arms, respectively.

The incidence of Grade 3 or 4 late radiationtoxicities were generally similar between the radiation therapy alone and theERBITUX plus radiation therapy arms.

The most common adverse events seen in patients withcarcinomas of the head and neck receiving ERBITUX in combination with radiationtherapy (n=208) versus radiation alone (n=212) were mucositis-stomatitis(93%/94%), acneform rash (87%/10%), radiation dermatitis (86%/90%), weight loss(84%/72%), xerostomia (72%/71%), dysphagia (65%/63%), asthenia (56%/49%),nausea (49%/37%), constipation (35%/30%) and vomiting (29%/23%). The mostcommon adverse events seen in patients with 

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carcinomas of the head andneck receiving ERBITUX as a single agent (n=103) were acneform rash (76%),asthenia (45%), pain (28%), fever (27%) and weight loss (27%).

The most common adverse events seen in patients withmCRC receiving ERBITUX with irinotecan (n=354) or ERBITUX as a single agent(n=420) were acneform rash (88%/90%), asthenia/malaise (73%/48%), diarrhea(72%/25%), nausea (55%/29%), abdominal pain (45%/26%), vomiting (41%/25%),fever (34%/27%), constipation (30%/26%), and headache (14%/26%).

Please see fullprescribing information, available at www.ERBITUX.com for important safetyinformation relating to ERBITUX, including boxed warnings.

***Human IgG1Monoclonal EGFR Inhibitor***

We have developed an IgG1 fully-human monoclonalantibody, referred to as IMC-11F8, which targets the human EGFR. IMC-11F8is a high affinity antibody that blocks ligand-dependent activation of the EGFR.Pre-clinical *in vitro* studieshave shown that IMC-11F8 inhibits EGFR activation, downstream signalingpathways and growth of human tumor cells an *in vitro* it hasbeen shown to be a mediator of antibody-dependent cellular cytotoxicity (ADCC).In pre-clinical human tumor xenograft models, IMC-11F8 suppresses thegrowth of EGFR-positive tumors and enhances the activity of chemotherapeuticdrugs when used in combination. We intend to commercialize this antibody inEurope and  other regions outside theUnited States and potentially in the United States and we believe that we haverights to do so under our agreements with BMS and Merck KGaA. ImClone’s fullrights to develop IMC-11F8 outside the United States was upheld inarbitration between ImClone and Merck KGaA in 2006. Binding arbitration upheldthat IMC-11F8 was not covered under the Merck KGaA development andlicense agreement.

The Company received approval to begin Phase Iclinical trials of IMC-11F8 from the National Institute for Public Healthand the Environment (RIVM), the Dutch regulatory agency. The first patientbegan treatment in fourth quarter of 2004 in a Phase I clinical trial ofpatients with solid tumors and the trial reached its endpoints and completedenrollment in the fourth quarter of 2006. The two-center study conducted at theFree University in Amsterdam and Utrecht University in Utrecht, evaluated thesafety and pharmacology of IMC-11F8 administered weekly or bi-weekly byintravenous infusion. Doses of IMC-11F8 above 800 mg were consistentlyassociated with headache, whereas the 800 mg dose was well tolerated andachieved plasma concentrations above target levels associated with biologicalactivity in preclinical studies. Biologically relevant plasma concentrationspersisted for the entire 2-week period following antibody administration.No hypersensitivity reactions were noted and major antitumor responses werenoted in several patients at the lower dose levels. Interim results of thistrial were reported at the ASCO 2006 meeting. Disease-directed developmentaltrials of 11F8 are projected to begin in the first half of 2007, with a pivotaltrial beginning in the fourth quarter of 2007 or first quarter of 2008.

| **Study**                        | ** ** | **Description**                                                                                             | ** ** | **Population**                         | ** ** | **Target  Enrollment** |
|----------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------------------|
| CP11-0401 (Enrollment completed) |       | Phase I Study of Weekly and Bi-Weekly Human  Anti-Epidermal Growth Factor Receptor Monoclonal Antibody 11F8 |       | In Patients with Advanced Solid Tumors |       | 40                     |

 

***Monoclonal Antibody Inhibitors of Angiogenesis***

Our general experience with growth factors, particularlythe use of ERBITUX to block the EGFR, is mirrored in our pursuit of what may beanother promising approach for the treatment of cancer, the inhibition ofangiogenesis. Angiogenesis is the natural process of new blood vessel growth.The VEGF family of ligands are a group of molecules that helps regulateangiogenesis. Tumor cells, as well as normal cells, produce VEGF. Once producedby the tumor cells, VEGF stimulates the production of new blood 

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vessels and ensures anadequate blood supply to the tumor, enabling the tumor to grow. KDR (VEGFR-2)is a growth factor receptor found almost exclusively on the surface of humanendothelial cells, which are the cells that line all blood vessels. VariousVEGF ligands recognize and bind to this receptor in order to stimulate theendothelial cells to grow and cause new blood vessels to form. We believe thatinterference with the binding of VEGF to the KDR receptor inhibits angiogenesisand potentially can be used to slow or halt tumor growth. We have identified potentialinhibitors collectively known by us as IMC-KDR antibodies.

In 2001, we concluded a Phase I clinical study with anIgG1 chimeric (part human, part mouse) anti-KDR antibody known as IMC-1C11.In 2002, we identified several fully-human IgG1monoclonal anti-KDR antibodieswith potent anti-KDR activity. In 2003, we initiated pre-clinical developmentof one of these antibodies, IMC-1121B. This fully-human antibody replacedIMC-1C11 in our development pipeline. We filed an Investigational NewDrug Application (“IND”) for IMC-1121B in July 2004 and initiated aclinical study assessing Phase I endpoints (safety, pharmacokinetics,preliminary activity) of IMC-1121B administered weekly in cancer patientsin the fourth quarter of 2004. A second study, evaluating Phase I endpoints ofIMC-1121B administered every 2-weeks, was initiated in 2006. Thepreliminary results of the weekly study were reported at the annual meeting ofASCO in 2006 and the EORTC-AACR-NCI Molecular Targeting meeting in 2006. As asingle agent, 1121B treatment has been associated with tumor regression inseveral patients with refractory advanced cancer, whereas toxicity has not beenpreclusive. In addition to overt tumor regression, stable disease exceeding sixmonths has been observed in a notable proportion of patients with refractorysolid tumors. Preliminary pharmacokinetic studies indicate thatbiologically-relevant concentrations are achieved and persist for at least 2weeks following treatment. One of these ongoing studies has been amended toexplore Phase I endpoints of 1121B on an every 3-week schedule, as well.It is projected that these studies will achieve their objectives in the firsthalf of 2007, and disease-directed trials, several of which will be randomizedPhase II and Phase III studies, will begin soon thereafter.

Subject to furtherinvestigation, we believe that such anti-KDR antibodies could be effective intreating other diseases, such as diabetic retinopathy and age-related maculardegeneration that, like cancer, depend on the growth of new blood vessels.

| Study                        | ** ** | **Description**                                                                                       | ** ** | **Population**                           | ** ** | **Target  Enrollment** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------|------------|
| CP12-0401  (Ongoing)

  |       | Phase I Study of Weekly  Anti-Vascular Endothelial Growth Factor Receptor 2 Monoclonal Antibody       |       | In Patients with  Advanced Solid  Tumors |       | 33                     |       |
| CP12-0402  (Ongoing)         |       | Phase I Study of Every 2  Week Anti-Vascular Endothelial Growth Factor Receptor 2 Monoclonal Antibody |       | In Patients with  Advanced Solid  Tumors |       | 33                     |       |

 

InAugust 2005, the Company entered into a Collaboration and License Agreementwith UCB S.A. (“UCB”), a company registered in Belgium, for the development andcommercialization of CDP-791, UCB’s novel, investigational PEGylateddi-Fab antibody targeting VEGFR-2. No upfront or milestone payments werepayable under the Agreement. In the first quarter of 2007, the Companyterminated this agreement with UCB, largely due to substantial progress made inthe development of 1121B.

| Study                  | ** ** | **Description**                                                                                                               | ** ** | **Population**                                                         | ** ** | **Target  Enrollment** | ** ** |
|------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------|------------|
| RPCE05A3166  (Ongoing) |       | Phase I/II Randomized  Study of Paclitaxel/ Carboplatin administered either alone or combined with  CDP-791 at 10 or 20 mg/kg |       | In Patients with  Advanced Stage IIIB or IV Non-small Cell Lung Cancer |       | 150                    |       |

 

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***Monoclonal Antibody to Insulin-Like Growth FactorReceptor-1***

In 2005, we successfully filed an IND for IMC-A12, aunique human monoclonal antibody against insulin-like growth factor-1receptor (IGF-1R) which is expressed in diverse human tumor types. Activationof IGF-1R in cancer cells in preclinical models increases the cells’ability to survive, especially under conditions of chemotherapy orradiotherapy, and it also contributes to cancer cell growth, as well as thedevelopment of resistance to chemotherapeutics, hormones (estrogens andandrogens), and signal transduction inhibitors. IMC-A12 prevents binding ofinsulin-like growth factor-1 to the receptor, thus preventing itsactivation and triggering of survival and growth mechanisms in cancer cells.The antibody also causes rapid internalization (removal from the cell surface)of IGF-1R, thus further interfering with cancer growth-supportingproperties of the receptor.

Following successfulfiling of an IND for IMC-A12 in 2005, we began a Phase I study of the agent ona weekly dosing schedule in patients with solid malignancies in December 2005.A second Phase I study of IMC-A12 on an every 2-week schedule was begunin 2006. The preliminary results of the initial trial, which demonstratedtolerability, preliminary evidence of antitumor activity as a single agent, anda pharmacokinetic profile supporting an every 2-week dosing schedule,were reported at the EORTC-AACR-NIC Molecular Targeting meeting in 2006. It isprojected that the Phase I studies will achieve their objectives and concludein the first half of 2007, and broad disease-directed evaluations, includingnon-randomized and randomized studies will begin in the second half of 2007.Although most disease-directed evaluations of IMC-A12 in 2007 will be sponsoredby ImClone, the National Cancer Institute will begin a series ofdisease-directed evaluations in both adult and pediatric malignancies under aClinical Trials Agreement with ImClone.

| **Study**           | ** ** | **Description**                                                                                  | ** ** | **Population**                          | ** ** | **Target  Enrollment** | ** ** |
|---------------------|------------|--------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|------------------------|------------|
| CP13-0501 (Ongoing) |       | Phase I Study of  IMC-A12, an Anti-IGF-1R Human Monoclonal Antibody, Administered Weekly         |       | In Patients with  Advanced Solid Tumors |       | 40                     |       |
| CP13-0502 (Ongoing) |       | Phase I Study of  IMC-A12, an Anti-IGF-1R Human Monoclonal Antibody, Administered Every 2  Weeks |       | In Patients with  Advanced Solid Tumors |       | 40                     |       |

 

***Monoclonal Antibody to Vascular Endothelial GrowthFactor Receptor-1 (VEGFR-1)***

Like VEGFR-2, the target of our anti-KDRantibodies, the VEGFR-1 receptor (also known as flt-1)**is believed to be involved in blood vessel formation, butrecent data suggest that it may function in novel ways unrelated toangiogenesis. We have discovered that VEGFR-1 is expressed by a number ofhuman tumors, most notably breast and colorectal cancer. We have developedspecific antibodies that block the function of VEGFR-1 and have conductedpre-clinical studies showing that these antibodies can inhibit the growth ofhuman breast and colorectal tumors in pre-clinical models. It is believed thatVEGFR-1 inhibitors could be useful in the treatment of VEGFR-1-positivetumors, such as breast or colorectal cancer and we are developing therapeuticantibodies against this target for future clinical studies.

Wesuccessfully filed an IND for IMC-18F1, an IgG1 fully-human monoclonalantibody to VEGFR-1, in December 2005, for which we initiatedpatient accrual to a Phase I study in the first half of 2006. 

| **Study**           | ** ** | **Description**                                                       | ** ** | **Population**                          | ** ** | **Target  Enrollment** | ** ** |
|---------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------|------------|------------------------|------------|
| CP14-0501 (Ongoing) |       | Phase I Study of  IMC-18F1, an Anti-VEGFR-1 Human Monoclonal Antibody |       | In Patients with  Advanced Solid Tumors |       | 40                     |       |

 

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***Monoclonal Antibody Against Platelet-Derived GrowthFactor Receptor Alpha (PDGFR***a)

PDGFRais a receptor tyrosine kinase that is activated by the binding ofplatelet-derived growth factors. Studies have shown that PDGFRais expressed on ovarian, prostate, breast, lung, glial, skin and bone tumors.We have developed an IgG1 fully-human antibody, designated IMC-3G3, thateffectively blocks the function of PDGFRaand inhibits the growth of glioblastoma and leiomyosarcoma tumors in animalmodels. We are conducting additional pre-clinical studies to evaluate if ourantibody can also inhibit the growth of other cancers. We filed an IND for IMC-3G3in the first half of 2006 and initiated patient accrual into a Phase Itrial in the fourth quarter of 2006. 

| **Study**           | ** ** | **Description**                                                     | ** ** | **Population**                          | ** ** | **Target  Enrollment** | ** ** |
|---------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------|------------|------------------------|------------|
| CP15-0601 (Ongoing) |       | Phase I Study of  IMC-3G3, an Anti-PDGFa  Human Monoclonal Antibody |       | In Patients with  Advanced Solid Tumors |       | 40                     |       |

 

**RESEARCH PROGRAMS**

***General***

Our research programs have been focused on cleargoals: the identification of antibodies with growth inhibiting activity againsthuman tumors. To this end we have discontinued our small molecule and vaccineprograms. After an extensive analysis we determined that our strengths andexpertise lie in the identification of new tumor targets and the selection andproduction of antibodies that bind and inhibit the activity of these targets.

In addition to concentrating on our products indevelopment, we perform ongoing research, including research in each of theareas of our ongoing clinical programs of growth factor blockers, other tumorcell growth inhibitors and angiogenesis inhibitors. We have assembled ascientific staff with expertise in a variety of disciplines, includingoncology, immunology, molecular and cellular biology, antibody engineering,bioinformatics and protein chemistry. We have centralized our targetidentification group into a new Tumor Biology department. These scientists havethe primary responsibility of identifying new targets and validating their rolein tumor growth and development. New targets are both engendered internally andobtained from external partners. Our primary goal is to identify a number oftargets sufficient to support and expand our portfolio beyond our currentlevel. In addition to pursuing research programs in-house, we collaborate withacademic institutions and corporations to support our research and developmentefforts.

***Research on Growth Factor Blockers***

*Researchon modulators of apoptosis (programmed cell death):*   Weare developing antibody therapeutics that interfere with anti-apoptoticsignaling and survival mechanisms of cancer cells. One mechanism involves theinsulin-like growth factor-1 receptor (IGF-1R) which is frequentlyover-expressed in diverse human tumor types. Activation of IGF-1R incancer cells increases the cells’ ability to survive, especially underconditions of chemotherapy or radiotherapy, and it also contributes to cancercell growth. We have developed and evaluated an antibody to IGF-1R,designated IMC-A12, that blocks binding of insulin-like growth factor-1to the receptor, thus preventing its activation and triggering of survival andgrowth mechanisms in cancer cells. The antibody also causes rapid internalization(removal from the cell surface) of IGF-1R, thus further interfering withcancer growth-supporting properties of the receptor. The IMC-A12 IND wasaccepted by the FDA and our Phase I study was initiated and is ongoing.

*Researchon VEGFR-1 inhibitors:*   Weare investigating the activities of antibodies that block the function of VEGFR-1(flt-1*)*, another receptor to which VEGF binds. Like VEGFR-2,the target of our anti-KDR antibodies, the VEGFR-1 receptor is believedto be involved in blood vessel formation, but recent data suggest that it mayfunction in novel ways unrelated to angiogenesis. We have discovered that VEGFR-1is expressed by a number of human tumors, most notably breast and colorectalcancer. We have 

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developed specificantibodies that block the function of VEGFR-1 and have conductedpre-clinical studies showing that these antibodies can inhibit the growth ofhuman breast and colorectal tumors in pre-clinical models. It is believed thatVEGFR-1 inhibitors could be useful in the treatment of VEGFR-1-positivetumors, such as breast or colorectal cancer and we are developing therapeuticantibodies against this target for future clinical studies. One such agent, IMC-18F1,is a fully-human monoclonal antibody for which an IND has been filed and accepted.Phase I studies began in the first half of 2006.

*Researchon PDGFR alpha inhibitors:*   Platelet-derivedgrowth factor receptor alpha (PDGFRa ) is a receptortyrosine kinase that is activated by the binding of platelet-derived growthfactors. Studies have shown that PDGFRa is expressed onovarian, prostate, breast, lung, glial, skin and bone tumors. We have developeda fully-human antibody, designated IMC-3G3, that effectively blocks thefunction of PDGFRaand inhibits the growth of glioblastoma and leiomyosarcoma tumors in animalmodels. We are conducting additional pre-clinical studies to evaluate if ourantibody can also inhibit the growth of other cancers. We filed an IND for IMC-3G3in the first half of 2006. Phase I studies began in the fourth quarter of 2006.

*Anti-FGFR:*   Dysregulationof the fibroblast growth factor (FGF) and receptor (FGFR) pathway has beenlinked to the development of both solid tumors and hematological malignancies.Inhibiting this pathway may therefore have therapeutic benefit. Twoneutralizing antibodies were generated that target FGFR-1 and FGFR-3,respectively. These antibodies have been tested for anti-tumor effects *in vitro* and have shown activity inprostate and bladder carcinoma, multiple myeloma and leukemia. Significanttumor inhibition *in vivo*was observed in humanprostate xenografts treated with anti-FGFR-1, and in human multiplemyeloma xenografts treated with anti-FGFR-3.

*Anti-RON:*   TheMacrophage-Stimulating Protein receptor (RON) belongs to the c-MET family ofreceptor tyrosine kinases. Since its discovery in 1993, several lines ofevidence suggest that RON is expressed in several major cancers and contributesto tumorigenesis. Antagonists of RON activity, however, have not been reported.Consequently, we generated several fully-human monoclonal antibodies that bindto human RON with high affinity and block ligand binding. By preventing RONsignaling, these antibodies have significantly inhibited cancer cell lineinvasion/migration as well as tumor formation in several tumor xenograftmodels. These findings are the first to validate RON as a cancer target andunderscore the potential of RON antibodies for therapeutic intervention in thetreatment of human cancer. We are currently studying the activity of RONantibodies in additional pre-clinical models.

*Anti-gp75:*   gp75is a melanoma antigen and an ideal target for antibody-based therapy. A novelfully-human antibody to gp75, 20D7, was generated. This antibody is effectiveagainst a panel of human melanomas grown as xenografts in nude mice. We arecurrently studying the activity of 20D7 in additional pre-clinical models.

*Anti-flt3:*   flt3is a receptor tyrosine kinase that is overexpressed in the majority of acutemyelogenous leukemias and lymphocytic leukeumia. We have developed afully-human anti-flt3 antagonist antibody named IMC-EB10. Preclinical studieshave shown that IMC-EB10 significantly inhibits leukemia cell growth in humanleukemia xenograft models in mice. In another approach, we have recentlydeveloped an immunotoxin conjugate named EB10-MMAF using IMC-EB10antibody in collaboration with Seattle Genetics. Preclinical data havedemonstrated that EB10-MMAF has a potent, antigen-specific therapeuticactivity in xenograft models.

***Research on Angiogenesis Inhibitors***

*Researchon VEGFR-2 inhibitors:*   Weare continuing to work with an experimental antibody known as DC101 in animalmodels in order to support the clinical development of our IMC-KDR monoclonalantibody known as IMC-1121B. DC101 neutralizes the flk-1 receptor, which is themouse receptor to VEGF that corresponds to KDR in humans. Tumor models in micehave shown that DC101 inhibits tumor growth as a single agent or in combinationwith chemotherapy or radiation therapy. We filed an IND for 

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IMC-1121B in August 2004and have since started a clinical Phase I trial to study its potential forangiogenesis inhibition in cancer patients.

*Researchon VE-cadherin inhibitors:*   Inanother approach to angiogenesis inhibition, we are exploring the therapeuticpotential of antibodies against vascular-specific cadherin (“VE-cadherin”).Cadherins are a family of cell surface molecules that help organize tissuestructures. VE-cadherin is believed to play an important role in angiogenesisby organizing endothelial cells into vascular tubes, which is a necessary stepin the formation of new blood vessels. Advanced tumor growth is dependent onthe formation of a capillary blood vessel network in the tumor to ensure anadequate blood supply to the tumor. Therefore, antibodies that inhibitVE-cadherin may inhibit such capillary formation in tumors, and help fightcancer by cutting off adequate blood supply to the tumor. Pre-clinical studies usingmonoclonal antibodies against VE-cadherin have demonstrated that inhibition ofangiogenesis, tumor growth and metastasis occurs as a consequence ofinterfering with the ability of VE-cadherin to form tubular structures. We areevaluating in pre-clinical studies antibodies that are efficacious ininhibiting angiogenesis and tumor growth without negatively affecting existingvessels.

In connection with our VE-cadherin research program,we have an exclusive license from ICOS Corporation to certain patent rightspertaining to VE-cadherin and antibodies thereto for the treatment of cancer inhumans.

*Researchon VEGFR-3 inhibitors:*   Antagonistantibodies to VEGFR-3 (also known as flt-4) have several potentialtherapeutic uses: blocking of metastasis by inhibiting lymphangiogenesis,blocking tumor angiogenesis, inhibiting the growth of tumors stimulated by flt-4/VEGF-Cor D autocrine loops and inhibiting inflammation. Systemic treatment of micewith monoclonal antibody, mF4-31C1, directed to the mouse VEGFR-3 resultsin inhibition of new lymphatic formation in tumor models, leading tosignificant inhibition of metastasis. Administration of mF4-31C1 reducesthe growth of primary human tumors in mice most likely by blocking angiogenesisor tumor inflammation and this effect appears to act additively withchemotherapy. In a model of lung inflammation, this antibody greatly reducedbronchial lymphangiogenesis and regional lymphadenopathy and prolonged retinalgraft survival in mice. A candidate therapeutic fully-human anti-human VEGFR-3antibody called hF4-3C5 has been produced and its antagonist activity forVEGFR-3 has been verified.

In connection with our VEGFR-3 research program,we have an extensive license from the Ludwig Institute for Cancer Research tocertain patent rights pertaining to VEGFR-3 and antibodies thereto forthe treatment of cancer in humans.

*ResearchSupport for Clinical Programs:  *ImClone presentlyhas five antibodies in various stages of clinical development—fully-humananti-EGFR, anti-IGF-1R, anti-VEGFR-2, anti-VEGFR-1 and PDGRFa.While all these agents are being assessed clinically as single agents, ourresearch scientists are performing studies to determine which potentialcombinations would be most useful in future clinical studies. These combinationsinclude chemotherapeutic small molecules, signaling inhibitors and selectiveantibodies.

**CORPORATECOLLABORATIONS**

In addition to our collaborations in the research andclinical areas with academic and medical institutions, we have a number of collaborationswith other corporations, the most significant of which are discussed below.

***Collaborations with Bristol-Myers Squibb Company***

On September 19, 2001, we entered into anacquisition agreement (the “Acquisition Agreement”) with BMS and Bristol-MyersSquibb Biologics Company, a Delaware corporation (“BMS Biologics”), which is awholly-owned subsidiary of BMS, providing for the tender offer by BMS Biologicsto purchase up to 14,392,003 shares of our common stock for $70.00 per share,net to the seller in cash. In connection with the Acquisition Agreement, weentered into a stockholder agreement with BMS and BMS Biologics, 

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dated as of September 19,2001 (the “Stockholder Agreement”), pursuant to which all parties agreed tovarious arrangements regarding the respective rights and obligations of eachparty with respect to, among other things, the ownership of shares of ourcommon stock by BMS and BMS Biologics. Concurrent with the execution of theAcquisition Agreement and the Stockholder Agreement, we entered into acommercial agreement (the “Commercial Agreement”) with BMS and E.R. Squibbrelating to ERBITUX, pursuant to which, among other things, BMS and E.R. Squibbare co-developing and co-promoting ERBITUX in the United States with us, andare co-developing and co-promoting ERBITUX in Japan with us and either togetheror co-exclusively with Merck KGaA.

On March 5, 2002, we amended the CommercialAgreement with E.R. Squibb and BMS. The amendment changed certain economics ofthe Commercial Agreement and expanded the clinical and strategic roles of BMSin the ERBITUX development program. One of the principal economic changes tothe Commercial Agreement is that we received payments of $140.0 million on March 7,2002 and $60.0 million on March 5, 2003. Such payments are in lieu of the$300.0 million milestone payment we would have received upon acceptance by theFDA of the ERBITUX BLA under the original terms of the Commercial Agreement.The terms of the Commercial Agreement, as amended on March 5, 2002, are setforth in more detail below.

**CommercialAgreement**

*Rights Granted to E.R. Squibb—**Pursuant* to theCommercial Agreement, as amended on March 5, 2002, we granted to E.R.Squibb (1) the exclusive right to distribute, and the co-exclusive rightto develop and promote (together with us) any prescription pharmaceuticalproduct using the compound ERBITUX (the “product”) in the United States andCanada, (2) the co-exclusive right to develop, distribute and promote(together with us and together or co-exclusively with Merck KGaA and itsaffiliates) the product in Japan, and (3) the non-exclusive right to useour registered trademarks for the product in the United States, Canada andJapan (collectively, the “territory”) in connection with the foregoing. Inaddition, we agreed not to grant any right or license to any third-party, orotherwise permit any third party, to develop ERBITUX for animal health or anyother application outside the human health field without the prior consent ofE.R. Squibb (which consent may not be unreasonably withheld).

*Rights Granted to the Company—**Pursuant*to theCommercial Agreement, E.R. Squibb has granted to us and our affiliates alicense, without the right to grant sublicenses (other than to Merck KGaA andits affiliates for use in Japan and to any third-party for use outside theterritory), to use solely for the purpose of developing, using, manufacturing,promoting, distributing and selling ERBITUX or the product, any process,know-how or other invention developed solely by E.R. Squibb or BMS that hasgeneral utility in connection with other products or compounds in addition toERBITUX or the product (“E.R. Squibb Inventions”).

*Up-Front and Milestone Payments—**The*CommercialAgreement provides for up-front and milestone payments by E.R. Squibb to theCompany of $900.0 million in the aggregate, of which $200.0 million was paid onSeptember 19, 2001, $140.0 million was paid on March 7, 2002, $60.0million was paid on March 5, 2003 $250.0 million was paid on March 12,2004 and $250.0 million was paid on March 31, 2006. All such payments arenon-refundable and non-creditable.

*DistributionFees—**The*Commercial Agreement provides that E.R. Squibbshall pay us distribution fees based on a percentage of “annual net sales” ofthe product (as defined in the Commercial Agreement) by E.R. Squibb in theUnited States and Canada. The distribution fee is 39% of net sales in theUnited States and Canada. During the year ended December 31, 2006, we haverecorded royalty revenues of approximately $254.4 million, representing 39% ofnet sales of ERBITUX by BMS. The Commercial Agreement also provides that thedistribution fees for the sale of the product in Japan by E.R. Squibb orImClone Systems shall be equal to 50% of operating profit or loss with respectto such sales for any calendar month. In the event of an operating profit, E.R.Squibb shall pay us the amount of such distribution fee, and in the event of anoperating loss, we shall credit E.R. Squibb the amount of such distributionfee.

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*Development of the Product—**Responsibilities*associatedwith clinical and other ongoing studies are apportioned between the parties asdetermined by the product development committee described below. The CommercialAgreement provides for the establishment of clinical development plans settingforth the activities to be undertaken by the parties for the purpose ofobtaining marketing approvals, providing market support and developing newindications and formulations of the product. After transition of responsibilitiesfor certain clinical and other studies, each party is primarily responsible forperforming the studies designated to it in the clinical development plans. Inthe United States and Canada, the Commercial Agreement provides that E.R.Squibb is responsible for 100% of the cost of all clinical studies other thanthose studies undertaken post-launch which are not pursuant to an IND (e.g.Phase IV studies), the cost of which is shared equally between E.R. Squibb andImClone Systems. As between E.R. Squibb and ImClone Systems, each isresponsible for 50% of the costs of all studies in Japan. We have also agreed,and may agree in the future, to share with E.R. Squibb, on terms other than theforegoing, costs of clinical trials that we believe are not potentiallyregistrational but should be undertaken prior to launch in the United States,Canada or Japan. In addition, to the extent that BMS and we, in 2005 and 2006,exceed expenditures specified under the annual contractual clinical developmentbudget, we have agreed to share such excess with BMS. We have incurredapproximately $20.8 million, $19.9 million and $9.1 million pursuant to suchcost sharing for the years ended December 31, 2006, 2005 and 2004,respectively. We have also incurred approximately $3.1 million, $1.4 millionand $721,000 related to the agreement with respect to development in Japan forthe years ended December 31, 2006, 2005 and 2004, respectively. Except asotherwise agreed upon by the parties, the Company will own all registrations forthe product and will be primarily responsible for the regulatory activitiesleading to registration in each country. E.R. Squibb is primarily responsiblefor the regulatory activities in each country after the product has beenregistered in that country. Pursuant to the terms of the Commercial Agreement,as amended, Andrew G. Bodnar, M.D., J.D., Senior Vice President, Strategy andMedical & External Affairs of BMS, and a member of our Board ofDirectors, is entitled to oversee the implementation of the clinical andregulatory plan for ERBITUX.

*Distribution and Promotion of the Product—**Pursuant*to theCommercial Agreement, E.R. Squibb has agreed to use all commercially reasonableefforts to launch, promote and sell the product in the territory with the objectiveof maximizing the sales potential of the product and promoting the therapeuticprofile and benefits of the product in the most commercially beneficial manner.In connection with its responsibilities for distribution, marketing and salesof the product in the territory, E.R. Squibb is performing all relevantfunctions, including but not limited to the provision of all sales forcepersonnel, marketing (including advertising and promotional expenditures),warehousing and physical distribution of the product.

However, we have the right, at our election and soleexpense, to co-promote with E.R. Squibb the product in the territory. Pursuantto this co-promotion option, which we have exercised, we are entitled on andafter April 11, 2002 (at our sole expense) to have our field organizationparticipate in the promotion of the product consistent with the marketing planand development plans agreed upon by the parties, provided that E.R. Squibbretains the exclusive rights to sell and distribute the product. Except for ourexpenses incurred pursuant to the co-promotion option, E.R. Squibb isresponsible for 100% of the distribution, sales and marketing costs in theUnited States and Canada, and as between E.R. Squibb and ImClone Systems, eachis responsible for 50% of the distribution, sales, marketing costs and otherrelated costs and expenses in Japan. During the third quarter of 2004, wedecided to establish a sales force to maximize the potential commercialopportunities for ERBITUX and to serve as a foundation for the marketing offuture products derived either from within our pipeline or through businessdevelopment opportunities.

*Manufacture and Supply—**The*CommercialAgreement provides that the Company is responsible for the manufacture andsupply of all requirements of ERBITUX in bulk form active pharmaceuticalingredient (“API”) for clinical and commercial use in the territory, and thatE.R. Squibb will purchase all of its requirements of API for commercial usefrom the Company. The Company supplies API for clinical 

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use at the Company’s fullyburdened manufacturing cost plus a mark-up of 10%. The agreement also specifiesthat the Company should use reasonable efforts to reduce the fully burdenedmanufacturing cost of producing bulk ERBITUX over time. Specifically, beginningwith 2006 production of bulk ERBITUX, the agreement provides that the cost ofAPI should not exceed a predetermined price per gram. Any excess over suchamount will be shared equally by the Company and BMS.

Upon the expiration, termination or assignment of anyexisting agreements between ImClone Systems and third party manufacturers, E.R.Squibb will be responsible for processing API into the finished form of theproduct. Sales of ERBITUX to BMS for commercial use are reflected in the Company’sConsolidated Statements of Operations as Manufacturing revenue.

*Management—**The*parties haveformed the following committees for purposes of managing their relationship andtheir respective rights and obligations under the Commercial Agreement:

·       a Joint Executive Committee(the “JEC”), which consists of certain senior officers of each party. The JECis co-chaired by a representative of each of BMS and us. The JEC is responsiblefor, among other things, managing and overseeing the development and commercializationof ERBITUX pursuant to the terms of the Commercial Agreement, approving theannual budgets and multi-year expense forecasts, and resolving disputes,disagreements and deadlocks arising in the other committees;

·       aProduct Development Committee (the “PDC”), which consists of members of seniormanagement of each party with expertise in pharmaceutical drug developmentand/or marketing. The PDC is chaired by our representative. The PDC isresponsible for, among other things, managing and overseeing the developmentand implementation of the clinical development plans, comparing actual versusbudgeted clinical development and regulatory expenses, and reviewing theprogress of the registrational studies;

·       aJoint Commercialization Committee (the “JCC”), which consists of members ofsenior management of each party with clinical experience and expertise inmarketing and sales. The JCC is chaired by a representative of BMS. The JCC isresponsible for, among other things, overseeing the preparation and implementationof the marketing plans, coordinating the sales and commercial support effortsof E.R. Squibb and us, and reviewing and approving the marketing andpromotional plans for the product in the territory; and

·       aJoint Manufacturing Committee (the “JMC”), which consists of members of seniormanagement of each party with expertise in manufacturing. The JMC is chaired byour representative (unless a determination is made that a long-term inabilityto supply API exists, in which case the JMC will be co-chaired byrepresentatives of E.R. Squibb and us). The JMC is responsible for, among otherthings, overseeing and coordinating the manufacturing and supply of API and theproduct, and formulating and directing the manufacturing strategy for theproduct.

Any matter that is the subject of a deadlock (i.e., noconsensus decision) in the PDC, the JCC or the JMC will be referred to the JECfor resolution. Subject to certain exceptions, deadlocks in the JEC will beresolved as follows: (1) if the matter was also the subject of a deadlockin the PDC, by the co-chairperson of the JEC designated by us, (2) if thematter was also the subject of a deadlock in the JCC, by the co-chairperson ofthe JEC designated by BMS, or (3) if the matter was also the subject of adeadlock in the JMC, by the co-chairperson of the JEC designated by us. Allother deadlocks in the JEC will be resolved by arbitration.

*Restriction on Competing Products—**During*the periodfrom the date of the Commercial Agreement until September 19, 2008, the partieshave agreed not to, directly or indirectly, develop or commercialize acompeting product (defined as a product that has as its only mechanism ofaction an antagonism of the EGFR) in any country in the territory. In the eventthat any party proposes to commercialize a competing product or purchases orotherwise takes control of a third party which has developed or commercializeda 

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competing product, thensuch party must either divest the competing product within 12 months oroffer the other party the right to participate in the commercialization anddevelopment of the competing product on a 50/50 basis (provided that if theparties cannot reach agreement with respect to such an agreement, the competingproduct must be divested within 12 months).

*Ownership—**The*CommercialAgreement provides that we own all data and information concerning ERBITUX andthe product and, except for E.R. Squibb inventions, all processes, know-how andother inventions relating to the product and developed by either party or jointlyby the parties. E.R. Squibb, however, has the right to use all such data andinformation, and all such processes, know-how or other inventions, in order tofulfill its obligations under the Commercial Agreement.

*Product Recalls—**If*E.R. Squibb isrequired by any regulatory authority to recall the product in any country inthe territory (or if the JCC determines such a recall to be appropriate), thenE.R. Squibb and ImClone Systems shall bear the costs and expenses associatedwith such a recall (1) in the United States and Canada, in the proportionof 39% for ImClone Systems and 61% for E.R. Squibb and (2) in Japan, inthe proportion for which each party is entitled to receive operating profit orloss (unless, in the territory, the predominant cause for such a recall is thefault of either party, in which case all such costs and expenses shall be borneby such party).

*Mandatory Transfer—**Each*of BMS and E.R.Squibb has agreed under the Commercial Agreement that in the event it sells orotherwise transfers all or substantially all of its pharmaceutical business orpharmaceutical oncology business, it must also transfer to the transferee itsrights and obligations under the Commercial Agreement.

*Indemnification—**Pursuant*to theCommercial Agreement, each party has agreed to indemnify the other for (1) itsnegligence, recklessness or wrongful intentional acts or omissions, (2) itsfailure to perform certain of its obligations under the agreement, and (3) anybreach of its representations and warranties under the agreement.

*Termination—**Unless*earlierterminated pursuant to the termination rights discussed below, the CommercialAgreement expires with regard to the product in each country in the territoryon the later of September 19, 2018 and the date on which the sale of theproduct ceases to be covered by a validly issued or pending patent in suchcountry. The Commercial Agreement may also be terminated prior to suchexpiration as follows:

·       byeither party, in the event that the other party materially breaches any of itsmaterial obligations under the Commercial Agreement and has not cured suchbreach within 60 days after notice;

·       byE.R. Squibb, if the JEC determines that there exists a significant concernregarding a regulatory or patient safety issue that would seriously impact thelong-term viability of all products.

**StockholderAgreement**

BMS received the right to nominate two directors toour Board (each a “BMS director”) so long as its ownership interest in ImCloneSystems is 12.5% or greater. If BMS’ ownership interest is 5% or greater butless than 12.5%, BMS will have the right to nominate one BMS director, and ifBMS’ ownership interest is less than 5%, BMS will have no right to nominate aBMS director. If the size of the Board is increased to a number greater thantwelve, the number of BMS directors would be increased, subject to rounding,such that the number of BMS directors is proportionate to the lesser of BMS’then-current ownership interest and 19.9%. Notwithstanding the foregoing, BMSwill have no right to nominate any BMS directors if (1) we have terminatedthe Commercial Agreement due to a material breach by BMS or (2) BMS’ownership interest were to remain below 5% for 45 consecutive days.

Based on the number of shares of common stock acquiredpursuant to the tender offer and the fact that we currently have ten directors,BMS has the right to nominate two directors. BMS designated Andrew G. Bodnar,M.D., J.D., BMS’ Senior Vice President, Strategy and Medical &External Affairs, as 

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one of the initial BMSdirectors. The nomination of Dr. Bodnar was approved by the Board on November 15,2001. BMS has not yet designated an individual to fill the open Board seat.

*Voting of Shares—**During*the period inwhich BMS has the right to nominate up to two BMS directors, BMS and itsaffiliates are required to vote all of their shares in the same proportion asthe votes cast by all of our other stockholders with respect to the election orremoval of non-BMS directors.

*Committees of the Board of Directors—**During*the period inwhich BMS has the right to nominate up to two BMS directors, BMS also has theright, subject to certain exceptions and limitations, to have one member ofeach committee of the Board be a BMS director. In order to maintainindependence of the Audit, Nominating and Corporate Governance, andCompensation Committees, no BMS director is serving on these committees.

*Transfers of Shares—*NeitherBMS nor any of its affiliates may transfer any shares or enter into anyarrangement that transfers any of the economic consequences associated with theownership of shares, except (1) pursuant to registration rights granted toBMS with respect to the shares, (2) pursuant to Rule 144 under theSecurities Act of 1933, as amended or (3) for certain hedgingtransactions. Any such transfer is subject to the following limitations: (1) thetransferee may not acquire beneficial ownership of more than 5% of thethen-outstanding shares of common stock; (2) no more than 10% of the totaloutstanding shares of common stock may be sold in any one registeredunderwritten public offering; and (3) neither BMS nor any of itsaffiliates may transfer shares of common stock (except for registered firmcommitment underwritten public offerings pursuant to the registration rightsdescribed below) or enter into hedging transactions in any twelve-month periodthat would, individually or in the aggregate, have the effect of reducing theeconomic exposure of BMS and its affiliates by the equivalent of more than 10%of the maximum number of shares of common stock owned by BMS and its affiliatesat any time after September 19, 2001. Notwithstanding the foregoing, BMSBiologics may transfer all, but not less than all, of the shares of commonstock owned by it to BMS or to E.R. Squibb or another wholly-owned subsidiaryof BMS.

*Registration Rights—**We*granted BMScustomary registration rights with respect to shares of common stock owned byBMS or any of its affiliates.

***Collaborations with Merck KGaA***

*ERBITUX Development and License Agreement—**In*December 1998,the Company entered into a development and license agreement with Merck KGaAwith respect to ERBITUX. In exchange for granting Merck KGaA exclusive rightsto market ERBITUX outside of the United States and Canada and co-exclusivedevelopment rights in Japan, the Company received $30.0 million through December 31,2001 in up-front cash fees and early cash payments based on the achievement ofdefined milestones. An additional $30.0 million was received through December 31,2004, based upon the achievement of further milestones for which Merck KGaAreceived equity in the Company. The equity interests underlying the milestonepayments were priced at varying premiums to the then market price of the commonstock depending upon the timing of the achievement of the respectivemilestones.

Merck KGaA pays us a royalty on sales of ERBITUXoutside of the United States and Canada. In August 2001, Merck KGaA and weamended this agreement to provide, among other things, that Merck KGaA maymanufacture ERBITUX for supply in its territory and may utilize a third-partyto do so upon our reasonable acceptance. The amendment further released MerckKGaA from its obligations under the agreement relating to providing a guarantyunder a $30.0 million credit facility relating to the build-out of BB36. Inaddition, the amendment provides that the companies have co-exclusive rights toERBITUX in Japan, including the right to sublicense and Merck KGaA waived itsright of first offer in the case of a proposed sublicense by us of ERBITUX inour territory. In consideration for the amendment, we agreed to a reduction inroyalties’ payable by Merck KGaA on sales of ERBITUX in Merck KGaA’s territory.

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In September 2002, the Company entered into abinding term sheet, effective as of April 15, 2002, for the supply ofERBITUX to Merck KGaA, which replaces previous supply arrangements. The termsheet provides for Merck KGaA to purchase bulk and finished ERBITUX orderedfrom us during the term of the December 1998 development and licenseagreement at a price equal to our fully loaded cost of goods. The term sheetalso provided for Merck KGaA to use reasonable efforts to enter into its owncontract manufacturing agreements for supply of ERBITUX and obligates MerckKGaA to reimburse us for costs associated with transferring technology and anyother services requested by Merck KGaA relating to establishing its ownmanufacturing or contract manufacturing capacity.

In July 2006, the Company and Merck KGaA enteredinto agreements amending and supplementing the 1998 development and licenseagreement. As part of the agreements, the Company consented to Merck KGaA’ssublicense of certain intellectual property rights relating to the developmentand commercialization of an anti-EGFR antibody to Takeda Pharmaceutical Company(“Takeda”). Merck KGaA and Takeda signed an alliance in September 2005 forthe development and commercialization of matuzumab (EMD-72000), ahumanized EGFR-targeting monoclonal antibody. In consideration for the Company’sconsent, Merck KGaA agreed to pay the Company €2.5million within 30 days of the execution of the agreements and a further €5.0million within 30 days of the Company’s written consent to the sublicense. TheCompany received the first payment of €2.5 million in August of2006 and has deferred the revenue associated with this payment and isrecognizing it over the estimated service period. The Company expects to givewritten consent to sublicense in the first quarter of 2007. In addition, MerckKGaA agreed to increase its fixed royalty to 9.5% on net sales of ERBITUXoutside the U.S. and Canada, effective July 1, 2006. The agreements alsopromote freedom to operate in the development and commercialization ofmatuzumab outside the United States and Canada and of IMC-11F8 (afully-human EGFR-targeted IgG1 monoclonal antibody being developed by ImCloneSystems) within the United States and Canada through the granting of certainreciprocal rights, including the sharing of confidential technical information.This is in addition to the exclusive rights held by the Company to develop andcommercialize IMC-11F8 outside of the United States and Canada. Theagreements do not extend to key intellectual property rights in the U.S. andCanada, where the Company and its partner Bristol-Myers Squibb continue to holdexclusive licenses to key patents covering certain uses of EGFR-targetedmonoclonal antibodies.

***UCB S.A.***

In August 2005, the Company entered into aCollaboration and License Agreement with UCB S.A. (“UCB”), a company registeredin Belgium, for the development and commercialization of CDP-791, UCB’snovel, investigational PEGylated di-Fab antibody targeting VEGFR-2. Noupfront or milestone payments were payable under the Agreement. In the firstquarter of 2007, the Company terminated this agreement with UCB, largely due tosubstantial progress made in the development of 1121B and agreed to pay UCB $450,000as settlement of all previous amounts due related to expenses associated withthe co-development activities under the agreement. As part of this settlement,the Company will receive a single-digit royalty on net sales worldwide uponcommercialization of such indications. The Company had recorded as of December 31,2005 an expense of approximately $2.5 million in its financial statementsrelated to this agreement. As a result of the termination of this contract, theCompany reversed approximately $2.0 million in 2006 of the previously expensedamount  Therefore, the Company had aliability due to UCB of $450,000 and $2.5 million as of December 31, 2006and 2005, respectively.

**MANUFACTURING**

***ImClone Systems Manufacturing Facilities***

We own and operate a pilot manufacturing facility (“BB22”)for biologics in Branchburg, New Jersey for the manufacture of clinical studymaterials. At our pilot facility, we previously manufactured a portion of theERBITUX utilized for clinical studies. We now are using our pilot facility forsupporting the scale-up of ERBITUX manufacturing process improvements,developing the cell culture and purification processes for new antibodies andproducing antibodies for anticipated clinical studies. Our pilot facility is 

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operated in accordancewith current Good Manufacturing Practices (“cGMP”), which is a requirement forproduct manufactured for use in clinical studies and for commercial sale.

In July 2001, we completed construction and putinto operation an 80,000 square foot manufacturing facility, BB36, on ourBranchburg, New Jersey campus. BB36 contains three 10,000 liter (productionvolume) fermenters and is dedicated to the clinical and commercial productionof ERBITUX. During 2006, we completed a 5,000 square foot expansion foradditional office space in this facility. The total construction of BB36 wasapproximately $57.3 million. In December 2003, Swissmedic approved ERBITUXmanufactured at BB36 for commercial use in Switzerland. On June 18, 2004,the FDA granted a license to the BB36 facility for U.S. commercial supply. In May 2005,Team Biologics conducted a routine biannual cGMP inspection. Additionally, BB36had a satisfactory cGMP inspection by the Regierungspräsidium Darmstadt thatresulted in a Product Import license being granted to Merck KGaA in April 2003,covering the period November 2003 to October 2004. TheRegierungspräsidium completed and successfully closed a reinspection of BB36 inJuly 2005. Another reinspection will be scheduled in approximately twoyears from the last inspection date.

We constructed a 250,000 square foot multiple productmanufacturing facility (“BB50”) in Branchburg, New Jersey with capacity of upto 110,000 liters (production volume). Mechanical completion of BB50 wasreached in the fourth quarter of 2005. This facility has three distinct suitescapable of producing up to three different products concurrently. We also havethe ability to produce multiple products at each of the three suites. Wecompleted the commissioning and initial validation of Suite 1 by the endof the second quarter of 2006, and began production of ERBITUX for commercialuse in the second half of 2006. We have fitted Suite 2 with equipment buthave not determined when we will begin commissioning and validation of thisSuite. At this point, Suite 3 remains vacant until further determinationof its ultimate use. The total cost of BB50 through December 31, 2006amounted to approximately $331.4 million.

***Contract Manufacturing***

On March 17, 2005, the Company entered into afive-year multi-product supply agreement (the “Agreement”) with Lonza BiologicsPLC (“Lonza”) for the manufacture of biological material at the 5,000 literscale. The Company has discretion over which products to manufacture, which mayinclude later-stage clinical production of the Company’s antibodies currentlyin Phase I clinical testing and those nearing Phase I testing. The value ofproducing all batches allocated under the Agreement is approximately $68.0million, unless terminated earlier. The Agreement provides that the Company cancancel any batches at any time; however, depending on how much notice theCompany provides Lonza, the Company could incur a cancellation fee that variesbased on timing of the cancellation. This cancellation fee is only applicableif Lonza does not resell the slots reserved for the cancelled batches.

We rely entirely on third-party manufacturers forfilling and finishing services. If our current third-party manufacturers orcritical raw material suppliers fail to meet our expectations, we cannot beassured that we will be able to enter into new agreements with other suppliersor third-party manufacturers without an adverse effect on our business.

**MARKETING AND SALES**

Pursuant to the terms of the Commercial Agreement,E.R. Squibb has primary responsibility for distribution, marketing and sales ofERBITUX in the United States and Canada and will provide sales force personneland marketing services for ERBITUX. We have the right, at our election and soleexpense, to co-promote ERBITUX with E.R. Squibb. As part of our strategy todevelop the capacity to market our cancer therapeutic products, we haveexercised this co-promotion right and are therefore entitled to have our fieldorganization participate in activities supporting the sale and furthercommercial launch of ERBITUX. Pursuant to the terms of the CommercialAgreement, E.R. Squibb retains the exclusive rights to sell and distribute theproduct. Pursuant to our co-promotion rights, during the third quarter of 2004the Company decided to establish a field force of oncology sales professionalsto increase 

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the Company’s presence andprominence within the oncology community and help maximize the market potentialfor ERBITUX in its approved indications.

We will continue to evaluate future arrangements andopportunities with respect to other products we may develop in order tooptimize our profits and our distribution, marketing and sales capabilities.

**PATENTS ANDTRADEMARKS**

***General***

We seek patentprotection for our proprietary technology and products in the United States andabroad. Patent applications have been submitted and are pending in the UnitedStates, Canada, Europe and Japan, as well as other countries. The patentposition of biopharmaceutical firms generally is highly uncertain and involvescomplex legal questions. Our success will depend, in part, on whether we can:

·       obtainpatents to protect our own products;

·       obtain licenses to use thetechnologies of third parties, which may be protected by patents;

·       protectour trade secrets and know-how; and

·       operate without infringingthe intellectual property and proprietary rights of others.

***Patent Rights; Licenses***

We currently have exclusive licenses or assignments to91 issued patents worldwide that relate to our proprietary technology in theUnited States and foreign countries, 48 of which are issued United Statespatents. In addition, we currently have exclusive licenses or assignments toapproximately 81 families of patent applications.

***ERBITUX.******  ***We have an exclusivelicense from the University of California to an issued United States patent forthe murine form of ERBITUX, our EGFR antibody product. We believe that thispatent’s scope should be its literal claim scope as well as other antibodiesnot literally embraced but potentially covered under the patent law doctrine ofequivalents. Whether or not a particular antibody is found to be an equivalentto the antibodies literally covered by the patent can only be determined at thetime of a potential infringement, and in view of the technical details of thepotentially infringing antibody in question. Our licensor of this patent didnot obtain patent protection outside the United States for this antibody.

We are pursuing additional patentprotection relating to the field of EGFR antibodies in the treatment of cancerthat may limit the ability of third parties to commercialize EGFR antibodiesfor such use. Specifically, we are pursuing patent protection for the use ofEGFR antibodies in combination with chemotherapy to inhibit tumors or tumorgrowth. We have exclusively licensed from Rhone-Poulenc Rorer Pharmaceuticals,now known as Sanofi-Aventis, patent applications seeking to cover thetherapeutic use of antibodies to the EGFR in conjunction with anti-neoplasticagents. A U.S. patent, a Canadian patent and a European patent were issued inthis family. In December 2002, Opposition Proceedings seeking to revokethe European patent were brought by the Scripps Research Institute,Amgen Inc., Abgenix, Inc., and YM Biosciences Inc. An OppositionProceeding is an administrative process, the outcome of which may be that ourEuropean patent will be revoked. The Company has vigorously defended itsposition in this matter, which is suspended pending a final determination ofthe Yeda matter discussed under Item 3— “Legal Proceedings”.We have filed additional patent applications, based in part on our own research,that would cover the use of ERBITUX and other EGFR antibodies in conjunctionwith radiation therapy, and the use of ERBITUX and other EGFR inhibitors inrefractory patients, either alone or in combination with chemotherapy orradiation therapy. We have also filed patent applications that include claimson the use of conjugated forms of ERBITUX, as well as humanized forms of theantibody and fragments.

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Our license agreements with the University ofCalifornia and Sanofi-Aventis require us to pay royalties on sales of ERBITUXthat are covered by these licenses. We have entered into license agreementswith Genentech for rights to patents covering certain use of epidermal growthfactor receptor antibodies and with both Genentech and Centocor for rights topatents covering various aspects of antibody technology. Our agreements withboth Genentech and Centocor require us to pay royalties on the sale of ERBITUX thatare covered by these licenses.

There can be no assurance that patent applicationsrelated to the field of antibodies in the treatment of cancer to which we holdrights will result in the issuance of patents, that any patents issued orlicensed to our company related to ERBITUX or its use will not be challengedand held to be invalid or of a scope of coverage that is different from what webelieve the patent’s scope to be, or that our present or future patents relatedto these technologies will ultimately provide adequate patent coverage for orprotection of our present or future EGFR antibody technologies, products orprocesses. Until recently, patent applications were secret until patents wereissued in the U.S., or corresponding applications were published in foreigncountries, and because publication of discoveries in the scientific or patentliterature often lags behind actual discoveries, we cannot be certain that wewere the first to make our inventions, or that we were the first to file patentapplications for such inventions. In addition, patents do not give the holderthe right to commercialize technology covered by the patents, should ourproduction or our use be found by a court to be embraced by the patent ofanother.

In the event that we are called upon to defend and/orprosecute patent suits and/or related legal or administrative proceedings, suchproceedings are costly and time consuming and could result in loss of ourpatent rights, infringement penalties or both. Litigation and patent interferenceproceedings could result in substantial expense to us and significant diversionof efforts by our technical and management personnel. An adverse determinationin any such interference proceedings or in patent litigation, particularly withrespect to ERBITUX, to which we may become a party could subject us tosignificant liabilities to third-parties or require us to seek licenses fromthird-parties. If required, the necessary licenses may not be available onacceptable financial or other terms or at all. Adverse determinations in ajudicial or administrative proceeding or failure to obtain necessary licensescould prevent us, in whole or in part, from commercializing our products, whichcould have a material adverse effect on our business, financial condition andresults of operations.

In the event that there is patent litigation involvingone or more of the patents issued to us, there can be no guarantee that thepatents will be held valid and enforceable. The scope of patents may be calledinto question and could result in a decision by a court that the claims have adifferent scope than we believe them to have. Further, the outcome of patentlitigation is subject to intangibles that cannot be adequately quantified inadvance, including the demeanor and credibility of witnesses that will becalled to testify and the identity of the adverse party. This is especiallytrue in biotechnology-related patent cases that may turn on the testimony ofexperts as to technical facts upon which experts may reasonably disagree.

There can be no assurance that we will not be subjectto claims in patent suits that one or more of our products or processesinfringe third parties’ patents or violate the proprietary rights of thirdparties. Defense and prosecution of such patent suits can result in thediversion of substantial financial, management and other resources from ourother activities. An adverse outcome could subject us to significant liabilityto third-parties, require us to obtain licenses from third-parties, or requirethat we cease any related product development activities or product sales.

An adverse determination by a court in any such patentlitigation, or by the U.S. Patent and Trademark Office in a patent interferenceproceeding, particularly with respect to ERBITUX, to which we may become aparty, could subject us to significant liabilities to third-parties or requireus to seek licenses from third-parties, or result in loss in whole or part ofour ability to continue to sell our product. If required, the necessarylicenses may not be available on acceptable terms or at all. Adversedeterminations 

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in a judicial oradministrative proceeding or failure to obtain necessary licenses could preventus, in whole or in part, from commercializing our products, which could have amaterial adverse effect on our business, financial condition and results ofoperations.

***AngiogenesisInhibitors.******  ***With respect to our research oninhibitors of angiogenesis based on the flk-1* *receptor (VEGFR-2), weare the exclusive licensee from Princeton University of a family of patents andpatent applications covering recombinant nucleic acid molecules that encode themurine flk-1 receptor andantibodies to extracellular portions of the receptor and its human homolog,KDR. We are also the assignee of a family of patents and patent applicationsfiled by our scientists generally related to angiogenesis-inhibiting antibodiesto receptors that bind VEGF, for example human flt-1 (VEGFR-1) andKDR (VEGFR-2). One of the patents licensed from Princeton Universityclaims the use of flk-1receptor antibodies to isolate cells expressing the flk-1 receptor on their cell surfaces. Additionally, weare a co-owner of a patent application claiming the use of flk-1/KDR receptor antibodiesto isolate endothelial stem cells that express flk-1/KDR on their cell surfaces. At present, we areseeking exclusive rights to this invention from the co-owners. We have anexclusive license from the Ludwig Institute for Cancer Research for patentrights pertaining to antibodies that specifically bind flt-4 (VEGFR-3)and their use in cancer.

Our license from Princeton University requires us topay royalties on sales that would otherwise infringe the licensed patents,which cover antibodies to the flk-1/KDRreceptor.

IMC-1121B and other antibodies of the IMC-KDRfamily are fully-human monoclonal antibodies. Patents have been issued to otherbiotechnology companies that relate to the selection of fully human antibodiesor their manufacture. Therefore, though we have licensed such patents fromcertain companies in this field we may be required to obtain additionallicenses before we can commercialize our own fully-human monoclonal antibodies,including IMC-1121B.

We cannot be certain that we will ever be able toobtain such additional patent licenses related to fully-human and/orphage-derived monoclonal antibodies in the U.S. or in other territories of theworld where we would want to commercialize such IMC-KDR antibodies. Even if weare able to obtain other licenses as requested, there can be no assurance thatwe would be able to obtain a license on financial or other terms acceptable tous or that we would be able to successfully redesign our products or processesto avoid the scope of such patents. In either such case, such inability couldhave a material adverse effect on our business, financial condition and resultsof operations. We cannot guarantee that the cost of such licenses would notmaterially affect the ability to commercialize IMC-KDR antibodies.

There can be no assurance that others will not be, orhave not been, issued patents that may prevent the sale of one or more of ourproducts or the practice of one or more of our processes, or require licensingand the payment of significant fees or royalties by us to third-parties inorder to enable us to conduct business.

There can be no assurance that we will not be subjectto claims that one or more of our products or processes infringe other patentsor violate the proprietary rights of third-parties. In the event that we arecalled upon to defend and/or prosecute patent suits, the related legal andadministrative proceedings would be costly and time consuming and could resultin loss of patent rights, infringement penalties or both. In addition, defenseand prosecution of patent suits can result in the diversion of substantialfinancial, management and other resources from our other activities. An adverseoutcome could subject us to significant liability to third-parties, require usto obtain licenses from third-parties, or require us to cease any relatedproduct development activities or product sales and might have a materialadverse effect on our business.

***VE-Cadherin.******  ***We have obtained anexclusive license from ICOS Corporation to certain patent rights pertaining toVE-cadherin and antibodies thereto for the treatment of cancer in humans. Weare also the assignee of a family of patent applications filed by an employeerelated to methods of generating 

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therapeutically valuableantibodies that bind VE-cadherins. These two families of patent applicationscover cadherin molecules that are involved in endothelial cell interactions.These interactions are believed to be involved in angiogenic processes. Thesubject patents and patent applications also cover antibodies that bind to, andaffect the cadherin molecules. Our license from ICOS requires us to payroyalties on the sale of certain VE-cadherin antibodies.

***Phage DisplayTechnology.******  ***A number of antibodies that we aredeveloping, including our fully-human anti-EGFR monoclonal antibody IMC-11F8and our fully-human anti-KDR monoclonal antibody IMC-1121B arephage-derived antibodies, which means they are made using phage technology.Since patents have been issued to biotechnology companies that relate tophage-derived antibodies and their manufacture, we may be required to obtainlicenses under these patents before we can commercialize certain phage-derivedantibodies. In March 2003, we entered into a license with Dyax Corp. (“Dyax”)for certain of Dyax’s patent rights and know-how covering certain phage displaytechnology and a proprietary phage display library. This license also includessublicense or non-enforcement covenant rights from other companies that possesspatent and other intellectual property rights relating to phage displaytechnology. We believe, though we cannot be certain, that this license willprovide us with the freedom to operate in the development of IMC-11F8 andIMC-1121B as well as certain other phage-derived antibodies.

***Trademarks.******  ***ERBITUX,ERBITUX/cetuximab & antibody design logo, IMCLONE, IMCLONE SYSTEMS,IMCLONE SYSTEMS INCORPORATED, TARGETED ONCOLOGY and the ANTIBODY DESIGN(pantone #172 “Orange”), our corporate icon, are trademarks and/or servicemarks of ImClone Systems Incorporated. Applications are pending orregistrations have been issued for various of these marks in the United Statesand/or foreign jurisdictions. In October 2003, ExxonMobil Corporation (“ExxonMobil”)filed a Notice of Opposition against our ERBITUX/cetuximab & antibodydesign logo. We have entered into a settlement agreement with ExxonMobil thatallows us to continue using the ERBITUX/cetuximab & antibody logo.

***Trade Secrets.******  ***With respect to certainaspects of our technology, we rely, and intend to continue to rely, on ourconfidential trade secrets, unpatented proprietary know-how and continuingtechnological innovation to protect our competitive position. Such aspects ofour technology include methods of isolating and purifying antibodies and otherproteins, collections of plasmids in viable host systems, and antibodies thatare specific for proteins that are of interest to us. We cannot be certain thatothers will not independently develop substantially equivalent proprietaryinformation or techniques, or that we are free of the patent or other rights ofthird parties to commercialize this technology.

Relationships between usand our employees, scientific consultants and collaborators provide thesepersons with access to our trade secrets, know-how and technological innovationunder confidentiality agreements with the parties involved. Similarly, ouremployees and consultants enter into agreements with us that require that theydo not disclose confidential information of ours and that they assign to us allrights to any inventions relating to our activities made while in our employ orwhile consulting for us.

**GOVERNMENTREGULATION**

The research and development, manufacture and marketingof human therapeutic and diagnostic products are subject to regulation,primarily by the FDA in the United States and by comparable authorities inother countries. These national agencies and other federal, state and localentities regulate, among other things, research and development activities(including testing in animals and in humans) and the testing, manufacturing,handling, labeling, storage, distribution, import, export, record keeping,reporting, approval, advertising and promotion of the products that we aredeveloping. Noncompliance with applicable requirements can result in variousadverse consequences, including delay in approval or refusal to approve productlicenses or other applications, suspension or termination of clinical investigations,revocation of approvals previously granted, fines, criminal prosecution, recallor seizure of 

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products, injunctionsagainst shipping products and total or partial suspension of production and/orrefusal to allow a company to enter into governmental supply contracts.

The process of obtaining requisite FDA approval hashistorically been costly, time consuming, and uncertain. Current FDArequirements for a new human drug or biological product to be marketed in theUnited States include: (1) the successful conclusion of pre-clinicallaboratory and animal tests, if appropriate, to gain preliminary information onthe product’s safety; (2) filing with the FDA of an IND, to conduct humanclinical studies for drugs or biologics; (3) the successful completion ofadequate and well-controlled human clinical investigations to establish thesafety and efficacy of the product for its recommended use; (4) filing bya company and acceptance and approval by the FDA of a New Drug Application (“NDA”)for a drug product or a BLA for a biological product to allow commercialdistribution of the drug or biologic, and (5) FDA review of whether thefacility in which the drug or biologic is manufactured, processed, packed orheld meets standards designed to assure the product’s continued quality.Overall, conducting clinical studies is a lengthy, time-consuming and expensiveprocess.

Pre-clinical tests include the evaluation of theproduct in the laboratory and in animal studies to assess the potential safetyand efficacy of the product and its formulation. The results of thepre-clinical tests are submitted to the FDA as part of an IND to support theevaluation of the product in human patients. Historically, the results frompre-clinical testing and early clinical studies have often not been predictiveof results obtained in later clinical studies. A number of new drugs andbiologics have shown promising results in early clinical studies, but for whichthere was a subsequent failure to establish sufficient safety and efficacy datato obtain necessary regulatory approvals. Data obtained from pre-clinical andclinical activities are susceptible to varying interpretations, which maydelay, limit or prevent regulatory approval.

In addition, we may encounter regulatory delays orrejections as a result of many factors, including changes in regulatory policyduring the period of pre-clinical and clinical development.

Clinical studies involve administration of the productto patients under supervision of a qualified principal investigator. Suchstudies are typically conducted in three sequential Phases, although the Phasesmay overlap. In Phase I, the initial introduction of the drug into humanpatients, the product is generally tested for safety, dosage tolerance,absorption, metabolism, distribution, and excretion. Phase II typicallyinvolves studies in a limited patient population to: (1) determine thebiological or clinical activity of the product for specific, targetedindications; (2) determine dosage tolerance and optimal dosage; and (3) identifypossible adverse effects and safety risks. If Phase II evaluationsindicate that a product is effective and has an acceptable benefit-to-riskrelationship, Phase III studies may be undertaken to further evaluateclinical efficacy and to further test for safety within an expanded patientpopulation. Phase III studies are often the pivotal studies upon whichcommercial approval is sought, although earlier Phase studies can sometimessupport approval, particularly in the case of products approved on anaccelerated or fast track basis. Phase IV studies, or post-regulatoryapproval studies, may also be required to provide additional data on safety orefficacy.

United States law requires that studies conducted tosupport approval for product marketing be “adequate and well controlled.” Ingeneral, this means that either a placebo or a product already approved for thetreatment of the disease or condition under study must be used as a referencecontrol. Studies must also be conducted in compliance with all applicable lawsand regulations including good clinical practice, or GCP, and informed consentrequirements.

The FDA may prevent clinical studies from beginningif, among other reasons, it concludes that clinical subjects would be exposedto an unacceptable health risk. Studies may also be prevented from beginning byinstitutional review boards, who must review and approve all research involvinghuman subjects. The FDA and institutional review boards review the results ofthe clinical studies and may order the temporary or permanent discontinuationof clinical studies at any time if they believe the product 

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candidate exposes clinicalsubjects to an unacceptable health risk. Investigational products used inclinical studies must be produced in compliance with cGMP pursuant to FDAregulations.

Side effects or adverse events that are reportedduring clinical studies can delay, impede, or prevent regulatory approval.Similarly, adverse events that are reported after regulatory approval canresult in additional limitations being placed on a product’s use and,potentially, withdrawal of the product from the market. Any adverse event,either before or after marketing authorization, can result in product liabilityclaims against the Company.

During the course of, and following the completion ofclinical studies, the data are analyzed to determine whether the studiessuccessfully demonstrated safety and effectiveness, and whether a productapproval application may be submitted. In the United States, if the product isregulated as a drug, a New Drug Application, or NDA, must be submitted andapproved before commercial marketing may begin. If the product is regulated asa biologic, such as antibodies, a Biologics License Application, or BLA, mustbe submitted and approved before commercial marketing may begin. The FDA Centerfor Drug Evaluation and Research, or CDER, has responsibility for the reviewand approval of drugs, and, following reorganization at FDA, also has responsibility for the review andapproval of certain therapeutic biologics such as monoclonal antibodies,cytokines, growth factors, enzymes, interferons and certain proteins. The FDACenter for Biologics Evaluation and Research, or CBER, has responsibility forother biologics. Based on this re-distribution of responsibility, we expectthat most of our products will be reviewed by CDER. The NDA or BLA must includea substantial amount of data and other information concerning the safety andeffectiveness (and, in the case of a biologic, purity and potency) of thecompound from laboratory, animal and clinical testing, as well as data andinformation on manufacturing, product stability, and proposed product labeling.

Under the Prescription Drug User Fee Act, as amended,the FDA receives fees for reviewing an NDA or BLA and supplements thereto, aswell as annual fees for commercial manufacturing establishments and forapproved products. These fees can be significant. The NDA or BLA review feealone can exceed $500,000, although certain limited deferrals, waivers andreductions may be available.

Under applicable laws and FDA regulations, each NDA orBLA submitted for FDA approval is usually reviewed for administrativecompleteness and reviewability within 45 to 60 days following submissionof the application. If deemed complete, the FDA will “file” the NDA or BLA,thereby triggering substantive review of the application. The FDA can refuse tofile any NDA or BLA that it deems incomplete or not properly reviewable. If theFDA refuses to file an application, the FDA will retain 25% percent of the userfee as a penalty. The FDA has established performance goals for the review ofNDAs and BLAs—six months for priority applications and ten months forregular applications. However, the FDA is not legally required to complete itsreview within these periods and these performance goals may change over time.Moreover, the outcome of the review, even if generally favorable, typically isnot an actual approval but an “action letter” that describes additional workthat must be done before the application can be approved. The FDA’s review ofan application may involve review and recommendations by an independent FDAadvisory committee. Even if the FDA approves a product, it may limit theapproved therapeutic uses for the product as described in the product labeling,require that warning statements be included in the product labeling, requirethat additional studies be conducted following approval as a condition of theapproval, impose restrictions and conditions on product distribution,prescribing or dispensing in the form of a risk management plan, or otherwiselimit the scope of any approval.

Some of our cancer treatments may be used inconjunction with *in vitro*diagnostic products to test patients for particular traits. *In vitro* diagnostic products are generallyregulated by the FDA as medical devices. Before a medical device may bemarketed in the United States, the manufacturer generally must obtain eitherclearance through a 510(k) pre-market notification (“510(k)”) process orapproval through 

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the pre-market approvalapplication (“PMA”) process. Section 510(k) notifications may befiled only for those devices that are “substantially equivalent” to a legallymarketed predicate device. If a device is not “substantially equivalent” to alegally marketed predicate device, a PMA must be filed. The pre-market approvalprocedure generally involves more complex and lengthy testing, and a longerreview process than the 510(k) process.

Under current law, each domestic and foreign drug anddevice product-manufacturing establishment must be registered with the FDAbefore product approval. Domestic and foreign manufacturing establishments mustmeet strict standards for compliance with cGMP regulations and licensingspecifications after the FDA has approved an NDA, BLA or PMA for a productmanufactured at such facility. The FDA and foreign regulatory authoritiesperiodically inspect domestic and foreign manufacturing facilities whereapplicable.

Significant additional legal and regulatory requirementsalso apply after FDA approval to market under an NDA or BLA. Along with therequirement for ongoing adherence to cGMPs these requirements include, amongother things, requirements related to adverse events and other reporting,product advertising and promotion, and the need to submit appropriate new orsupplemental applications and obtain FDA approval for certain changes to theapproved product, product labeling or manufacturing process.

In the United States, the research, manufacturing,distribution, sale, and promotion of drug and biological products arepotentially subject to regulation by various federal, state and localauthorities in addition to the FDA, including the Centers for Medicare andMedicaid Services, other divisions of the United States Department of Healthand Human Services (e.g., the Office of Inspector General), and state and localgovernments. For example, sales and marketing and medical affairs programs mustcomply with a variety of federal, state and local laws, and regulations andprinciples, such as the Medicare-Medicaid Anti-Fraud and Abuse Act, as amended,the False Claims Act, also as amended, the privacy provisions of the HealthInsurance Portability and Accountability Act, or HIPAA, and the PharmaceuticalResearch and Manufacturers of America Code on Interactions with HealthcareProfessionals. Pricing and rebate programs must comply with the Medicaid rebaterequirements of the Omnibus Budget Reconciliation Act of 1990, as amended. Ifproducts are made available to authorized users of the Federal Supply Scheduleof the General Services Administration, additional laws and requirements apply.All of these activities are also potentially subject to federal and stateconsumer protection and unfair competition laws.

Moreover, we are now, and may become subject to,additional federal, state and local laws, regulations and policies relating tosafe working conditions, laboratory practices, the experimental use of animals,and/or the use, storage, handling, transportation and disposal of human tissue,waste and hazardous substances, including radioactive and toxic materials andinfectious disease agents used in conjunction with our research work.

Sales outside the United States of products we developwill also be subject to regulatory requirements governing human clinicalstudies and marketing for drugs and biological products and devices. Therequirements vary widely from country to country, but typically theregistration and approval process takes several years and requires significantresources. In most cases, if the FDA has not approved a product for sale in theUnited States the product may be exported to any country if it complies withthe laws of that country and has valid marketing authorization by theappropriate authority (1) in Canada, Australia, New Zealand, Japan,Israel, Switzerland or South Africa, or (2) in the European Union or acountry in the European Economic Area if the drug is marketed in that countryor the drug is authorized for general marketing in the European Economic Area.There are specific FDA regulations that govern this process.

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Our ability to earn sufficient returns on our productsmay depend in part on the extent to which government health administrationauthorities, private health coverage insurers and other organizations willprovide reimbursement for the costs of such products and related treatments.Significant uncertainty exists as to the reimbursement status of newly approvedhealth care products, and there can be no assurance that adequate third-partycoverage will be available.

In the United States, debate over the reform of thehealth care system has resulted in an increased focus on pricing. Althoughthere are currently no government price controls over private sector purchasesin the United States, federal legislation requires pharmaceutical manufacturersto pay prescribed rebates on certain drugs to enable them to be eligible forreimbursement under certain public health care programs. Various states haveadopted mechanisms under Medicaid and otherwise that seek to control drugprices, including by disfavoring certain higher priced drugs and by seekingsupplemental rebates from manufacturers. In the absence of new governmentregulation, managed care has become a potent force in the market place thatincreases downward pressure on the prices of pharmaceutical products. Newfederal legislation, enacted in December 2003, has altered the way inwhich physician-administered drugs covered by Medicare are reimbursed,generally leading to lower reimbursement for physicians. As of January 1,2005, physicians are reimbursed for physician-administered drugs, such asERBITUX, based on the Average Sales Price of the drug plus six (6) percent.The Average Sales Price is the average net price of a drug to all non-federalpurchasers. Price discounts will affect the drug reimbursement rates. To date,the Company has not discounted the sale of ERBITUX to non-federal purchasers,other than routine prompt payment discounts.

This focus on pricing has led to other governmentaction, and may lead to other action in the future. For example, in December 2003federal legislation was enacted to change United States import laws and expandthe ability to import lower priced versions of pharmaceutical products fromCanada, where there are government price controls. These changes to the importlaws will not take effect unless and until the Secretary of Health and HumanServices certifies that the changes will lead to substantial savings forconsumers and will not create a public health safety issue. The currentSecretary of Health and Human Services has indicated that there is not a basisto make such a certification at this time. However, it is possible that thisSecretary or a subsequent Secretary could make the certification in the future.In addition, legislative proposals have been made to implement the changes tothe import laws without any certification, and to broaden permissible importsin other ways. Even if the changes to the import laws do not take effect, andother changes are not enacted, imports from Canada and elsewhere may increasedue to market and political forces, and the limited enforcement resources ofthe FDA, the Customs Service, and other government agencies. For example,numerous states and localities have proposed programs to facilitate Canadianimports, and at least one locality has already begun such a program,notwithstanding questions raised by FDA about the legality of such actions. Weexpect that pressures on pricing results will continue.

In the EU, governments influence the price ofpharmaceutical products through their pricing and reimbursement rules andcontrol of national health care systems that fund a large part of the cost ofsuch products to consumers. The approach taken varies from member state tomember state. Some jurisdictions operate positive and/or negative list systemsunder which products may only be marketed once a reimbursement price has beenagreed. Other member states allow companies to fix their own prices formedicines, but monitor and control company profits. The downward pressure onhealth care costs in general, particularly prescription drugs, has become veryintense. As a result, increasingly high barriers are being erected to the entryof new products, as exemplified by the National Institute for ClinicalExcellence in the United Kingdom which evaluates the data supporting newmedicines and passes reimbursement recommendations to the government. Inaddition, in some countries cross-border imports from low-priced markets(parallel imports) exert a commercial pressure on pricing within a country.

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In Japan, the NationalHealth Ministry biannually reviews the pharmaceutical prices of individualproducts. In the past, these reviews have resulted in price reductions.

**ENVIRONMENTAL ANDSAFETY MATTERS**

We use hazardouschemicals, biological agents and various radioactive isotopes and compounds inour research and development and our manufacturing activities. Accordingly, weare subject to and seek to comply with, applicable regulations under federal,state and local laws regarding employee safety, environmental protection andhazardous substance control. We have made and will continue to makeexpenditures for environmental compliance, environmental protection andemployee safety. Such expenditures have not had, and in the opinion ofmanagement are not expected to have a material effect on our financialposition, results of operation, capital expenditures or competitive position.However, these laws may change, our processes may change, or other facts mayemerge which could affect our operations, business or assets and therefore theamount and timing of expenditures in the future may vary substantially fromthose currently anticipated.

**COMPETITION**

Competition in the biopharmaceutical industry isintense and based significantly on scientific, technological and market factors.These factors include the availability of patent and other protection fortechnology and products, the ability to commercialize technologicaldevelopments and the ability to obtain governmental approval for testing,manufacturing and marketing. We compete with specialized biopharmaceuticalfirms in the United States, Europe and elsewhere, as well as a growing numberof large pharmaceutical companies that are applying biotechnology to theiroperations. Many biopharmaceutical and large pharmaceutical companies havefocused their development efforts in the human therapeutics area, includingcancer. Many major pharmaceutical companies have developed or acquired internalbiotechnology capabilities or made commercial arrangements with otherbiopharmaceutical companies. Further, such companies have substantially greaterfinancial resources and greater access to the capital markets than we do. Thesecompanies, as well as academic institutions, governmental agencies and privateresearch organizations, also compete with us in recruiting and retaining highlyqualified scientific, technical and professional personnel and consultants.

We are aware of certain products under development ormanufactured by competitors that are used or marketed for the prevention, diagnosis,or treatment of certain diseases that we have targeted for product development.Various companies are developing or commercializing biopharmaceutical productsthat potentially compete directly with our commercial product and productcandidates. These include areas such as: (1) the use of biopharmaceuticaland pharmaceutical products targeted to the EGFR or antibodies to that receptorto treat cancer; (2) the existence and development of inhibitors toangiogenesis; and (3) the existence and development of inhibitors to IGF.Currently there is one small molecule EGFR inhibitor approved by the FDA. OSIPharmaceuticals, Inc. and Genentech, Inc. received approval from theFDA for TarcevaTM (erlotinib) for the treatment of patients with locallyadvanced or metastatic non-small cell lung cancer after failure of at least oneprior chemotherapy regimen and for first-line pancreatic cancer when used incombination with Gemzar. AstraZeneca Pharmaceutical’s IRESSA® (gefitinib), asmall molecule EGFR inhibitor has been withdrawn from the market after failingits confirmatory study with non-small cell lung cancer, yet they have ongoingstudies in various tumor types. In addition, several product candidates are inadvanced stages of clinical studies. We are aware of several companies thathave potential antibody or other product candidates in clinical testing thattarget the EGFR and therefore may compete with our lead product, ERBITUX. Thesecompanies include, but are not limited to: (1) Amgen, Inc. whichreceived approval in September 2006 for their IgG2 fully-human monoclonalantibody, panitumumab, for use as a single agent for highly refractorycolorectal cancer (2) Pfizer, Inc.; 

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(3) GlaxoSmithKlineplc; (4) Novartis; (5) Merck KGaA; (6) Wyeth; (7) Medarex;and (8) YM Bioscience Inc.

On February 26, 2004, Genentech received FDAapproval for Avastin® for treatment in first-line metastatic colorectal cancer.Avastin® (including second-line CRC and first-line non-small cell lung cancerindications) is an approved therapeutic antibody designed to inhibit vascularendothelial growth factor (VEGF). While Avastin® does not target the EGFR andis indicated for a patient population different than the patient population inthe pivotal studies we submitted as the basis of the FDA’s approval for ERBITUX(i.e., previously-untreated metastatic colorectal cancer patients versusirinotecan-refractory metastatic colorectal cancer patients), it is competingsignificantly with ERBITUX as a treatment for colorectal cancer and may competesignificantly with ERBITUX as a treatment for other cancers. We believe that,notwithstanding the fact that the FDA has approved Avastin® and ERBITUX for thetreatment of metastatic colorectal cancer in different indications, physicianshave prescribed Avastin® outside of its approved indication and within ERBITUX’sapproved indications. If physicians continue or accelerate such prescription ofAvastin® outside of its approved indication, the prescription volume or marketshare of ERBITUX within its approved indication may be limited or may diminish.

During the third quarter of 2006, Amgen received FDAapproval for VectibixTM (panitumumab), which is indicated as a monotherapy forthe treatment of patients with EGFR-expressing metastatic colorectal cancer whohave disease progression, on or following fluoropyrimidine-, oxaliplatin- andirinotecan- containing regimens. We believe that ERBITUX’s strength andleadership in clinical data, the product’s established market presence,combined with our strategic planning and tactical execution will effectively positionus to address our competition within the colorectal marketplace, however theaddition of this direct competitor’s drug will likely adversely impact themarketability of ERBITUX.

We expect that ourproducts under development and in clinical studies will address major marketswithin the cancer sector, and potentially markets in other therapeutic areas.Our competition will be determined in part by the potential indications forwhich drugs are developed and ultimately approved by regulatory authorities.Additionally, the timing of market introduction of some of our potentialproducts or of competitors’ products may be an important competitive factor.Accordingly, the relative speed with which we can develop products, completepre-clinical testing, clinical studies and approval processes and supplycommercial quantities to market are expected to be important competitivefactors. We expect that competition among products approved for sale will bebased on various factors, including product efficacy, safety, reliability,availability, price, patent position, manufacturing capacity and capability,distribution capability and government action.

**OUR EMPLOYEES**

We have assembled aqualified business, professional and scientific staff with a variety ofcomplementary skills in a broad base of areas, including legal, finance,advanced research technologies, oncology, immunology, molecular and cellbiology, antibody engineering, protein and medicinal chemistry andhigh-throughput screening. We believe that we have been successful to date inattracting and retaining skilled and experienced business and scientificprofessionals. We have also recruited a staff of technical and professionalemployees to carry out manufacturing at our Branchburg, New Jersey facilities.Of our 993 full-time personnel on January 31, 2007, 865 were employed atour New Jersey facilities and 128 were employed at our New York headquarters.Our staff includes 53 persons with Ph.D.’s and 16 with M.D.’s.

**INDUSTRY SEGMENT**

We operate in only oneindustry segment—biotechnology. We do not have any foreign operations, and ourbusiness is not seasonal.

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**ITEM 1A.**        RISKFACTORS

**Risks Relating toOur Business and Other Matters**

**The recent changesin the composition of our Board of Directors do not constitute a “change incontrol.” However, if in the future additional persons are added to the Boardof Directors who are not deemed incumbent directors under certain of ouremployee benefit plans, a “change in control” may occur which may adversely affectour business.**

The recent changes in thecomposition of our Board of Directors did not constitute a “change in control”for purposes of certain severance and compensation agreements entered into bythe Company. However, if in the future additional persons who are not deemedincumbent directors for purposes of such agreements are added to the Board ofDirectors, a “change in control” may occur. Those agreements define incumbentdirectors as the directors serving on the date of the agreement and directorswhose election was approved by two-thirds vote of the incumbent directors;provided that directors initially elected as a result of an actual orthreatened proxy solicitation or election will not be deemed incumbentdirectors. If a “change in control” is deemed to occur, covered employees maybecome eligible for additional compensation if their employment is terminatedwithout cause or if they leave the Company for good reason (as defined in therelevant agreements and plan documents) following such change in control. Inaddition, under certain circumstances, covered employees’ equity awards mayalso vest in full. If this occurs, we may bear additional expenditures toretain or replace the services of covered employees.

**ERBITUX now facesdirect competition, which will likely hurt its marketability.**

During the third quarterof 2006, the FDA approved the drug VectibixTM (panitumumab), which ismanufactured by Amgen, a major pharmaceutical company that has considerablygreater financial, research, clinical, regulatory, manufacturing, and marketingresources than we do. VectibixTM competes directly with ERBITUX in one of thefour indications for which ERBITUX has been approved and the addition of thisdirect competitor’s drug may hurt the marketability of ERBITUX.

**Royalty andmanufacturing revenue from sales of ERBITUX represent a substantial portion ofour revenues. If ERBITUX does not receive continued market acceptance, salesmay not continue and we may not earn sufficient revenues.**

Our future growthand a significant portion of our future revenues depend on the continuedcommercial success of ERBITUX, our only FDA-approved product. We cannot becertain that ERBITUX will continue to be licensed or approved in the UnitedStates or in any foreign market. A number of factors may affect the rate andlevel of market acceptance of ERBITUX, including:

·       The perception byphysicians and other members of the healthcare community of ERBITUX’s safety orefficacy or that of competing products;

·       The effectiveness of ourand BMS’ sales and marketing efforts in the United States and the effectivenessof Merck KGaA’s sales andmarketing efforts outside the United States;

·       The ability to obtainadditional FDA approvals to market ERBITUX in additional treatment indicationsand tumor types;

·       Any unfavorable publicity concerning the Company,ERBITUX or competitive drugs;

·       Theprice of ERBITUX relative to other drugs or competing treatments;

·       Theavailability and level of third-party reimbursement for sales of ERBITUX;

·       Thecontinued availability of adequate supplies of ERBITUX to meet demand; and

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·       Regulatorydevelopments related to the manufacture or continued use of ERBITUX.

If ERBITUX does notcontinue to be accepted, our revenues would decline, which would impact ourprofitability and the price of our common stock.

**We depend on BMSand Merck KGaA to co-promote market and sell ERBITUX. If either BMS or MerckKGaA becomes unable to meet its obligations, or we fail to adequately maintainour relationship with these partners, it would negatively impact our revenuesand harm our business.**

Under our agreement withBMS, BMS has the exclusive right to distribute ERBITUX in the United States andCanada, in exchange for which we receive royalty payments of 39% of BMS’ netsales of ERBITUX in the United States and Canada. Under our agreement withMerck KGaA, Merck has the exclusive right to market ERBITUX outside of theUnited States, Canada and Japan, in exchange for which we receive royaltypayments based on Merck’s gross profit from ERBITUX sales. These royaltypayments from BMS and Merck represent a significant portion of our currentrevenues. In addition, we receive milestone payments and reimbursements ofvarious regulatory and clinical expenses as well as certain marketing andadministrative expenses from BMS and Merck. Our reliance on these relationshipscreates a number of potential risks, including the risk that our corporatepartners may not devote sufficient resources to our programs or product. Ifeither BMS or Merck becomes unable to market effectively and sell sufficientquantities of ERBITUX, or otherwise unable to meet its contractual obligations,our revenues and/or profitability may be negatively impacted due to decreasedrevenues or increased commercial expenses on our part.

Recently, we informed BMS that we are not generallypleased with the results of our relationship with them. This led to a series ofdiscussions between us and BMS with respect to the relationship. No agreements,arrangements or understandings have been reached with respect to the mattersunder discussion and no assurance can be given that any will result.

**We operate in ahighly competitive industry, including in terms of product pricing, that issubject to rapid and significant technological change.**

The pharmaceuticalindustry in which we operate is highly competitive. Our present and potentialcompetitors include major pharmaceutical and biotechnology companies, as wellas specialty pharmaceutical firms. Certain of these companies have considerablygreater financial, research, clinical, regulatory, manufacturing, and marketingresources than we do. We have already experienced significant competition toERBITUX from Avastin® (bevacizumab) (a non-chemotherapeutic biopharmaceuticalproduct manufactured by Genentech, Inc. and approved by the FDA as first-and second-line treatment for patients with metastatic colorectal cancer and asfirst-line treatment in non-small cell lung cancer). Xeloda® (capecitabine) (achemotherapeutic biopharmaceutical product manufactured by Roche Laboratories, Inc.and also approved by the FDA as a first-line treatment for patients withmetastatic colorectal cancer) has also presented competitive challenges.VectibixTM (panitumumab) (an IgG2 anti-EGFR monoclonal antibody manufactured byAmgen and approved by the FDA as a single agent for patients where fouracil,oxaliplatin and irinotecan have failed). We believe that, notwithstanding thefact that the FDA has approved Avastin®, Xeloda®. VectibixTM and ERBITUX for the treatment of metastaticcolorectal cancer in different indications, physicians have prescribed****each****outside of their approvedindications and within ERBITUX’s approved indications. ERBITUX is priced at apremium to all of these agents for a monthly course of therapy. We are alsoaware of products in development at other biotechnology or pharmaceuticalcompanies that, if successful in clinical trials and approved for marketing,may be priced competitively and compete with ERBITUX for the indication forwhich we have FDA approval, or for indications for which we are seeking, or mayseek, FDA approval. Business arrangements among our competitors may increasecompetition and the resources available to these competitors. In addition, thepharmaceutical industry has undergone, and is expected to continue to undergo,rapid and 

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significanttechnological change, and we expect competition to increase with technicaladvances. The development of products or processes by our competitors withsignificant advantages over those that we are seeking to develop could causethe marketability of our products to stagnate or decline.

**We are subject toextensive governmental regulation. If we are unable to obtain or maintainregulatory approvals for our product or product candidates, we will not be ableto market our product or further develop our product candidates.**

We are subject to stringent regulation with respect toproduct safety and efficacy by various international and U.S. federal, stateand local authorities. Of particular significance are the FDA’s requirementscovering research and development, testing, manufacturing, quality control,labeling and promotion of drugs for human use. Any biopharmaceutical that wemay develop cannot be marketed in the United States until it has been approvedby the FDA, and then can only be marketed for the indications and claimsapproved by the FDA. As a result of these requirements, the length of time, thelevel of expenditures and the laboratory and clinical information required forapproval of an NDA or a BLA, or any supplements thereto, are substantial andcan require a number of years, and the ability to obtain regulatory approval isuncertain. In addition, after any of our products receives regulatory approval,it remains subject to ongoing FDA regulation, including with respect to, forexample, changes to the product, its manufacturing or label, new or revisedregulatory requirements for manufacturing practices, additional clinical studyrequirements, restricted distribution, written warnings to physicians, aproduct recall, and withdrawal of a previously obtained approval. Similarlyextensive regulation exists outside of the United States, including in Europeand Japan.

We cannot be sure that we will be able to receivenecessary regulatory approvals on a timely basis, if at all, for any of theproduct candidates we are developing or that we can maintain or receive anyadditional necessary regulatory approvals for ERBITUX. Any delay in obtainingsuch approval or failure to maintain regulatory approvals could prevent us frommarketing our product and would have a material adverse effect on our business.

Moreover, it is possiblethat the current regulatory framework could change or additional regulationscould arise at any stage during our product development or marketing processes,which may affect our ability to obtain or maintain approval of our products.

**Our revenues willdiminish if our collaborators fail to obtain acceptable prices or adequatereimbursement for ERBITUX from third-party payors.**

All our revenues from ERBITUX are based on sales ofthe product by our two collaborators, BMS and Merck KGaA. The continuingefforts of U.S. and foreign government and third-party payors to contain orreduce the costs of health care may limit the revenues that we earn from thesesales of ERBITUX. If government and other third-party payors do not provideadequate coverage and reimbursement for our product, physicians may not prescribeit.

In some foreign markets, pricing and profitability ofprescription pharmaceuticals are subject to government control. In the UnitedStates, there is, and we expect that there will continue to be, federal, stateand local legislation aimed at imposing similar controls. In addition, weexpect managed care and government initiatives in the United States to continueto put pressure on the pricing of pharmaceutical products. Cost controlinitiatives would decrease the price received by our collaborators for any ofour products in the future. Further, cost control initiatives would impair ordiminish our ability or incentive, or the ability or incentive of our partnersor potential partners, to commercialize our other product candidates, andaccordingly, our ability to earn revenues.

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Our ability tocommercialize any other product candidates, alone or with collaborators, willcontinue to depend in part on the availability of reimbursement from:

·       governmentand health administration authorities, including Medicare and Medicaid;

·       privatehealth insurers; and

·       otherthird-party payors.

Third-party payors,including Medicare, are increasingly challenging the prices charged for medicalproducts and services. Government and other third-party payors increasingly arelimiting both coverage and level of reimbursement for new drugs and, in somecases, refusing to provide coverage for a patient’s use of an approved drug forpurposes not approved by the FDA.

**Our royalty andcollaborative agreement revenues could vary significantly and may adverselyimpact our business.**

Royalty andcollaborative agreement revenues in future periods could vary significantly.Major factors affecting these revenues include, but are not limited to:

·       Variationsin BMS’ and Merck KGaA’s and other licensees’ sales of licensed products;

·       Theexpiration or termination of existing arrangements with our collaborativepartners, particularly Merck KGaA and BMS, which may include development andmarketing arrangements for our products in the U.S., Europe and other countriesoutside the United States;

·       Thetiming of U.S. and non-U.S. approvals, if any, for our products licensed toBMS, Merck KGaA and other licensees;

·       Theinitiation of new collaborative agreements with other companies;

·       Thefailure or refusal of a licensee to pay royalties;

·       Theexpiration or invalidation of our patents or licensed intellectual property;

·       Decreasesin licensees’ sales of our products due to competition, manufacturingdifficulties or other factors affecting sales of products, including any safetyissues; and

·       Disputesarising with respect to the interpretation of provisions in existing or futureagreements with our collaborative partners.

If we are unable to earn sufficient revenues fromERBITUX, our operating results or financial condition could be adverselyaffected.

**We will be requiredto expend significant resources for research and development of our products indevelopment and these products may not be developed successfully, which wouldadversely affect our prospects for future revenue growth and our stock price.**

Our only approved product is ERBITUX while our productcandidates are still undergoing clinical trials and are in the early stages ofdevelopment. Any successful development of our product candidates is highlyuncertain and depends on a number of factors, many of which are beyond ourcontrol. In addition, each of our product candidates under development willrequire significant additional research and development resources to beexpended prior to their commercialization. Even if we spend substantial amountson research and development, our potential products may not be developedsuccessfully. If the product candidates on which we have expended significantamounts for research and development are not commercialized, we will not earn areturn on their research and development expenditures, which would adverselyaffect our prospects for future revenue growth and our stock price.

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**Difficulties ordelays in product manufacturing and finishing could cause shortfalls in thesupply of ERBITUX or our product candidates currently being developed whichwould harm our business and, in the case of ERBITUX, our ability to meet ourfinancial obligations.**

Cardinal Health Inc. (“Cardinal”) is currentlyour primary provider of filling and finishing services—the final stage ofmanufacturing for ERBITUX. On January 25, 2007, Cardinal announced it hadreached an agreement to sell its Pharmaceutical Technologies and Servicessegment (which includes its fill-finish business) to Blackstone Group. Inaddition, we currently manufacture ERBITUX at our BB36 manufacturing facility,our BB50 manufacturing facility and through Cardinal. Any prolonged interruptionin the operations of our or our contractors’ manufacturing and finishingfacilities could result in cancellations of shipments, loss of product in theprocess of being manufactured, or a shortfall of available product inventory. Anumber of factors could cause interruptions, including a failure of our or ourcontractors’ manufacturing and finishing facilities to obtain FDA approval andmaintain compliance with current good manufacturing practice requirements,changes in the FDA’s regulatory requirements or standards that requiremodifications to our manufacturing processes, action by the FDA that results inthe halting of production of one or more of our products due to regulatoryissues, a contract manufacturer going out of business, natural or otherdisasters, or other similar factors. Because our manufacturing and finishingprocesses and those of our contractors are highly complex and are subject to alengthy FDA approval process and extensive ongoing regulation, alternativequalified production capacity may not be available on a timely basis or at all.We may also experience insufficient available capacity to manufacture existingor new products which could cause shortfalls of available product inventory.Difficulties or delays in our and our contractors’ manufacturing and supply ofexisting or new products could increase our costs, cause us to lose revenue ormarket share and damage our reputation. However, we are currently in theprocesss of taking the steps necessary to qualify an additional fill-finishprovider.

Although the FDA has approved our BB36 manufacturingfacilities and the facilities have passed multiple subsequent inspections, ifwe are unable to maintain FDA approval for BB36, it may cause shortfalls in ourproduct inventory which would negatively impact our revenues and our business.

The Company expects tofile a supplemental Biological License Application with the FDA for approval ofour BB50 manufacturing facility in the first quarter of 2007, however, thereare no guarantees that the FDA will approve it. If the FDA does not approve ourBB50 manufacturing facility, then we will not be able to sell the ERBITUXmanufactured there. As of December 31, 2006, we have capitalizedapproximately $35.5 million of inventory produced in BB50.

**Our marketingpartners may experience pressure to lower the price of ERBITUX because of newand/or proposed federal legislation, which would reduce our royalty revenue andmay harm our business.**

Federal legislation hasaltered the way in which physician administered drugs covered by Medicare, suchas ERBITUX, are reimbursed, generally leading to lower reimbursement levels.This legislation also added an outpatient prescription drug benefit toMedicare, effective January 2006. The outpatient prescription drug benefitis provided primarily through private entities, which will attempt to negotiateprice concessions from pharmaceutical manufacturers, including ourcollaborators. These negotiations may increase pressures to lower pricing forERBITUX. While the law specifically prohibits the United States government frominterfering in price negotiations between manufacturers and Medicare drug plansponsors, some members of Congress are pursuing legislation that would permitthe United States government to use its enormous purchasing power to demanddiscounts from pharmaceutical companies, thereby creating de facto pricecontrols on prescription drugs, such as ERBITUX. In addition, the new lawcontains triggers for Congressional consideration of cost containment measuresfor Medicare in the event Medicare cost increases exceed a certain level. Thesecost containment measures could include some sorts of limitations onprescription drug prices that our collaborators charge for ERBITUX which wouldreduce our royalty revenue and harm our business.

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**If we becomesubject to importation of products from Canada and other countries, it willaffect our profitability and harm our business.**

ERBITUX and other products that we may develop maybecome subject to competition from lower priced imports from Canada, Mexico andother countries where government price controls or other market dynamics haveresulted in lower priced products. The ability of patients and other customersto obtain these lower priced imports has grown significantly as a result of theInternet, an expansion of pharmacies in Canada and elsewhere targeted toAmerican purchasers, the increase in U.S.-based businesses affiliated withCanadian pharmacies marketing to American purchasers and other factors. Many ofthese foreign imports are illegal under current law. However, the volume ofimports continues to rise due to the limited enforcement resources of the FDAand the U.S. Customs Service, and the pressure in the current politicalenvironment to permit the imports as a mechanism for expanding access to lowerpriced medicines.

In addition, in December 2003, federallegislation was enacted to modify United States import laws and expand theability for lower priced pharmaceutical products to be imported from Canada,where government price controls have been enacted. These changes to the importlaws will not take effect unless and until the Secretary of Health and HumanServices certifies that the changes will lead to substantial savings forconsumers and will not create a public health safety issue. The currentSecretary of Health and Human Services has indicated that there is not a basisto make such a certification at this time. However, it is possible that thisSecretary or a subsequent Secretary could make such a certification in thefuture.

In addition, legislation has been proposed toimplement the changes to the import laws without any requirement forcertification from the Secretary of Health and Human Services, and to broadenpermissible imports in other ways. Even if these changes to the import laws donot take effect, and other changes are not enacted, lower priced imports ofproducts from Canada and elsewhere may continue to increase due to market andpolitical forces, and the limited enforcement resources of the FDA, the U.S.Customs Service, and other government agencies. For example, state and localgovernments have suggested that they may import drugs from Canada for employeescovered by state health plans or others, and some have already enacted suchplans.

Lower priced imports willadversely affect our profitability. This impact could become more significantin the future, and the impact could be even greater if there is a furtherchange in the law or if state or local governments take further steps to permitlower priced imports from abroad.

**We depend on keyemployees in a competitive market for skilled personnel, and the loss of theservices of any of our key employees would affect our ability to develop ourbusiness.**

We are highly dependent onthe principal members of our management, operations and scientific staff. Weexperience intense competition for qualified personnel. Our future successdepends in part on the continued service of our executive management andscientific personnel and our ability to recruit, train and retain highlyqualified management, scientific, manufacturing and sales and marketingpersonnel. If we lose the services of any of these personnel, our research andproduct development and marketing goals, including the maintenance of relationshipswith leading research institutions and key collaborators, could be delayed orcurtailed. In addition, we do not maintain “key man” life insurance on any ofour employees. As a result, we may be unable to minimize the negative impact onour business stemming from the loss of a key employee.

**The law or FDApolicy could change and expose us to competition from “generic” or “follow-on”versions of our products, which may impact our market share and harm ourbusiness.**

Under current U.S. law and FDA policy, genericversions of conventional chemical drug compounds, sometimes referred to assmall molecule compounds, may be approved through an abbreviated approvalprocess. In general terms, the generic applicant references an approvedinnovator product for which full 

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clinical datademonstrating safety and effectiveness exist for the approved conditions ofuse. The generic applicant in turn need only demonstrate that its product hasthe same active ingredient(s), dosage form, strength, route of administration, andconditions of use (labeling) as the referenced innovator drug, and that thegeneric product is absorbed in the body at the same rate and to the same extentas the referenced innovator drug (this is known as bioequivalence). Inaddition, the generic application must contain information regarding themanufacturing processes and facilities that will be used to ensure productquality, and must contain certifications to patents listed with the FDA for thereferenced innovator drug.

There is no such abbreviatedapproval process under current law for biological products approved under thePublic Health Service Act through a BLA, such as monoclonal antibodies,cytokines, growth factors, enzymes, interferons and certain other proteins.However, various proposals have been made to establish an abbreviated approvalprocess to permit approval of generic or follow-on versions of these types ofbiological products. The proposals include proposals for legislation, andproposals for the FDA to extend its existing authority to this area. Forexample, some have proposed that the FDA allow a generic or follow-on copy ofcertain therapeutic biologics to be approved under an existing mechanism knownas a 505(b)(2) application. A 505(b)(2) application is a form of anNDA, where the applicant does not have a right to reference some of the databeing relied upon for approval. Under current regulations, 505(b)(2) applicationscan be used where the applicant is relying in part on published literature oron findings of safety or effectiveness in another company’s NDA 505(b)(2) applicationshave not been used to date for therapeutic biologic products. In addition, theuse of 505(b)(2)  applications even for conventional chemical drugproducts is the subject of ongoing legal challenge. It is thus not clear whatthe permitted use of a 505(b)(2) application might be in the future forbiologics products, or whether any other proposals on generic or follow-onbiologics will be adopted. However, if the law is changed or if the FDA somehowextends its existing authority in new ways, and third parties are permitted toobtain approvals of versions of our products through an abbreviated approvalmechanism and without conducting full clinical studies of their own, it couldadversely affect our business. Such products would be significantly less costlythan ours to bring to market, and could lead to the existence of multiple lowerpriced competitive products. This would substantially limit our ability toobtain a return on the investments we have made in those products.

**Risks Relating toIntellectual Property and Legal Matters**

**Protecting ourproprietary rights is difficult and costly. If we fail to adequately protect orenforce our proprietary rights, we could lose revenue.**

Our success depends in large part on our ability toobtain, maintain and enforce our patents. Our ability to commercialize anyproduct successfully will largely depend on our ability to obtain and maintainpatents of sufficient scope to prevent third parties from developing similar orcompetitive products. In the absence of patent protection, competitors maycause a negative impact to our business by developing and marketingsubstantially equivalent products and technology.

Patent disputes are frequent and can preclude thecommercialization of products. We have in the past been, are currently, and mayin the future be, involved in material patent litigation, such as the mattersdiscussed under “Part I—Item 3. Legal Proceedings”. Patent litigation istime-consuming and costly in its own right and could subject us to significantliabilities to third parties. In addition, an adverse decision could force usto either obtain third-party licenses at a material cost or cease using thetechnology or product in dispute.

The existence of patentsor other proprietary rights belonging to other parties may lead to ourtermination of the research and development of a particular product or cause usto obtain third-party licenses at potentially material costs. We believe thatwe have strong patent protection or the potential for strong patent protectionfor our product and product candidates. However, it is for the courts and/orother governmental agencies in the U.S. and in other jurisdictions ultimatelyto determine the strength of that 

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patentprotection. We hold patents or licenses to patents relating to murineantibodies as well as patents and licenses relating to the therapeutic use ofEGFR antibodies. These patents expire on various dates, the earliest of whichis in 2007. Risks related to our patent position with respect to ERBITUX andour product candidates are more fully discussed under “Item 1—Business—Patentsand Trademarks”.

**Several lawsuitshave been filed against us which may be costly to defend and the outcome ofwhich are uncertain and may harm our business.**

Litigations or arbitrations to which we are currentlyor have been subjected relate to, among other things, our patent and otherintellectual property rights, licensing arrangements with other persons andthose other claims more fully described under “Part I—Item 3. LegalProceedings”, including an action brought by Yeda Research and DevelopmentCompany Ltd. (“Yeda”) in which the U.S. District Court for the SouthernDistrict of New York ruled that three individuals associated with Yeda be namedas sole inventors on U.S. Patent No. 6,217,866 relating to the therapeuticuse of EGFR antibodies. We have appealed the ruling of the U.S. District Courtfor the Southern District of New York in this matter. If the Company’s appealis unsuccessful and Yeda’s sole inventorship rights to the patent are upheldand the Company is unsuccessful with respect to its declaratory judgment actionmore fully described under “Part 1—Item 3. Legal Proceedings.” the Companymay become obligated to pay Yeda a royalty and may be liable to Yeda for otherdamages.

Related actions are currently pending in the UnitedKingdom, Germany, France and Austria.

We cannot provide anyassurance as to the outcome of these pending lawsuits or arbitrations. Anyconclusion of these matters in a manner adverse to us could have a materialadverse effect on our business and operating results. In addition, the costs tous of defending these claims or any other proceedings, even if resolved in ourfavor, could be substantial. Uncertainties resulting from the initiation andcontinuation of any litigation or other proceedings could also harm our abilityto compete in the marketplace.

**Our operations usehazardous materials, which may lead to environmental liability, and may harmour business.**

We use certain hazardousmaterials in connection with our research and manufacturing activities. Thesehazardous materials include various flammable solvents, corrosives, oxidizersand toxics. We also use radioactive isotopes in our scientific research. In theevent such hazardous materials are stored, handled or released into theenvironment in violation of law or any permit, or in a manner that adverselyaffects the environment, we could be subject to loss of our permits, governmentfines or penalties and/or other adverse governmental or third party action. Wedo not maintain any specific insurance to cover any accidents associated withthe hazardous materials that we use in our manufacturing and researchactivities. The levy of a substantial fine or penalty, the payment ofsignificant environmental remediation costs or the loss of a permit or otherauthorization to operate or engage in our ordinary course of business couldmaterially adversely affect our business.

**We could be exposedto material product liability claims that could prevent or interfere with thecommercialization of any other products that we may develop.**

The testing,manufacturing, marketing and sale of medical products entail an inherent riskof product liability. Liability exposures for biopharmaceuticals, such asERBITUX, could prevent or interfere with continued sales of ERBITUX or thecommercialization of any other products that we may develop. Product liabilityclaims could require us to spend significant time and money in litigation or topay significant damages. We currently have $30.0 million of aggregateproduct liability insurance coverage. Our business may be materially andadversely affected by a successful product liability claim or claims in excessof or outside our insurance coverage.

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**Risks Relating toour Common Stock**

**Certain provisionsof Delaware law, our charter and bylaws and our stockholder rights plan couldhinder, delay or prevent changes in control.**

Certain provisions of Delaware law, our charter andour bylaws, as well as our stockholder rights plan have the effect ofdiscouraging, delaying or preventing transactions that involve an actual orthreatened change in control. These provisions include the following:

*StockholderRights Plan.**  *Weadopted a stockholder rights plan on February 15, 2002. Our stockholderrights plan, as amended May 4, 2006, may discourage any potential acquirerfrom acquiring more than 19.9% of our outstanding common stock since, subjectto certain exceptions, upon this type of acquisition without approval of ourBoard of Directors, all other common stockholders will have the right topurchase a specified amount of our common stock at a substantial discount frommarket price, thus significantly increasing the acquisition cost to a potentialacquirer.

*SpecialMeetings.**  *Accordingto our bylaws, special meetings of stockholders may be called only by our Boardof Directors.

*Removalof Directors.**  *Subjectto the rights of BMS to elect at least one director, our bylaws provide that adirector can be removed with or without cause by the affirmative vote of atleast a majority of all votes entitled to be cast.

*AdvanceNotice Provisions for Stockholder Nominations and Proposals.**  *Our bylaws require advance written noticefor stockholders to nominate persons for election as directors at, or to bringother business before, any meeting of stockholders. This bylaw provision limitsthe ability of stockholders to make nominations of persons for election asdirectors or to introduce other proposals unless we are notified in a timelymanner prior to the meeting.

*PreferredStock.**  *Underour charter, our Board of Directors has authority to issue preferred stock fromtime to time in one or more series and to establish the terms, preferences andrights of any such series of preferred stock, all without approval of ourstockholders.

*DelawareBusiness Combinations.**  *Weare subject to Section 203 of the Delaware General Corporation Law which,subject to certain exceptions, restricts certain transactions and businesscombinations between a corporation and a stockholder owning 15% or more of thecorporation’s outstanding voting stock for a period of three years from thedate the stockholder becomes a 15% stockholder.

In addition todiscouraging a third party from acquiring control of us, the foregoingprovisions could impair the ability of existing stockholders to remove andreplace our management and/or our Board of Directors.

**Our stock price ishighly volatile. It may be difficult for you to resell our common stock.**

Over the past three years our common stock price hasranged from a high of $86.79 per share to a low of $26.28 per share. The marketprice of our common stock has been and may continue to be volatile.

In addition, thefollowing factors may have a significant impact on the market price of ourcommon stock:

·       Announcementsof technological innovations or new commercial products by us or ourcompetitors;

·       Publicityregarding actual or potential medical results relating to products underdevelopment or being commercialized by us or our competitors;

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·       Developmentsor outcomes of investigations and litigation generally, including litigationrelating to proprietary rights and patents;

·       Regulatorydevelopments or delays concerning our products in the United States and foreigncountries;

·       Issuesconcerning the safety of our products or of biotechnology products generally;

·       Economicand other external factors or a disaster or crisis; and

·       Period-to-periodfluctuations in our financial results.

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

None

**ITEM 2.**                PROPERTIES

***180 Varick Street, New York, New York***

We have occupied certainleased space at 180 Varick Street in New York City since 1986. The propertyserves as our corporate headquarters and biologics research facility. Theoriginal lease for two floors (sixth and seventh, totaling 45,000 square feet) waseffective as of January 1, 1999. From 1999 to 2003 we have addedadditional space on the fifth and eighth floors of 11,786 square feet. In August 2004,we modified our existing operating lease to extend the term of the lease, whichwas to expire on December 31, 2004, for an additional ten years (withrenewal rights) for a portion of the premises and by an additional three years(with renewal rights) for the space that currently houses our researchdepartment. The modification also added additional space on the fifth andeighth floors of 4,286 square feet in 2004 and granted us the right to addadditional space in the future. Our rent expense was approximately $2.1 millionfor the year ended December 31, 2006.

***325 Spring Street, New York, New York***

On October 5, 2001,we entered into a sublease for a four-story building at 325 Spring Street, NewYork, New York, which includes approximately 100,000 square feet of usablespace. The sublease has a term of just under 22 years, expiring on April 29,2023, followed by two five-year renewal option periods. The future minimumlease payments remaining at December 31, 2006, are approximately $46.5million over the term of the sublease. In order to induce the sub landlord toenter into the sublease, we made a loan to the sub landlord in the principalamount of a $10.0 million note receivable, of which approximately $8.4 millionis outstanding as of December 31, 2006. The loan is secured by a leaseholdmortgage on the prime lease as well as a collateral assignment of rents by thesub landlord. The loan is payable by the sub landlord over 20 years andbears interest at 51¤2%in years one through five, 61¤2%in years six through ten, 71¤2%in years eleven through fifteen and 81¤2%in years sixteen through twenty. In addition, we paid the owner a consent feein the amount of $500,000. Effective March 1, 2005, the Company amendedthe sublease to add an additional 6,500 square feet of space upon all the sameterms and conditions set forth in the sublease. In connection with thisamendment, the Company paid an up-front fee of approximately  $1.7 million. In 2006, we incurred rentexpense of approximately $2.4 million for this sublease.

***22 ImClone Drive, Branchburg, New Jersey***

In 1992, we acquired a 5.1acre parcel of land and a 54,400 square foot building located at 22 ImCloneDrive, Branchburg, New Jersey at a cost of approximately $4.7 million,including expenses. We have retrofitted the building to serve as our pilotfacility for biologics manufacturing. When purchased, the facility had in placevarious features, including clean rooms, air handling, electricity, and waterfor 

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injectionsystems and administrative offices. The cost for completion of facilitymodifications was approximately $5.4 million. We currently operate the facilityto develop and manufacture biologics for a portion of our clinical studies. In January 1998,we completed the construction and commissioning of a 1,750 square foot processdevelopment center at this facility dedicated to manufacturing process optimizationfor existing products and the pre-clinical and Phase I development of newbiological therapeutics. The cost of this construction activity wasapproximately $1.7 million.

***33 ImClone Drive, Branchburg, New Jersey***

On May 20, 2002, we purchased a 45,800 squarefoot warehouse on 6.94 acres of property located at 33 ImClone Drive. Thepurchase price for both land and building was $4.5 million. Extensive site workand exterior and interior renovations began in late June 2002. Thelocation houses the clinical, regulatory, field operations, marketing, finance,human resources, legal, project management and MIS departments, as well ascertain executive offices and other campus amenities. We have incurredapproximately $4.5 million, for the renovation and fit-out of this facility.The administrative facility was ready for its intended use and put in operationin December 2002.

***36 ImClone Drive, Branchburg, New Jersey***

In July 2001, wecompleted the construction and placed into operation our 80,000 square footmanufacturing facility, BB36, adjacent to the pilot facility in Branchburg, NewJersey. BB36 was built on a 5.7 acre parcel of land we purchased inDecember 1999 for $700,000. During 2006, we completed a 5,000 square footexpansion for additional office space in this facility. BB36 contains three10,000 liter (production volume) fermenters and is dedicated to the productionof ERBITUX. BB36 cost a total of approximately $57.3 million.

***50 ImClone Drive, Branchburg, New Jersey***

The facility was built ona 7.12 acre parcel of land that we purchased in July 2000 for $950,000.The BB50 facility has a capacity of up to 110,000 liters (production volume)and three distinct manufacturing suites. BB50 cost a total of approximately$331.4 million.

***41 ImClone Drive, Branchburg, New Jersey***

This facility consists of  approximately 7,600 square feet of officespace that is  leased by the Company.Effective September 1, 2005, we amended the lease for a five-year term toexpire August 31, 2010, with the option to renew for two additionalfive-year terms, so the lease will automatically renew each term for up to twoadditional terms, unless terminated by our notice three months prior to theexpiration of that term. In the year ended December 31, 2006, we incurredrent expense of $114,000 for this lease.

***59-61 ImClone Drive, Branchburg, New Jersey***

In June 2004, we entered into an operating leasefor a 54,247 square foot facility located at 59-61 ImClone Drive inBranchburg, New Jersey. This lease expires on December 31, 2022, with nooption to renew or extend beyond such date. Extensive interior renovations ofapproximately 24,000 square feet of the facility began in August 2004. Thenewly renovated areas house various laboratories used by our Quality Controland Clinical Pharmacology departments, as well as office space occupied by theQuality Assurance organization. The administrative area of the facility and thelaboratories were put in operation in December 2004. The Phase Irenovation and fit-out of this facility was completed in 2005 and had a totalcost of approximately $5.4 million. We expect to incur an additional estimated$13.0 million for the Phase II renovation of this facility, which we expect tocomplete in 2007. In the year ended December 31, 2006, we incurred rentexpense of $686,000 for this lease.

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***1181 Route 202N, Branchburg, New Jersey***

On January 31, 2002,we purchased a 7.36 acre parcel of land located at 1181 Route 202. The parcelincludes a 51,400 square foot building, 39,000 square feet of which iswarehouse space and 12,000 square feet of which is office space. The purchaseprice for the property, initial improvements and renovation was approximately$8.1 million. We are currently using this property for warehousing andlogistics for our Branchburg campus. Extensive renovations to the 12,000 squarefeet of office area were completed in the first quarter of 2003 to accommodatethe relocation and consolidation of engineering, warehousing, logistics andquality assurance personnel from other campus locations. Interior renovationsincluded office space, as well as the construction of a raw materials samplinglaboratory, associated temperature-controlled storage locations and theaddition of emergency power generation.

**ITEM 3.**                LEGALPROCEEDINGS

***A.   Litigation***

**1.   FederalSecurities Actions**

As previously reported,beginning in January 2002, a number of complaints asserting claims underthe federal securities laws against the Company and certain of the Company’sdirectors and officers were filed in the U.S. District Court for the SouthernDistrict of New York. Those actions were consolidated under the caption Irvinev. ImClone Systems Incorporated, et al., No. 02 Civ. 0109 (RO). In thecorrected consolidated amended complaint plaintiffs asserted claims against theCompany, its former President and Chief Executive Officer, Dr. Samuel D.Waksal, its former Chief Scientific Officer and then-President and ChiefExecutive Officer, Dr. Harlan W. Waksal, and several of the Company’sother present or former officers and directors, for securities fraud undersections 10(b) and 20(a) of the Securities Exchange Act of 1934 andSecurities and Exchange Commission Rule 10b-5, on behalf of apurported class of persons who purchased the Company’s publicly traded securitiesbetween March 27, 2001 and January 25, 2002. The complaint alsoasserted claims against Dr. Samuel D. Waksal under section 20A of theExchange Act on behalf of a separate purported sub-class of purchasers of theCompany’s securities between December 27, 2001 and December 28, 2001.The complaint sought to proceed on behalf of the alleged classes describedabove, sought monetary damages in an unspecified amount and sought recovery ofplaintiffs’ costs and attorneys’ fees. On January 24, 2005, the Company announcedthat it had reached an agreement in principle to settle the consolidated classaction for a cash payment of $75.0 million, a portion of which would bepaid by the Company’s insurers. The parties signed a definitive stipulation ofsettlement and as  provided for under thestipulation of settlement, on March 11, 2005, the Company paid $50.0million into an escrow account, subject to Court approval of the proposedsettlement. On July 29, 2005 the Court approved the proposed settlementand on August 5, 2005, the Company paid the remaining $25.0 million intothe escrow account, with such funds to be held and distributed pursuant to theterms of the settlement documents. The Company received $20.5 million from itsinsurers with respect to these matters. The foregoing $20.5 million included$8.75 million, less attorneys fees of $875,000, that was paid to the Companyunder the derivative settlement discussed below.

**2.   DerivativeActions**

As previously reported,beginning on January 13, 2002, and continuing thereafter, nine separatepurported shareholder derivative actions were filed against members of theCompany’s board of directors, certain of the Company’s present and formerofficers, and the Company, as nominal defendant, advancing claims based onallegations similar to the allegations in the federal securities class actioncomplaints. Four of these derivative cases were filed in the Delaware Court ofChancery and have been consolidated in that court under the caption In reImClone Systems Incorporated Derivative Litigation, Cons. C.A. No. 19341-NC.Three of these derivative actions were filed in New York State Supreme Court in

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Manhattan.All of these state court actions were stayed in deference to the proceedings inthe U.S. District Court for the Southern District of New York, which wereconsolidated under the caption In re ImClone Systems, Inc. ShareholderDerivative Litigation, Master File No. 02 CV 163 (RO). A supplementalverified consolidated amended derivative complaint in these consolidatedfederal actions was filed on August 8, 2003. It asserted, purportedly onbehalf of the Company, claims including breach of fiduciary duty by certaincurrent and former members of the Company’s board of directors, among others,based on allegations including that they failed to ensure that the Company’sdisclosures relating to the regulatory and marketing prospects for ERBITUX werenot misleading and that they failed to maintain adequate controls and toexercise due care with regard to the Company’s ERBITUX application to the FDA.On January 24, 2005, the Company announced that it had reached anagreement in principle to settle the consolidated derivative action. Theparties entered into a definitive stipulation of settlement on March 14,2005, which was subject to Court approval. On July 29, 2005, the Courtapproved the proposed settlement. Thereafter, the Company was paid$8.75 million by its insurers, which the Company has contributed towardthe settlement of the Irvine securities class action described above after deducting$875,000 for Court awarded plaintiffs’ attorney’s fees and expenses. FollowingCourt approval of the settlement of the consolidated derivative action, all ofthe state court derivative actions that had been pending in Delaware and NewYork were dismissed with prejudice, with no further payment required by theCompany.

***B.   Government Inquiries and Investigations***

As previously reported, the Company received subpoenasand requests for information in connection with an investigation by the SECrelating to the circumstances surrounding the disclosure of the FDA “refusal tofile” letter dated December 28, 2001, and trading in the Company’ssecurities by certain ImClone Systems insiders in 2001. The Company alsoreceived subpoenas and requests for information pertaining to documentretention issues in 2001 and 2002, and to certain communications regardingERBITUX in 2000. On June 19, 2002, the Company received a written “WellsNotice” from the staff of the SEC, indicating that the staff of the SEC isconsidering recommending that the SEC bring an action against the Companyrelating to the Company’s disclosures immediately following the receipt of a “refusalto file” letter from the FDA on December 28, 2001 for the Company’s BLAfor ERBITUX. The Company filed a Wells submission on July 12, 2002 inresponse to the staff’s Wells Notice. There have been no developments inconnection with this SEC investigation since February 2003.

In January 2003, New York State notified theCompany that the Company was liable for the New York State and City incometaxes that were not withheld because one or more the Company’s employees whoexercised certain non-qualified stock options in 1999 and 2000 failed to payNew York State and City income taxes for those years. On March 13,2003, the Company entered into a closing agreement with New York State, paying$4.5 million to settle the matter. The Company believes that substantially allof the underpayment of New York State and City income tax identified byNew York State is attributable to the exercise of non-qualified stockoptions by the Company’s former President and Chief Executive Officer, Dr. SamuelD. Waksal. At the same time, the Company informed the IRS, the SEC and theUnited States Attorney’s Office, responsible for the prosecution of Dr. SamuelD. Waksal, of this issue. In order to confirm whether the Company’s liabilityin this regard was limited to Dr. Samuel D. Waksal’s failure to pay incometaxes, the Company contacted current and former officers and employees who hadexercised non-qualified stock options to confirm that those individuals hadproperly reported and paid their personal income tax liabilities for the years1999 and 2000 in which they exercised options, which would reduce or eliminatethe Company’s potential liability for failure to withhold income taxes on theexercise of those options. In the course of doing so, the Company became awareof another potential income and employment tax withholding liability associatedwith the exercise of certain warrants granted in the early years of the Company’sexistence that were held by certain former officers, directors and employees,including the Company’s former President and Chief Executive Officer, Samuel D.Waksal, the Company’s former General Counsel, John B. Landes, the Company’sformer Chief Scientific Officer, 

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Harlan W. Waksal, and theCompany’s former director and Chairman of the Board, Robert F. Goldhammer.Again, the Company promptly informed the IRS, the SEC and the United StatesAttorney’s Office of this issue. The Company also informed New York State ofthis issue. On June 17, 2003, New York State notified the Company thatbased on this issue, they were continuing a previously conducted audit and wereevaluating the terms of the closing agreement to determine whether it should bere-opened. On March 31, 2004, the Company entered into a new closingagreement pursuant to which the Company paid New York State an additional $1.0million in full satisfaction of all the deficiencies and determinations ofwithholding taxes for the years 1999-2001. Therefore, the Company haseliminated the liability of approximately $2.8 million which was accrued as of December 31,2003, primarily attributable to New York State withholding taxes on stockoptions and warrants exercised by Dr. Samuel D. Waksal and has recognizeda benefit of approximately $1.8 million as a recovery in the ConsolidatedStatements of Operations in the first quarter of 2004.

On March 31, 2003, the Company receivednotification from the SEC that it was conducting an informal inquiry into thematters discussed above and, subsequently, the Company received and respondedto a request from the SEC for the voluntary production of related documents andinformation. There have been no other requests for documents or information orother developments in connection with this SEC informal inquiry since April 2003.

After disclosure to theIRS in 2003, the IRS commenced audits of the Company’s income tax andemployment tax returns for the years 1999-2001. The Company hascooperated in full with this audit and has responded to all requests forinformation and documents received from the IRS. On February 8, 2006, theCompany received a draft of the IRS’s report of its preliminary findings withrespect to the employment tax audit. The draft report indicated that the IRS,in addition to imposing liability on the Company for taxes not withheld,intended to assert penalties with respect to both the failure to withhold onnon-qualified stock options and the failure to report and withhold on thewarrants described above. On March 14, 2006, the Company reached anagreement in principle with the IRS to resolve the employment tax audit, whichincludes the Company’s agreement to the imposition of an accuracy-relatedpenalty under Section 6662 of the Internal Revenue Code. Under thisagreement in principle, the Company made a total payment of approximately $31.7million to the IRS. The Company had previously recorded a withholding taxliability of $18,096,000 and a withholding tax asset of $274,000 in itsconsolidated Balance Sheet as of December 31, 2004. Based on the agreementin principle reached with the IRS, the Company has eliminated the withholdingtax asset of $274,000 and recorded an additional withholding tax liability ofapproximately $13.9 million, or a total of $32.0 million, in its Consolidated BalanceSheet as of December 31, 2005. As a result, the Company recorded a netwithholding tax expense of approximately $14.2 million  in the fourth quarter of 2005. In the fourthquarter of 2006, the Company reversed the remaining $264,000 of excess liabilityrelated to this settlement.

***C.   Actions Against Dr. Samuel D. Waksal***

As previously reported, on August 14, 2002, afterthe federal grand jury indictment of Dr. Samuel D. Waksal had beenissued but before Dr. Samuel D. Waksal’s guilty plea to certain counts ofthat indictment, the Company filed an action in New York State Supreme Courtseeking recovery of certain compensation, including advancement of certaindefense costs, that the Company had paid to or on behalf of Dr. Samuel D.Waksal and cancellation of certain stock options. That action was styledImClone Systems Incorporated v. Samuel D. Waksal, Index No. 02/602996.On July 25, 2003, Dr. Samuel D. Waksal filed a Motion to CompelArbitration seeking to have all claims in connection with the Company’s actionagainst him resolved in arbitration. By order dated September 19, 2003,the Court granted Dr. Samuel D. Waksal’s motion and the action wasstayed pending arbitration. On September 25, 2003, Dr. Samuel D.Waksal submitted a Demand for Arbitration with the American ArbitrationAssociation (the “AAA”), by which Dr. Samuel D. Waksal asserts claims toenforce the terms of his separation agreement, including provisions 

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relating to advancement oflegal fees, expenses, interest and indemnification, for which Dr. Samuel D.Waksal claims unspecified damages of at least $10.0 million.

As previously reported, on March 10, 2004, theCompany commenced a second action against Dr. Samuel D. Waksal in the NewYork State Supreme Court. That action is styled ImClone Systems Incorporated v.Samuel D. Waksal, Index No. 04/600643. Specifically, by this action, theCompany seeks to recover: (a) $4.5 million that the Company paid tothe State of New York in respect of exercises of non-qualified stock optionsand certain warrants in 2000; (b) at least $16.6 million that theCompany paid to Samuel D. Waksal in the form of ImClone common stock, in lieuof withholding federal income taxes from exercises of non-qualified stockoptions and certain warrants in 2000; and (c)  approximately$1.1 million that the Company paid in the form of ImClone common stock toSamuel D. Waksal and his beneficiaries, in lieu of withholding federal, stateand local income taxes from certain warrant exercises in 1999-2001. Thecomplaint asserts claims for unjust enrichment, common law indemnification,moneys had and received and constructive trust. On June 18, 2004, Dr. SamuelD. Waksal filed an Answer to the Company’s Complaint.

On December 21, 2005,the Company and Dr. Samuel D. Waksal entered into a settlement agreementwith respect to the foregoing actions, providing for, among otherthings, judgments in both actions in the Company’s favor. The settlementagreement includes the payment of director and officer legal fee expenseindemnification by the Company, for which the Company paid approximately $2.0million in the fourth quarter of 2005.

***D.   Intellectual Property Litigation***

As previously reported, on October 28, 2003, acomplaint was filed by Yeda Research and Development Company Ltd. (“Yeda”)against ImClone Systems and Aventis Pharmaceuticals, Inc. in the U.S.District Court for the Southern District of New York (03 CV 8484). This actiondid not seek damages, but rather alleged that three individuals associated withYeda should also be named as co-inventors on U.S. Patent No. 6,217,866, whichrelates to the therapeutic use of EGFR antibodies (such as ERBITUX, the Company’sEGFR antibody product) in combination with chemotherapy. The Company hasexclusively licensed this patent from Rhone-Poulenc Rorer Pharmaceuticals, nowknown as Sanofi-Aventis. On June 7, 2005, Yeda amended its U.S. complaintto seek sole inventorship of the subject patent. On November 4, 2005, theCourt denied the Company’s motion for summary judgment with respect to thismatter, as filed with the Court on June 24, 2005. At the same time, theCourt granted summary judgment to Yeda dismissing two of ImClone’s affirmativedefenses. A bench trial on the merits of Yeda’s complaint was held between June 5,2006 and July 19, 2006. On September 18, 2006, the Court ruled infavor of Yeda by awarding it sole inventorship rights to the patent. ImCloneSystems then appealed the Court’s decision to the Court of Appeals for theFederal Circuit. The appeal was docketed on October 5, 2006 (as No. 2007-1012),and is in its early stages. The Company, having had the advice of its patentcounsel, believes the positions raised on appeal are sound, and it plans tovigorously pursue this appeal.

On September 20, 2006, subsequent to the Court’sinventorship decision, the Company also filed an action (06 CV 7190) againstYeda in the U.S. District Court for the Southern District of New York seeking adeclaratory judgment that the patent is invalid due to the removal of theoriginally named inventors. On October 31, 2006, Yeda filed an answer andcounterclaim to the Company’s declaratory judgment complaint in which Yedaalleges the Company is liable to Yeda for willful patent infringement, unjustenrichment and conversion, and seeks damages from the Company and an orderrequiring the Company to license the patent and pay Yeda royalties until thepatent expires. The declaratory judgment action is in its early stages. TheCompany,  having had the advice of itspatent counsel, believes that the claims asserted in the declaratory judgmentaction are sound, and that Yeda’s counterclaims are not sound, and it plans tovigorously pursue this action. If the Company’s appeal is unsuccessful andYeda’s sole inventorship rights 

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to the patent are upheldand the Company is unsuccessful with respect to its declaratory judgmentaction, the Company may become obligated to pay Yeda a royalty and may beliable to Yeda for other damages.

As previously reported, on March 25, 2004, anaction was filed in the United Kingdom Patent Office entitled Referrer’sStatement requesting transfer of co-ownership and amendment ofpatent EP (UK) 0 667 165 to add three Yeda employees asinventors. Also on March 25, 2004, a German action entitled Legal Actionwas filed in the Munich District Court I, Patent Litigation Division, in whichYeda sought a 75% ownership interest in patent EP (DE) 0 667 165 based on itsallegation that the inventorship on that patent was incorrect. The Company wasnot named as a party in these actions which relate to the European equivalentof U.S. Patent No. 6,217,866 discussed above. Accordingly, the Companyintervened in the U.K. and German actions. Yeda sought to amend its pleadingsin the United Kingdom and Germany to seek sole inventorship and sole ownership.Following hearings, both the U.K. and German courts held that Yeda was notentitled to amend its pleadings. In the U.K., Yeda sought leave from the Houseof Lords to appeal the High Court’s decision, and such leave was granted in November 2006.In Germany, Yeda has appealed the lower court’s decision to the Higher RegionalCourt of Munich. Additionally, on or about March 25, 2005 and March 29,2005, respectively, Yeda filed legal actions in Austria and France against bothAventis and ImClone Systems seeking full inventorship of EP (AU) 0 667 165and EP (FR) 0 667 165, as well as payment of legal costs and fees.The Company, having had the advice of its patent counsel, believes there aresound defenses to these actions, and it presently plans to vigorously defendagainst the claims asserted. In addition, in December 2002, OppositionProceedings seeking to revoke the European patent discussed above were broughtby Scripps Research Institute Amgen Inc. Abgenix, Inc. and YM Biosciences Inc.An Opposition Proceeding is an administrative process, the outcome of which maybe that the European patent will be revoked. The Company has vigorouslydefended its position in this matter, which is suspended pending a finaldetermination on the Yeda matter discussed above.

As previously reported, on May 4, 2004, acomplaint was filed against the Company by Massachusetts Institute ofTechnology (“MIT”) and Repligen Corporation (“Repligen”) in the U.S. DistrictCourt for the District of Massachusetts (04-10884 RGS). This actionalleges that ERBITUX infringes U.S. Patent No. 4,663,281, which is ownedby MIT and exclusively licensed to Repligen and that the Company shouldtherefore pay damages. On July 28, 2006, the Court denied the Company’smotion for summary judgment seeking to dismiss all claims on the basis that thepatent rights at issue were exhausted as a matter of law and granted MIT andRepligen’s cross motion that their patent rights were not exhausted. On September 26,2006, a hearing was held in response to a Motion for Sanctions filed byRepligen, which alleged that the Company’s counsel, Kenyon & Kenyon,and the Company acted improperly during and after the deposition of one ofRepligen’s potential witnesses. Repligen seeks evidentiary sanctions which maylimit the Company’s proofs on non-infringement issues, and the Court has raisedthe possibility that Kenyon & Kenyon may be disqualified from furtherrepresentation of the Company in the case. The Company and Kenyon &Kenyon deny any improper conduct. The Court has not ruled on the motion, and itis not possible to predict what impact, if any, this collateral matter may havein the case. Upon a ruling by the Court, the case will proceed to trial on themerits of the Company’s other defenses. The Company, having had the advice of itspatent counsel, believes that its defenses are sound, and it presently plans tovigorously defend against the claims asserted.

On February 5, 2007, a complaint was filedagainst the Company by Abbott Laboratories (“Abbott”) in the U.S. DistrictCourt for the District of Massachusetts (07-cv-10216). This actionalleges that the manufacture and sale of ERBITUX infringes U.S. Patent No,5,665,578, which is owned by Abbott and that the Company should therefore paydamages. As of this time, the Company has not yet filed an answer to thiscomplaint. The Company plans to vigorously defend against any claims assertedin this action. The Company is unable to predict the outcome of this action atthe present time.

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No reserve has been established in the financial statementsfor any of the items described in this “Part I—Item 3. LegalProceedings. D. Intellectual Property Litigation” immediately set out above becausethe Company does not believe that such a reserve is required to be establishedat this time under Statement of Financial Accounting Standards No. 5.However, if in a future period, events in any such legal proceedings render it probablethat a loss will be incurred and if such loss is reasonably estimable, theCompany will establish such a reserve. Thus, it is possible that legalproceedings and settlements arising therefrom, if any, may have a materialadverse impact on operating results for that period, on our balance sheet orboth.

The Company is developing a fully-human monoclonalantibody referred to as IMC-11F8. The Company believes it has the right to doso under its existing development and license agreement with Merck KGaA.However, Merck KG&A had advised the Company that it believed that IMC-11F8was covered under the development and license agreement with Merck KGaA andthat it could therefore have the exclusive rights to market IMC-11F8 outsidethe United States and Canada and co-exclusive development rights in Japan, forwhich it would pay the same royalty as it pays for ERBITUX. In agreement withMerck KGaA, the Company submitted this dispute to binding arbitration throughan expedited process outside of the provisions of the development and licenseagreement. Merck KGaA subsequently took the position that the expeditedarbitration provision was no longer valid and the Company sued Merck KGaA infederal court in the Southern District of New York to either enforce thearbitration provision previously agreed to or to have the court decide thequestion of whether IMC-11F8 is or is not covered under the development andlicense agreement with Merck KGaA. On November 29, 2005, the Court grantedthe Company’s motion to enforce the expedited arbitration provision previously agreedto, and subsequently appointed a new arbitrator to hear and decide thisdispute. On March 31, 2006, the arbitrator decided the matter in favor ofthe Company, finding that Merck KGaA had no rights to IMC-11F8. That decisionis binding and unappealable pursuant to the parties’ arbitration agreement andthe parties have subsequently confirmed the arbitration award. 

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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**PART II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES.

**(a)   MARKETINFORMATION**

Our common stock is traded on the Nasdaq Global SelectMarket (“Nasdaq”) under the symbol “IMCL”.

The following table sets forth, for the periodsindicated, the range of high and low sale prices for our common stock on theNasdaq Global Select Market, as reported by Nasdaq. The quotations shownrepresent inter-dealer prices without adjustment for retail mark-ups,mark-downs or commissions, and may not necessarily reflect actual transactions.

| ** **                                           | ** ** | **High**   | ** ** | **Low**    | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|
| **Year ended December 31, 2006** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter                                        |       | $          | 39.17      |       | $          | 33.26 |   |
| Second Quarter                                       |       | $          | 43.08      |       | $          | 32.67 |   |
| Third Quarter                                        |       | $          | 39.80      |       | $          | 27.40 |   |
| Fourth Quarter                                       |       | $          | 33.74      |       | $          | 26.28 |   |
| **Year ended December 31,  2005**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter                                        |       | $          | 46.12      |       | $          | 34.50 |   |
| Second Quarter                                       |       | $          | 35.53      |       | $          | 30.11 |   |
| Third Quarter                                        |       | $          | 36.55      |       | $          | 29.90 |   |
| Fourth Quarter                                       |       | $          | 36.11      |       | $          | 28.65 |   |

 

On February 20, 2007,the closing price of our common stock as reported by Nasdaq was $29.20.

**(b)   STOCKHOLDERS**

As of the close ofbusiness on February 20, 2007, there were 331 holders of record of ourcommon stock. We believe that the number of beneficial owners is substantiallygreater than the number of holders of record because a large portion of ourcommon stock is held in broker “street names.”

**(c)   DIVIDENDS**

We have never declaredcash dividends on our common stock and have no present intention to declare anycash dividends in the foreseeable future.

**(d)   SECURITIESAUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS**

The information regardingsecurities authorized for issuance under our equity compensation plans isdisclosed in Item 12—“Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters.”

**(e)   PERFORMANCEGRAPH**

The following graph compares total stockholder returnsfrom December 31, 2001 through December 31, 2006 to The Nasdaq StockMarket (U.S. Companies) Total Return Index and The Nasdaq Pharmaceutical StocksTotal Return Index. The Nasdaq Stock Market (U.S. Companies) Total Return Indexcomprises all domestic common shares traded on the Nasdaq National Market andthe Nasdaq SmallCap Market. The Nasdaq Pharmaceutical Stocks Total ReturnsIndex represents all companies, including biotechnology companies, trading onNasdaq classified under the Standard Industrial Classification Code forpharmaceuticals.

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The graph assumes that the value of the investment inthe Company’s Common Stock and in the above referenced indices was $100.00 at December 31,2001 and that all dividends were reinvested. The Company’s Common Stock priceon December 31, 2001 (on which the graph is based) was $46.46. Thestockholder return shown on the following graph is not necessarily indicativeof future performance.

| ** **              | ** ** | **ImClone** | ** ** | **Nasdaq US** | ** ** | **Nasdaq  Pharmaceutical  Stocks** | ** ** |
|-------------------------|------------|-------------|------------|--------------------|------------|------------------------------------|------------|
| December 31,  2001 |       | $           | 100.00     |               |       | $                                  | 100.00     |   |   |   | $ | 100.00 |   |   |
| December 31,  2002 |       | 22.86       |       |               | 72.20      |                               |       |   | 64.92 |   |   |
| December 31,  2003 |       | 85.36       |       |               | 108.58     |                               |       |   | 93.35 |   |   |
| December 31,  2004 |       | 99.18       |       |               | 120.76     |                               |       |   | 100.02 |   |   |
| December 31,  2005 |       | 73.70       |       |               | 136.22     |                               |       |   | 114.24 |   |   |
| December 31, 2006  |       | 57.60       |       |               | 149.66     |                               |       |   | 111.83 |   |   |
|                         |            |             |            |                    |            |                                    |            |  |  |  |  |  |  |  |

 

**(f)   RECENT SALES BY THE COMPANY OF UNREGISTEREDSECURITIES; PURCHASES OF EQUITY SECURITIES**

We did not sell any unregistered securities in theyears ended December 31, 2006, 2005 or 2004. On September 19, 2005,we announced the approval, by our Board of Directors, of a stock repurchaseprogram permitting the repurchase of up to $100.0 million of outstanding sharesof the Company’s common stock during a two year period. We did not repurchaseany shares of the Company’s common stock during 2006. During the fourth quarter of 2005, we purchased 811,416 shares atan average price of $30.62 per share, for aggregate consideration ofapproximately $24.8 million.

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**ITEM 6.**                SELECTEDFINANCIAL DATA.

The following selectedconsolidated financial information for the five years ended December 31,2006 has been derived from the audited consolidated financial statements. Theinformation below is not necessarily indicative of results of futureoperations, and should be read in conjunction with Item 7- “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” ofthis Form 10-K and the consolidated financial statements and relatednotes thereto included in Item 8 of this Form 10-K in order to fullyunderstand factors that may affect the comparability of the informationpresented below.

| ** **                                    | ** ** | **2006**                                                           | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------|------------|-----------|------------|----------|------------|----------|------------|
| ** **                                    | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenues(1)                                   |       | $                                                                  | 677,847    |      | $          | 383,673   |       | $        | 388,690    |     | 80,830     |   | $ | 60,005 |   |
| Operating  expenses(2)                        |       | 388,622                                                            |       | 316,894   |       | 263,424   |       | 189,681  |       | 214,854  |       |
| Net income  (loss)(3)                         |       | 370,674                                                            |       | 86,496    |       | 113,563   |       | (112,502 | )          | (157,949 | )          |
| Basic income  (loss) per common share         |       | 4.40                                                               |       | 1.03      |       | 1.43      |       | (1.52    | )          | (2.15    | )          |
| Diluted income  (loss) per common share       |       | 4.11                                                               |       | 1.01      |       | 1.33      |       | (1.52    | )          | (2.15    | )          |
| Total assets                                  |       | 1,839,836                                                          |       | 1,343,415 |       | 1,434,776 |       | 381,595  |       | 484,506  |       |
| Long-term  obligations                        |       | 603,391                                                            |       | 602,491   |       | 603,434   |       | 242,979  |       | 241,972  |       |
| Deferred revenue                              |       | 379,877                                                            |       | 359,025   |       | 457,808   |       | 337,232  |       | 322,504  |       |
| Accumulated  deficit                          |       | 71,785                                                             |       | 442,459   |       | 528,955   |       | 642,608  |       | 530,106  |       |
| Total stockholders’  equity (deficit)(4) |       | 759,649                                                            |       | 252,404   |       | 178,838   |       | (270,593 | )          | (185,629 | )          |
|                                               |            |                                                                    |            |           |            |           |            |          |            |          |            |  |  |  |  |

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We        have paid no dividends.

(1)          Revenues in 2006, 2005and 2004 include royalties related to the sales of ERBITUX by our corporatepartners BMS and Merck KGaA and manufacturing revenue related to sales ofERBITUX to these partners for commercial use.

(2)          Operating expensesinclude charges in 2005 of approximately $14.2 million related to withholdingtaxes and $6.2 million related to the discontinuation of our small moleculeresearch program, and a charge in 2004 of approximately $55.4 million relatedto a stockholders’ litigation settlement.

(3)          Net income in 2006includes the recognition of $112.7 million of revenue for a one-time catch-upadjustment related to the achievement of a $250.0 million milestone from BMS,as well as a release of  approximately$111.3 million related to a portion of the valuation allowance against deferredtaxes.

(4)          In2005, the Company’s Board of Directors approved a share repurchase planpermitting the repurchase of the Company’s common stock up to a total aggregateamount of $100.0 million. During the fourth quarter of 2005, we purchased811,416 shares at an average price of $30.62 per share, for aggregateconsideration of approximately $24.8 million.

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

The following discussionand analysis is provided to further the reader’s understanding of theconsolidated financial statements, financial condition and results ofoperations of ImClone Systems. This discussion should be read in conjunctionwith the consolidated financial statements and the accompanying notes includedin this Annual Report on Form 10-K. This discussion containsforward-looking statements based upon current expectations that involve riskand uncertainties. Our actual results and the timing of certain events coulddiffer materially from those anticipated in these forward-looking statements asa result of certain factors, including those set forth below and under “RiskFactors” set forth in Item 1A and elsewhere in this Annual Report on Form 10-K.

**OVERVIEW**

ImClone Systems is a biopharmaceutical company whosemission is to advance oncology care by developing and commercializing aportfolio of targeted treatments designed to address the medical needs ofpatients with cancer. Our commercially available product, ERBITUX bindsspecifically to epidermal growth factor receptor (EGFR, HER1, c-ErbB-1)on both normal and tumor cells, and competitively inhibits the binding ofepidermal growth factor (EGF) and other ligands, such as transforming growthfactor-alpha. We are conducting, and in some cases have completed, clinicalstudies evaluating ERBITUX for broader use in colorectal cancer, for thepotential treatment of lung and pancreatic cancers, as well as other potentialindications.

On February 12, 2004, the FDA approved ERBITUXfor use in combination with irinotecan in the treatment of patients withEGFR-expressing, metastatic colorectal cancer who are refractory toirinotecan-based chemotherapy and for use as a single agent in the treatment ofpatients with EGFR-expressing, metastatic colorectal cancer who are intolerantto irinotecan-based chemotherapy. In September 2005, Health Canadaapproved the use of ERBITUX for use in combination with irinotecan for thetreatment of EGFR-expressing metastatic colorectal carcinoma in patients whoare refractory to other irinotecan-based chemotherapy regimens and for use as asingle agent for the treatment of EGFR-expressing, metastatic colorectalcarcinoma in patients who are intolerant to irinotecan-based chemotherapy. On March 1,2006, the FDA approved ERBITUX for use in combination with radiation therapyfor the treatment of locally or regionally advanced squamous cell carcinoma ofthe head and neck (“SCCHN”) and as a single agent in recurrent or metastaticSCCHN where prior platinum-based chemotherapy has failed. Please see full prescribinginformation, available at www.ERBITUX.com, for important safety informationrelating to ERBITUX, including boxed warnings.

On December 1, 2003, Swissmedic, the Swiss agencyfor therapeutic products, approved ERBITUX in Switzerland for the treatment ofpatients with colorectal cancer who no longer respond to standard chemotherapytreatment with irinotecan. Merck KGaA licensed the right to market ERBITUXoutside the United States and Canada from the Company in 1998. On June 30,2004, Merck KGaA received marketing approval by the European Commission to sellERBITUX for use in combination with irinotecan for the treatment of patientswith EGFR-expressing metastatic colorectal cancer after failure of irinotecanincluding cytotoxic therapy. On December 22, 2005, Swissmedic approvedERBITUX in Switzerland in combination with radiation in the treatment ofpatients with previously untreated, advanced SCCHN. On April 3, 2006,Merck KGaA was granted marketing authorization by the European Commission toextend the use of ERBITUX, in combination with radiotherapy, to the treatmentof patients with locally advanced SCCHN. In Japan, Merck KGaA has marketingrights to ERBITUX, which are co-exclusive to the co-development rights of theCompany and BMS. In February 2007, an application was submitted with theJapanese Pharmaceuticals and Medical Devices Agency for the use of ERBITUX intreating patients with advanced colorectal cancer. ERBITUX is the first IgG1monoclonal antibody that inhibits EGFR to be submitted for marketingauthorization in Japan.

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Our revenues, aswell as our results of operations, have fluctuated and are expected to continueto fluctuate significantly from period to period due to several factors,including but not limited to:

·       theamount and timing of revenues earned from commercial sales of ERBITUX;

·       thetiming of recognition of license fees and milestone revenues;

·       thestatus of development of our various product candidates;

·       whetheror not we achieve specified research or commercialization objectives;

·       anybusiness development transactions;

·       fluctuationsin our effective tax rate and timing on when we may revise our conclusionsregarding the realization of our net deferred tax assets, which currently havea partial valuation allowance;

·       legalcosts and the outcome of outstanding legal proceedings; and

·       theaddition or termination of research programs or funding support and variationsin the level of expenses related to our proprietary product candidates duringany given period.

As a result of oursubstantial investment in research and development, we have incurredsignificant operating losses and have an accumulated deficit of approximately$71.8 million as of December 31, 2006. We anticipate that our accumulateddeficit may continue to decrease in the future as we earn revenues oncommercial sales of ERBITUX and generate net income. There is no assurance thatwe will be able to continue to successfully manufacture, market orcommercialize ERBITUX or that potential customers will buy ERBITUX. We relyentirely on third-party manufacturers for filling and finishing services withrespect to ERBITUX. If our current third-party manufacturers or critical rawmaterial suppliers fail to meet our expectations, we cannot be assured that wewill be able to enter into new agreements with other suppliers or third-partymanufacturers without an adverse effect on our business.

**HIGHLIGHTS ANDOUTLOOK**

2006 was a year of transformation for ImClone. Duringthe first quarter of 2006, the Company’s Board of Directors engaged an investment bank to conduct a full reviewof the Company’s strategic alternatives to maximize shareholder value. At thecompletion of this effort, in August 2006, the Board of Directorsconcluded that the Company should remain independent. In September 2006,Carl C. Icahn, Alexander J. Denner, Ph.D., Barberry Corp and High River LimitedPartnership  filed a consent solicitationto remove six members of the Company’s Board of Directors as well as to add Peter S. Liebert, M.D. to theBoard. In October 2006,David M. Kies, then Chairman of the Company’s Board of Directors, and WilliamW. Crouse resigned from the Board of Directors. Peter S. Liebert, M.D., wasappointed to fill one of the vacancies resulting from the resignations and CarlC. Icahn was appointed  Chairman of theBoard of Directors. In addition, on October 24, 2006,  Joseph L. Fischer resigned as Interim ChiefExecutive Officer and as a member of the Board of Directors and was replaced bya newly formed Executive Committee of the Board (the “Executive Committee”),chaired by Alexander J. Denner, Ph.D., and including Directors RichardMulligan, Ph.D., and Charles Woler, M.D., Ph.D. The Executive Committee willserve as the principal executive body for the Company until a Chief ExecutiveOfficer is named. The Company also announced that Directors Vincent T. DeVita, Jr.,M.D., John A. Fazio and William R. Miller will not stand for reelection to theBoard of Directors at the Company’s next annual meeting. In addition, the Boarddetermined that it would waive all director fees for six months and all optiongrants for directors for the next year. As a result of these developments, CarlC. Icahn and related parties withdrew their shareholder consent solicitation.

2006 also marked a significant milestone for ERBITUX,which reached $1 billion in annual in-market global sales. From a clinicalperspective, in the fourth quarter of 2006, we began to obtain much 

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anticipated Phase IIIclinical data from a number of trials that could result in the utilization ofERBITUX in novel therapeutic regimens. Specifically, on November 6, 2006,we and our partner BMS announced results from two randomized Phase III trialsof ERBITUX in patients with metastatic colorectal cancer. A randomized,multicenter, Phase III trial compared ERBITUX plus best supportive care tobest supportive care alone in 572 patients with metastatic colorectalcancer whose disease was refractory to all available chemotherapy, includingirinotecan, oxaliplatin, and fluoropyrimidines. The study, conducted by theNational Cancer Institute of Canada Clinical Trials Group in collaboration withthe Australasian Gastro-Intestinal Trials Group, met its primary efficacyendpoint showing a statistically significant improvement in overall survival. Asecond Phase III, randomized study, compared irinotecan to irinotecan plusERBITUX in approximately 1,300 patients whose disease was not respondingto first-line oxaliplatin-based chemotherapy. After randomization, patientswere treated until their disease progressed. Upon disease progression, studytreatment was stopped and further treatment was at the discretion of thephysician. Secondary efficacy endpoints (progression free survival, responserate) strongly favored the combination of ERBITUX plus irinotecan overirinotecan alone; however, the primary endpoint (overall survival) was not met,possibly because a high proportion of patients in the control (irinotecan only)arm received treatment with ERBITUX following development of progressivecancer, potentially confounding the interpretation of this endpoint.  In January 2007, we and our partner BMSannounced that a Phase III study of ERBITUX plus FOLFIRI (an irinotecan- basedchemotherapy) met the primary endpoint of increasing median duration of progression-freesurvival over FOLFIRI alone in patients with previously untreated metastaticcolorectal cancer. More than 1,000 patients were recruited from around theworld to participate in the study, known as the CRYSTAL study. These studiesrepresent the beginning of a series of data milestones from a number ofregistrational quality clinical studies of ERBITUX expected to mature through2008 and most importantly, provide new important information with patients withmetastatic colorectal cancer.

Looking ahead, the Executive Committee is planningsubstantial activity for the Company during 2007. In addition to analyzing theimplications of the on-going clinical data for our business, we are alsoaddressing a number of other issues of key importance to the Company, such as (1) optimizingthe Company’s business and assets; (2) identifying the principalimpediments to the realization of the Company’s potential; and (3) assigningindividual responsibility for achieving the targets we set. Our goal is toinvest our resources wisely, take significant but calculated risks, andrebalance the Company’s assets to make them more appropriate for its currentposition. As we continue our search for a permanent Chief Executive Officer,the Executive Committee intends to provide effective leadership and workaggressively in the best interest of the Company.

ERBITUX remains the engine of the Company and theprincipal focus of our efforts. We are continually evaluating the optimalinternal investment relative to the opportunities we see for its continuedgrowth and development and, as we have disclosed in the past, we are indiscussions with our corporate partner, BMS regarding the best way to takeadvantage of such opportunities. We believe that ERBITUX’s future remains veryattractive, and we are committed to ensuring the most effective commercialstrategy and clinical development plan. The Company’s pipeline is just ascritical. We believe the potential of each of ImClone’s antibodies isextraordinary, particularly in light of the robust development plans we lookforward to implementing beginning in 2007. While we hope to demonstrate some ofthis value through select partnerships, we are keen to reserve for ourselves asmuch of this potential value as our development resources will allow. 2007 willbe a significant year for the pipeline. We are also taking significant steps toenergize the discovery activities at ImClone, as we believe that commitment toscience will continue to drive the development of innovative therapeutic products.

Finally, we are also evaluating our physicalinfrastructure needs, including our second commercial manufacturing facility,BB50, and our facility at 325 Spring Street in New York. Given the anticipatedexcess capacity of BB50, we may consider ways to better achieve the economicopportunities afforded by 

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this facility, includingbut not limited to the initiation of contract manufacturing activities. As forthe Company’s legal proceedings, we are diligently pursuing legal strategiesthat we believe will lead to acceptable resolutions, however legal proceedingscan take time to resolve.

With respect to financialguidance for 2007, we anticipate that milestone revenues will range between$100 to $140 million, depending on the level of clinical spending for ERBITUX;and we anticipate a range of $60-$70 million of collaborative agreementrevenue. Starting in the first quarter of 2007, the reimbursement rate from BMSfor third party royalty expense will decrease from 4.5% to 2.5% based on ourcontractual agreement. We anticipate spending approximately 45% more in 2007 inresearch and development activities. The increase in this category is primarilydue to an increase in projected clinical shipments of ERBITUX with theremaining increase due to increased development cost related to our pipeline.Clinical and regulatory expenses in 2007 are expected to nearly double from2006 based on a focused investment strategy to develop our pipeline candidatesbeyond Phase I as well as Phase III studies of ERBITUX in multiple tumor types.Marketing, general and administrative expenses in 2007 are expected to beconsistent with 2006, reflecting our continued focus on efficiencies and costsaving initiatives. Finally, from a cash tax perspective, it is important tonote that we have sufficient tax operating losses to offset taxable income onour tax return, thereby substantially eliminating our need to pay cash taxes. Froma financial statement perspective, we expect that our effective tax rate in2007 will be in the range of 40%-43%. This rate is calculated withoutassuming any change in the valuation allowance in 2007. We expect capitalexpenditures in 2007 in the range of $25.0 million. It should be noted that theguidance above assumes continuation of our current operating structure, withoutthe impact of any possible business development opportunities.

**CRITICAL ACCOUNTINGPOLICIES**

The preparation of financial statements in conformitywith U.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting period. We base our estimates on historical experience andon assumptions that we believe to be reasonable under the circumstances.Estimates are deemed critical when a different methodology could havereasonably been used or where changes in the estimate from period to period mayhave a material impact on our financial condition or results of operations. Ourcritical accounting policies that require management to make significantjudgments, estimates, and assumptions are set forth below. The development andselection of the critical accounting policies, and the related disclosure belowhave been reviewed with the Audit Committee of our Board of Directors.

*Revenue Recognition**—Our*revenues are derived from four primary sources:license fees and milestone payments, manufacturing revenue, royalty revenue,and collaborative agreement revenue.

Revenues from license fees and milestone paymentsprimarily consist of up-front license fees and milestone payments receivedunder the Commercial Agreement with BMS, relating to ERBITUX, and milestonepayments received under the development and license agreement with Merck KGaA.We recognize all non-refundable up-front license fees as revenues in accordancewith the guidance provided in the SEC’s Staff Accounting Bulletin No. 104.Our most critical application of this policy, to date, relates to the $900.0million in license fees received from BMS under the Commercial Agreement whichare being deferred and recognized as revenue based upon the actual productresearch and development costs incurred since September 19, 2001 to dateby BMS and ImClone as a percentage of the estimated total of such costs to beincurred over the 17 year term of the Commercial Agreement. The estimatedtotal of such costs is based on the clinical development budget whichestablishes joint responsibilities that will be carried out by both the Companyand BMS for certain clinical and other studies. Of the $900.0 million inpayments received through December 31, 2006, approximately $231.9 millionwas recognized as revenue in 2006 and 

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approximately $525.8million from the commencement of the Commercial Agreement in 2001 through December 31,2006. The methodology used to recognize deferred revenue involves a number ofestimates and judgments, such as the estimate of total product research anddevelopment costs to be incurred under the Commercial Agreement. Changes inthese estimates and judgments can have a significant effect on the size andtiming of revenue recognition. In addition, if management had chosen adifferent methodology to recognize the license fee and milestone paymentsreceived under the Commercial Agreement, the Company’s financial position andresults of operations could have differed materially. For example, if theCompany were to recognize the revenues earned from the Commercial Agreement ona straight-line basis over the life of the agreement, the Company would haverecognized approximately $60.4 million and $189.2 million as revenue for 2006and from the commencement of the Commercial Agreement, respectively, through December 31,2006. Management believes that the current methodology used to recognizerevenues under the Commercial Agreement, which reflects the level of effortconsistent with the product development activities, is the most appropriatemethodology because it reflects the level of expenditure and activity in theperiod in which it is being spent as compared to the total expected expenditureover the life of the Commercial Agreement. This cost to cost approach issystematic and rational, it provides a factually supportable pattern to trackprogress, and is reflective of the level of effort, which varies over time.

Non-refundable upfront payments received from MerckKGaA were deferred due to our significant continuing involvement and are beingrecognized as revenue on a straight-line basis over the estimated serviceperiod because the activities specified in the agreement between the Companyand Merck KGaA will be performed over the estimated service period and there isno other pattern or circumstances that indicate a different way in which therevenue is earned. In addition, the development and license agreement withMerck KGaA does not contain any provisions for establishing a clinical budgetand none has been established between the parties. This agreement does not callfor co-development with the Company in Merck KGaA’s territory; rather MerckKGaA is solely responsible for regulatory efforts in its territory.Non-refundable milestone payments, which represent the achievement of asignificant step in the research and development process, pursuant tocollaborative agreements other than the Commercial Agreement, are recognized asrevenue upon the achievement of the specified milestone. This is because eachmilestone payment represents the achievement of a substantive step in theresearch and development process and Merck KGaA has the right to evaluate thetechnology to decide whether to continue with the research and developmentprogram as each milestone is reached.

Manufacturing revenue consists of revenue earned onthe sale of ERBITUX to our corporate partners for subsequent commercial sale.The Company recognizes manufacturing revenue when the product is shipped, whichis when our partners take ownership and title has passed, collectibility isreasonably assured, the sales price is fixed or determinable, and there ispersuasive evidence of an arrangement. We are contractually obligated to sellERBITUX to BMS at our cost of production plus a 10% markup on bulk. We sellbulk inventory to Merck KGaA at our full absorption cost of production. Thecontinuing level of manufacturing revenue in future periods may fluctuatesignificantly based on market demand, our cost of production, as well as BMS’srequired level of safety stock inventory for ERBITUX and whether Merck KGaAorders ERBITUX for commercial use.

Royalty revenues from licensees, which are based onthird-party sales of licensed products and technology, are recorded as earnedin accordance with contract terms when third-party sales can be reliablymeasured and collection of funds is reasonably assured.

Collaborative agreement revenue consists ofreimbursements received from BMS and Merck KGaA related to clinical andregulatory studies, ERBITUX provided to them for use in clinical studies,reimbursement of a portion of royalty expense and certain marketing andadministrative costs. Collaborative agreement revenue is recorded as earnedbased on the performance requirements under the respective contracts.

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*Inventories—**Until*February 12,2004, all costs associated with the manufacturing of ERBITUX were included inresearch and development expenses when incurred. Effective February 13,2004, the date after the Company received approval from the FDA for ERBITUX, webegan to capitalize in inventory the cost of manufacturing ERBITUX and willexpense such costs as cost of manufacturing revenue at the time of sale. Sincewe had previously expensed all inventory produced, the costs of manufacturingrevenue in 2004 reflected minimal costs that primarily consisted of shippingand storage charges. In 2005, we continued to sell inventory that waspreviously expensed and gradually began to sell inventory that was partiallyexpensed, since there was inventory in process on the date that we received FDAapproval of ERBITUX. In the first quarter of 2006, we sold all partiallyexpensed inventory and we expect that our quarterly margins on sales of ERBITUXwill therefore begin to stabilize beginning in 2007. The fluctuation in ourmargin is based on various circumstances such as the level of demand from ourpartners and the costs of filling and finishing the product (which does notinclude a markup when selling to BMS), relative to the overall costs of thebulk product.

Our policy is to capitalize inventory costs associatedwith our products when, based on management’s judgment,  future economic benefit is expected to berealized. Our accounting policy addresses the attributes that should be consideredin evaluating whether the costs to manufacture a product have met thedefinition of an asset as stipulated in FASB Concepts Statement No. 6. Ifapplicable, we assess the regulatory and approval process including any knownconstraints and impediments to approval. We also consider the shelf-life of theproduct in relation to the expected timeline for approval. We  review our inventory for excess or obsoleteinventory and write down obsolete or otherwise unmarketable inventory to itsestimated net realizable value.

In June 2006, we began producing ERBITUX forcommercial use at our BB50 manufacturing facility. Based on our currenttimeline, we expect to file a sBLA with the FDA for approval of our BB50facility in the first quarter of 2007. Until such time as we receive approvalof BB50 from the FDA, we will not be able to sell the ERBITUX inventoryproduced in BB50. Based on management’s current expectations, we expect thatthe costs of such inventory will be fully realizable once we obtain approval ofBB50. Therefore, in June 2006 we began to capitalize the costs ofproducing ERBITUX in BB50 and will continue to do so, as long as we canconclude that the costs of such inventory will be fully realizable. As of December 31,2006, we have capitalized approximately $35.5 million of inventory produced inBB50.

*Litigation—**The*Company iscurrently involved in certain legal proceedings more fully described under“Part I—Item 3. Legal Proceedings” and as disclosed in the notes tothe consolidated financial statements. As of December 31, 2006, we havenot established a legal reserve in our financial statements because we do notbelieve that such a reserve is required to be established at this time, inaccordance with Statement of Financial Standards No. 5. However, if in afuture period, events in any such legal proceedings render it probable that aloss will be incurred, and if such loss is reasonably estimable at that time,we will establish such a reserve. Thus, it is possible that legal proceedingsmay have a material adverse impact on the operating results for that period, onour balance sheet or both**.**

*Long-Lived Assets—**We*review long-livedassets for impairment when events or changes in business conditions indicatethat their full carrying value may not be recovered. Assets are considered tobe impaired and written down to fair value if expected associated undiscountedcash flows are less than carrying amounts. Fair value is generally determinedas the present value of the expected associated cash flows. As noted under Item2- “Properties”, we own a number of buildings that are primarilydedicated to the manufacturing of ERBITUX and other clinical products in ourpipeline. Based on management’s current estimates, we expect to recover thecarrying value of such assets. Changes in regulatory or other businessconditions in the future could change our judgments about the carrying value ofthese facilities, which could result in the recognition of material impairmentlosses.

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*Income Taxes—**Income*taxes areaccounted for under the asset and liability method. Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases, and operating loss and taxcredit carryforwards. Significant estimates are required in determining ourprovision for income taxes. In 2006, we released a portion of our valuationallowance against our deferred tax assets. This partial release was based onrevised expectations of our projected book and taxable income which caused usto conclude that it is more likely than not that a portion of the benefits ofthese deferred tax assets would be realized. This release resulted in net taxbenefit of approximately $111.3 million. The financial projections supportingour conclusion to release a portion of our valuation allowance containsignificant assumptions based on current facts about our market share and ourcompetitive landscape. If such assumptions were to differ significantly, it mayhave a material impact on our ability to realize our deferred tax assets. Wewill continue to monitor our current performance and future financialprojections, including market share and competitive landscape, in order todetermine the effect on the valuation allowance.

**Impact of RecentAccounting Pronouncements**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes—an interpretation of FASB StatementNo. 109.” This Interpretation clarifies the accounting for uncertainty inincome taxes recognized in an enterprise’s financial statements in accordancewith FASB No. 109, “Accounting for Income Taxes.” It also prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. This Interpretation also provides guidance on derecognition,classification of interest and penalties, accounting in interim periods,disclosure and transition. This Interpretation is effective for fiscal yearsbeginning after December 15, 2006. We have reviewed our tax positions andwe do not expect that the Interpretation will have a material impact on ourresults of operations or financial position.

**RESULTS OFOPERATIONS**

Selectedfinancial and operating data for the three years ended December 31, 2006,2005 and 2004 are as follows: (in thousands)

| ** **                                 | ** ** | **2006** | ** **  | **2005**   | ** ** | **2004**    | ** ** | **2006 vs.  2005  Variance** | ** **  | **2005 vs.  2004  Variance** | ** ** |
|--------------------------------------------|------------|----------|-------------|------------|------------|-------------|------------|-----------------------------------|-------------|-----------------------------------|------------|
| Royalty revenue                            |       | $        | 290,599     |       | $          | 177,440     |       | $                                 | 106,274     |                              | $          | 113,159 |   | $ | 71,166 |   |
| License fees and  milestone revenue        |       | 232,269  |        | 97,239     |       | 129,386     |       | 135,030                           |        | (32,147                           | )          |
| Manufacturing  revenue                     |       | 86,476   |        | 44,090     |       | 99,041      |       | 42,386                            |        | (54,951                           | )          |
| Collaborative  agreement revenue           |       | 68,503   |        | 64,904     |       | 53,989      |       | 3,599                             |        | 10,915                            |       |
| **Total revenues**                         | ** ** | **$**    | **677,847** | ** ** | **$**      | **383,673** | ** ** | **$**                             | **388,690** | ** **                        | **$**      | **294,174** | ** ** | **$** | **(5,017** | **)** |
| Research and  development                  |       | $        | 112,145     |       | $          | 99,303      |       | $                                 | 82,658      |                              | $          | 12,842 |   | $ | 16,645 |   |
| Clinical and  regulatory                   |       | 54,244   |        | 50,136     |       | 30,254      |       | 4,108                             |        | 19,882                            |       |
| Marketing,  general and administrative     |       | 72,476   |        | 72,334     |       | 59,800      |       | 142                               |        | 12,534                            |       |
| Royalty expense                            |       | 73,958   |        | 58,376     |       | 36,065      |       | 15,582                            |        | 22,311                            |       |
| Litigation  settlement                     |       | —   |        | —     |       | 55,363      |       | —                            |        | (55,363                           | )          |
| Cost of manufacturing  revenue             |       | 76,063   |        | 16,367     |       | 1,099       |       | 59,696                            |        | 15,268                            |       |
| Discontinuation  of small molecule program |       | —   |        | 6,200      |       | —      |       | (6,200                            | )           | 6,200                             |       |
| Withholding tax  (recovery) expense        |       | (264     | )           | 14,178     |       | (1,815      | )          | (14,442                           | )           | 15,993                            |       |
| **Total  operating expenses**              | ** ** | **$**    | **388,622** | ** ** | **$**      | **316,894** | ** ** | **$**                             | **263,424** | ** **                        | **$**      | **71,728** | ** ** | **$** | **53,470** | ** ** |

 

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***Years Ended December 31, 2006 and 2005***

**Revenues**

**Royalty Revenue**

Royalty revenues consist of royalty payments earned onthe sales of ERBITUX by our partners, BMS and Merck KGaA. Under our agreementwith BMS, we are entitled to royalty payments equal to 39% of BMS’s net salesof ERBITUX in the United States and Canada. Under our agreement with MerckKGaA, we were entitled to royalty payments based on a percentage of grossmargin of Merck KGaA’s sales of ERBITUX outside the United States and Canada. Beginningin July of 2006, we are entitled to 9.5% of Merck’s KGaA net sales outsideof the United States and Canada. In 2006, global in-market sales of ERBITUXreached $1.1 billion. In North America, in-market net sales by BMS in 2006amounted to approximately $652.2 million compared to approximately $413.1million in 2005. Outside of North America, in-market net sales by Merck KGaA in2006 amounted to approximately $428.2 million compared to approximately $265.3million in 2005.

In 2006, total royaltyrevenues increased by approximately $113.2 million or 64% from 2005 primarilydue to an increase in net sales of ERBITUX and the change in royalties earnedunder the Merck KGaA agreement.

**License Fees andMilestone Revenue**

License fees and milestone revenues consist of therecognition of up-front license fees and milestone payments received under theCommercial Agreement with BMS and recognition of payments received under thedevelopment and license agreements with Merck KGaA. In 2006, total license feeand milestone revenue consisted of approximately $231.9 million earned from BMSand $348,000 earned from Merck KGaA as compared to 2005 in which approximately$94.2 million was earned from BMS and approximately $3.0 million was earnedfrom Merck KGaA.

In 2006, total license fees and milestone revenuesincreased by approximately $135.0 million or 139% from 2005 primarily due tothe receipt of $250.0 million in March 2006 from BMS as a result ofobtaining FDA approval for ERBITUX in head and neck indication. The milestonerevenue earned in the first quarter of 2006 included a “catch-up” adjustment ofapproximately $112.7 million related to the actual product clinical developmentcosts to be incurred from inception through December 31, 2005 as apercentage of estimated total costs incurred over the life of the CommercialAgreement. The remaining increase is due primarily to the higher amount ofdeferred revenue being recognized through year-end as a result of the receiptof the $250.0 million milestone payment from BMS. These increases werepartially offset by a decrease in amortization related to the Merck KGaAdevelopment and license agreements of approximately $2.7 million related to thetermination of the BEC2 and gp75 antigen agreement in the fourth quarter of2005.

In 2007, license fees andmilestone revenues is estimated to range for the full year between  $100.0 million to $140.0 million.

**ManufacturingRevenue**

Manufacturing revenues consist of sales of ERBITUX toour corporate partners for commercial use. In accordance with the CommercialAgreement, we are contractually obligated to sell ERBITUX to BMS at our cost ofproduction plus a 10% markup on bulk. We sell bulk inventory to Merck KGaA atour full absorption cost of production. In 2006, purchases by BMS amounted toapproximately $82.4 million and purchases by Merck KGaA amounted toapproximately $4.0 million.

In 2006, totalmanufacturing revenues increased by $42.4 million or 96% from 2005 primarilydue to increased commercial sales of ERBITUX to BMS of approximately $38.4million and to Merck KGaA of approximately $4.0 million.

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**CollaborativeAgreement Revenue**

Collaborative agreement revenues consist ofreimbursements from our partners BMS and Merck KGaA under our collaborativeagreements. There are certain categories for which we receive reimbursementfrom our partners: the cost of ERBITUX supplied to our partners for use inclinical studies, clinical and regulatory expenses, certain marketing andadministrative expenses, and a portion of royalty expense. Of the total $68.5million in collaborative agreement revenues earned in 2006, approximately $50.9million was earned from BMS and approximately $17.6 million was earned fromMerck KGaA. In comparison, of the $64.9 million in collaborative agreementrevenues earned in 2005, approximately $42.9 million was earned from BMS andapproximately $22.0 million was earned from Merck KGaA.

In 2006, totalcollaborative agreement revenues increased by approximately $3.6 million or 6% from2005 primarily due to an increase in royalty expense reimbursement ofapproximately $14.5 million, partly offset by decreases in reimbursement ofclinical drugs of approximately $7.9 million, clinical and regulatory costs ofapproximately $2.3 million, and reimbursements for certain marketing, generaland administrative expenses of $749,000. It is important to note that beginningJanuary 1, 2007, reimbursement for royalty expense from our corporatepartner BMS, decreases from 4.5% to 2.5% of North American net sales inaccordance with the existing terms of our contractual agreement.

**Expenses**

**Research andDevelopment**

Research and development expenses consist of costsassociated with our in-house research programs, product and process developmentexpenses, costs to manufacture product candidates for clinical studies, qualityassurance and quality control infrastructure and costs of ERBITUX supplied toour corporate partners, BMS and Merck KGaA, for use in clinical studies.Research and development expenses also include our cost of inventory suppliedto our partners for use in clinical studies that are reimbursable from ourcorporate partners. As a result, a total of approximately $19.5 million in 2006and approximately $27.4 million in 2005 of these expenses are also reflected asrevenues under collaborative agreement revenue.

In 2006, total research and development expensesincreased by approximately $12.8 million or 13% from 2005 primarily due to anincrease in third-party costs associated with manufacturing some of ourpipeline products of approximately $9.9 million and an increase in shipments ofERBITUX to our partners for clinical studies of approximately $4.3 million. Theincrease in the manufacturing of pipeline products in 2006 is part of the overallclinical development strategy related to our pipeline candidates, which we planto take from Phase I to Phase II, beginning in 2007. The production of theseproducts will provide the Company with the ability to have sufficient productavailable for the various clinical trials that we plan to begin for a number ofour pipeline candidates in the second quarter of 2007.

In 2007, we anticipatespending approximately 45% more than in 2006 in research and developmentactivities. The increase in this category is primarily due to an increase inprojected clinical shipments of ERBITUX with the remaining increase due toincreased development costs related to our pipeline products.

**Clinical andRegulatory**

Clinical and regulatory expenses consist of costs toconduct our clinical studies and associated regulatory activities. Clinical andregulatory expenses also include certain amounts that are reimbursable from ourcorporate partners. As a result, a total of approximately $12.4 million in 2006and $14.7 million in 2005 of these expenses are also reflected as revenuesunder collaborative agreement revenue.

In 2006, total clinical and regulatory expensesincreased by approximately $4.1 million, or 8% from 2005. This increase is dueto the fact that during the last half of 2006, we made significant efforts toincrease personnel and add to the infrastructure in the clinical and regulatoryfunctions. This effort will 

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continue during 2007 untilwe have the adequate resources in place so that we are able to advance ourpipeline candidates while concurrently investing a significant amount of effortin the continued development of ERBITUX in other indications. The increase inclinical and regulatory expenses in 2006 was partially offset by a decrease ofapproximately $2.0 million, related to the termination of our collaborativeagreement with UCB.

In 2007, we expect thatclinical and regulatory expenses to nearly double from 2006 based on a focusedinvestment strategy to develop our pipeline candidates beyond Phase I as wellPhase III studies of ERBITUX in multiple tumor types.

**Marketing, Generaland Administrative**

Marketing, general and administrative expenses consistof marketing and administrative personnel costs, including related facilitycosts, additional costs to develop internal marketing and field operationscapabilities and expenses associated with applying for patent protection forour technology and products. Marketing, general and administrative expensesalso include certain amounts that are reimbursable from our corporate partners.As a result, a total of approximately $1.2 million in 2006 and $2.0 million in2005 of these expenses are also reflected as revenues under collaborativeagreement revenue.

In 2006, total marketing, general and administrativeexpenses  increased by $142,000 or lessthan 1% from 2005 primarily due to increases in salaries and benefits ofapproximately $6.4 million, including share-based compensation of approximately$5.2 million, due to increased headcount and merit increases from the prioryear. This increase was primarily offset by decreases in severance expense ofapproximately $2.9 million related to the resignation of our former chiefexecutive officer in October 2005, and a decrease in legal expenses fromthe prior year.

In 2007, we expect thatmarketing, general and administrative expenses will be consistent with theprior year, reflecting our continued focus on efficiencies and cost-savinginitiatives.

**Royalty Expense**

Royalty expenses consist of obligations related tocertain licensing agreements related to ERBITUX.  We are obligated to pay royalties of 9.25% ofNorth American net sales and a low single-digit royalty on net sales outsideNorth America, which will increase if net sales outside North America consistof ERBITUX produced in the United States. In 2006, we received reimbursementsfrom our corporate partners of 4.5% on North American net sales and a lowsingle-digit percentage on net sales outside of North America, which isreflected in collaborative agreement revenues. As a result, a total ofapproximately $35.4 million in 2006 and $20.9 million in 2005 of these expensesare also reflected as revenues under collaborative agreement revenue.

In 2006, total royaltyexpenses increased by approximately $15.6 million, or 27% from 2005 primarilydue to the increase in net sales as described in royalty revenue above.

**Cost ofManufacturing Revenue**

We began to capitalize in inventory the cost ofmanufacturing ERBITUX after we received approval in February of 2004. In2005, we continued to sell inventory that was previously expensed as well asinventory that was partially expensed, since there was inventory in process onthe date that we received FDA approval of ERBITUX. It took nearly two years tosell all inventory that was previously expensed or partially expensed. In thefirst quarter of 2006, we exhausted the remaining batches of ERBITUX withpartial costs and we expect our margins to normalize going forward. We sellERBITUX to BMS at our costs of production plus a 10% mark-up on bulk and to MerckKGaA at our cost of production. Therefore, depending on certain circumstances,such as the mix of demand from our partners, the formulation used in theproduction of ERBITUX, and the costs of filling and finishing ERBITUX bulk (forwhich we do not 

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charge a 10% markup whenselling to BMS), we expect that our gross margins on sales of ERBITUX mayfluctuate from quarter to quarter.

In 2006, cost ofmanufacturing revenue amounted to $76.1 million representing a gross margin ofapproximately 12% compared to costs of manufacturing revenue for 2005 ofapproximately $16.4 million, or a gross margin of 63%. The fluctuation in ourgross margin is based on the explanation noted above.

**Withholding Tax(Recovery) Expense**

The Company had recorded aliability of $32.0 million as of December 31, 2005 to resolve a previouslypending withholding tax matter. Payments totaling approximately $31.7 millionwere made during the year as final settlement of this matter. During the fourthquarter of 2006, the Company recorded a recovery of the remaining liability of$264,000 into income.

**Interest Income andInterest Expense**

In 2006, interest income increased by  approximately $12.5 million or 45% from 2005primarily due to increases in interest rates and higher average cash andsecurities balances during 2006 as compared with 2005, due to receiving a$250.0 million milestone payment from BMS in April 2006.

Interest expense in 2006increased by approximately $2.8 million or 42% from 2005 primarily due to thefact that we finalized construction of our BB50 manufacturing facility in May 2006,and therefore ceased capitalizing interest on the construction of thisfacility.

**Provision forIncome Taxes**

The effective tax rate for the year ended December 31,2006 amounted to approximately 19.0%. The effective tax rate for 2006 excludesthe effect of the partial release of our valuation allowance described below.The effective tax rate for 2006 is less than the federal statutory rate of 35%,mainly due to the utilization of fully reserved deferred tax assets. Areconciliation of the statutory federal income tax rate to the effective incometax rate for each period is included in the notes to the consolidated financialstatements. We expect our 2007 effective tax rate to be in the range ofapproximately 40% to 43%, which does not include the effect of any change inthe valuation allowance on deferred tax assets.

In 2006, we released a portion of our valuation allowance against our total deferredtax assets. This partial release was based on expectations of projected bookand taxable income, which caused us to conclude that it is more likely than notthat  a portion of the benefit of these deferredtax assets would be realized. This release resulted in a net tax benefit ofapproximately $111.3 million. The financial projections supporting ourconclusion to release a portion of our valuation allowance contain significantassumptions based on current facts about our market share and our competitivelandscape. If such assumptions were to differ significantly, it may have amaterial impact on our ability to realize our deferred tax assets. We willcontinue to monitor our current performance and future financial projections,including market share and competitive landscape, in order to determine theeffect on the valuation allowance.

**Net Income**

We had net income ofapproximately $370.7 million, or $4.40 per basic common share and $4.11 perdiluted common share for the year ended December 31, 2006, compared withnet income of approximately $86.5 million, or $1.03 per basic common share and$1.01 per diluted common share for the year ended December 31, 2005. Thefluctuation in results was due to the factors noted above.

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***Years Ended December 31, 2005 and 2004***

**Revenues**

**Royalty Revenue**

Royalty revenues consist of royalty payments earned onthe sales of ERBITUX by our partners, BMS and Merck KGaA. Under our agreementwith BMS, we are entitled to royalty payments equal to 39% of BMS’s net salesof ERBITUX in the United States and Canada. Under our agreement with MerckKGaA, we are entitled to royalty payments based on a percentage of gross marginof Merck KGaA’s sales of ERBITUX outside the United States and Canada. In 2005,our royalty revenue increased by approximately $71.2 million from 2004 due toan increase in net sales of ERBITUX. In North America, sales by BMS in 2005amounted to approximately $413.1 million compared to net sales in 2004 ofapproximately $260.8 million. Outside of North America, sales of ERBITUX byMerck KGaA increased to approximately $265.0 million in 2005 as compared toapproximately $100.0 million in 2004.

**License Fees andMilestone Revenue**

License fees and milestonerevenues in 2005 of approximately $97.2 million consists of the recognition ofup-front license fees and milestone payments received under the CommercialAgreement with BMS of approximately $94.2 million and recognition of paymentsreceived under the development and license agreements with Merck KGaA ofapproximately $3.0 million. The decrease of approximately $32.1 million from2004 is primarily due to a decrease of approximately $35.5 million inamortization related to the Commercial Agreement with BMS primarily due to thefact that in 2004 we received $250.0 million from BMS when we obtained FDAapproval of ERBITUX, resulting in incremental amortization. Such decrease waspartially offset by an increase in amortization related to the Merck KGaAdevelopment and license agreements of approximately $1.6 million related to thetermination of the BEC2 and gp75 antigen agreement in the fourth quarter of2005.

**ManufacturingRevenue**

Manufacturing revenues in2005 of approximately $44.1 million consists of sales of ERBITUX to BMS forcommercial use. The decrease of approximately $55.0 million from 2004 is mainlydue to a lower selling price in 2005. In accordance with the CommercialAgreement, we are contractually obligated to sell ERBITUX to BMS at our cost ofproduction plus a 10% markup on bulk. We sell bulk inventory to Merck KGaA atour full absorption cost of production. During 2004, the price charged to BMSincluded the costs of inventory produced by Lonza, which is significantlyhigher than our cost of production at our BB36 manufacturing plant. During2004, we depleted all inventory produced by Lonza, therefore our costs in 2005reflect only costs associated with manufacturing inventory at our BB36manufacturing facility.

**CollaborativeAgreement Revenue**

Collaborative agreementrevenues consist of reimbursements from our partners BMS and Merck KGaA underour collaborative agreements. There are certain categories for which we receivereimbursement from our partners:  thecost of ERBITUX supplied to our partners for use in clinical studies, clinicaland regulatory expenses, certain marketing and administrative expenses, and aportion of royalty expense. During 2005, we earned approximately $64.9 millionin collaborative agreement revenue, of which approximately $42.9 millionrepresents amounts earned from BMS and approximately $22.0 million representsamounts earned from Merck KGaA, as compared to approximately $54.0 millionearned in the comparable period in 2004, of which approximately $38.9 millionwas earned from BMS and approximately $15.0 million was earned from Merck KGaA.The increase in collaborative agreement revenue of  approximately $10.9 million  is principally due to an increase inreimbursement for clinical drugs of approximately $2.9 million and an increasein royalty expense reimbursement of approximately $8.1 million, partly offsetby minor decreases in the reimbursement of certain marketing, general andadministrative expenses.

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**Expenses**

**Research andDevelopment**

Research and developmentexpenses in 2005 of approximately $99.3 million increased by approximately$16.6 million, or 20% from 2004. The increase is primarily due to shipments ofERBITUX to our partners for clinical studies of approximately $13.0 million andan increase in costs associated with the development of our non-ERBITUXpipeline. Research and development expenses include costs associated with ourin-house and collaborative research programs, product and process developmentexpenses, costs to manufacture ERBITUX (until February 12, 2004) and otherproduct candidates and quality assurance and quality control costs. Researchand development expenses include inventory supplied to our partners for use inclinical trials that are reimbursable from our corporate partners.Approximately $27.4 million and $24.5 million of costs representing anddevelopment expenses in 2005 and 2004, respectively, were reimbursed andincluded under collaborative agreement revenue since they represent inventorysupplied to our partners for use in clinical studies.

**Clinical andRegulatory**

Clinical and regulatoryexpenses consist of costs to conduct our clinical studies and associatedregulatory activities. Clinical and regulatory expenses in 2005 amounted toapproximately $50.1 million, an increase of approximately $19.9 million, or 66%from 2004. The increase is primarily due to an increase of approximately $10.5million due BMS for reimbursement of clinical expenses related to ERBITUX, anincrease of approximately $4.2 million in third-party clinical trial costs, andan increase in salaries and benefits of approximately $3.5 million. During2005, we increased our headcount in our clinical and regulatory department aswell as our investment in clinical trials for ERBITUX and other products in ourpipeline in order to invest in the continued growth of ERBITUX and to developother product candidates. Approximately $14.7 million and $13.9 million of thecosts included in this category for 2005 and 2004, respectively, are reflectedas revenues under collaborative agreement revenue since they represent coststhat are reimbursable by our corporate partners.

**Marketing, Generaland Administrative**

Marketing, general and administrative expenses consistof  marketing and administrativepersonnel costs, including related facility costs, additional costs to developinternal marketing and field operations capabilities and expenses associatedwith applying for patent protection for our technology and products. Marketing,general and administrative expenses also include certain amounts that arereimbursable from our corporate partners.

Marketing, general andadministrative expenses in 2005 amounted to approximately $72.3 million, anincrease of approximately $12.5 million, or 21% from 2004. This increase ispartly due to increases in salaries and benefits of approximately $6.0 milliondue to increased headcount and merit increases from the prior year and anincrease in professional services of approximately $5.3 million due toincreases in legal, tax consulting and marketing programs, and a charge ofapproximately $2.9 million in severance expense related to the resignation ofDaniel S. Lynch (our former chief executive officer) in October 2005.Approximately $2.0 million and $2.8 million of costs representing marketing andgeneral expenses in 2005 and 2004, respectively, are reimbursed and included incollaborative agreement revenue.

**Royalty Expense**

Royalty expense consistsof obligations related to certain licensing agreements related toERBITUX. Prior to the third quarter of 2005, we were obligated to payroyalties of approximately 12.75% of North American net sales and a singledigit royalty on sales outside of North America, which will increase if salesoutside of North America consist of ERBITUX produced in the United States.Beginning in the third quarter of 2005, gross royalty expense decreased as apercentage of net sales in North America from 12.75% to 12.25%. We receivereimbursements from our corporate partners of 4.5% on North 

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Americannet sales and a minimum of 1% on net sales outside of North America, which isreflected in collaborative agreement revenue. In 2005, we incurred royaltyexpense of approximately $58.4 million as compared to $36.1 million in 2004, anincrease of approximately $22.3 million, or 62%. The increase is primarilyassociated with the increase in North American net sales, which consisted ofapproximately $413.1 million in 2005 as compared to approximately $260.8million in 2004. Approximately $20.8 million and $12.7 million of royaltyexpense was reimbursable by our corporate partners and included ascollaborative agreement revenue in 2005 and 2004, respectively.

**Cost ofManufacturing Revenue**

Effective February 13,2004, the date after we received approval from the FDA for ERBITUX, we began tocapitalize in inventory the cost of manufacturing ERBITUX and to expense suchcosts as cost of manufacturing revenue at the time of sale. Since we hadpreviously expensed all inventory produced prior to February 13, 2004, thecosts of manufacturing revenue in 2004 reflected minimal costs that primarily consistedof shipping and storage charges. In 2005, we continued to sell inventory thatwas previously expensed as well as inventory that was partially expensed, sincethere was inventory in process on the date that we received FDA approval ofERBITUX. In the fourth quarter of 2005, we sold substantially all the inventorywith partial costs and thereafter our cost of manufacturing reflects fullabsorption costs of production.

**Discontinuation ofSmall Molecule Program**

On May 11, 2005, weannounced a plan to discontinue our small molecule research program. Thisdecision was made after evaluating our investment in such program against thetime horizon before commercial benefits would be realized. As a result of thisdecision, we recorded in the second quarter of 2005 approximately $6.2 millionof costs associated with the discontinuation of this program. Such costsinclude approximately $2.2 million of costs related to severance for 45employees that were terminated, approximately $3.7 million of costs related tothe write-off of fixed assets used in such program and approximately $60,000 ofcontract termination costs related to the cancellation of the lease at theBrooklyn facility where the employees were conducting such research andapproximately $280,000 of other shutdown expenses. The disposition of thisprogram was substantially complete and the majority of the termination benefitswere paid as of December 31, 2005.

**Withholding TaxExpense (Recovery)**

The increase ofapproximately $16.0 million was due to the fact that, in the fourth quarter of2005, we recorded a net withholding tax expense of approximately $14.2 millionas a result of reaching an agreement in principle with the IRS to resolve apending withholding tax matter. The agreement in principle reached with the IRSprovides for the imposition of an accuracy-related penalty under Section 6662of the Internal Revenue Code, which increased the estimated withholding taxliability from approximately $18.1 million as previously recorded in ourBalance Sheet as of December 31, 2004 to a total of $32.0 million. In2004, we recorded a recovery of withholding tax of approximately $1.8 millionbecause we reversed a liability that was settled at an amount less thanoriginally estimated.

**Interest Income andInterest Expense**

In 2005, interest income amounted to approximately$27.9 million, an increase of approximately $13.8 million, or 98% from thecomparable period in 2004. This increase is attributable to increases ininterest rates from the comparable period in 2004 as well as well as a higheraverage cash and securities balance during 2005 as compared with 2004, a resultof receiving $600.0 million  from theissuance of convertible debt in May 2004 and receiving a $250.0 millionmilestone payment from BMS in March of 2004.

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Interest expense in 2005amounted to approximately $6.6 million, a decrease of approximately $1.9million, or 22% from 2004. The decrease is due to lower interest rates than inthe comparable period of 2004, partly offset by an increase in debt outstanding.

**Provision forIncome Taxes**

The effective tax rate forthe year ended December 31, 2005 amounted to approximately 2.0%. Theeffective tax rate for 2005 includes an adjustment of approximately $440,000resulting from the reconciliation of the 2004 tax provision to our filed taxreturns. The primary reason for the increase in the effective rate from therate previously estimated is due to the impact of a withholding tax expense ofapproximately $14.2 million recorded in the fourth quarter of 2005 as a resultof reaching a tentative agreement with the IRS to resolve an employment taxmatter that had been outstanding since 2003. The difference from the statutoryrate of 35% is due to the utilization of fully reserved deferred tax assets,primarily the amortization of deferred revenue associated with license fees andmilestones, which were taxable in prior periods. A reconciliation of thestatutory federal income tax rate to the effective income tax rate for eachperiod is included in the notes to the consolidated financial statements.

**Net Income**

We had net income ofapproximately $86.5 million, or $1.03 per basic common share and $1.01 perdiluted common share for the year ended December 31, 2005, compared withnet income of approximately $113.6 million, or $1.43 per basic common share and$1.33 per diluted common share for the year ended December 31, 2004. Thefluctuation in results was due to the factors noted above.

**LIQUIDITY ANDCAPITAL RESOURCES**

At December 31, 2006,our principal sources of liquidity consisted of cash and cash equivalents andsecurities available for sale of approximately $1.0 billion. Historically,we have financed our operations through a variety of sources, mostsignificantly through the issuance of convertible notes, the receipt of licensefees and milestone payments and from reimbursement of certain expenses from ourcorporate partners. Since the approval of ERBITUX on February 12, 2004, webegan to generate royalty revenue and manufacturing revenue from the commercialsale of ERBITUX by our corporate partners and we have generated positive cashflows from operations in 2004 and in 2006. As we continue to generate revenuesfrom royalties and sales of ERBITUX for commercial distribution,  our cash flows from operating activities areexpected to increase as a source to fund our operations. As previouslydiscussed, we are planning to invest significantly in the development of ourpipeline candidates in 2007, while also continuing to develop ERBITUX in otherindications. Therefore, the utilization of our existing cash will be dependenton the level of in-market sales for ERBITUX in 2007, which will have a directimpact on whether we will generate positive or negative cash flows fromoperations in 2007.

**SUMMARY OF CASHFLOWS**

| ** **                                            | ** ** | **Years Ended December 31,** | ** ** | **Variance** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|--------------|------------|
| ** **                                            | ** ** | **2006**                                    | ** ** | **2005**     | ** ** | **2004** | ** ** | **2006 vs. 2005** | ** ** | **2005 vs. 2004** | ** ** |
| ** **                                            | ** ** | **(Thousands of dollars)**                  | ** ** |
| Cash provided by (used  in):                          |       |                                        |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  activities                                 |       |                                        | $          | 205,100      |       |   | $ | (64,592 | ) | $ | 255,657 |   |   | $ | 269,692 |   |   |   | $ | (320,249 | ) |   |
| Investing  activities                                 |       |                                        | (312,460   | )            |       | (5,053 | ) | (872,249 | ) |   | (307,407 | ) |   |   | 867,196 |   |   |
| Financing  activities                                 |       |                                        | 124,525    |         |       | (6,273 | ) | 665,048 |   |   | 130,798 |   |   |   | (671,321 | ) |   |
| Net increase (decrease)  in cash and cash equivalents |       |                                        | $          | 17,165       |       |   | $ | (75,918 | ) | $ | 48,456 |   |   | $ | 93,083 |   |   |   | $ | (124,374 | ) |   |

 

Historically, our cashflows from operating activities have fluctuated significantly due to the natureof our operations and the timing of our cash receipts. During the year ended December 31,2006, we 

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generated approximately$205.1 million in cash for operating activities, as compared to net cashused  in operating activities in 2005 ofapproximately $64.6 million. The increase in operating cash flows in 2006is primarily due to the receipt of a $250.0 million milestone payment from ourcorporate partner BMS, as a result of obtaining approval from the FDA forERBITUX in a second indication, partly offset by a payment to the IRS ofapproximately $31.7 million for withholding taxes related to an employment taxaudit for the years 1999-2001. The fluctuation in operating cash flows isalso due to the fact that in 2005 we paid approximately $55.4 million inlitigation expenses, net of insurance reimbursements related to the securitiesclass action settled in January 2005, and approximately $30.0 million ofroyalty payments to Genentech and Centocor related to 2004 for licenseagreements that we finalized during January 2005. These uses of cash fromoperations in 2005 were partially offset by cash generated from operations dueto increased royalty income in 2005 as a result of higher in-market net salesof ERBITUX by our partners BMS and Merck KGaA. In 2004, we generated cash flowsfrom operating activities of approximately $255.7 million, mainly due toreceipt of a milestone payment of $250.0 million from BMS as a result of theFDA’s approval of ERBITUX in the first quarter of 2004. As we continue to earnrevenues and operating income from the sale of ERBITUX, we expect that ouroperating cash flows will continue to experience significant fluctuations fromprior period results.

Our primary sources anduses of cash under investing activities consist of purchases and sales activityin our investment portfolio, which we manage based on our liquidity needs,possible business development transactions and amounts used for capitalexpenditures. During the year ended December 31, 2006, we used net cashfrom investing activities of approximately $312.5 million, comprised of netpurchases of investments of approximately $266.6 million and acquisition offixed assets of approximately $45.9 million. During the year ended December 31,2005, we used net cash from investing activities of approximately $5.1 millioncomprised of approximately $84.3 million in acquisition of fixed assets,primarily related to the construction of our BB50 manufacturing facility,offset by net proceeds from the sale and maturity of securities in ourinvestment portfolio of approximately $79.2 million. In 2004, we usedapproximately $872.2 million from investing activities mainly due to thefact that in 2004 we had net purchases of approximately $766.0 million ininvestment securities for our portfolio, which we classified as securitiesavailable for sale and we spent approximately $106.3 million on fixed assets,primarily related to the construction of our BB50 manufacturing facility. Thecash used in 2004 for investing purposes was generated from the issuance of the$600.0 million of senior convertible notes in the second quarter of 2004 andfrom the $250.0 million milestone payment received from BMS in March 2004.

Net cash flows generatedin financing activities in 2006 were approximately $124.5 million, of whichapproximately $29.8 million of proceeds were generated from the exercise ofstock options and sales under the Company’s employee stock purchase plan andfrom tax benefits associated with equity net operating losses that will betaken as a reduction on our tax returns. In 2005, we used approximately $6.3million  for financing activities due tothe purchase of 811,416 shares of our common stock at an average price of$30.62 per share for aggregate consideration of approximately $24.8 million,which was partially offset by proceeds from the exercise of stock options byemployees of approximately $18.0 million. In 2004, we generated approximately$665.0 million in net cash from financing activities primarily as a result ofthe issuance of the $600.0 million in senior convertible notes and also as aresult of proceeds of approximately $77.9 million from employees’ exercise of stockoptions.

Webelieve that our existing cash and cash equivalents and marketable securitiesand our cash provided by operating activities will provide us with sufficientliquidity to support our operations at least through the first quarter of 2008.We are also entitled to reimbursement for certain marketing, royalty expense,and research and development expenditures. Our future working capital andcapital requirements will depend upon numerous factors, including, but notlimited to:

·       progressand cost of our research and development programs, pre-clinical testing andclinical studies;

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·       the amount and timing ofrevenues earned from the commercial sale of ERBITUX;

·       our corporate partnersfulfilling their obligations to us;

·       timingand cost of seeking and obtaining additional regulatory approvals;

·       possiblebusiness development transactions;

·       level of resources that wedevote to the development of marketing and field operations capabilities;

·       costs involved in filing,prosecuting and enforcing patent claims; and legal costs associated with theoutcome of outstanding legal proceedings and investigations;

·       status of competition; and

·       ourability to maintain existing corporate collaborations and establish newcollaborative arrangements with other companies to provide funding to supportthese activities.

Below is a table thatpresents our contractual obligations and commercial commitments as ofDecember 31, 2006: (in thousands)

| ** **                          | ** ** | **Payments due by Year(1)** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                  | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012 and  Thereafter** | ** ** |
| Long-term debt(2)                   |       | $                                          | 600,000    |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 600,000 |   |
| Interest on  long-term debt         |       | 143,344                                    |       | 8,250 |   | 8,250 |   | 8,250 |   | 8,250 |   | 8,250 |   | 102,094 |   |
| Operating leases                    |       | 66,133                                     |       | 5,411 |   | 4,253 |   | 4,281 |   | 4,174 |   | 4,050 |   | 43,964 |   |
| Purchase  obligations               |       | 9,827                                      |       | 9,827 |   | — |   | — |   | — |   | — |   | — |   |
| Contract services  obligations      |       | 14,220                                     |       | 8,280 |   | 1,350 |   | 1,620 |   | 2,970 |   | — |   | — |   |
| Total contractual cash  obligations |       | $                                          | 833,524    |   | $ | 31,768 |   | $ | 13,853 |   | $ | 14,151 |   | $ | 15,394 |   | $ | 12,300 |   | $ | 746,058 |   |

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(1)           Amounts in the above table do not includemilestone-type payments payable by us under development agreements, if theachievement of that milestone is uncertain or the obligation amount is notdeterminable.

(2)     On May 15 of 2009, 2014 and 2019, or upon theoccurrence of certain designated events, holders may require the Company torepurchase the notes at a repurchase price equal to 100% of the principalamount of the notes plus accrued and unpaid interest.

**OFF-BALANCE SHEET ARRANGEMENTS**

We have no off-balancesheet arrangements that have or are reasonably likely to have a current orfuture effect on our financial condition, results of operations, liquidity,capital expenditures or capital resources.

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**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our holdings of financial instruments comprise a mixof U.S. dollar denominated securities that may include U.S. corporate debt,foreign corporate debt, U.S. government debt, foreign government debt,asset-backed securities, auction rate securities and commercial paper. All suchinstruments are classified as securities available for sale. Generally, we donot invest in portfolio equity securities, commodities, foreign exchangecontracts or use financial derivatives for trading purposes. Our debt securityportfolio represents funds held temporarily pending use in our business andoperations. We manage these funds accordingly. We seek reasonable assurednessof the safety of principal and market liquidity by investing in investmentgrade fixed income securities while at the same time seeking to achieve afavorable rate of return. Our market risk exposure consists principally ofexposure to changes in interest rates. Our holdings are also exposed to therisks of changes in the credit quality of issuers. We invest in securities thathave a range of maturity dates.

The table below presents the principal amounts andrelated weighted average interest rates by year of maturity for our investmentportfolio as of December 31, 2006: (in thousands, except interest rates)

| ** **            | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012 and  Thereafter** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-------------------------------|------------|-----------|------------|---------------------|------------|
| Fixed Rate            |       | $        | 212,400    |     | $          | 100,000  |       | $        | 55,000     |     | $          | 20,000                        |       |      | $          | —              |       |   |   | $ | — |   |   | $ | 387,400 |   | $ | 382,375 |   |
| Average Interest Rate |       | 3.51     | %          | 3.86     | %          | 4.33     | %          | 4.54     | %          |     | —     |                          |       |      | —     |                |       | 3.77 | % |   |   |
| Variable Rate         |       | —   |       | 1,802    | (1)        | —   |       | 10,000   | (1)        |     | —     |                          |       |      | 629,470    | (1)                 |       | 641,272 |   | 641,234 |   |
| Average Interest Rate |       | —   |       | 4.85     | %          | —   |       | 4.00     | %          |     | —     |                          |       |      | 5.35       | %                   |       | 5.33 | % |   |   |
|                  |       | $        | 212,400    |     | $          | 101,802  |       | $        | 55,000     |     | $          | 30,000                        |       |      | $          | —              |       |   |   | $ | 629,470 |   |   | $ | 1,028,672 |   | $ | 1,023,609 |   |

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(1)           These holdings primarily consist of U.S.corporate and foreign corporate floating rate notes. Interest on the securitiesis adjusted monthly, quarterly or semi-annually, depending on the instrument,using prevailing interest rates. These holdings are highly liquid and weconsider the potential for loss of principal to be minimal.

Our outstanding 13¤8%fixed rate convertible senior notes in the principal amount of $600.0 milliondue May 15, 2024 are convertible into our common stock at a conversionprice of $94.69 per share, subject to adjustment and to certain restrictions asoutlined in the indenture agreement. The fair value of fixed interest rateinstruments is affected by changes in interest rates and in the case of theconvertible notes by changes in the price of our common stock as well. The fairvalue of the convertible senior notes was approximately $545.6 million at December 31,2006.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.

The response to this itemis submitted as a separate section of this report as Part II commencing onPage F-1.

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Not Applicable.

**ITEM 9A.**        CONTROLSAND PROCEDURES.

***Disclosure Controls and Procedures***

Our management, with theparticipation of our Executive Committee of the Board, Chairman and Senior VicePresident, Finance, has evaluated the effectiveness of our “disclosure controlsand procedures” (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) as of the end of the period covered by this report. Based onsuch evaluation, Executive Committee of the Board, Chairman and 

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SeniorVice President, Finance, have concluded that, as of the end of the periodcovered by this report, our disclosure controls and procedures are effective inrecording, processing, summarizing and reporting, on a timely basis,information that we are required to disclose in the reports that we file orsubmit under the Exchange Act.

***Management’s Annual Report on Internal Control OverFinancial Reporting***

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rules 13a-15(f). Under the supervision andwith the participation of our management, including our Executive Committee ofthe Board, Chairman and Senior Vice President, Finance, we conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation under theframework in*Internal Control—IntegratedFramework*, our management concluded that our internal control overfinancial reporting was effective as of December 31, 2006.

KPMG LLP, an independentregistered public accounting firm, has audited the consolidated financialstatements included in this Annual Report on Form 10-K and, as partof their audit, has issued their report, included herein, (1) on ourmanagement’s assessment of the effectiveness of our internal control overfinancial reporting and (2) on the effectiveness of our internal controlover financial reporting.

***Changes in Internal Control Over Financial Reporting***

There has been no changein our internal control over financial reporting during our fourth fiscalquarter of 2006 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**The Board of Directors and Stockholders**ImClone SystemsIncorporated:

We have audited management’s assessment, included inthe accompanying Management’s Annual Report on Internal Control Over FinancialReporting*,*that ImClone SystemsIncorporated maintained effective internal control over financial reporting asof December 31, 2006, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).**ImCloneSystems Incorporated’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining an understandingof internal control over financial reporting, evaluating management’sassessment, testing and evaluating the design and operating effectiveness ofinternal control, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with U.S. generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with U.S. generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that ImCloneSystems Incorporated maintained effective internal control over financialreporting as of December 31, 2006, is fairly stated, in all materialrespects, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).**Also, in ouropinion, ImClone Systems Incorporated maintained, in all material respects,effective internal control over financial reporting as of December 31,2006, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

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We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of ImCloneSystems Incorporated and subsidiary as of December 31, 2006 and 2005, andthe related consolidated statements of operations, stockholders’ equity(deficit) and comprehensive income, and cash flows for each of the years in thethree-year period ended December 31, 2006, and our report dated March 1,2007 expressed an unqualified opinion on those consolidated financialstatements.

|                        | /s/ KPMG LLP |
|------------------------|--------------|
| Princeton, New  Jersey |         |   |
| March 1,  2007    |         |   |

 

**ITEM 9B.**       OTHERINFORMATION.

Not Applicable.

**PART III**

**ITEM 10.**         DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNACE.

The information requiredby Item 10 is incorporated into Part III of this Annual Report on Form 10-Kby reference to our definitive Proxy Statement for the 2007 Annual Meeting ofStockholders.

**ITEM 11.**         EXECUTIVECOMPENSATION.

The information requiredby Item 11 is incorporated into Part III of this Annual Report on Form 10-Kby reference to our definitive Proxy Statement for the 2007 Annual Meeting ofStockholders.

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information requiredby Item 12 is incorporated into Part III of this Annual Report on Form 10-Kby reference to our definitive Proxy Statement for the 2007 Annual Meeting ofStockholders.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information requiredby Item 13 is incorporated into Part III of this Annual Report on Form 10-Kby reference to our definitive Proxy Statement for the 2007 Annual Meeting ofStockholders.

**ITEM 14.**         PRINCIPALACCOUNTING FEES AND SERVICES.

The information required by Item 14 is incorporated intoPart III of this Annual Report on Form 10-K by reference to ourdefinitive Proxy Statement for the 2007 Annual Meeting of Stockholders.

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**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES.

| (a)(1) and (2) |   | The response to this portion of Item 15 is submitted  as a separate section of this report commencing on page F-1. |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------------------|
| (a)(3)              |   | Exhibits (numbered in accordance with Item 601 of  Regulation S-K).                                                     |

 

|      | **Exhibit No.** | ** **                                                                                                                                                                                             | ** ** | ** **   | **Description** | ** ** | ** ** | ** ** | **Incorporated by   Reference** | ** ** | ** ** |
|------|----------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|-----------------|------------|------------|------------|---------------------------------|------------|------------|
| 3.1  |                 | Certificate of  Incorporation, as amended through December 31, 1998                                                                                                                               |       | C(3.1)       |            |
| 3.2  |                 | Amendment dated June 4,  1999 to the Company’s Certificate of Incorporation, as amended                                                                                                      |       | G(3.1A)      |            |
| 3.3  |                 | Amendment dated  June 12, 2000 to the Company’s Certificate of Incorporation, as amended                                                                                                     |       | I(3.1A)      |            |
| 3.4  |                 | Amendment dated  August 9, 2002 to the Company’s Certificate of Incorporation, as amended                                                                                                    |       | O(3.1C)      |            |
| 3.5  |                 | Amended and Restated  By-Laws of the Company                                                                                                                                                           |       | X(3.1)       |            |
| 4.1  |                 | Rights Agreement dated  as of February 15, 2002 between the Company and EquiServe Trust Company,  N.A., as Rights Agent, as amended May 4, 2006                                              |       | K(Ex-1,Ex-2) |            |
| 4.2  |                 | Stockholder Agreement,  dated as of September 19, 2001, among Bristol-Myers Squibb Company,  Bristol-Myers Squibb Biologics Company and the Company                                               |       | J(99.2D2)    |            |
| 4.3  |                 | Indenture dated as of  May 7, 2004 by and between the Company and The Bank of New York, as Trustee  and Form of 13/8% Convertible Notes Due 2024                                             |       | T(4.5)       |            |
| 4.4  |                 | Registration Rights  Agreement dated as of May 7, 2004 by and between the Company, as Issuer,  and Morgan Stanley & Co., Incorporated and UBS Securities LLC, as  the Initial Purchasers |       | T(4.6)       |            |
| 10.1 |                 | 1996 Incentive Stock  Option Plan, as amended                                                                                                                                                          |       | M(99.1)      |            |
| 10.2 |                 | 1996 Non-Qualified Stock  Option Plan, as amended                                                                                                                                                      |       | M(99.2)      |            |
| 10.3 |                 | ImClone Systems  Incorporated 1998 Non-Qualified Stock Option Plan, as amended                                                                                                                         |       | M(99.2)      |            |
| 10.4 |                 | ImClone Systems Incorporated  2002 Stock Option Plan                                                                                                                                                   |       | O(99.8)      |            |
| 10.5 |                 | ImClone Systems  Incorporated 1998 Employee Stock Purchase Plan                                                                                                                                        |       | H(99.4)      |            |
| 10.6 |                 | Option Agreement, dated  as of September 1, 1998, between the Company and Ron Martell                                                                                                             |       | E(99.3)      |            |
| 10.7 |                 | License Agreement  between the Company and the Regents of the University of California dated  April 9, 1993                                                                                       |       | A(10.48)     |            |
| 10.8 |                 | License Agreement  between the Company and Rhone-Poulenc Rorer dated June 13, 1994                                                                                                                |       | B(10.56)     |            |
| 10.9 |                 | Development and License  Agreement between the Company and Merck KGaA dated December 14, 1998                                                                                                     |       | D(10.70)     |            |

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| 10.10 |   | Lease dated as of  December 15, 1998 for the Company’s premises at 180 Varick Street,  New York, New York                                                                                                                                                                                                   |   | F(10.69)   |   |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|
| 10.11 |   | Amendment dated  March 2, 1999 to Development and License Agreement between the Company  and Merck KGaA                                                                                                                                                                                                               |   | F(10.71)   |   |
| 10.12 |   | Acquisition Agreement  dated as of September 19, 2001, among the Company, Bristol-Myers Squibb  Company and Bristol-Myers Squibb Biologics Company                                                                                                                                                                    |   | J(99.D1)   |   |
| 10.13 |   | Development, Promotion,  Distribution and Supply Agreement, dated as of September 19, 2001, among  the Company, Bristol-Myers Squibb Company and E.R. Squibb & Sons,  L.L.C.                                                                                                                                 |   | J(99.D3)   |   |
| 10.14 |   | Employment Agreement,  dated as of March 19, 2004, between the Company and Daniel S. Lynch                                                                                                                                                                                                                            |   | S(10.1)    |   |
| 10.15 |   | Agreement of Sublease  dated October 5, 2001, by and between 325 Spring Street LLC and the  Company                                                                                                                                                                                                              |   | M(10.86)   |   |
| 10.16 |   | Promissory Note in the  principal amount of $10,000,000, dated October 5, 2001, executed by 325  Spring Street LLC in favor of the Company                                                                                                                                                                            |   | M(10.86.1) |   |
| 10.17 |   | Amendment No. 1 to  Development, Promotion, Distribution and Supply Agreement, dated as of  March 5, 2002, among the Company, Bristol-Myers Squibb Company and E.R.  Squibb & Sons, L.L.C.                                                                                                              |   | L(99.2)    |   |
| 10.18 |   | Amendment, dated as of  August 16, 2001 to the Development and License Agreement between the  Company and Merck KGaA                                                                                                                                                                                                  |   | N(10.88)   |   |
| 10.19 |   | Agreement of Sale and  Purchase between Building Associates, LP and ImClone Systems Incorporated  pertaining to 33 Chubb Way, Branchburg, New Jersey executed as of March 1,  2002                                                                                                                                    |   | O(10.92)   |   |
| 10.20 |   | Target Price Contract,  dated as of July 15, 2002, between ImClone Systems Incorporated and  Kvaerner Process, a division of Kvaerner U.S. Inc., for the Architectural,  Engineering, Procurement Assistance, Construction Management and Validation  of a Commercial Manufacturing Project in Branchburg, New Jersey |   | P(10.93)   |   |
| 10.21 |   | Modifications Agreement  dated as of December 15, 2000 by an between 180 Varick Street  Corporation and the Company                                                                                                                                                                                                   |   | Q(10.94)   |   |
| 10.22 |   | Amendment number 4 to  the Company’s lease at 180 Varick Street dated August 13, 2004 by and  between 180 Varick Street Corporation and the Company                                                                                                                                                              |   | U(10.28)   |   |
| 10.23 |   | ImClone Systems  Incorporated Annual Incentive Plan                                                                                                                                                                                                                                                                        |   | R(A.C)     |   |
| 10.24 |   | Supply Agreement between  the Company and Lonza Biologics PLC dated March 17, 2005                                                                                                                                                                                                                                    |   | W(10.30)   |   |
| 10.25 |   | ImClone Systems  Incorporated Senior Executive Severance Plan                                                                                                                                                                                                                                                              |   | V(10.29)   |   |
| 10.26 |   | ImClone Systems  Incorporated Change in Control Plan, as amended                                                                                                                                                                                                                                                           |   | EE(10.32)  |   |
| 10.27 |   | Terms of inducement  stock option grants to Dr. Philip Frost and Dr. Eric Rowinsky on  March 1, 2005 and February 21, 2005, respectively, as approved by  the Compensation Committee of Board of Directors                                                                                             |   | Y          |   |

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| 10.28†  |   | Collaboration and  License Agreement between the Company and UCB S.A. dated August 15, 2005                                                                                                                              |   | AA        |   |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|--------|
| 10.29        |   | Approval by Board of  Directors of certain compensation related matters and Company stock  repurchase program                                                                                                                 |   | Z         |   |
| 10.30        |   | ImClone Systems  Incorporated 2005 Inducement Stock Option Plan                                                                                                                                                               |   | BB(10.1)  |   |
| 10.31        |   | Terms of accelerated  Company stock options and form of lock-up agreement                                                                                                                                                     |   | CC(10.1)  |   |
| 10.32        |   | ImClone Systems  Incorporated 2006-2008 Retention Plan                                                                                                                                                                        |   | DD(10.1)  |   |
| 10.33        |   | ImClone Systems  Incorporated Transition Severance Plan                                                                                                                                                                       |   | EE(10.40) |   |
| 10.34        |   | Approval by the  Compensation Committee of the Board of Directors of performance criteria for  executive officer cash bonus awards under the Company’s Annual Incentive Plan  for the year ended December 31, 2006  |   | FF        |   |
| 10.35        |   | Letter Agreement, dated  March 21, 2006, by and between Joseph L. Fischer and ImClone Systems  Incorporated                                                                                                              |   | GG(10.42) |   |
| 10.36        |   | Letter Agreement, dated  August 23, 2006, by and between Joseph L. Fischer and ImClone Systems  Incorporated                                                                                                             |   | HH(99.1)  |   |
| 10.37        |   | Letter Agreement, dated  October 24, 2006, by and between Joseph L. Fischer and ImClone Systems  Incorporated                                                                                                            |   | II(99.1)  |   |
| 10.38†  |   | Settlement Agreement,  dated July 19, 2006, by and between ImClone Systems Incorporated and  Merck KGaA, including an amendment to the Development and License Agreement  between the Company and Merck KGaA, as amended |   | JJ(10.38) |   |
| 10.39*       |   | ImClone Systems  Incorporated 2006 Stock Incentive Plan                                                                                                                                                                       |   |      |   |
| 10.40*† |   | Letter Agreement between  the Company and UCB S.A. dated February 1, 2007                                                                                                                                                |   |      |   |
| 12.1*        |   | Calculation of Ratio of  Earnings to Fixed Charges                                                                                                                                                                            |   |      |   |
| 21.1*        |   | Subsidiaries of the  Company                                                                                                                                                                                                  |   |      |   |
| 23.1*        |   | Consent of KPMG LLP,  Independent Registered Public Accountants                                                                                                                                                               |   |      |   |
| 31.1*        |   | Certification of the  Company’s Principal Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                             |   |      |   |
| 31.2*        |   | Certification of the  Company’s Principal Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                             |   |      |   |
| 32*          |   | Certification of the  Company’s Principal Executive Officer and Principal Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                             |   |      |   |

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*                            Filedherewith.

†                            Arequest for confidential treatement was filed for certain portions of theindicated document. Confidential portions have been omitted and filedseparately with the Commission as required by Rule 24b-2 of theCommission.

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(A)               Previouslyfiled with the Commission; incorporated by reference to the Company’s AnnualReport on Form 10-K, File No. 0-19612, for the fiscalyear ended December 31, 1993. Confidential Treatment was granted for aportion of this Exhibit.

(B)                Previouslyfiled with the Commission; incorporated by reference to the Company’s AnnualReport on Form 10-K, File No. 0-19612, for the fiscalyear ended December 31, 1994.

(C)                Previouslyfiled with the Commission; incorporated by reference to the Company’s QuarterlyReport on Form 10-Q, File No. 0-19612, for the quarterended June 30, 1997.

(D)               Previouslyfiled with the Commission; incorporated by reference to the Company’sRegistration Statement on Form S-3, File No. 333-67335.Confidential treatment was granted for a portion of this Exhibit.

(E)                Previouslyfiled with the Commission; incorporated by reference to the Company’sRegistration Statement on Form S-8, File No. 333-64827.

(F)                 Previouslyfiled with the Commission; incorporated by reference to the Company’s AnnualReport on Form 10-K, File No. 0-19612, for the fiscalyear ended December 31, 1998.

(G)              Previouslyfiled with the Commission; incorporated by reference to the Company’s QuarterlyReport on Form 10-Q for the quarter ended June 30, 1999.

(H)              Previouslyfiled with the Commission; incorporated by reference to the Company’s AnnualReport on Form 10-K for the year ended December 31, 1999.

(I)                    Previouslyfiled with the Commission; incorporated by reference to the Company’s QuarterlyReport on Form 10-Q for the quarter ended June 30, 2000.

(J)                   Previouslyfiled with the Commission; incorporated by reference to the Company’sSchedule 14D-9 filed on September 28, 2001.

(K)               Previouslyfiled with the Commission; incorporated by reference to the Company’s CurrentReport on Form 8-K dated May 4, 2006.

(L)                 Previouslyfiled with the Commission; incorporated by reference to the Company’s CurrentReport on Form 8-A/A dated March 6, 2002.

(M)             Previouslyfiled with the Commission; incorporated by reference to the Company’s AnnualReport on Form 10-K, for the year ended December 31, 2001.

(N)               Previouslyfiled with the Commission; incorporated by reference to the Company’s AnnualReport on Form 10-K, for the year ended December 31, 2001, andConfidential Treatment has been requested for a portion of this exhibit.

(O)              Previouslyfiled with the Commission; incorporated by reference to the Company’s QuarterlyReport on Form 10-Q for the quarter ended June 30, 2002.

(P)                 Previouslyfiled with the Commission; incorporated by reference to the Company’s QuarterlyReport on Form 10-Q for the quarter ended September 30, 2002.

(Q)              Previouslyfiled with the Commission; incorporated by reference to the Company’s AnnualReport on Form 10-K, for the year ended December 31, 2002.

(R)               Previouslyfiled with the Commission; incorporated by reference to the Company’s ProxyStatement for its 2003 Annual Meeting of Shareholders, filed August 21,2003, as appendix C.

(S)                  Previouslyfiled with the Commission; incorporated by reference to the Company’s CurrentReport on Form 8-K dated March 19, 2004.

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(T)                Previouslyfiled with the Commission; incorporated by reference to the Company’s QuarterlyReport on Form 10-Q for the quarter ended June 30, 2004.

(U)              Previouslyfiled with the Commission; incorporated by reference to the Company’s QuarterlyReport on Form 10-Q for the quarter ended September 30, 2004.

(V)               Previouslyfiled with the Commission; incorporated by reference to the Company’s AnnualReport on Form 10-K for the year ended December 31, 2004.

(W)            Previouslyfiled with the Commission; incorporated by reference to the Quarterly Report onForm 10-Q for the quarter ended March 31, 2005.

(X)               Previouslyfiled with the Commission; incorporated by reference to the Company’s CurrentReport on Form 8-K dated October 3, 2006.

(Y)               Previouslyfiled with the Commission; incorporated by reference to the Company’s CurrentReport on Form 8-K dated July 15, 2005.

(Z)                Previouslyfiled with the Commission; incorporated by reference to the Company’s CurrentReport on Form 8-K dated September 19, 2005.

(AA)     Previouslyfiled with the Commission, incorporated by reference to the Quarterly Report onForm 10-Q for the quarter ended September 30, 2005.

(BB)     Previouslyfiled with the Commission; incorporated by reference to the Company’s CurrentReport on Form 8-K dated October 21, 2005.

(CC)     Previouslyfiled with the Commission, incorporated by reference to the Company’s CurrentReport on Form 8-K dated December 21, 2005.

(DD)     Previouslyfiled with the Commission; incorporated by reference to the Company’s CurrentReport on Form 8-K dated January 23, 2006.

(EE)       Previouslyfiled with the Commission; incorporated by reference to the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005.

(FF)         Previouslyfiled with the Commission; incorporated by reference to the Company’s CurrentReport on Form 8-K dated March 22, 2006.

(GG)   Previouslyfiled with the Commission; incorporated by reference to the Company’s amendedAnnual Report on Form 10-K/A for the year ended December 31,2005.

(HH)   Previouslyfiled with the Commission; incorporated by reference to the Company’s CurrentReport on Form 8-K dated August 24, 2006.

(II)               Previouslyfiled with the Commission; incorporated by reference to the Company’s CurrentReport on Form 8-K dated October 25, 2006.

(JJ)             Previouslyfiled with the Commission; incorporated by reference to the Company’s QuarterlyReport on Form 10-Q for the quarter ended September 30, 2006.

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this Reportto be signed on its behalf by the undersigned, thereunto duly authorized.

|                          |     | Imclone Systems Incorporated                                     |
|--------------------------|----------|------------------------------------------------------------------|
| Date: March 1, 2007 | By:      | /s/ ALEXANDER  J. DENNER                                    |
|                     | * * | Alexander J.  Denner*Executive Committee of the Board, Chairman* |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the dateindicated.

|                                  | **Name** | ** **                                  | ** ** | ** **          | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|----------------------------------|----------|---------------------------------------------|------------|---------------------|-----------|------------|------------|------------|----------|------------|
| /s/ ALEXANDER J. DENNER     |     | Executive  Committee of the Board, Chairman |       | March 1,  2007 |
| Alexander  J. Denner             |     | Director (Principal  Executive Officer)     |       |                |
| /s/ ANA I. STANCIC          |     | Senior Vice  President, Finance             |       | March 1,  2007 |
| Ana  I. Stancic                  |     | (Principal Financial  Officer)              |       |                |
| /s/ ANDREW G. BODNAR        |     | Director                                    |       | March 1,  2007 |
| Andrew  G. Bodnar                |     |                                        |       |                |
| /s/ VINCENT T. DE VITA, JR. |     | Director                                    |       | March 1,  2007 |
| Vincent  T. DeVita, Jr.     |     |                                        |       |                |
| /s/ JOHN A. FAZIO           |     | Director                                    |       | March 1,  2007 |
| John  A. Fazio                   |     |                                        |       |                |
|                             |     | Director                                    |       | March 1,  2007 |
| Carl  C. Icahn                   |     |                                        |       |                |
| /s/ PETER S. LIEBERT        |     | Director                                    |       | March 1,  2007 |
| Peter  S. Liebert                |     |                                        |       |                |
| /s/ WILLIAM R. MILLER       |     | Director                                    |       | March 1,  2007 |
| William  R. Miller               |     |                                        |       |                |
| /s/ RICHARD C. MULLIGAN     |     | Director                                    |       | March 1,  2007 |
| Richard  C. Mulligan             |     |                                        |       |                |
| /s/ DAVID SIDRANSKY         |     | Director                                    |       | March 1,  2007 |
| David  Sidransky                 |     |                                        |       |                |
| /s/ CHARLES WOLER                |     | Director                                    |       | March 1,  2007 |
| Charles Woler                    |     |                                        |       |                |

 

83

----

**INDEX TO FINANCIALSTATEMENTS**

| **Audited Financial Statements:**                                                                                                                             |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Report of Independent Registered Public Accounting  Firm                                                                                                      |   | F-2    |
| Consolidated  Balance Sheets at December 31, 2006 and 2005                                                                                          |   | F-3    |
| Consolidated Statements of Operations for the Years  Ended December 31, 2006, 2005 and 2004                                                         |   | F-4    |
| Consolidated Statements of Stockholders’ Equity  (Deficit) and Comprehensive Income for the Years Ended December 31,  2006, 2005 and 2004 |   | F-5    |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2006, 2005 and 2004                                                         |   | F-6    |
| Notes to Consolidated Financial Statements                                                                                                                    |   | F-7    |

 

F-1

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**The Board of Directors and StockholdersImClone Systems Incorporated:**

We have audited the consolidated financial statementsof ImClone Systems Incorporated and subsidiary as listed in the accompanyingindex. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

We conducted our audits in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of ImClone Systems Incorporated and subsidiary as of December 31,2006 and 2005, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2006, inconformity with U.S. generally accepted accounting principles.

As discussed in notes 2(i) and 11(d) to theconsolidated financial statements, the Company adopted the provisions ofStatement of Financial Accounting Standards No. 123R, “Share-BasedPayment,” effective January 1, 2006.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of ImCloneSystems Incorporated’s internal control over financial reporting as of December 31,2006, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), and our report dated March 1, 2007 expressed an unqualifiedopinion on management’s assessment of, and the effective operation of, internalcontrol over financial reporting.

/s/ KPMG LLP

Princeton, New JerseyMarch 1, 2007

 

F-2

----

**IMCLONE SYSTEMSINCORPORATEDCONSOLIDATED BALANCE SHEETS(in thousands, except per share and share data)**

| ** **                                                                                                                                                                                                                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                       |       |                  |       |   |   |
| Current assets:                                                                                                                                                                                                                                  |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                        |       | $                     | 20,568     |   | $ | 3,403 |   |
| Securities available for  sale                                                                                                                                                                                                                   |       | 1,023,609             |       | 752,973 |   |
| Prepaid expenses                                                                                                                                                                                                                                 |       | 3,972                 |       | 3,766 |   |
| Amounts due from  corporate partners                                                                                                                                                                                                             |       | 78,030                |       | 59,271 |   |
| Inventories                                                                                                                                                                                                                                      |       | 102,215               |       | 81,394 |   |
| Deferred income taxes,  net                                                                                                                                                                                                                      |       | 29,715                |       | — |   |
| Other current assets                                                                                                                                                                                                                             |       | 12,123                |       | 8,311 |   |
| Total current assets                                                                                                                                                                                                                             |       | 1,270,232             |       | 909,118 |   |
| Property, plant and  equipment, net                                                                                                                                                                                                              |       | 423,000               |       | 406,595 |   |
| Deferred financing costs,  net                                                                                                                                                                                                                   |       | 8,818                 |       | 12,531 |   |
| Deferred income taxes,  net                                                                                                                                                                                                                      |       | 124,033               |       | — |   |
| Notes receivable, less  current portion                                                                                                                                                                                                          |       | 7,844                 |       | 8,313 |   |
| Other assets                                                                                                                                                                                                                                     |       | 5,909                 |       | 6,858 |   |
| Total assets                                                                                                                                                                                                                                     |       | $                     | 1,839,836  |   | $ | 1,343,415 |   |
| **LIABILITES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                    |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                                                                             |       |                  |       |   |   |
| Accounts payable  (including $4,765 and $4,610 due Bristol-Myers Squibb Company (“BMS”) at December 31,  2006 and 2005, respectively)                                                                                             |       | $                     | 26,421     |   | $ | 35,530 |   |
| Accrued expenses  (including $21,705 and $11,427 due BMS at December 31, 2006 and 2005,  respectively)                                                                                                                                      |       | 69,080                |       | 60,934 |   |
| Withholding tax liability                                                                                                                                                                                                                        |       | —                |       | 32,000 |   |
| Current portion of  deferred revenue                                                                                                                                                                                                             |       | 142,013               |       | 112,624 |   |
| Other current liabilities                                                                                                                                                                                                                        |       | 1,418                 |       | 1,031 |   |
| Total current liabilities                                                                                                                                                                                                                        |       | 238,932               |       | 242,119 |   |
| Deferred revenue, less  current portion                                                                                                                                                                                                          |       | 237,864               |       | 246,401 |   |
| Long-term debt                                                                                                                                                                                                                                   |       | 600,000               |       | 600,000 |   |
| Share-based compensation,  less current portion                                                                                                                                                                                                  |       | 261                   |       | — |   |
| Deferred rent, less  current portion                                                                                                                                                                                                             |       | 3,130                 |       | 2,491 |   |
| Total liabilities                                                                                                                                                                                                                                |       | 1,080,187             |       | 1,091,011 |   |
| Commitments and contingencies (Note 14)                                                                                                                                                                                                          |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                                                                                       |       |                  |       |   |   |
| Preferred stock, $1.00  par value; authorized 4,000,000 shares; reserved 1,200,000 series B  participating cumulative preferred stock, none issued or outstanding                                                                      |       | —                |       | — |   |
| Common stock, $0.001 par  value; authorized 200,000,000 shares; issued 86,143,604 and 84,412,408  at December 31, 2006 and 2005, respectively; outstanding 85,138,930 and  83,407,734 at December 31, 2006 and 2005, respectively |       | 86                    |       | 84 |   |
| Additional paid-in  capital                                                                                                                                                                                                                      |       | 865,560               |       | 733,069 |   |
| Accumulated deficit                                                                                                                                                                                                                              |       | (71,785               | )          | (442,459 | ) |
| Treasury stock, at cost;  1,004,674 shares at December 31, 2006 and 2005                                                                                                                                                                    |       | (29,149               | )          | (29,149 | ) |
| Accumulated other comprehensive loss:                                                                                                                                                                                                            |       |                  |       |   |   |
| Net unrealized loss on  securities available for sale                                                                                                                                                                                            |       | (5,063                | )          | (9,141 | ) |
| Total stockholders’  equity                                                                                                                                                                                                                 |       | 759,649               |       | 252,404 |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                  |       | $                     | 1,839,836  |   | $ | 1,343,415 |   |

 

See accompanying notes to consolidated financial statements.

F-3

----

**IMCLONE SYSTEMS INCORPORATEDCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data)**

| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                               |       |                                       |       |   |   |   |   |
| Royalty revenue                                         |       | $                                          | 290,599    |   | $ | 177,440 |   | $ | 106,274 |   |
| License fees and milestone revenue                      |       | 232,269                                    |       | 97,239 |   | 129,386 |   |
| Manufacturing revenue                                   |       | 86,476                                     |       | 44,090 |   | 99,041 |   |
| Collaborative agreement revenue                         |       | 68,503                                     |       | 64,904 |   | 53,989 |   |
| Total revenues                                          |       | 677,847                                    |       | 383,673 |   | 388,690 |   |
| Operating  expenses:                                    |       |                                       |       |   |   |   |   |
| Research and development                                |       | 112,145                                    |       | 99,303 |   | 82,658 |   |
| Clinical and regulatory                                 |       | 54,244                                     |       | 50,136 |   | 30,254 |   |
| Marketing, general and administrative                   |       | 72,476                                     |       | 72,334 |   | 59,800 |   |
| Royalty expense                                         |       | 73,958                                     |       | 58,376 |   | 36,065 |   |
| Litigation settlement                                   |       | —                                     |       | — |   | 55,363 |   |
| Cost of manufacturing revenue                           |       | 76,063                                     |       | 16,367 |   | 1,099 |   |
| Discontinuation of small molecule research program      |       | —                                     |       | 6,200 |   | — |   |
| Withholding tax (recovery) expense                      |       | (264                                       | )          | 14,178 |   | (1,815 | ) |
| Total operating expenses                                |       | 388,622                                    |       | 316,894 |   | 263,424 |   |
| Operating income                                        |       | 289,225                                    |       | 66,779 |   | 125,266 |   |
| Other (income)  expense:                                |       |                                       |       |   |   |   |   |
| Interest income                                         |       | (40,418                                    | )          | (27,877 | ) | (14,049 | ) |
| Interest expense                                        |       | 9,323                                      |       | 6,569 |   | 8,432 |   |
| Loss (gain) on sale of securities, net                  |       | —                                     |       | 13 |   | (131 | ) |
| Other income, net                                       |       | (31,095                                    | )          | (21,295 | ) | (5,748 | ) |
| Income before income taxes                              |       | 320,320                                    |       | 88,074 |   | 131,014 |   |
| (Benefit) provision for income taxes                    |       | (50,354                                    | )          | 1,578 |   | 17,361 |   |
| Net income                                              |       | $                                          | 370,674    |   | $ | 86,496 |   | $ | 113,653 |   |
| Income per common  share:                               |       |                                       |       |   |   |   |   |
| Basic                                                   |       | $                                          | 4.40       |   | $ | 1.03 |   | $ | 1.43 |   |
| Diluted                                                 |       | $                                          | 4.11       |   | $ | 1.01 |   | $ | 1.33 |   |
| Shares used in  calculation of income per common share: |       |                                       |       |   |   |   |   |
| Basic                                                   |       | 84,235                                     |       | 83,582 |   | 79,500 |   |
| Diluted                                                 |       | 92,012                                     |       | 92,183 |   | 91,193 |   |

 

See accompanying notes to consolidated financial statements.

F-4

----

**IMCLONE SYSTEMSINCORPORATED**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)AND COMPREHENSIVE INCOME**

**Years Ended December 31,2006, 2005 and 2004**

**(in thousands,except share data)**

| ** **                                                                    | ** ** | ** **               | ** ** | ** **            | ** ** | ** **  | ** **    | ** **      | ** ** | ** **     | ** ** | ** **  | ** ** | ** ** | ** ** | **Accumulated**   | ** **     | ** ** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------|---------------|-----------------|------------|----------------|------------|-------------|------------|------------|------------|-------------------|----------------|------------|------------|
| ** **                                                                    | ** ** | ** **               | ** ** | ** **            | ** ** | ** **  | ** **    | ** **      | ** ** | ** **     | ** ** | ** **  | ** ** | ** ** | ** ** | **Other**         | ** **     | ** ** | ** ** |
| ** **                                                                    | ** ** | ** **               | ** ** | ** **            | ** ** | ** **  | ** **    | ** **      | ** ** | **Additional** | ** ** | ** **  | ** ** | ** ** | ** ** | **Comprehensive** | ** **     | ** ** | ** ** |
| ** **                                                                    | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-in** | ** **    | **Accumulated** | ** ** | **Treasury**   | ** ** | **Income**  | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**  | ** **    | **Amount**      | ** ** | **Capital**    | ** ** | **Deficit** | ** ** | **Stock**  | ** ** | **(Loss)**        | ** **     | **Total**  | ** ** |
| Balance at  December 31, 2003                                            |       |                     | —     |                  |       |        | $ — |            |       | 75,296,117     |       |        | $ 75  |       |       |              | $ 375,731 |       |       |   | $ (642,608 | ) |   |   | $ (4,100 | ) |   |   | $    309 |   |   | $ (270,593 | ) |
| Options exercised                                                             |       |                     |       |                  |       |        |          |            |       | 3,522,003      |       |        | 4          |       |       |              | 78,056         |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 78,060 |   |
| Issuance of shares  on conversion of 51¤2% notes                         |       |                     |       |                  |       |        |          |            |       | 4,356,468      |       |        | 4          |       |       |              | 239,993        |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 239,997 |   |
| Issuance of shares  to Merck KGaA                                             |       |                     |       |                  |       |        |          |            |       | 58,807         |       |        | —     |       |       |              | 5,000          |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 5,000 |   |
| Issuance of shares  through employee stock purchase plan                      |       |                     |       |                  |       |        |          |            |       | 16,751         |       |        | —     |       |       |              | 802            |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 802 |   |
| Compensation  related to options granted to non-employees                |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              | 2,420          |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 2,420 |   |
| Tax benefit of  stock options                                                 |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              | 9,982          |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 9,982 |   |
| Unamortized  deferred financing costs on the 51¤2% notes            |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              | (1,193         | )          |       |   |   |   |   |   |   |   |   |   |   |   |   | (1,193 | ) |
| Compensation  related to modification of options granted to employees         |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              | 2,028          |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 2,028 |   |
| Treasury shares                                                               |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   | (200 | ) |   |   |   |   |   | (200 | ) |
| Comprehensive income:                                                         |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                    |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   | 113,653 |   |   |   |   |   |   |   |   |   |   | 113,653 |   |
| Other comprehensive loss:                                                     |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss on  marketable securities arising during the period |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   | (987 | ) |   | (987 | ) |
| Less:  Reclassification adjustment for realized gain included in net income   |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   | 131 |   |   | 131 |   |
| Total other  comprehensive loss                                               |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   | (1,118 | ) |   | (1,118 | ) |
| Comprehensive  income                                                         |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 112,535 |   |
| Balance at  December 31, 2004                                            |       |                     | —     |                  |       |        | —        |            |       | 83,250,146     |       |        | 83         |       |       |              | 712,819        |       |       |   | (528,955 | ) |   |   | (4,300 | ) |   |   | (809 | ) |   | 178,838 |   |
| Options exercised                                                             |       |                     |       |                  |       |        |          |            |       | 1,128,642      |       |        | 1          |       |       |              | 17,643         |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 17,644 |   |
| Issuance of shares  through employee stock purchase plan                      |       |                     |       |                  |       |        |          |            |       | 33,620         |       |        | —     |       |       |              | 932            |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 932 |   |
| Tax benefit of  stock options                                                 |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              | 1,675          |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 1,675 |   |
| Treasury shares                                                               |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   | (24,849 | ) |   |   |   |   |   | (24,849 | ) |
| Comprehensive income:                                                         |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                    |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   | 86,496 |   |   |   |   |   |   |   |   |   |   | 86,496 |   |
| Other comprehensive loss:                                                     |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss on  marketable securities arising during the period           |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   | (8,345 | ) |   | (8,345 | ) |
| Less:  Reclassification adjustment for realized loss included in net income   |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   | (13 | ) |   | (13 | ) |
| Total other  comprehensive loss                                               |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   | (8,332 | ) |   | (8,332 | ) |
| Comprehensive  income                                                         |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 78,164 |   |
| Balance at  December 31, 2005                                            |       |                     | —     |                  |       |        | —        |            |       | 84,412,408     |       |        | 84         |       |       |              | 733,069        |       |       |   | (442,459 | ) |   |   | (29,149 | ) |   |   | (9,141 | ) |   | 252,404 |   |
| Options exercised                                                             |       |                     |       |                  |       |        |          |            |       | 1,701,447      |       |        | 2          |       |       |              | 28,998         |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 29,000 |   |
| Issuance of shares  through employee stock purchase plan                      |       |                     |       |                  |       |        |          |            |       | 29,749         |       |        | —     |       |       |              | 806            |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 806 |   |
| Share-based  compensation expense                                             |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              | 8,798          |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 8,798 |   |
| Tax benefit of  stock options                                                 |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              | 93,889         |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 93,889 |   |
| Comprehensive income:                                                         |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                    |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   | 370,674 |   |   |   |   |   |   |   |   |   |   | 370,674 |   |
| Other comprehensive income:                                                   |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized gain on  marketable securities arising during the period      |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   | 4,078 |   |   | 4,078 |   |
| Total other  comprehensive income                                             |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   | 4,078 |   |   | 4,078 |   |
| Comprehensive  income                                                         |       |                     |       |                  |       |        |          |            |       |           |       |        |       |       |       |              |           |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 374,752 |   |
| Balance at  December 31, 2006                                            |       |                     | —     |                  |       |        | $ — |            |       | 86,143,604     |       |        | $ 86  |       |       |              | $ 865,560 |       |       |   | $ (71,785 | ) |   |   | $ (29,149 | ) |   |   | $ (5,063 | ) |   | $ 759,649 |   |

 

See accompanying notes to consolidated financial statements.

F-5

----

**IMCLONE SYSTEMS INCORPORATEDCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**

| ** **                                                                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                        |       |                                       |       |   |   |   |   |
| Net income                                                                                   |       | $                                          | 370,674    |   | $ | 86,496 |   | $ | 113,653 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                                                               |       | 29,616                                     |       | 13,227 |   | 13,062 |   |
| Amortization of deferred  financing costs                                                    |       | 3,713                                      |       | 3,713 |   | 3,107 |   |
| Share-based compensation                                                                     |       | 8,798                                      |       | — |   | 4,448 |   |
| Tax benefit from share-based  compensation                                                   |       | (94,719                                    | )          | 1,675 |   | 9,982 |   |
| Loss on disposal of  fixed assets                                                            |       | 2                                          |       | 3,668 |   | 1 |   |
| Recovery of withholding  tax asset                                                           |       | —                                     |       | — |   | (1,815 | ) |
| Loss (gain) on  securities available for sale, net                                           |       | —                                     |       | 13 |   | (131 | ) |
| Deferred income taxes                                                                        |       | (153,748                                   | )          | — |   | — |   |
| Other                                                                                        |       | (183                                       | )          | 438 |   | — |   |
| Changes in:                                                                                  |       |                                       |       |   |   |   |   |
| Prepaid expenses                                                                             |       | (206                                       | )          | 288 |   | (426 | ) |
| Amounts due from  corporate partners                                                         |       | (18,759                                    | )          | 10,482 |   | (60,774 | ) |
| Inventories                                                                                  |       | (20,821                                    | )          | (40,776 | ) | (40,618 | ) |
| Other current assets                                                                         |       | (3,812                                     | )          | 19,929 |   | (24,625 | ) |
| Other assets                                                                                 |       | 1,216                                      |       | 1,182 |   | (5,824 | ) |
| Accounts payable                                                                             |       | (9,109                                     | )          | (2,962 | ) | 9,770 |   |
| Other current  liabilities                                                                   |       | 387                                        |       | — |   | (3,369 | ) |
| Accrued expenses                                                                             |       | 102,035                                    |       | (243 | ) | 43,320 |   |
| Share-based compensation                                                                     |       | 261                                        |       | — |   | — |   |
| Withholding tax  liability                                                                   |       | (31,736                                    | )          | 13,904 |   | (1,076 | ) |
| Litigation settlement                                                                        |       | —                                     |       | (75,900 | ) | 75,900 |   |
| Deferred rent, less  current portion                                                         |       | 639                                        |       | (943 | ) | 496 |   |
| Deferred revenue                                                                             |       | 20,852                                     |       | (98,783 | ) | 120,576 |   |
| Net cash provided by  (used in) operating activities                                         |       | 205,100                                    |       | (64,592 | ) | 255,657 |   |
| Cash flows from investing activities:                                                        |       |                                       |       |   |   |   |   |
| Acquisitions of  property, plant and equipment                                               |       | (45,902                                    | )          | (84,263 | ) | (106,286 | ) |
| Purchases of securities  available for sale                                                  |       | (1,595,970                                 | )          | (574,072 | ) | (3,457,174 | ) |
| Proceeds from sale of  securities available for sale                                         |       | 1,130,990                                  |       | 575,598 |   | 1,967,058 |   |
| Maturities of securities  available for sale                                                 |       | 198,422                                    |       | 77,607 |   | 724,161 |   |
| Other                                                                                        |       | —                                     |       | 77 |   | (8 | ) |
| Net cash used in  investing activities                                                       |       | (312,460                                   | )          | (5,053 | ) | (872,249 | ) |
| Cash flows from financing activities:                                                        |       |                                       |       |   |   |   |   |
| Proceeds from exercise  of stock options                                                     |       | 29,000                                     |       | 17,644 |   | 77,860 |   |
| Proceeds from issuance  of common stock under the employee stock purchase plan               |       | 806                                        |       | 932 |   | 802 |   |
| Tax benefit from  share-based compensation                                                   |       | 94,719                                     |       | — |   | — |   |
| Proceeds from issuance  of 13¤8%  convertible notes                                     |       | —                                     |       | — |   | 600,000 |   |
| Repurchase of common  stock                                                                  |       | —                                     |       | (24,849 | ) | — |   |
| Payment of financing  costs                                                                  |       | —                                     |       | — |   | (18,559 | ) |
| Proceeds from issuance  of common stock to Merck KGaA                                        |       | —                                     |       | — |   | 5,000 |   |
| Other                                                                                        |       | —                                     |       | — |   | (55 | ) |
| Net cash provided by  (used in) financing activities                                         |       | 124,525                                    |       | (6,273 | ) | 665,048 |   |
| Net increase (decrease)  in cash and cash equivalents                                        |       | 17,165                                     |       | (75,918 | ) | 48,456 |   |
| Cash and cash  equivalents at beginning of period                                            |       | 3,403                                      |       | 79,321 |   | 30,865 |   |
| Cash and cash equivalents at end of period                                                   |       | $                                          | 20,568     |   | $ | 3,403 |   | $ | 79,321 |   |

 

See accompanying notes to consolidated financial statements.

F-6

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(1)**   BusinessOverview and Basis of Preparation

ImClone Systems Incorporated (the “Company”) is abiopharmaceutical company whose mission is to advance oncology care bydeveloping and commercializing a portfolio of targeted treatments designed toaddress the medical needs of patients with cancer. A substantial portion of theCompany’s efforts and resources are devoted to research and developmentconducted on its own behalf and through collaborations with corporate partnersand academic research and clinical institutions. The Company does not operateseparate lines of business or separate business entities and does not conductany of its operations outside of the United States. Accordingly, the Companydoes not prepare discrete financial information with respect to separateproduct areas or by location and does not have separately reportable segments.

On September 28, 2006, Carl C. Icahn, AlexanderJ. Denner, Ph.D., Barberry Corp and High River Limited Partnership filed aconsent solicitation to remove six members of the Company’s Board of Directorsas well as to add Peter S. Liebert, M.D. to the Board. On October 9,2006, David M. Kies and WilliamW. Crouse resigned from the Board of Directors of the Company. On October 19,2006, Peter S. Liebert, M.D. was appointed by the Company’s Board of Directorsto fill one of the vacancies resulting from the resignation of the twoDirectors discussed above. On October 24, 2006, the Company’s Board ofDirectors appointed Carl C. Icahn as Chairman of the Board. In addition, on October 24,2006,  Joseph L. Fischer resigned asInterim Chief Executive Officer and as a member of the Company’s Board ofDirectors and was replaced by a newly formed Executive Committee of the Board(the “Executive Committee”), chaired by Alexander J. Denner, Ph.D., andincluding Directors Richard Mulligan, Ph.D., and Charles Woler, M.D., Ph.D. TheExecutive Committee will serve as the principal executive body for the Companyuntil such time as a Chief Executive Officer is named. The Company also announcedthat Directors Vincent T. DeVita, Jr., M.D., John A. Fazio and William R.Miller will not stand for reelection to the Board of Directors at the Company’snext annual meeting. In addition, the Board determined that it would waive alldirector fees for six months and all option grants for directors for the nextyear. As a result of these developments, Carl C. Icahn and related partieswithdrew their shareholder consent solicitation.

On February 12, 2004, the United States Food andDrug Administration (“FDA”) approved ERBITUX® (cetuximab) injection for use incombination with irinotecan in the treatment of patients with EGFR-expressing,metastatic colorectal cancer who are refractory to irinotecan-basedchemotherapy and for use as a single agent in the treatment of patients withEGFR-expressing, metastatic colorectal cancer who are intolerant toirinotecan-based chemotherapy. In September 2005, Health Canada approvedthe use of ERBITUX for use in combination with irinotecan for the treatment ofEGFR-expressing metastatic colorectal carcinoma in patients who are refractoryto other irinotecan-based chemotherapy regimens and for use as a single agentfor the treatment of EGFR expressing, metastatic colorectal carcinoma inpatients who are intolerant to irinotecan-based chemotherapy. On March 1,2006, the FDA approved ERBITUX for use in combination with radiation therapyfor the treatment of locally or regionally advanced squamous cell carcinoma ofthe head and neck (“SCCHN”) and as a single agent in recurrent or metastaticSCCHN where prior platinum-based chemotherapy has failed. Please see fullprescribing information, available at www.ERBITUX.com, for important safetyinformation relating to ERBITUX, including boxed warnings.

On December 1, 2003, Swissmedic, the Swiss agencyfor therapeutic products, approved ERBITUX in Switzerland for the treatment ofpatients with colorectal cancer who no longer respond to standard chemotherapytreatment with irinotecan. Merck KGaA licensed the right to market ERBITUX outsidethe United States and Canada from the Company in 1998. On June 30, 2004,Merck KGaA received marketing approval by the European Commission to sellERBITUX for use in combination with irinotecan for the 

F-7

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

treatment of patients withEGFR-expressing metastatic colorectal cancer after failure of irinotecanincluding cytotoxic therapy. On December 22, 2005, Swissmedic approvedERBITUX in Switzerland in combination with radiation in the treatment ofpatients with previously untreated, advanced SCHHN. On April 3, 2006,Merck KGaA was granted marketing authorization by the European Commission toextend the use of ERBITUX, in combination with radiotherapy, to the treatmentof patients with locally advanced SCCHN. In Japan, Merck KGaA has marketingrights to ERBITUX, which are co-exclusive to the co-development rights of theCompany and BMS. In February 2007, an application was submitted with theJapanese Pharmaceuticals and Medical Devices Agency for the use of ERBITUX intreating patients with advanced colorectal cancer. ERBITUX is the first IgG1monoclonal antibody that inhibits EGFR to be submitted for marketingauthorization in Japan.

The Company believes that its existing cash and cashequivalents and marketable securities and its cash provided from operating activitieswill provide it with sufficient liquidity to support the Company’s operationsat least through the first quarter of 2008. The Company is also entitled toreimbursement for certain marketing and research and development expenditures.

The Company reliesentirely on third-party manufacturers for filling and finishing services withrespect to ERBITUX. If the Company’s current third-party manufacturers orcritical raw material suppliers fail to meet the Company’s expectations, theCompany cannot be assured that it will be able to enter into new agreementswith other suppliers or third-party manufacturers without an adverse effect onthe Company’s business.

**(2)**   Summaryof Significant Accounting Policies

***(a) Principles of Consolidation***

The consolidated financialstatements include the financial statements of ImClone Systems Incorporated andits wholly-owned subsidiary, Endoclone Incorporated. All intercompany balancesand transactions have been eliminated in consolidation.

***(b) Cash Equivalents***

Cash equivalents mayconsist of money market funds, commercial paper and other readily marketabledebt instruments. The Company considers all highly liquid debt instruments withoriginal maturities at date of purchase not exceeding three months to be cashequivalents.

***(c) Investments in Securities***

The Company classifies itsinvestments in debt and marketable equity securities as available-for-sale. TheCompany invests primarily in asset-backed securities, auction rate securitiesand corporate notes. Available-for-sale securities are recorded at fair value.Unrealized holding gains and losses on available-for-sale securities areexcluded from earnings and are reported as a separate component of accumulatedother comprehensive income (loss) until realized. Realized gains and lossesfrom the sale of available-for-sale securities are determined on a specificidentification basis. If the fair value of a security in the portfolio is belowits carrying value, the Company evaluates whether it has the intent and abilityto retain the investment for a period of time sufficient to allow for recoveryin the market value of the investment. In making a determination of whether animpairment is other-than-temporary the Company considers a number of factors,including the liquidity position and credit worthiness of the issuer of suchsecurities. A decline in the market value of any available-for-sale securitybelow cost that is deemed to be other than temporary results in a reduction incarrying amount to fair value. The impairment is charged to Other 

F-8

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

(income)expense and a new cost basis for the security is established. Dividend andinterest income are recognized when earned.

***(d) Inventories***

Inventories are stated atthe lower of cost or market. Cost is determined on the first-in first-out (FIFO)basis. The Company’s policy is to capitalize inventory product costs when,based on management’s judgment, future economic benefit is expected to berealized. The Company’s accounting policy addresses the attributes that shouldbe considered in evaluating whether the costs to manufacture a product have metthe definition of an asset as stipulated in Financial Accounting StandardsBoard (“FASB”) Concepts Statement No. 6. If applicable, the Companyassesses the regulatory and approval process including any known constraintsand impediments to approval. The Company also considers the shelf-life of theproduct in relation to the expected timeline for approval. The Company reviewsits inventory for excess or obsolete inventory and writes down obsolete or otherwiseunmarketable inventory to its estimated net realizable value.

***(e) Long-Lived Assets***

Property, plant and equipment are stated at cost.Equipment under capital leases are stated at the present value of the minimumlease payments. Leasehold improvements are amortized on the straight-linemethod over the related lease term or the useful life of the improvement,whichever is shorter. Depreciation of fixed assets is provided on thestraight-line method over the estimated useful life of the asset. Estimateduseful lives are generally as follows: buildings 20 to 50 years; manufacturingequipment 10 to 20 years; laboratory and other machinery and equipment 3 to 10years; and furniture and fixtures 8 years.

Patent and patent application costs that have been capitalizedare amortized on a straight-line basis over their respective expected usefullives, up to a 15-year period. Gross patent costs were $1,888,000 and$2,080,000 at December 31, 2006 and 2005, respectively. Accumulatedamortization was $1,218,000 and $1,208,000 at December 31, 2006 and 2005,respectively. Amortization expense was $121,000, $161,000 and $169,000 for thethree years ended December 31, 2006, 2005 and 2004, respectively.Amortization expense is estimated to be $95,000 for each of the next fiveyears. For the years ended December 31, 2006, 2005 and 2004 the Companyhad net patent write-offs of $81,000, $288,000, and $0, respectively, reflectedin Marketing, general and administrative expenses on the ConsolidatedStatements of Operations.

The Company reviewslong-lived assets for impairment when events or changes in business conditionsindicate that their full carrying value may not be recovered. Assets areconsidered to be impaired and are written down to fair value if expectedassociated undiscounted cash flows are less than the carrying amounts. Fairvalue is generally the present value of the expected associated cash flows.

***(f) Deferred Financing Costs***

Costs incurred in issuingthe 13¤8%convertible senior notes are amortized and the 51⁄2% convertible subordinatednotes that were outstanding until June 2004, were amortized using thestraight-line method over the shorter of: the term of the related instrument orthe initial date on which the holders can require repurchase of the notes. Theamortization of deferred financing costs is included in Interest expense in theConsolidated Statements of Operations. Upon redemption of the Company’s 51⁄2%convertible subordinated notes in 2004, the remaining unamortized deferredfinancing costs of approximately $1.2 million were reclassified to stockholders’equity.

F-9

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***(g) Revenue Recognition***

The Company recognizes all non-refundable up-frontlicense fees as revenues in accordance with the guidance provided in theSecurities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin No. 104,“Revenue Recognition, corrected copy” (“SAB 104”) and Emerging Issues TaskForce (“EITF”) Issue No. 00-21, “Revenue Arrangements withMultiple Deliverables” (“EITF 00-21”). Non-refundable fees receivedupon entering into license and other collaborative agreements where the Companyhas continuing involvement are recorded as deferred revenue and recognized overthe estimated service period. Payments received under the Commercial Agreementare being deferred and recognized as revenue based on the percentage of actualproduct research and development costs incurred to date by both BMS and theCompany to the estimated total of such costs to be incurred over the term ofthe agreement. Other than the Commercial Agreement, non-refundable milestonepayments, which represent the achievement of a significant step in the researchand development process, pursuant to collaborative agreements, are recognizedas revenue upon the achievement of the specified milestone.

Pursuant to the guidance in EITF Issues No. 99-19,“Reporting Revenue Gross as a Principal versus Net as an Agent,” and No. 01-14,“Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’Expenses Incurred,” the Company characterizes reimbursements received forresearch and development, clinical and regulatory, royalty expense andmarketing and administrative expenses incurred as Collaborative agreementrevenue in the Consolidated Statements of Operations. In analyzing whether tocategorize reimbursed expenses from the Company’s corporate partners as a) thegross amount billed or b) the net amount retained, the Company has analyzed therelevant facts and circumstances related to these expenses and considered thefactors, as specified in the EITF Issues noted above. These expenses, which areassociated with ERBITUX, are broader than would ordinarily result in centralongoing operations. These expenses have been incurred as a result of enteringinto the collaborative agreements that the Company has in place with itspartners. In assessing whether revenue should be reported gross or net, theCompany considered various factors, among them: (1) the Company is theprimary obligor with respect to all expenses incurred and reimbursed; (2) theCompany bears credit risk and inventory risk; (3) the Company bearsresponsibility for manufacturing the product and its specification; and (4) theCompany has pricing latitude and supplier discretion. Based on the factorsconsidered, the Company has concluded that costs reimbursed by its corporatepartners should be characterized as revenue in its Consolidated Statements ofOperations.

Royalty revenue from licensees, which are based onthird-party sales of licensed products and technology are earned in accordancewith the contract terms when third-party sales can be reliably measured andcollection of the funds is reasonably assured. Royalty revenue is recognizedwhen earned and collection is probable.

Manufacturing revenue consists of revenue earned onthe sale of ERBITUX to the Company’s corporate partners for subsequentcommercial sale. The Company recognizes manufacturing revenue when the productis shipped which is when the Company’s partners take ownership and title haspassed, collectibility is reasonably assured, the sales price is fixed ordeterminable, and there is persuasive evidence of an arrangement.

Collaborative agreement revenue consists ofreimbursements received from BMS, E.R. Squibb and Merck KGaA related toclinical and regulatory studies, ERBITUX provided for use in clinical studies,certain marketing and administrative costs and a portion of royalty expense.Collaborative agreement revenue is recorded as earned based on the performancerequirements under the respective contracts.

F-10

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Revenue recognized in theaccompanying Consolidated Statements of Operations is not subject to repayment.Payments received that are related to future performance are classified asdeferred revenue and recognized when the revenue is earned. Amounts receivablefrom the sale of inventories, reimbursement of expenses and royalty receivableare reflected in the Company’s Consolidated Balance Sheet as Amounts due fromcorporate partners and the cash flows associated with such revenues areclassified in the Company’s Consolidated Statements of Cash Flows as operatingactivities.

***(h) Foreign Currency Transactions***

Gains and losses fromforeign currency transactions, such as those resulting from the translation andsettlement of receivables and payables denominated in foreign currencies, areincluded in the Consolidated Statements of Operations. The Company does notcurrently use derivative financial instruments to manage the risks associatedwith foreign currency fluctuations. The Company recorded gains on foreigncurrency transactions of approximately $20,000 for the year ended December 31,2005, and losses on foreign currency transactions of approximately $10,000 and$26,000 for the years ended December 31, 2006 and 2004, respectively.Gains and losses from foreign currency transactions are included as a componentof operating expenses.

***(i) Stock-Based Compensation Plans***

The Company has threetypes of stock-based compensation plans: stock option plans, an employee stockpurchase plan, and effective as of January 1, 2006, a retention plan. OnJanuary, 1, 2006, the Company adopted FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS123R”) using the modified prospective transition method. Under this method,prior periods are not revised for comparative purposes and the Company recognizescompensation cost using a fair-value based method for all share-based paymentsgranted after December 31, 2005, plus any awards granted to employeesprior to December 31, 2005 that remain unvested at that time. Prior to January 1,2006, the Company accounted for its share-based compensation plans inaccordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB No. 25”), and relatedinterpretations including FASB Interpretation No. 44, “Accounting forCertain Transactions Involving Stock Compensation—An Interpretation of APBOpinion No. 25” (FIN 44). On November 10, 2005, the FASB issued FASBStaff Position No. FAS123(R)-3, “Transition Election Related toAccounting for Tax Effects of Share-Based Payment Awards.” The Company haselected to adopt the alternative transition method provided in this FASB StaffPosition for purposes of calculating the pool of excess tax benefits availableto absorb tax deficiencies recognized subsequent to the adoption of SFAS 123R.

***(j) Research and Development and Clinical andRegulatory***

Research and developmentand clinical and regulatory expenses are comprised of the following types ofcosts: salaries and benefits, allocated overhead and occupancy costs, clinicaltrial and related clinical manufacturing costs, contract services and otheroutside costs. These expenses also include costs related to activitiesperformed on behalf of corporate partners that are subject to reimbursement.Research and development and clinical and regulatory costs are expensed asincurred. The Company is producing clinical and commercial grade ERBITUX in itsBB36 and BB50 facilities. Prior to the receipt of approval of ERBITUX forcommercial sale on February 12, 2004, the Company had expensed all costsassociated with the production of ERBITUX to research and development expense.

F-11

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***(k) Interest***

Interest costs are expensed as incurred, except to theextent such interest is related to construction in progress, in which caseinterest is capitalized. Interest costs capitalized for the years endedDecember 31, 2006, 2005 and 2004 were approximately $2.6 million, $5.4million, and $6.1 million, respectively. Interest expense includes theamortization of deferred financing costs associated with the Company’s 13¤8%convertible senior notes, and the 51⁄2% convertible subordinated notes until theirredemption in June 2004.

***(l) Income Taxes***

Income taxes are accounted for under the asset andliability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss and tax credit carryforwards. Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect of a change in tax rates ondeferred tax assets and liabilities is recognized in income or expense in theperiod that includes the enactment date of the rate change.

***(m) Use of Estimates***

Management of the Company has made a number ofestimates and assumptions relating to the reporting of assets and liabilitiesand related revenue and expense accounts and the disclosure of contingentassets and liabilities to prepare these consolidated financial statements inconformity with U.S. generally accepted accounting principles. Actual resultscould differ materially from those estimates.

***(n) Income Per Common Share***

Basic income per common share is computed by dividingnet income by the weighted-average number of common shares outstanding duringthe period. Diluted income per common share is computed by dividing net incomeby the weighted-average number of common shares outstanding during the periodincreased to include all additional common shares that would have beenoutstanding assuming potentially dilutive common share equivalents had beenissued. Dilutive common share equivalents include 1) the dilutive effect ofin-the-money shares related to stock options, which is calculated based on theaverage share price for each period using the treasury stock method. Under thetreasury stock method, the exercise price of an option, the average amount ofcompensation cost, if any, for future service that the Company has not yetrecognized, and the amount of tax benefits that would be recorded in additionalpaid-in capital, if any, when the option is exercised, are assumed to be usedto repurchase shares in the current period and 2) the conversion ofconvertible debt which is calculated using an “if-converted” basis. Inaddition, in computing the dilutive effect of convertible debt, the numeratoris adjusted to add back the after-tax amount of interest recognized in theperiod.

***(o) Comprehensive Income***

Comprehensive income consists of net income and netunrealized gains (losses) on securities and is presented in the ConsolidatedStatements of Stockholders’ Equity (Deficit). The tax (provision) benefit onthe items included in Other comprehensive income (loss), assuming they wererecognized in income, would be approximately $(772,000), $108,000 and $148,000for the years ended December 31, 2006, 2005 and 2004, respectively.

***(p) Legal Defense Costs***

Legal defense costs are expensed as incurred.

F-12

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***(q) Impact of Recent Accounting Pronouncements***

In June 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes—an interpretation ofFASB Statement No. 109.” This Interpretation clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB No. 109 and prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. ThisInterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. This Interpretation is effective for fiscal years beginning after December 15,2006. The Company has reviewed its tax positions and does not expect that theInterpretation will have a material impact on its results of operations orfinancial position.

**(3)**   SecuritiesAvailable for Sale

The securitiesavailable for sale by major security type at December 31, 2006 and 2005were as follows: (in thousands)

| ** **                           | ** ** | ** ** | ** ** | **Gross**               | ** ** | **Gross**              | ** ** | ** **              | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | **Unrealized**          | ** ** | **Unrealized**         | ** ** | ** **              | ** ** |
| **December 31, 2006**      | ** ** | ** ** | ** ** | **Amortized Cost** | ** ** | **Holding Gains** | ** ** | **Holding Losses** | ** ** | **Fair Value** | ** ** |
| Asset-backed  securities             |       |       | $          | 397,400                 |       |                   |       | $                       | —     |   |   |   | $ | (5,062 | ) |   | $ | 392,338 |   |
| Foreign corporate  debt              |       |       | 1,802      |                    |       |                   | —     |                    |       |   | (1 | ) |   | 1,801 |   |
| Auction rate  securities             |       |       | 629,470    |                    |       |                   | —     |                    |       |   | — |   |   | 629,470 |   |
| Total securities  available for sale |       |       | $          | 1,028,672               |       |                   |       | $                       | —     |   |   |   | $ | (5,063 | ) |   | $ | 1,023,609 |   |
|                                      |            |            |            |                         |            |                        |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                           | ** ** | ** ** | ** ** | **Gross**               | ** ** | **Gross**              | ** ** | ** **              | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | **Unrealized**          | ** ** | **Unrealized**         | ** ** | ** **              | ** ** |
| **December 31, 2005**      | ** ** | ** ** | ** ** | **Amortized Cost** | ** ** | **Holding Gains** | ** ** | **Holding Losses** | ** ** | **Fair Value** | ** ** |
| Asset-backed  securities             |       |       | $          | 552,400                 |       |                   |       | $                       | —     |   |   |   | $ | (9,132 | ) |   | $ | 543,268 |   |
| Foreign corporate  debt              |       |       | 3,662      |                    |       |                   | —     |                    |       |   | (9 | ) |   | 3,653 |   |
| Auction rate  securities             |       |       | 206,052    |                    |       |                   | —     |                    |       |   | — |   |   | 206,052 |   |
| Total securities  available for sale |       |       | $          | 762,114                 |       |                   |       | $                       | —     |   |   |   | $ | (9,141 | ) |   | $ | 752,973 |   |
|                                      |            |            |            |                         |            |                        |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Unrealizedloss positions for which other-than-temporary impairments have not beenrecognized at December 31, 2006 and 2005, is summarized below (in thousands):

| ** **                      | ** ** | **Less Than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total**  | ** ** |
|---------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                      | ** ** | **Fair**                               | ** ** | **Unrealized**                          | ** ** | **Fair**   | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **December 31, 2006** | ** ** | ** **                             | ** ** | **Value**                               | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| Asset-backed  securities        |       | $                                      | 210,374    |                                    |       | $          | (2,026     | ) |   | $ | 181,964 |   |   | $ | (3,036 | ) |   | $ | 392,338 |   |   | $ | (5,062 | ) |   |
| Foreign corporate  debt         |       | —                                 |       |                                    | —     |       |       | 1,801 |   |   | (1 | ) |   | 1,801 |   |   | (1 | ) |   |
| Total                           |       | $                                      | 210,374    |                                    |       | $          | (2,026     | ) |   | $ | 183,765 |   |   | $ | (3,037 | ) |   | $ | 394,139 |   |   | $ | (5,063 | ) |   |
|                                 |            |                                        |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                      | ** ** | **Less Than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total**  | ** ** |
|---------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                      | ** ** | **Fair**                               | ** ** | **Unrealized**                          | ** ** | **Fair**   | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **December 31, 2005** | ** ** | ** **                             | ** ** | **Value**                               | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| Asset-backed  securities        |       | $                                      | 228,754    |                                    |       | $          | (3,646     | ) |   | $ | 314,514 |   |   | $ | (5,486 | ) |   | $ | 543,268 |   |   | $ | (9,132 | ) |   |
| Foreign corporate  debt         |       | —                                 |       |                                    | —     |       |       | 3,653 |   |   | (9 | ) |   | 3,653 |   |   | (9 | ) |   |
| Total                           |       | $                                      | 228,754    |                                    |       | $          | (3,646     | ) |   | $ | 318,167 |   |   | $ | (5,495 | ) |   | $ | 546,921 |   |   | $ | (9,141 | ) |   |
|                                 |            |                                        |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Unrealized losses relate to various debt securitiesincluding asset-backed securities and foreign corporate debt. For thesesecurities, the unrealized losses are primarily due to increases in interestrates. Because the Company has the ability and intent to hold these investmentsuntil recovery of fair value, which may be maturity, it does not consider theseinvestments to be other-than-temporarily impaired as of December 31, 2006.

Maturitiesof debt securities classified as available for sale were as follows at December 31,2006: (in thousands)

| ** **           | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|----------------------|------------|---------------------|------------|-----------------|------------|
| 2007                 |       | $                   | 212,400    |            | $          | 210,374 |   |
| 2008                 |       | 101,802             |       | 100,089         |       |
| 2009                 |       | 55,000              |       | 54,038          |       |
| 2010                 |       | 30,000              |       | 29,638          |       |
| 2011                 |       | —              |       | —          |       |
| 2012 and  thereafter |       | 629,470             |       | 629,470         |       |
|                 |       | $                   | 1,028,672  |            | $          | 1,023,609 |   |

 

Gross realized gainsincluded in income in the years ended December 31, 2006, 2005 and 2004were approximately $0, $3,000 and $142,000, respectively, and gross realizedlosses included in income in the years ended December 31, 2006, 2005 and2004 were approximately $0, $16,000 and $11,000, respectively**.** These gains and losses were determined ona specific identification basis. Interest on certain securities is adjustedmonthly, quarterly or semi-annually, depending on the instrument, usingprevailing interest rates. These holdings are highly liquid and the Companyconsiders the potential for loss of principal to be minimal. All holdings aredenominated in U.S. currency.

**(4)**   Inventories

Inventoriesconsist of the following: (in thousands)

| ** **                  | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Raw materials and  supplies |       |                  | $          | 17,818                |       |   |   | $ | 22,664 |   |   |
| Work in process             |       |                  | 79,048     |                  |       |   | 49,149 |   |   |
| Finished goods              |       |                  | 5,349      |                  |       |   | 9,581 |   |   |
| Total                       |       |                  | $          | 102,215               |       |   |   | $ | 81,394 |   |   |

 

In June 2006, theCompany began producing ERBITUX for commercial use at its multiple productmanufacturing facility (“BB50”), located in Branchburg, New Jersey. The Companyexpects to file a supplemental Biological License Application with the FDA forapproval of BB50 in the first quarter of 2007. Until such time as the Companyreceives approval of BB50 from the FDA, the ERBITUX inventory produced in BB50cannot be used for commercial distribution. Based on management’s currentexpectations, the Company expects that the costs of such inventory will befully realizable once the Company obtains approval of BB50, which is expectedin the second half of 2007. As of December 31, 2006, the Company hascapitalized approximately $35.5 million related to the costs of producing 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

ERBITUXin BB50. The Company will continue to capitalize the costs of producing ERBITUXin BB50 as long as management can conclude that the costs of such inventorywill be fully realizable in the future.

**(5)**   Property,Plant and Equipment

Property,plant and equipment are recorded at cost and consist of the following: (inthousands)

| ** **                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Land                                |       |                  | $          | 4,899                 |       |   |   | $ | 4,899 |   |   |
| Building                            |       |                  | 281,556    |                  |       |   | 67,597 |   |   |
| Leasehold  improvements             |       |                  | 14,595     |                  |       |   | 13,969 |   |   |
| Machinery and  equipment            |       |                  | 164,869    |                  |       |   | 62,806 |   |   |
| Furniture and  fixtures             |       |                  | 6,368      |                  |       |   | 4,596 |   |   |
| Construction in  progress           |       |                  | 45,924     |                  |       |   | 318,446 |   |   |
| Total cost                          |       |                  | 518,211    |                  |       |   | 472,313 |   |   |
| Less accumulated  depreciation      |       |                  | (95,211    | )                     |       |   | (65,718 | ) |   |
| Property, plant  and equipment, net |       |                  | $          | 423,000               |       |   |   | $ | 406,595 |   |   |

 

The Company constructed a 250,000 square foot multipleproduct manufacturing facility in Branchburg, New Jersey with capacity of up to110,000 liters (production volume). Mechanical completion was reached in thefourth quarter of 2005 and commissioning and validation of a portion of thebuilding was reached in the second quarter of 2006. In June 2006, theCompany transferred, from construction in progress, the cost associated withthis facility into the appropriate fixed asset categories, with the exceptionof costs related to equipment in a portion of the building which is not yetready for its intended use. The total cost of building this facility amountedto approximately $331.4 million.

The process of preparingconsolidated financial statements in accordance with U.S. generally acceptedaccounting principles requires the Company to evaluate the carrying values ofits long-lived assets. The recoverability of the carrying values of long-livedassets depends on the Company’s ability to earn sufficient returns on ERBITUX.Based on management’s current estimates, the Company expects to recover thecarrying value of such assets.

**(6)**   AccruedExpenses

Thefollowing items are included in accrued expenses: (in thousands)

| ** **                                  | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Salaries and  employee benefits             |       |                  | $          | 13,964                |       |   |   | $ | 18,976 |   |   |
| Research and  development contract services |       |                  | 23,802     |                  |       |   | 20,540 |   |   |
| License fee and  royalty expense            |       |                  | 21,159     |                  |       |   | 16,397 |   |   |
| Other                                       |       |                  | 10,155     |                  |       |   | 5,021 |   |   |
|                                        |       |                  | $          | 69,080                |       |   |   | $ | 60,934 |   |   |

 

**(7)**   WithholdingTax Assets and Liability

On March 14, 2006,the Company reached an agreement in principle with the IRS to resolve theemployment tax audit related to the years 1999-2001, which included theCompany’s agreement to the 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

impositionof an accuracy-related penalty under Section 6662 of the Internal RevenueCode. Under this agreement, the Company’s liability to the IRS was calculatedto be approximately $32.0 million. The Company had previously recorded awithholding tax liability of $18.1 million and a withholding tax asset of$274,000 in its consolidated Balance Sheet as of December 31, 2004. Basedon the agreement in principle reached with the IRS, the Company eliminated thewithholding tax asset of $274,000 and recorded an additional withholding taxliability of approximately $13.9 million, or a total of $32.0 million, in itsconsolidated Balance Sheet as of December 31, 2005. As a result, theCompany recorded in the fourth quarter of 2005 a net withholding tax expense ofapproximately $14.2 million. On April 19, 2006, the Company signed anagreement with the IRS to resolve the employment tax audit. Pursuant to suchagreement the Company paid approximately $28.7 million to the IRS on April 21,2006, and on April 28, 2006, the Company paid the IRS approximately $3.1million consisting of interest. The remaining $264,000 of excess withholdingtax liability was reversed into income during the fourth quarter of 2006 afterthe Company had concluded that the payments were accepted by the IRS and thematter had been finalized.

**(8)**   Long-TermDebt

The Company’s long-term debt was $600.0 million at December 31,2006 and 2005.

In May 2004, the Company completed a privateplacement of $600.0 million in convertible senior notes due 2024. The notesbear interest at 13¤8% per annum payablesemi-annually. The Company received net proceeds from this offering ofapproximately $581.4 million. Holders may convert the notes into shares of theCompany’s common stock at a conversion rate of 10.5613 shares per $1,000principal amount of notes which is equivalent to a conversion price of $94.69per share, subject to adjustment, before the close of business on the businessday immediately prior to May 15, 2024, subject to prior redemption orrepurchase of the notes, only under the following circumstances: (1) on orprior to May 15, 2019, during any calendar quarter commencing after June 30,2004, if the closing sale price of the Company’s common stock exceeds 120% ofthe conversion price for at least 20 trading days in the 30 consecutive tradingdays ending on the last trading day of the preceding calendar quarter and afterMay 15, 2019, if the closing sale price of the Company’s common stockexceeds 120% of the conversion price on the immediately preceding trading day; (2) duringthe five business day period after any five consecutive trading day period inwhich the trading price per note for each day of that period was less than 98%of the product of the closing sale price of the Company’s common stock and theconversion rate; (3) if the notes have been called for redemption; or (4) uponthe occurrence of certain corporate events. Beginning May 20, 2009, theCompany may redeem all or any portion of the notes at a redemption price equalto 100% of the principal amount of the notes, plus accrued and unpaid interest.On May 15 of 2009, 2014 and 2019, or upon the occurrence of certaindesignated events, holders may require the Company to repurchase the notes at arepurchase price equal to 100% of the principal amount of the notes plusaccrued and unpaid interest. The notes are unsubordinated unsecured debt andwill rank on a parity with all of the Company’s other existing and futureunsubordinated unsecured debt and prior to all of the Company’s existing andfuture subordinated debt. Deferred financing costs of approximately $18.6million associated with the issuance of this debt are being amortized over fiveyears.

In June 2004, the Company redeemed all of theoutstanding 51¤2% convertible subordinated notes due in 2005. All of the outstanding noteswhich amounted to approximately $240.0 million, were converted by June 17,2004, into 4,356,000 shares of the Company’s common stock. At the time ofredemption there was approximately $1.2 million of unamortized deferredfinancing cost which was recorded against additional paid-in capital.

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(9)**   IncomePer Common Share

Basicand diluted income per common share (“EPS”) were computed using the following:(in thousands, except per share data)

| ** **                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| EPS Numerator—Basic:                                                  |       |                                       |       |   |   |   |   |
| Net income                                                                 |       | $                                          | 370,674    |   | $ | 86,496 |   | $ | 113,653 |   |
| EPS Denominator—Basic:                                                |       |                                       |       |   |   |   |   |
| Weighted-average number of shares of common  stock outstanding             |       | 84,235                                     |       | 83,582 |   | 79,500 |   |
| EPS Numerator—Diluted:                                                |       |                                       |       |   |   |   |   |
| Net income                                                                 |       | $                                          | 370,674    |   | $ | 86,496 |   | $ | 113,653 |   |
| Adjustment for interest, net of amounts capitalized  and income tax effect |       | 7,557                                      |       | 6,484 |   | 7,315 |   |
| Net income, adjusted                                                       |       | $                                          | 378,231    |   | $ | 92,980 |   | $ | 120,968 |   |
| EPS Denominator—Diluted:                                              |       |                                       |       |   |   |   |   |
| Weighted-average number of shares of common  stock outstanding             |       | 84,235                                     |       | 83,582 |   | 79,500 |   |
| Effect of  dilutive securities:                                            |       |                                       |       |   |   |   |   |
| Stock options                                                              |       | 1,441                                      |       | 2,265 |   | 5,589 |   |
| Convertible subordinated notes                                             |       | 6,336                                      |       | 6,336 |   | 6,104 |   |
| Dilutive potential common shares                                           |       | 7,777                                      |       | 8,601 |   | 11,693 |   |
| Weighted-average common shares and dilutive  potential common shares       |       | 92,012                                     |       | 92,183 |   | 91,193 |   |
| Basic income per  common share                                             |       | $                                          | 4.40       |   | $ | 1.03 |   | $ | 1.43 |   |
| Diluted income per  common share                                           |       | $                                          | 4.11       |   | $ | 1.01 |   | $ | 1.33 |   |

 

For the year ended December 31, 2004, potentiallydiluted common shares applicable to the 51¤2%convertible notes that were converted during 2004 have been weighted andincluded for the period the convertible securities were outstanding prior toconversion. The dilutive effect of the 13¤8%convertible notes issued in 2004 has been weighted and included in the dilutedshare computation for the period the convertible securities were outstanding.

For the years ended December 31,2006, 2005, and 2004, there were an aggregate of 8,671,000, 8,277,000 and2,333,000, respectively, potential common shares, excluded from the dilutedloss per share computation because their inclusion would have had ananti-dilutive effect.

**(10)**   CollaborativeAgreements

***(a) Merck KGaA***

In April 1990,the Company entered into an agreement with Merck KGaA relating to thedevelopment and commercialization of BEC2 and the recombinant gp75 antigen.Under this agreement, the Company:

·       grantedMerck KGaA a license, with the right to sublicense, to make, have made, use,sell, or have sold BEC2 and gp75 antigen outside North America;

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

·       grantedMerck KGaA a license, without the right to sublicense, to use, sell, or havesold, but not to make, BEC2 within North America in conjunction with ImCloneSystems;

·       retainedthe rights, (1) without the right to sublicense, to make, have made, use,sell, or have sold BEC2 in North America in conjunction with Merck KGaA and (2) withthe right to sublicense, to make, have made, use, sell, or have sold gp75antigen in North America

·       wasrequired to give Merck KGaA the opportunity to negotiate a license in NorthAmerica to gp75 antigen before granting such a license to any third party.

In return, MerckKGaA:

·       maderesearch support payments to us totaling $4.7 million;

·       wasrequired to make milestone payments to us of up to $22.5 million, of which $5.0million was received through December 31, 2005 based on milestonesachieved in the product development of BEC2;

·       wasrequired to make royalty payments to us on all sales of the licensed productsoutside North America, if any, with a portion of the earlier funding receivedunder the agreement being creditable against the amount of royalties due.

Following an analysis of the results of variousclinical studies involving BEC2 and work on the recombinant gp75 antigen, theCompany and Merck KGaA determined to discontinue their further development andterminated the related agreement in the fourth quarter of 2005. Approximately$1.6 million of deferred revenue related to this agreement was recorded asrevenue upon the cancellation of the contract. The Company incurred expenses ofapproximately $0, $19,000 and $333,000 for the years ended December 31,2006, 2005 and 2004, respectively, related to this contract.

In December 1998, the Company entered into adevelopment and license agreement with Merck KGaA with respect to ERBITUX. Inexchange for granting Merck KGaA exclusive rights to market ERBITUX outside ofthe United States and Canada and co-exclusive development rights in Japan, theCompany received $30.0 million in up-front cash fees and early cash paymentsbased on the achievement of defined milestones, all of which were received by December 31,2001. An additional $30.0 million was received through December 31, 2004,based upon the achievement of further milestones for which Merck KGaA receivedequity in the Company. The equity interests underlying the milestone paymentswere priced at varying premiums to the then-market price of the common stockdepending upon the timing of the achievement of the respective milestones.

Merck KGaA pays the Company a royalty on its sales ofERBITUX outside of the United States and Canada. In August 2001, theCompany and Merck KGaA amended this agreement to provide, among other things,that Merck KGaA may manufacture ERBITUX for supply in its territory and mayutilize a third-party to do so upon the Company’s reasonable acceptance. Theamendment further released Merck KGaA from its obligations under the agreementrelating to providing a guaranty under a $30.0 million credit facility relatingto the build-out of BB36. In addition, the amendment provides that the companieshave co-exclusive rights to ERBITUX in Japan, including the right to sublicenseand Merck KGaA waived its right of first offer in the case of a proposedsublicense by the Company of ERBITUX in the Company’s territory. Inconsideration for the amendment, the Company agreed to a reduction in royalties’payable by Merck KGaA on sales of ERBITUX in Merck KGaA’s territory.

F-18

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In September 2002, the Company entered into abinding term sheet, effective as of April 15, 2002, for the supply ofERBITUX to Merck KGaA, which replaced previous supply arrangements. The termsheet provided for Merck KGaA to purchase bulk and finished ERBITUX orderedfrom the Company during the term of the December 1998 development andlicense agreement at a price equal to the Company’s fully loaded cost of goods.The term sheet also provided for Merck KGaA to use reasonable efforts to enterinto its own contract manufacturing agreements for supply of ERBITUX andobligates Merck KGaA to reimburse the Company for costs associated with transferringtechnology and any other services requested by Merck KGaA relating toestablishing its own manufacturing or contract manufacturing capacity.

In July 2006, theCompany and Merck KGaA entered into agreements amending and supplementing the1998 development and license agreement. As part of the agreements, the Companyconsented to Merck KGaA’s sublicense of certain intellectual property rightsrelating to the development and commercialization of an anti-EGFR antibody toTakeda Pharmaceutical Company (“Takeda”). Merck KGaA and Takeda signed analliance in September 2005 for the development and commercialization ofmatuzumab (EMD-72000), a humanized EGFR-targeting monoclonal antibody. Inconsideration for the Company’s consent, Merck KGaA agreed to pay the Company €2.5million within 30 days of the execution of the agreements and a further €5.0million within 30 days of the Company’s written consent to the sublicense. TheCompany received the first payment of €2.5 million in August of2006 and has deferred the revenue associated with this payment and isrecognizing it over the estimated service period. The Company expects to givewritten consent to sublicense in the first quarter of 2007. In addition, MerckKGaA agreed to increase its fixed royalty to 9.5% on net sales of ERBITUXoutside the U.S. and Canada, effective July 1, 2006. The agreements alsopromote freedom to operate in the development and commercialization ofmatuzumab outside the United States and Canada and of IMC-11F8 (afully-human EGFR-targeted IgG1 monoclonal antibody being developed by ImCloneSystems) within the United States and Canada through the granting of certainreciprocal rights, including the sharing of confidential technical information.This is in addition to the exclusive rights held by the Company to develop andcommercialize IMC-11F8 outside of the United States and Canada. Theagreements do not extend to key intellectual property rights in the U.S. andCanada, where the Company and its partner Bristol-Myers Squibb continue to holdexclusive licenses to key patents covering certain uses of EGFR-targetedmonoclonal antibodies. The Company has a liability due Merck KGaA ofapproximately $58,000 and $2.5 million as of December 31, 2006 and 2005,respectively.

***(b) Bristol-Myers Squibb Company***

On September 19, 2001, the Company entered intoan acquisition agreement (the “Acquisition Agreement”) with BMS andBristol-Myers Squibb Biologics Company, a Delaware corporation (“BMS Biologics”),which is a wholly-owned subsidiary of BMS, providing for the tender offer byBMS Biologics to purchase up to 14,392,003 shares of the Company’s common stockfor $70.00 per share, net to the seller in cash. In connection with theAcquisition Agreement, the Company entered into a stockholder agreement with BMSand BMS Biologics, dated as of September 19, 2001 (the “StockholderAgreement”), pursuant to which all parties agreed to various arrangementsregarding the respective rights and obligations of each party with respect to,among other things,  the ownership ofshares of the Company’s common stock by BMS and BMS Biologics. Concurrent withthe execution of the Acquisition Agreement and the Stockholder Agreement, theCompany entered into the Commercial Agreement with BMS and E.R. Squibb,relating to ERBITUX, pursuant to which, among other things, BMS and E.R. Squibbare co-developing and co-promoting ERBITUX in the United States andCanada with the Company, and are 

F-19

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

co-developing andco-promoting ERBITUX in Japan with the Company and either together or co-exclusivelywith Merck KGaA.

On March 5, 2002, theCompany amended the Commercial Agreement with E.R. Squibb and BMS. Theamendment changed certain economics of the Commercial Agreement and expandedthe clinical and strategic roles of BMS in the ERBITUX development program. Oneof the principal economic changes to the Commercial Agreement is that theCompany received payments of $140.0 million on March 7, 2002 and $60.0million on March 5, 2003. Such payments are in lieu of the $300.0 millionmilestone payment the Company would have received upon acceptance by the FDA ofthe ERBITUX BLA under the original terms of the Commercial Agreement. The termsof the Commercial Agreement, as amended on March 5, 2002, are set forth inmore detail below.

***Commercial Agreement***

*Rights Granted to E.R. Squibb**—Pursuant*to the Commercial Agreement, as amended on March 5,2002, the Company granted to E.R. Squibb (1) the exclusive right todistribute, and the co-exclusive right to develop and promote (together withthe Company) any prescription pharmaceutical product using the compound ERBITUX(the “product”) in the United States and Canada, (2) the co-exclusiveright to develop, distribute and promote (together with the Company andtogether or co-exclusively with Merck KGaA and its affiliates) the product inJapan, and (3) the non-exclusive right to use the Company’s registeredtrademarks for the product in the United States, Canada and Japan(collectively, the “territory”) in connection with the foregoing. In addition,the Company agreed not to grant any right or license to any third party, orotherwise permit any third party, to develop ERBITUX for animal health or anyother application outside the human health field without the prior consent ofE.R. Squibb (which consent may not be unreasonably withheld).

*Rights Granted to the Company**—Pursuant*to the Commercial Agreement, E.R. Squibb has grantedto the Company and the Company’s affiliates a license, without the right togrant sublicenses (other than to Merck KGaA and its affiliates for use in Japanand to any third party for use outside the territory), to use solely for thepurpose of developing, using, manufacturing, promoting, distributing andselling ERBITUX or the product, any process, know-how or other inventiondeveloped solely by E.R. Squibb or BMS that has general utility in connectionwith other products or compounds in addition to ERBITUX or the product (“E.R.Squibb Inventions”).

*Up-Front and Milestone Payments**—The*Commercial Agreement provided for up-front andmilestone payments by E.R. Squibb to the Company of $900.0 million in theaggregate, of which $200.0 million was paid on September 19, 2001, $140.0million was paid on March 7, 2002, $60.0 million was paid on March 5,2003,  $250.0 million was paid on March 12,2004, and  $250.0 million was paid on March 31,2006, as a result of obtaining FDA approval on March 1, 2006 of ERBITUXfor use in the treatment of SCCHN. All such payments are non-refundable andnon-creditable.

*Distribution Fees**—The* Commercial Agreement provides that E.R. Squibb shallpay the Company distribution fees based on a percentage of “annual net sales”of the product (as defined in the Commercial Agreement) by E.R. Squibb in theUnited States and Canada. The distribution fee is 39% of net sales in the UnitedStates and Canada. The Commercial Agreement also provides that the distributionfees for the sale of the product in Japan by E.R. Squibb or ImClone Systemsshall be equal to 50% of operating profit or loss with respect to such salesfor any calendar month. In the event of an operating profit, E.R. Squibb 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*shallpay the Company the amount of such distribution fee, and in the event of anoperating loss, the Company shall credit E.R. Squibb the amount of suchdistribution fee.*

*Development of the Product**—Responsibilities*associated with clinical and other ongoing studiesare apportioned between the parties as determined by the product developmentcommittee described below. The Commercial Agreement provides for theestablishment of clinical development plans setting forth the activities to beundertaken by the parties for the purpose of obtaining marketing approvals,providing market support and developing new indications and formulations of theproduct. After transition of responsibilities for certain clinical and otherstudies, each party is primarily responsible for performing the studiesdesignated to it in the clinical development plans. In the United States andCanada, the Commercial Agreement provides that E.R. Squibb is responsible for100% of the cost of all clinical studies other than those studies undertakenpost-launch which are not pursuant to an IND (e.g. Phase IV studies), the costof which is shared equally between E.R. Squibb and ImClone Systems. As betweenE.R. Squibb and ImClone Systems, each is responsible for 50% of the costs ofall studies in Japan. The Company has also agreed, and may agree in the future,to share with E.R. Squibb, on terms other than the foregoing, costs of clinicaltrials that the Company believes are not potentially registrational but shouldbe undertaken prior to launch in the United States, Canada or Japan. Inaddition, to the extent that in 2005 and 2006 the Company and BMS exceed thecontractual maximum registrational costs for clinical development, the Companyhas agreed to share such cost with BMS. The Company has incurred approximately$20.8 million,  $19.9 million and $9.1million pursuant to such cost sharing for the years ended December 31,2006, 2005 and 2004, respectively. The Company has also incurred approximately$3.1 million, $1.4 million and $721,000 for the years ended December 31,2006, 2005 and 2004, respectively, related to the agreement with respect todevelopment in Japan. Except as otherwise agreed upon by the parties, theCompany will own all registrations for the product and is primarily responsiblefor the regulatory activities leading to registration in each country. E.R.Squibb will be primarily responsible for the regulatory activities in eachcountry after the product has been registered in that country. Pursuant to theterms of the Commercial Agreement, as amended, Andrew G. Bodnar, M.D., J.D.,Senior Vice President, Strategy and Medical & External Affairs of BMS,and a member of the Company’s Board of Directors, is entitled to oversee theimplementation of the clinical and regulatory plan for ERBITUX.

*Distribution and Promotionof the Product—**Pursuant* to the CommercialAgreement, E.R. Squibb has agreed to use all commercially reasonable efforts tolaunch, promote and sell the product in the territory with the objective ofmaximizing the sales potential of the product and promoting the therapeuticprofile and benefits of the product in the most commercially beneficial manner.In connection with its responsibilities for distribution, marketing and salesof the product in the territory, E.R. Squibb is performing all relevantfunctions, including but not limited to the provision of sales force personnel,marketing, warehousing and physical distribution of the product.

However, the Company has the right, at its electionand sole expense, to co-promote with E.R. Squibb the product in the territory.Pursuant to this co-promotion option, which the Company has exercised, theCompany is entitled on and after April 11, 2002 (at the Company’s soleexpense) to have the Company’s field organization participate in the promotionof the product consistent with the marketing plan agreed upon by the parties,provided that E.R. Squibb retains the exclusive rights to sell and distributethe product. Except for the Company’s expenses incurred pursuant to theco-promotion option, E.R. Squibb is responsible for 100% of the distribution,sales and marketing costs in the United States and Canada, and as between E.R.Squibb and ImClone Systems, each is responsible for 50% of the distribution,sales, marketing costs and other related costs and expenses in Japan. Duringthe third quarter of 2004, the 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Company established asales force to maximize the potential commercial opportunities for ERBITUX andto serve as a foundation for the marketing of future products derived eitherfrom within the Company’s pipeline or through business developmentopportunities.

*Manufacture and Supply—**The* CommercialAgreement provides that the Company is responsible for the manufacture andsupply of all requirements of ERBITUX in bulk form (“API”) for clinical andcommercial use in the territory, and that E.R. Squibb will purchase all of itsrequirements of API for commercial use from the Company. The Company suppliesAPI for clinical use at the Company’s fully burdened manufacturing cost, andsupplies API for commercial use at the Company’s fully burdened manufacturingcost plus a mark-up of 10%. The agreement also specifies that the Companyshould use reasonable efforts to reduce the fully burdened manufacturing costof producing bulk ERBITUX over time. Specifically, beginning with 2006production of bulk ERBITUX, the agreement provides that the cost of API shouldnot exceed a predetermined price per gram. Any excess over such amount will beshared equally by the Company and BMS.

Upon the expiration, termination or assignment of anyexisting agreements between ImClone Systems and third party manufacturers, E.R.Squibb will be responsible for processing API into the finished form of theproduct. Sales of ERBITUX to BMS for commercial use are reflected in theCompany’s Consolidated Statements of Operations as Manufacturing revenue.

*Management—**The* parties haveformed the following committees for purposes of managing their relationship andtheir respective rights and obligations under the Commercial Agreement:

·       aJoint Executive Committee (the “JEC”), which consists of certain seniorofficers of each party. The JEC is co-chaired by a representative of each ofBMS and the Company. The JEC is responsible for, among other things, managingand overseeing the development and commercialization of ERBITUX pursuant to theterms of the Commercial Agreement, approving the annual budgets and multi-yearexpense forecasts, and resolving disputes, disagreements and deadlocks arisingin the other committees;

·       aProduct Development Committee (the “PDC”), which consists of members of seniormanagement of each party with expertise in pharmaceutical drug developmentand/or marketing. The PDC is chaired by the Company’s representative. The PDCis responsible for, among other things, managing and overseeing the developmentand implementation of the clinical development plans, comparing actual versusbudgeted clinical development and regulatory expenses, and reviewing theprogress of the registrational studies;

·       aJoint Commercialization Committee (the “JCC”), which consists of members ofsenior management of each party with clinical experience and expertise inmarketing and sales. The JCC is chaired by a representative of BMS. The JCC isresponsible for, among other things, overseeing the preparation andimplementation of the marketing plans, coordinating the sales efforts of E.R.Squibb and the Company, and reviewing and approving the marketing andpromotional plans for the product in the territory; and

·       aJoint Manufacturing Committee (the “JMC”), which consists of members of seniormanagement of each party with expertise in manufacturing. The JMC is chaired bythe Company’s representative (unless a determination is made that a long-terminability to supply API exists, in which case the JMC will be co-chaired byrepresentatives of E.R. Squibb and the Company). The JMC is 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

responsible for, amongother things, overseeing and coordinating the manufacturing and supply of APIand the product, and formulating and directing the manufacturing strategy forthe product.

Any matter that is the subject of a deadlock (i.e., noconsensus decision) in the PDC, the JCC or the JMC will be referred to the JECfor resolution. Subject to certain exceptions, deadlocks in the JEC will beresolved as follows: (1) if the matter was also the subject of a deadlockin the PDC, by the co-chairperson of the JEC designated by the Company, (2) ifthe matter was also the subject of a deadlock in the JCC, by the co-chairpersonof the JEC designated by BMS, or (3) if the matter was also the subject ofa deadlock in the JMC, by the co-chairperson of the JEC designated by theCompany. All other deadlocks in the JEC will be resolved by arbitration.

*Restriction on Competing Products—**During***the period from the date of the Commercial Agreement until September 19,2008, the parties have agreed not to, directly or indirectly, develop orcommercialize a competing product (defined as a product that has as its onlymechanism of action an antagonism of the EGFR) in any country in the territory.In the event that any party proposes to commercialize a competing product orpurchases or otherwise takes control of a third party which has developed orcommercialized a competing product, then such party must either divest thecompeting product within 12 months or offer the other party the right toparticipate in the commercialization and development of the competing producton a 50/50 basis (provided that if the parties cannot reach agreement withrespect to such an agreement, the competing product must be divested within12 months).

*Ownership—**The***Commercial Agreement provides that the Company owns alldata and information concerning ERBITUX and the product and (except for theE.R. Squibb Inventions) all processes, know-how and other inventions relatingto the product and developed by either party or jointly by the parties. E.R.Squibb, however, has the right to use all such data and information, and allsuch processes, know-how or other inventions, in order to fulfill itsobligations under the Commercial Agreement.

*Product Recalls—**If* E.R. Squibb isrequired by any regulatory authority to recall the product in any country inthe territory (or if the JCC determines such a recall to be appropriate), thenE.R. Squibb and ImClone Systems shall bear the costs and expenses associatedwith such a recall (1) in the United States and Canada, in the proportionof 39% for ImClone Systems and 61% for E.R. Squibb and (2) in Japan, inthe proportion for which each party is entitled to receive operating profit orloss (unless, in the territory, the predominant cause for such a recall is thefault of either party, in which case all such costs and expenses shall be borneby such party).

*Mandatory Transfer—**Each***of BMS and E.R. Squibb has agreed under the CommercialAgreement that in the event it sells or otherwise transfers all orsubstantially all of its pharmaceutical business or pharmaceutical oncologybusiness, it must also transfer to the transferee its rights and obligationsunder the Commercial Agreement.

*Indemnification—**Pursuant* to theCommercial Agreement, each party has agreed to indemnify the other for(1) its negligence, recklessness or wrongful intentional acts oromissions, (2) its failure to perform certain of its obligations under theagreement, and (3) any breach of its representations and warranties underthe agreement.

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Termination—**Unless***earlier terminated pursuant to the termination rightsdiscussed below, the Commercial Agreement expires with regard to the product ineach country in the territory on the later of September 19, 2018 and thedate on which the sale of the product ceases to be covered by a validly issuedor pending patent in such country. The Commercial Agreement may also beterminated prior to such expiration as follows:

·       byeither party, in the event that the other party materially breaches any of itsmaterial obligations under the Commercial Agreement and has not cured suchbreach within 60 days after notice;

·       by E.R. Squibb, if the JECdetermines that there exists a significant concern regarding a regulatory orpatient safety issue that would seriously impact the long-term viability of allproducts.

***Stockholder Agreement***

Pursuant to the Stockholder Agreement, the Company’sBoard was increased from ten to twelve members in October 2001. Our Boardhas subsequently been reduced to eleven members. BMS received the right tonominate two directors to the Company’s Board (each a “BMS director”) so longas its ownership interest in ImClone Systems is 12.5% or greater. If BMS’ownership interest is 5% or greater but less than 12.5%, BMS will have theright to nominate one BMS director, and if BMS’ ownership interest is less than5%, BMS will have no right to nominate a BMS director. If the size of the Boardis increased to a number greater than twelve, the number of BMS directors wouldbe increased, subject to rounding, such that the number of BMS directors isproportionate to the lesser of BMS’ then-current ownership interest and 19.9%.Notwithstanding the foregoing, BMS will have no right to nominate any BMSdirectors if (1) the Company has terminated the Commercial Agreement dueto a material breach by BMS or (2) BMS’ ownership interest were to remainbelow 5% for 45 consecutive days.

Based on the number of shares of common stock acquiredpursuant to the tender offer and the fact that we currently have ten, BMS hasthe right to nominate two directors. BMS designated Andrew G. Bodnar, M.D.,J.D., BMS’ Senior Vice President, Strategy and Medical & ExternalAffairs, as one of the initial BMS directors. The nomination of Dr. Bodnarwas approved by the Board on November 15, 2001. BMS has not yet designatedan individual to fill the open Board seat.

*Voting of Shares—**During* the period inwhich BMS has the right to nominate up to two BMS directors, BMS and itsaffiliates are required to vote all of their shares in the same proportion asthe votes cast by all of the Company’s other stockholders with respect to theelection or removal of non-BMS directors.

*Committees of the Board of Directors—**During* the period inwhich BMS has the right to nominate up to two BMS directors, BMS also has theright, subject to certain exceptions and limitations, to have one member ofeach committee of the Board be a BMS director.

*Transfers of Shares—*NeitherBMS nor any of its affiliates may transfer any shares or enter into anyarrangement that transfers any of the economic consequences associated with theownership of shares, except (1) pursuant to registration rights granted toBMS with respect to the shares, (2) pursuant to Rule 144 under theSecurities Act of 1933, as amended or (3) for certain hedgingtransactions. Any such transfer is subject to the following limitations: (1) thetransferee may not acquire beneficial ownership of more than 5% of thethen-outstanding shares of common stock; (2) no more than 10% of the totaloutstanding shares of common stock may be sold in any one registeredunderwritten public offering; and (3) neither BMS nor any of itsaffiliates may transfer shares of common stock (except for registered firm 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

commitment underwrittenpublic offerings pursuant to the registration rights described below) or enterinto hedging transactions in any twelve-month period that would, individuallyor in the aggregate, have the effect of reducing the economic exposure of BMSand its affiliates by the equivalent of more than 10% of the maximum number ofshares of common stock owned by BMS and its affiliates at any time after September 19,2001. Notwithstanding the foregoing, BMS Biologics may transfer all, but notless than all, of the shares of common stock owned by it to BMS or to E.R. Squibbor another wholly-owned subsidiary of BMS.

*Registration Rights—**The* Company grantedBMS customary registration rights with respect to shares of common stock ownedby BMS or any of its affiliates.

***(c)***   UCBS.A.

In August 2005, theCompany entered into a Collaboration and License Agreement with UCB S.A. (“UCB”),a company registered in Belgium, for the development and commercialization ofCDP-791, UCB’s novel, investigational PEGylated di-Fab antibody targetingthe vascular endothelial growth factor receptor-2 (“VEGFR-2”). Noupfront or milestone payments were payable under the Agreement. In the firstquarter of 2007, the Company terminated this agreement with UCB, largely due tosubstantial progress made in the development of 1121B and agreed to pay UCB $450,000as settlement of all previous amounts due related to expenses associated withthe co-development activities under the agreement. As part of this settlement,the Company will receive a single-digit royalty on net sales worldwide uponcommercialization of such indications. The Company had recorded as of December 31,2005 an expense of $2.5 million in its financial statements related to theagreement. As a result of the termination of this contract, the Companyreversed $2.0 million in 2006 of the previously expensed amount. Therefore, theCompany had a liability due to UCB of $450,000 and $2.5 million as of December 31,2006 and 2005, respectively.

***Collaborative Agreement Tables***

Royaltyrevenue consists of the following: (in thousands)

| ** **             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------|------------|--------------------------------------------|------------|
| ** **             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| BMS                    |       | $                                          | 254,359    |   | $ | 161,116 |   | $ | 101,703 |   |
| Merck KGaA             |       | 35,971                                     |       | 16,229 |   | 4,314 |   |
| Other                  |       | 269                                        |       | 95 |   | 257 |   |
| Total royalty  revenue |       | $                                          | 290,599    |   | $ | 177,440 |   | $ | 106,274 |   |

 

License fees and milestone revenue consists of thefollowing: (in thousands)

| ** **                                | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| BMS:                                      |       |                                       |       |   |   |   |   |
| ERBITUX license  fee revenue              |       | $                                          | 231,921    |   | $ | 94,232 |   | $ | 128,943 |   |
| Merck KGaA:                               |       |                                       |       |   |   |   |   |
| ERBITUX and BEC2  license fee revenue     |       | 348                                        |       | 3,007 |   | 385 |   |
| Other license fee  revenue                |       | —                                     |       | — |   | 58 |   |
| Total license  fees and milestone revenue |       | $                                          | 232,269    |   | $ | 97,239 |   | $ | 129,386 |   |

 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Manufacturing revenue from corporate partners consistsof the following: (in thousands)

| ** **                             | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| BMS                                    |       | $                                          | 82,428     |   | $ | 44,090 |   | $ | 99,041 |   |
| Merck KGaA                             |       | 4,048                                      |       | — |   | — |   |
| Total  collaborative agreement revenue |       | $                                          | 86,476     |   | $ | 44,090 |   | $ | 99,041 |   |

 

Collaborative agreementrevenue from partners consists of the following: (in thousands)

| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| BMS:                                                    |       |                                       |       |   |   |   |   |
| Drug                                                    |       | $                                          | 8,026      |   | $ | 8,926 |   | $ | 13,062 |   |
| ERBITUX clinical and regulatory expenses                |       | 12,424                                     |       | 13,748 |   | 12,105 |   |
| ERBITUX marketing, general and administrative  expenses |       | 1,093                                      |       | 1,594 |   | 2,017 |   |
| ERBITUX royalty expenses                                |       | 29,349                                     |       | 18,591 |   | 11,735 |   |
| Total BMS                                               |       | 50,892                                     |       | 42,859 |   | 38,919 |   |
| Merck KGaA:                                             |       |                                       |       |   |   |   |   |
| Drug                                                    |       | 11,468                                     |       | 18,455 |   | 11,446 |   |
| ERBITUX clinical and regulatory expenses                |       | —                                     |       | 928 |   | 1,753 |   |
| ERBITUX marketing, general and administrative  expenses |       | 110                                        |       | 358 |   | 774 |   |
| ERBITUX royalty expenses                                |       | 6,018                                      |       | 2,292 |   | 1,003 |   |
| BEC2 expenses                                           |       | —                                     |       | — |   | 42 |   |
| Total Merck KGaA                                        |       | 17,596                                     |       | 22,033 |   | 15,018 |   |
| Other                                                   |       | 15                                         |       | 12 |   | 52 |   |
| Total  collaborative agreement revenue                  |       | $                                          | 68,503     |   | $ | 64,904 |   | $ | 53,989 |   |

 

Amountsdue from corporate partners in the table below are net of allowance fordoubtful accounts in 2006, 2005 and 2004 of $0, $0, and $430, respectively.Amounts due from corporate partners were written-off against the allowance of$430 in 2005. There were no write-offs in 2006 or 2004 and no additions to theallowance in 2006 or 2005. All amounts including the table below are inthousands:

| ** **                                 | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| BMS:                                       |       |                        |       |                        |       |   |   |   |   |
| ERBITUX                                    |       |                        | $          | 64,991                      |       |   |   | $ | 51,503 |   |   |
| Merck KGaA:                                |       |                        |       |                        |       |   |   |   |   |
| ERBITUX and BEC2                           |       |                        | 13,039     |                        |       |   | 7,768 |   |   |
| Total amounts due  from corporate partners |       |                        | $          | 78,030                      |       |   |   | $ | 59,271 |   |   |

 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Deferredrevenue consists of the following: (in thousands)

| ** **                                | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| BMS:                                      |       |                        |       |                        |       |   |   |   |   |
| ERBITUX commercial agreement              |       |                        | $          | 374,215                     |       |   |   | $ | 356,136 |   |   |
| Merck KGaA:                               |       |                        |       |                        |       |   |   |   |   |
| ERBITUX development and license agreement |       |                        | 5,662      |                        |       |   | 2,889 |   |   |
| Total deferred revenue                    |       |                        | 379,877    |                        |       |   | 359,025 |   |   |
| Less: current  portion                    |       |                        | (142,013   | )                           |       |   | (112,624 | ) |   |
| Total long-term  deferred revenue         |       |                        | $          | 237,864                     |       |   |   | $ | 246,401 |   |   |

 

**(11) Stockholder’ Equity**

***(a)***   Common Stock

The Company is authorized to issue 200,000,000 sharesof common stock.

***(b)***   Stockholder RightsPlan

On February 15, 2002, the Company’s Board ofDirectors approved a Stockholder Rights Plan and declared a dividend of oneright for each share of the Company’s common stock outstanding at the close ofbusiness on February 19, 2002. In connection with the Board of Directors’approval of the Stockholders Rights Plan Series B Participating CumulativePreferred Stock was created. Under certain conditions, each right entitles theholder to purchase from the Company one-hundredth of a share of Series BParticipating Cumulative Preferred Stock at an initial purchase price of $175per share. The Stockholder Rights Plan is designed to enhance the Board’s abilityto protect stockholders against, among other things, unsolicited attempts toacquire control of the Company which do not offer an adequate price to all ofthe Company’s stockholders or are otherwise not in the best interests of theCompany and the Company’s stockholders.

Subject to certain exceptions, rights becomeexercisable (i) on the tenth day after public announcement that anyperson, entity, or group of persons or entities has acquired ownership of 19.9%or more of the Company’s outstanding common stock, or (ii) 10 businessdays following the commencement of a tender offer or exchange offer, other thancertain qualifying tender offers, by any person which would, if consummated,result in such person acquiring ownership of 19.9% or more of the Company’soutstanding common stock, (collectively an “Acquiring Person”).

In such event, each right holder (other than theAcquiring Person and its affiliates) will have the right to receive the numberof shares of common stock having a then-current market value equal to two timesthe aggregate exercise price of such rights. If the Company were to enter intocertain business combination or disposition transactions with an AcquiringPerson, each right holder will have the right to receive shares of common stockof the acquiring company having a value equal to two times the aggregateexercise price of the rights.

The Company may redeem these rights in whole at aprice of $.001 per right. The rights expire on February 15, 2012.

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***(c)***   Stock RepurchaseProgram

On September 19, 2005, the Company announced theapproval by the Board of Directors of a stock repurchase program permitting therepurchase of up to $100.0 million in aggregate principal amount of outstandingshares of the Company’s common stock during a two year period. The stockrepurchase program is to be employed for general corporate purposes, includingto offset dilution resulting from future grants of stock options or otherdilutive incentive compensation granted to the Company’s employees anddirectors. Stock repurchases under this program may be made through open marketor privately negotiated transactions at such times and in such amounts as theCompany deems appropriate, based on a variety of factors such as price, corporateand regulatory requirements and overall market conditions. The stock repurchaseprogram may be limited or terminated at any time without prior notice. As of December 31,2006 the Company has repurchased 811,416 shares at an average price of $30.62per share for aggregate consideration of approximately $24.8 million under theprogram.

***(d)***   Share-BasedCompensation Plans

The Company has three types of share-basedcompensation plans: stock option plans, an employee stock purchase plan andeffective as of January 1, 2006, a retention plan.

***Stock Option Plans***

In February 1996, the Company’s Board ofDirectors adopted and the shareholders thereafter approved an Incentive StockOption Plan and Non-Qualified Stock Option Plan (the “96 Plans”). In May 1998,the Company’s Board of Directors adopted an additional Non-Qualified StockOption Plan (the “98 Plan”), which shareholders were not required to approve.On June 11, 2002, the shareholders approved and the Company adopted the2002 Stock Option Plan (the “02 Plan”). Effective with the adoption of the 02Plan, the Company will not award new grants from the 96 Plans or the 98 Plan.The 02 Plan provides for the granting of both incentive stock options andnon-qualified stock options to purchase, subject to adjustment under the plan,3,300,000 shares of the Company’s common stock to employees, directors,consultants and advisors of the Company. Any common stock subject to an optionwhich is cancelled, forfeited or expires prior to exercise whether such optionwas granted under this plan or the 96 Plans or the 98 Plan, shall again becomeavailable for grant under the 02 Plan. Options granted under the 02 Plan becomefully vested and exercisable upon the occurrence of a change in control, asdefined. Incentive stock options granted under the 02 Plan may not exceed825,000 shares of common stock, may not be granted at a price less than thefair market value of the stock at the date of grant and may not be granted tonon-employees. In September 2003, the shareholders approved an amendmentto the 02 Plan that increased the maximum total number of shares of commonstock currently available for grant of options under the plan from 3,300,000shares to 6,600,000 shares, and increased the number of shares of common stockwith respect to which incentive stock options may be granted under the planfrom 825,000 shares to 1,650,000 shares.

In November 2001, the Board of Directors approvedthe amendment of the 96 Plans and the 98 Plan whereby upon the occurrence of achange in control, as defined in the amended plan documents, each outstandingoption under the 96 Plans and the 98 Plan shall become fully vested andexercisable.

On October 17, 2005, the Compensation Committeeof the Board of Directors approved the adoption of a stock option plan for thesole purpose of making one-time grants of stock options to newly hired keyemployees who have not previously been employees or directors of the Company asan inducement to such persons entering into employment with the Company (the “InducementPlan”), in accordance with 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

NASDAQ Marketplace Rule 4350(i)(1)(A)(iv).The Inducement Plan permitted the Company to issue up to a total of 600,000 “inducement”options to eligible participants to purchase shares of common stock of theCompany on terms and conditions set forth therein and in individual awardagreements under the Inducement Plan, in each case on terms commensurate withoptions granted under the Company’s 2002 Stock Option Plan. The Inducement Planwas cancelled on September 20, 2006.

On September 20, 2006, the shareholders approvedand the Company adopted the 2006 Stock Incentive Plan (the “06 Plan”). Underthe 06 Plan, the Company has the ability to grant (i) stock options; (ii) stockappreciation rights; (iii) restricted stock awards; (iv) restrictedstock unit awards; (v) performance awards; and (vi) other stock-basedawards. Effective with the adoption of the 06 Plan, the Company will not awardnew grants from the 02 Plan. Any common stock option which is cancelled,forfeited or expires prior to exercise whether such option was granted underthis plan, the 96 Plans, the 98 Plan or the 02 Plan, shall again becomeavailable for grant under the 06 Plan. Options granted under the 06 Plangenerally vest over one-to-four-year periods and unless earlier terminated, andexpire ten years from the date of grant. The aggregate number of shares ofcommon stock that may be granted or used for reference purposes under the 06Plan shall not exceed 5,500,000 shares plus common stock available for grantunder prior plans. Any shares of common stock that are subject to awards ofstock options or stock appreciation rights will be counted against this limitas one share for every share granted. Any shares of common stock that aresubject to awards other than stock options or stock appreciation rights will becounted against this limit as two shares for every share granted.

As of December 31, 2006, the number of remainingshares authorized and currently available for grant under plans discussed aboveis approximately 7,136,000. Incentive stock options may not be granted at aprice less than the fair market value of the stock at the date of grant and maynot be granted to non-employees. Options under all the plans, unless earlierterminated, expire ten years from the date of grant. Options granted underthese plans generally vest over one-to-four-year periods.

**In September 2001, and inconnection with the Board of Directors’ approval of certain employment theCompany granted options to purchase, in the aggregate, 2,450,000 shares of itscommon stock to its former President and Chief Executive Officer, Dr. SamuelD. Waksal, its then-current Chief Operating Officer, and now-former ChiefScientific Officer, Dr. Harlan W. Waksal and its then-current Senior VicePresident, Finance, and Chief Financial Officer and former Chief ExecutiveOfficer, Daniel S. Lynch. The options have a per-share exercise price equal to$50.01, the last reported sale price of the common stock preceding the dateBoard of Director approval was obtained. The terms of the options granted to Dr. SamuelD. Waksal and Dr. Harlan W. Waksal provided that they vest in theirentirety three years from the date of grant, but may vest earlier as to 33.33%of the shares if certain targets in the Company’s common stock price wereachieved. The options granted to Daniel S. Lynch vested equally over threeyears. In connection with the resignation of Dr. Samuel D. Waksal, and theassociated May 24, 2002 Separation Agreement between the Company and Dr. SamuelD. Waksal, the Company amended Dr. Samuel D. Waksal’s September 2001stock option award such that the then unvested portion totaling 833,332 shareswould vest immediately as of the date of termination. In December 2005,the Company and Dr. Samuel D. Waksal entered into a settlement agreementproviding for the return to the Company of 416,667 of stock options that werepreviously issued to Dr. Samuel D. Waksal. Such options were returned tothe Company and were cancelled as of December 31, 2005.**

The Company’s employee stock option plans generallypermit option holders to pay for the exercise price of stock options and anyrelated income tax withholding with shares of the Company’s common stock 

F-29

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

that have been held by theoption holders for at least six months. During the year ended December 31,2004, 4,008 shares of common stock were delivered to the Company in payment ofthe aggregate exercise price and related to income tax withheld associated withthe exercise of stock options to purchase an aggregate of 19,044 shares ofcommon stock. The 4,008 shares delivered to the Company had a value of $200,000determined by multiplying the closing price of the common stock on the date ofdeliver for the number of shares presented for payment. These shares areincluded as treasury stock in the Consolidated Statements of Stockholders’Equity (Deficit) and Comprehensive Income at December 31, 2004.

The Company granted options to purchase 45,000 sharesof its common stock to certain Scientific Advisory Board members inconsideration for future services during the year ended December 31, 2003.The fair value of these options was subject to remeasurement through thevesting date using the Black-Scholes option-pricing model. The Companyrecognized compensation expense associated with the options granted toScientific Advisory Board members of approximately $0, $0 and $2.4 million inthe years ended December 31, 2006, 2005 and 2004, respectively. All ofthese options were either exercised or cancelled as of February 16, 2006.

During the years ended December 31, 2006, 2005and 2004, the Company granted options to non-employee members of its Board ofDirectors to purchase 310,000, 255,000 and 352,000 shares, respectively, of itscommon stock. The annual grant of stock options to non-employee members of theBoard of Directors vest quarterly, however if a Board member ceases to be aDirector, the stock options vest pro rata up to the last day the Board memberserves as a Director of the Company. During 2004, the Company recognizedcompensation expense of approximately $2.0 million associated with themodification of stock options for a number of terminated employees.

On December 16, 2005, the Company’s Board ofDirectors approved the acceleration of vesting of unvested stock options withexercise prices equal to or greater than $33.44 per share outstanding as of December 16,2005 that had been previously awarded to Company employees and other eligibleparticipants, including officers and non-employee directors. Options topurchase 2,805,169 shares of the Company’s common stock were subject to thisacceleration. Of this amount, 163,750 options were held by non-employeedirectors, with a weighted average exercise price of $45.00 per share, and628,347 options were held by officers of the Company with a weighted averageexercise price of $44.32 per share. The Board required each non-employeedirector and, as a condition to continued employment, each officer of theCompany, to agree to refrain from selling, transferring, pledging or otherwisedisposing of shares of Company common stock acquired upon any exercise ofsubject stock options (other than sales by such persons to fund the exerciseprice or to satisfy minimum statutory withholding on such exercise, each inaccordance with the applicable Plan and the Company’s existing policies andprocedures) until the date on which the exercise would have been permittedunder the stock option’s pre-acceleration vesting terms or pursuant to theCompany’s Change-in-Control Plan or, if earlier, the officer’s last day ofemployment with, or director’s last day of service as a director of, theCompany. The decision to accelerate vesting of these stock options, which were “out-of-the-money”was made primarily to minimize future compensation expense that the Companywould otherwise have been required to recognize in its Consolidated Statementsof Operations pursuant to FAS123R, which the Company adopted on January 1,2006. The Company estimates that the aggregate future expense that will beeliminated as a result of this acceleration of vesting is approximately $22.5million in 2006 and $9.5 million in 2007.

F-30

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Employee Stock Purchase Plan***

In April 1998, the Company’s Board of Directorsadopted the ImClone Systems Incorporated 1998 Employee Stock Purchase Plan (the“ESPP”), subject to shareholders’ approval, which was received in May 1998.The ESPP, as amended, allows eligible employees to purchase shares of theCompany’s common stock through payroll deductions at the end of quarterlypurchase periods. To be eligible, an individual must be an employee, work morethan 20 hours per week for at least five months per calendar year and notown greater than 5% of the Company’s common stock. Pursuant to the ESPP, theCompany has reserved 1,000,000 shares of common stock for issuance. Prior tothe first day of each quarterly purchase period, each eligible employee may electto participate in the ESPP. The participant is granted an option to purchase anumber of shares of common stock determined by dividing each participant’scontribution accumulated prior to the last day of the quarterly period by thepurchase price. The participant has the ability to withdraw from the ESPP untilthe second-to-last day of the quarterly purchase period. The purchase price isequal to 85% of the market price per share on the last day of each quarterlypurchase period. An employee may purchase stock from the accumulation ofpayroll deductions up to the lesser of 15% of such employee’s compensation or$25,000 in aggregate purchase price, per year.

***Retention Plan***

In January 2006, the Compensation Committee ofthe Board of Directors approved a Retention Plan, effective as of January 1,2006, for performance periods ending December 31, 2007 and****December 31, 2008 (each, a “Performance Period”). ThePlan is intended to reward employees for achieving specified performance goalsover specified performance periods. Specifically, the Compensation Committeeapproved the share performance criteria that will be used to determine cashbonus awards under the Retention Plan, and the terms of the individual awardsto eligible employees under the Retention Plan for each of the two PerformancePeriods. Cash awards under the Retention Plan will depend on the performance ofthe Company’s common stock against specified targets, generally measured bycomparing the Company’s share price at the beginning of the Performance Periodto the Company’s share price at the conclusion of the Performance Period, ineach case based on a 30-day average. In particular, at the end of anapplicable Performance Period, the percentage of the cash award earned (if any)and, correspondingly, the amount of the actual award payouts to an employee forsuch Performance Period will be (i) equal to the employee’s target awardopportunity, (ii) greater than the target award opportunity (but in noevent more than 150% of the target award opportunity), or (iii) zero, ineach case directly corresponding to actual Company common stock performance atthe conclusion of the Performance Period compared to the beginning of thePerformance Period. No awards will be payable in respect of a PerformancePeriod if the Company’s share price at the conclusion of the Performance Periodis less than the share price at the beginning of the Performance Period. TheCompany’s share price at the beginning of the Performance Periods wascalculated to be $32.99. Special measurement dates and payment conditions applyin the event of a change in control of the Company occurring during aPerformance Period. The Company has determined that awards granted under thisplan should be classified as liability awards.

F-31

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The following table summarizes the effect ofcompensation cost arising from share-based payment arrangements on the Company’sstatements of income for the year ended December 31, 2006 for the Company’sStock Option Plans, the ESPP, and the Retention Plan: (in thousands)

| Research and development                                                                            |   | $      | 2,995  |   |   |
|-----------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
| Clinical and regulatory                                                                             |   | 1,296  |   |   |
| Marketing, general and  administrative                                                              |   | 5,155  |   |   |
| Total cost of  share-based compensation for the year                                                |   | 9,446  |   |   |
| Amount capitalized in  inventory and fixed assets during the year                                   |   | (1,328 | )      |   |
| Amount recognized in  income for amounts previously capitalized in inventory and fixed assets  |   | 326    |   |   |
| Amounts charged against  income, before income tax benefit                                          |   | $      | 8,444  |   |   |
|                                                                                                     |        |        |        |        |        |  |

 

As a result of adopting SFAS 123R, the Company’sincome before income taxes and net income for the year ended December 31,2006 was approximately $8.4 million and $6.8 million, respectively, lower thanif it had continued to account for share-based compensation in accordance withthe provisions of APB No. 25. Basic and diluted income per share for theyear ended December 31, 2006, would have been $4.48 and $4.18,respectively, if the Company had not adopted SFAS 123R, compared to reportedbasic and diluted income per share of $4.40 and $4.11, respectively. Inaddition, for the year ended December 31, 2006, the adoption ofSFAS 123R resulted in net cash provided by operating activities beinglower and net cash provided by financing activities being higher by approximately$94.7 million. This amount represents the benefit of equity net operatinglosses that will be taken as a reduction on our tax returns and therefore,saving us cash by reducing our federal and state taxes due.

Prior to the adoption of SFAS 123R, all tax benefitsfor deductions resulting from the exercise of stock options were presented asoperating cash flows on the Consolidated Statements of Cash Flows. Uponadoption of SFAS 123R, cash flows resulting from the tax benefits of taxdeductions are classified as financing cash flows.

***Determining Fair Value***

*Valuationand Amortization Method:**  *Thefair value of stock options granted under the Company’s Stock Option Plans andthe ESPP is estimated using the Black-Scholes option pricing model. The fairvalue of stock options granted after January 1, 2006 is amortized on astraight-line basis. The fair value of stock options granted before January 1,2006 is amortized using the graded vesting attribution approach. Compensationexpense is amortized over the requisite service periods of the awards, whichare generally the vesting periods. The fair value of awards granted under theRetention Plan were calculated using a Monte-Carlo simulation pricing model.The fair value of these awards is being amortized based on the proportionateamount of the requisite service period that has been rendered to date for eachrespective performance period.

*ExpectedTerm:**  *The expectedterm of an employee share option is the period of time for which the option isexpected to be outstanding. The Company has made a determination of expectedterm by analyzing employees’ historical exercise experience and post-vestingemployment termination behavior from its history of grants and exercises in theCompany’s option database. The historical pattern of option exercises has beenanalyzed in an effort to determine if there were any discernable patterns ofactivity based on certain demographic characteristics such as employees’ lengthof service, salary and job level.

F-32

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*ExpectedVolatility:*   Volatility is a measure of theamount by which a financial variable, such as share price, has fluctuated(historical volatility) or is expected to fluctuate (expected volatility). Theexpected volatility of stock option awards at the date of grant is estimatedbased on the implied volatility of greater than one-year publicly tradedoptions. The decision to use implied volatility was based upon the availabilityof actively traded options on the Company’s common stock and the assessment thatimplied volatility is more representative of future stock price trends thanhistorical volatility. Prior to the adoption of SFAS 123R, the Companycalculated expected volatility using only historical stock price volatility.

*Risk-FreeInterest Rate:*   The risk-freeinterest rate used in the Black-Scholes option pricing model is based on theimplied yield available on U.S. Treasury zero-coupon issues with a remainingterm equal to the expected term used. The risk free rate used in theMonte-Carlo valuation model is based on the implied yield in effect at the timeof grant from the constant maturity treasury yield curve over the contractualterms of the award.

*Dividends:**  *Cashdividends have never been declared on the Company’s common stock and theCompany has no present intention to declare cash dividends in the foreseeablefuture. Consequently, an expected dividend yield of zero was used in both theBlack-Scholes and Monte-Carlo valuation models.

*Forfeitures:**  *TheCompany uses historical data to estimate pre-vesting option forfeitures.Share-based compensation expense is recorded only for those awards that areexpected to vest.

Thefollowing assumptions were used to estimate the fair value of options grantedunder the Company’s Stock Option Plans:

| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected term  (years)   |       | 3.95-5.72                                  |       | 4.49 |   | 4.47 |   |
| Risk-free  interest rate |       | 4.31-5.21                                  | %          | 3.62 | % | 2.63 | % |
| Expected  volatility     |       | 27.45-42.70                                | %          | 82.92 | % | 85.42 | % |
| Expected dividend rate   |       | 0                                          | %          | 0 | % | 0 | % |

 

The assumptions used inthe Monte-Carlo simulation modeling to estimate the fair value of awards underthe Retention Plan for the year ended December 31, 2006 were: expectedvolatility of 42.23 %, risk-free interest rate ranging from 4.87% to 5.03% andexpected dividend yield of 0%. The fair value of the Company’s ESPP awardsduring the year ended December 31, 2006 were calculated using theintrinsic value of the common stock purchased on the end of each quarter basedon the fact that the Company’s offering period is three months and the ESPPdoes not contain a look-back provision.

F-33

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Stock Option Activity and Share-Based CompensationExpense***

Stockoption activity for the year ended December 31, 2006 is summarized asfollows:

| ** **                             | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------|------------|----------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | ** **                 | ** ** | ** **                                                 | ** ** | **(Years)**                                         | ** ** | **(in thousands)**             | ** ** |
| Outstanding at  December 31, 2005 |       | 12,619,193                 |       |                                                       | $          | 37.38                                               |       |                                |       |   |   |   |   |   |   |   |
| Granted                                |       | 1,763,905                  |       |                                                       | 34.32      |                                                |       |                                |       |   |   |   |   |   |   |
| Exercised                              |       | (1,701,447                 | )          |                                                       | 17.04      |                                                |       |                                |       |   |   |   |   |   |   |
| Forfeitures                            |       | (2,171,921                 | )          |                                                       | 45.14      |                                                |       |                                |       |   |   |   |   |   |   |
| Expired                                |       | (436                       | )          |                                                       | 6.01       |                                                |       |                                |       |   |   |   |   |   |   |
| Outstanding at  December 31, 2006 |       | 10,509,294                 |       |                                                       | $          | 38.55                                               |       |                                |       | 6.12 |   |   |   | $ | 19,331 |   |   |
| Vested and  expected to vest           |       | 10,327,285                 |       |                                                       | $          | 38.64                                               |       |                                |       | 6.01 |   |   |   | $ | 19,325 |   |   |
| Exercisable at December 31,  2006 |       | 9,089,017                  |       |                                                       | $          | 39.42                                               |       |                                |       | 5.65 |   |   |   | $ | 18,587 |   |   |

 

The weighted average fair value of options grantedduring the years ended December 31, 2006, 2005 and 2004 was $14.64,  $25.34 and $33.21, respectively. Theaggregate intrinsic value of options outstanding at December 31, 2006 iscalculated as the difference between the exercise price of the underlyingoptions and the market price of the Company’s common stock for the 1,486,837shares that had exercise prices that were lower than the $26.76 market price ofour common stock at December 31, 2006. The total intrinsic value ofoptions exercised during the years ended December 31, 2006, 2005 and 2004was approximately $27.3 million, $22.5 million and $150.8 million,respectively, determined as of the date of exercise.

The Company recognized for the year ended December 31,2006 approximately $7.4 million in share-based compensation expense, net ofamounts capitalized, for stock options granted under the Company’s Stock OptionPlans. As of December 31, 2006, there was approximately $14.9 million oftotal unrecognized compensation cost related to non-vested share-basedcompensation arrangements granted under the Company’s Stock Option Plans. Thisamount assumes the Company’s expected forfeiture rate. That cost is expected tobe recognized over a weighted average period of approximately 2.6 years. TheCompany utilizes newly issued shares to satisfy the exercise of stock options.

Upon issuance of the awards, the grant date fair valuefor the Retention Plan was approximately $3.7 million. The fair value(based on the December 31, 2006 valuation) of the Retention Plan awardsoutstanding at December 31, 2006 was approximately $1.8 million. Thecombined fair value of the Retention Plan awards that were cancelled during theyear ended December 31, 2006 was approximately $591,000 (based on the December 31,2006 valuation). The aggregate intrinsic value of the awards outstanding at December 31,2006, all of which are not vested, is $0 because the 30-day averageclosing stock price preceding December 31, 2006 did not exceed the triggerprice of $32.99. The aggregate intrinsic value of the awards expected to vestat December 31, 2006 is $0. The weighted average remaining contractualterm for both the awards outstanding and the awards that are vested andexpected to vest at December 31, 2006 is approximately 1.5 years.

F-34

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The Company recognized for the year ended December 31,2006 approximately $557,000 in share-based compensation expense, net of amountscapitalized, for the Retention Plan. As of December 31, 2006, there wasapproximately $910,000 of total unrecognized compensation cost related tonon-vested share-based compensation arrangements granted under the RetentionPlan. This amount assumes the Company’s expected forfeiture rate. The costsassociated with the awards are expected to be recognized over the PerformancePeriods.

During the year ended December 31,2006, the Company granted  29,749 sharesfor the ESPP for a total of 213,144 shares that have been issued under the planand recognized approximately $122,000 in share-based compensation expense, netof amounts capitalized. The Company utilizes newly issued shares to satisfy theissuance of shares under the ESPP.

***Comparable Disclosures***

Thefollowing table illustrates the effect on net income and net income per sharefor the years ended December 31, 2005 and 2004, if the compensation costfor the Company’s stock option grants had been determined based on the fairvalue at the grant dates for awards consistent with the fair value method ofStatement of Financial Accounting Standards No. 123 “Accounting forStock-Based Compensation (“SFAS 123”). The stock-based employeecompensation expense determined under the fair value based method wascalculated using the graded vesting attribution approach.

| ** **                                                                                                       | ** ** | **Year Ended December 31,**                        | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2005**                                                          | ** ** | **2004** | ** ** |
| ** **                                                                                                       | ** ** | **(in thousands, except per  share amounts)** | ** ** |
| Net income, as  reported                                                                                         |       | $                                                                 | 86,496     |   | $ | 113,653 |   |
| Add: Stock-based  employee compensation expense included in net income, tax effected                             |       | —                                                            |       | 1,759 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method, tax effected |       | (89,365                                                           | )          | (46,283 | ) |
| Pro forma net (loss) income                                                                                      |       | $                                                                 | (2,869     | ) | $ | 69,129 |   |
| Net (loss) income per  common share:                                                                             |       |                                                              |       |   |   |
| Basic, as reported                                                                                               |       | $                                                                 | 1.03       |   | $ | 1.43 |   |
| Basic, pro forma                                                                                                 |       | $                                                                 | (0.03      | ) | $ | 0.87 |   |
| Diluted, as reported                                                                                             |       | $                                                                 | 1.01       |   | $ | 1.33 |   |
| Diluted, pro  forma                                                                                              |       | $                                                                 | (0.03      | ) | $ | 0.85 |   |

 

For the years ended 2005and 2004 there were 19,552,000, and 3,487,000, respectively, of potentialcommon shares excluded from the pro forma diluted income per share computationbecause their inclusion would have had an anti-dilutive effect. The potentialcommon shares excluded from the computation consist of anti-dilutive stockoptions for all periods and shares related to the 13¤8% convertiblenotes and 51¤2%convertible notes for the year ended December 31, 2005. The pro formaeffect on the net income (loss) for the years ended December 31, 2005 and2004 is not necessarily indicative of the effect on future years’ operatingresults. Pro-forma stock-based compensation expense in 2005 includes expensesassociated with the accelerated vesting of options in the fourth quarter of2005.

F-35

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(12) Income Taxes**

The(benefit) provision for income taxes includes the following:(in thousands)

| ** **                            | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:                              |       |                                       |       |   |   |   |   |
| Federal                               |       | $                                          | 78,993     |   | $ | 861 |   | $ | 5,947 |   |
| State and local                       |       | 24,401                                     |       | 717 |   | 11,414 |   |
| Total provision  for income taxes     |       | 103,394                                    |       | 1,578 |   | 17,361 |   |
| Deferred:                             |       |                                       |       |   |   |   |   |
| Federal                               |       | (130,846                                   | )          | — |   | — |   |
| State and local                       |       | (22,902                                    | )          | — |   | — |   |
| Total benefit for  income taxes       |       | (153,748                                   | )          | — |   | — |   |
| (Benefit)  provision for income taxes |       | $                                          | (50,354    | ) | $ | 1,578 |   | $ | 17,361 |   |

 

The Company recorded as increases to additionalpaid-in capital approximately $93.9 million, $1.7 million and $10.0 million oftax benefit from the exercise of stock options for the years ended December 31,2006, 2005 and 2004, respectively. As a result of legislation in New Jerseypassed in 2002 an Alternative Minimum Assessment (AMA) tax is computed and maybe applicable. This AMA tax impacted the Company’s tax provision for the yearended December 31, 2005.

Reconciliationsbetween the total tax provision and the tax provision based on the federalstatutory rate are presented below: (in thousands)

| ** **                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Pre-tax income                                         |       | $                                          | 320,320    |   | $ | 88,074 |   | $ | 131,014 |   |
| Tax provision at  federal statutory rate of 35%        |       | 112,112                                    |       | 30,826 |   | 45,855 |   |
| State and local  income taxes (net of federal benefit) |       | 5,159                                      |       | 338 |   | 8,005 |   |
| Change in  valuation allowance                         |       | (161,095                                   | )          | (28,418 | ) | (33,023 | ) |
| Research and  development credits                      |       | (5,989                                     | )          | (4,331 | ) | (3,585 | ) |
| Non-deductible  expenses                               |       | (541                                       | )          | 3,163 |   | 109 |   |
| (Benefit) provision for  income taxes                  |       | $                                          | (50,354    | ) | $ | 1,578 |   | $ | 17,361 |   |

 

F-36

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The tax effects of temporary differences that giverise to significant portions of the gross deferred tax assets and grossdeferred tax liabilities are presented below: (in thousands)

| ** **                                                           | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Gross deferred tax  assets:                                          |       |                  |       |   |   |
| Research and development credit carryforwards and  other credits     |       | $                     | 73,619     |   | $ | 77,012 |   |
| Compensation relating to the issuance of stock  options and warrants |       | 3,413                 |       | 894 |   |
| Net operating loss carryforwards                                     |       | 49,614                |       | 173,096 |   |
| Deferred revenue                                                     |       | 156,118               |       | 142,135 |   |
| Withholding tax liability                                            |       | —                |       | 9,422 |   |
| Capital loss carryforward                                            |       | 3,909                 |       | 3,761 |   |
| Other                                                                |       | 12,218                |       | 10,470 |   |
| Total gross  deferred tax assets                                     |       | 298,891               |       | 416,790 |   |
| Less valuation allowance                                             |       | (133,589              | )          | (415,510 | ) |
| Net deferred tax assets                                              |       | 165,302               |       | 1,280 |   |
| Gross deferred tax  liabilities:                                     |       |                  |       |   |   |
| Other                                                                |       | 3,538                 |       | 1,280 |   |
| State taxes                                                          |       | 8,016                 |       | — |   |
| Net deferred tax  asset                                              |       | $                     | 153,748    |   | $ | — |   |

 

In 2006, the Company released a portion of itsvaluation allowance against our total deferred tax assets. This partial releasewas based on revised expectations of projected book and taxable income, whichcaused the Company to conclude that it is more likely than not that a portionof the benefit of these deferred tax assets would be realized. This releaseresulted in a net tax benefit of approximately $111.3 million. The financialprojections supporting our conclusion to release a portion of our valuationallowance contain significant assumptions based on current facts about ourmarket share and our competitive landscape. If such assumptions were to differsignificantly, it may have a material impact on our ability to realize ourdeferred tax assets. The Company will continue to monitor its currentperformance and future financial projections, including market share andcompetitive landscape, in order to determine the effect on the valuationallowance.

The net change in the total valuation allowance forthe years ended December 31, 2006, 2005 and 2004 were decreases ofapproximately $281.9 million, $14.6 million and $2.7 million, respectively.Approximately $120.7 million of the total valuation allowance pertains to taxdeductions relating to stock option exercises for which any subsequentlyrecognized tax benefit will be recorded as an increase to additional paid-incapital.

At December 31, 2006, the Company had netoperating loss carryforwards for federal and certain state income tax purposesof approximately $124.0 million, which expire at various dates from 2010through 2025. At December 31, 2006, the Company had research credit carryforwardsfor federal and New Jersey state purposes of $49.6 million and $14.5 million,respectively, and federal alternative minimum tax credits of $9.4 million. Thefederal and state research credits expire at various dates from 2007 through2026. The American Jobs Creation Act of 2004 provides for a tax deduction up to9% (when fully phased in) of qualified production activities income. Thisdeduction does not yet provide any material benefit to the Company.

F-37

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(13)**Discontinuationof Small Molecule Program

On May 11, 2005, the Company announced a plan todiscontinue its small molecule research program. This decision was made afterevaluating the Company’s investment in such program against the time horizonbefore commercial benefits would be realized. As a result of this decision, theCompany reflected $6.2 million of costs associated with the discontinuation ofthis program in the Consolidated Statements of Operations for the year ended December 31,2005. Such costs included approximately $2.2 million of costs related toseverance for 45 employees that were terminated, approximately $3.7 million ofcosts related to the write-off of fixed assets used in such program (shown netof $227,000 from the subsequent sale of equipment that was previously written offas part of this discontinuance), approximately $60,000 of contract terminationcosts related to the cancellation of the lease at the Brooklyn facility wherethe employees were conducting such research and approximately $282,000 of othershutdown expenses. The Company had no additional other shutdown expenses andpaid the remaining  amount of $12,000that was accrued at December 31, 2005 during the year ended December 31,2006 to complete the disposition of this program.

**(14) Contingencies**

In January 2002, a number of complaints assertingclaims under the federal securities laws against the Company and certain of theCompany’s directors and officers were filed in the U.S. District Court for theSouthern District of New York. Those actions were consolidated under thecaption Irvine v. ImClone Systems Incorporated, et al., No. 02 Civ. 0109(RO). In the corrected consolidated amended complaint, plaintiffs assertedclaims against the Company, its former President and Chief Executive Officer, Dr. SamuelD. Waksal, its former Chief Scientific Officer and then-President and ChiefExecutive Officer, Dr. Harlan W. Waksal, and several of the Company’sother present or former officers and directors, for securities fraud undersections 10(b) and 20(a) of the Securities Exchange Act of 1934 andSecurities and Exchange Commission Rule 10b-5, on behalf of apurported class of persons who purchased the Company’s publicly tradedsecurities between March 27, 2001 and January 25, 2002. The complaintalso asserted claims against Dr. Samuel D. Waksal under section 20Aof the Exchange Act on behalf of a separate purported sub-class of purchasersof the Company’s securities between December 27, 2001 and December 28,2001. The complaint sought to proceed on behalf of the alleged classesdescribed above, sought monetary damages in an unspecified amount and soughtrecovery of plaintiffs’ costs and attorneys’ fees. On January 24, 2005,the Company announced that it had reached an agreement in principle to settlethe consolidated class action for a cash payment of $75.0 million, aportion of which would be paid by the Company’s insurers. Therefore, theCompany recorded in its Consolidated Balance Sheet as of December 31,2004, as Litigation settlement, a liability of approximately $75.9 million and a receivable from our insurers ofapproximately $20.5 million, included in Other assets. Net expense ofapproximately $55.4 million was recorded in the fourth quarter of 2004 andreflected in the Consolidated Statement of Operations as Litigation settlement.The parties signed a definitive stipulation of settlement and as provided forunder the stipulation of settlement, on March 11, 2005, the Company paid$50.0 million into an escrow account, subject to Court approval of the proposedsettlement. On July 29, 2005 the Court approved the proposed settlementand on August 5, 2005, the Company paid the remaining $25.0 million intothe escrow account, with such funds to be held in and distributed pursuant tothe terms of the settlement. The Company has collected from its insurers all ofthe outstanding receivable amounting to $20.5 million. The amount received fromthe insurers includes $8.75 million, less attorneys fees of $875,000, that waspaid to the Company under the derivative settlement discussed below.

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

On January 13, 2002, and continuing thereafter,nine separate purported shareholder derivative actions were filed againstmembers of the Company’s board of directors, certain of the Company’s presentand former officers, and the Company, as nominal defendant, advancing claimsbased on allegations similar to the allegations in the federal securities classaction complaints. Four of these derivative cases were filed in the DelawareCourt of Chancery and have been consolidated in that court under the caption Inre ImClone Systems Incorporated Derivative Litigation, Cons. C.A. No. 19341-NC.Three of these derivative actions were filed in New York State Supreme Court inManhattan. All of these state court actions have been stayed in deference tothe proceedings in the U.S. District Court for the Southern District of NewYork, which have been consolidated under the caption In re ImClone Systems, Inc.Shareholder Derivative Litigation, Master File No. 02 CV 163 (RO). Asupplemental verified consolidated amended derivative complaint in theseconsolidated federal actions was filed on August 8, 2003. It asserted,purportedly on behalf of the Company, claims including breach of fiduciary dutyby certain current and former members of the Company’s board of directors,among others, based on allegations  includingthat they failed to ensure that the Company’s disclosures relating to theregulatory and marketing prospects for ERBITUX were not misleading and thatthey failed to maintain adequate controls and to exercise due care with regardto the Company’s ERBITUX application to the FDA. On January 24, 2005, theCompany announced that it had reached an agreement in principle to settle theconsolidated derivative action. The parties entered into a definitivestipulation of settlement on March 14, 2005, which was approved by theCourt on July 29, 2005. In August 2005, the Company received $8.75million from its insurers, which was contributed toward the settlement of theIrvine securities class action described above, after deducting $875,000 forCourt awarded plaintiffs’ attorney’s fees and expenses. Following Courtapproval of the settlement of the consolidated derivative action, all of thestate court derivative actions that had been pending in Delaware and New Yorkwere dismissed with prejudice, with no further payment required by the Company.

On August 14, 2002, after the federal grand juryindictment of Dr. Samuel D. Waksal had been issued but before Dr. SamuelD. Waksal’s guilty plea to certain counts of that indictment, the Company filedan action in New York State Supreme Court seeking recovery of certaincompensation, including advancement of certain defense costs, that the Companyhad paid to or on behalf of Dr. Samuel D. Waksal and cancellation ofcertain stock options. That action was styled ImClone Systems Incorporated v.Samuel D. Waksal, Index No. 02/602996. On July 25, 2003, Dr. SamuelD. Waksal filed a Motion to Compel Arbitration seeking to have all claims inconnection with the Company’s action against him resolved in arbitration. Byorder dated September 19, 2003, the Court granted Dr. Samuel D.Waksal’s motion and the action was stayed pending arbitration. On September 25,2003, Dr. Samuel D. Waksal submitted a Demand for Arbitration with theAmerican Arbitration Association (the “AAA”), by which Dr. Samuel D.Waksal asserted claims to enforce the terms of his separation agreement,including provisions relating to advancement of legal fees, expenses, interestand indemnification, for which Dr. Samuel D. Waksal claimedunspecified damages of at least $10.0 million. On March 10, 2004, theCompany commenced a second action against Dr. Samuel D. Waksal in the NewYork State Supreme Court. That action was styled ImClone Systems Incorporatedv. Samuel D. Waksal, Index No. 04/600643. Specifically, by this action,the Company sought to recover: (a) $4.5 million that the Company paidto the State of New York in respect of exercises of non-qualified stock optionsand certain warrants in 2000; (b) at least $16.6 million that theCompany paid to Samuel D. Waksal in the form of ImClone common stock, in lieuof withholding federal income taxes from exercises of non-qualified stockoptions and certain warrants in 2000; and (c)  approximately$1.1 million that the Company paid in the form of ImClone common stock toSamuel D. Waksal and his beneficiaries, in lieu of withholding federal, stateand local 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

income taxes from certainwarrant exercises in 1999-2001. The complaint asserted claims for unjustenrichment, common law indemnification, moneys had and received andconstructive trust. On June 18, 2004, Dr. Samuel D. Waksal filed anAnswer to the Company’s Complaint.

On December 21, 2005, the Company and Dr. SamuelD. Waksal entered into a settlement agreement with respect to the foregoingactions, providing for, among other things, judgments in both actions inthe Company’s favor. The settlement agreement included the payment of directorand officer legal fee expense indemnification by the Company, for which theCompany paid approximately $2.0 million in the fourth quarter of 2005. Thesettlement agreement also provided for the return to the Company of 416,667 ofstock options that were previously issued to Dr. Samuel D. Waksal. Suchoptions were returned to the Company and were cancelled as of December 31,2005.

On October 28, 2003, a complaint was filed byYeda Research and Development Company Ltd. (“Yeda”) against ImCloneSystems and Aventis Pharmaceuticals, Inc. in the U.S. District Court forthe Southern District of New York (03 CV 8484). This action did not seekdamages, but rather alleged that three individuals associated with Yeda shouldalso be named as co-inventors on U.S. Patent No. 6,217,866, which relatesto the therapeutic use of EGFR antibodies (such as ERBITUX, the Company’s EGFRantibody product) in combination with chemotherapy. The Company has exclusivelylicensed this patent from Rhone-Poulenc Rorer Pharmaceuticals, now known as Sanofi-Aventis.On June 7, 2005, Yeda amended its U.S. complaint to seek sole inventorshipof the subject patent. On November 4, 2005, the Court denied the Company’smotion for summary judgment with respect to this matter, as filed with theCourt on June 24, 2005. At the same time, the Court granted summaryjudgment to Yeda dismissing two of ImClone’s affirmative defenses. A benchtrial on the merits of Yeda’s complaint was held between June 5, 2006 andJuly 19, 2006. On September 18, 2006, the Court ruled in favor ofYeda by awarding it sole inventorship rights to the patent. ImClone Systemsthen appealed the Court’s decision to the Court of Appeals for the FederalCircuit. The appeal was docketed on October 5, 2006 (as No. 2007-1012),and is in its early stages. The Company, having had the advice of its patentcounsel, believes the positions raised on appeal are sound, and it plans tovigorously pursue this appeal.

On September 20, 2006, subsequent to the Court’sinventorship decision, the Company also filed an action (06 CV 7190) againstYeda in the U.S. District Court for the Southern District of New York seeking adeclaratory judgment that the patent is invalid due to the removal of theoriginally named inventors. On October 31, 2006, Yeda filed an answer andcounterclaim to the Company’s declaratory judgment complaint in which Yeda allegesthe Company is liable to Yeda for willful patent infringement, unjustenrichment and conversion, and seeks damages from the Company and an orderrequiring the Company to license the patent and pay Yeda royalties until thepatent expires. The declaratory judgment action is in its early stages. TheCompany,  having had the advice of itspatent counsel, believes that the claims asserted in the declaratory judgment actionare sound, and that Yeda’s counterclaims are not sound, and it plans tovigorously pursue this action. The Company is unable to predict the outcome ofthese actions at this time. If the Company’s appeal is unsuccessful and Yeda’ssole inventorship rights to the patent are upheld and the Company isunsuccessful with respect to its declaratory judgment action, the Company maybecome obligated to pay Yeda a royalty and may be liable to Yeda for otherdamages.

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

On March 25, 2004, anaction was filed in the United Kingdom Patent Office entitled Referrer’sStatement requesting transfer of co-ownership and amendment of patent EP (UK) 0667 165 to add three Yeda employees as inventors. Also on March 25, 2004,a German action entitled Legal Action was filed in the Munich District Court I,Patent Litigation Division, in which Yeda sought a 75% ownership interest inpatent EP (DE) 0 667 165 based on its allegation that the inventorship on thatpatent was incorrect. The Company was not named as a party in these actionswhich relate to the European equivalent of U.S. Patent No. 6,217,866discussed above. Accordingly, the Company has intervened in the U.K. and Germanactions. Yeda sought to amend its pleadings in the United Kingdom and Germanyto seek sole inventorship and sole ownership. Following hearings, both the U.K.and German courts held that Yeda was not entitled to amend its pleadings. Inthe U.K., Yeda sought leave from the House of Lords to appeal the High Court’s decision,and such leave was granted in November 2006. In Germany, Yeda has appealedthe lower court’s decision to the Higher Regional Court of Munich.Additionally, on or about March 25, 2005 and March 29, 2005,respectively, Yeda filed legal actions in Austria and France against bothAventis and ImClone Systems seeking full inventorship of EP (AU) 0 667 165 andEP (FR) 0 667 165, as well as payment of legal costs and fees. The Company,having had the advice of its patent counsel, believes there are sound defensesto these actions, and it presently plans to vigorously defend against theclaims asserted. The Company is unable to predict the outcome of these actionsat this time. In addition, in December 2002, Opposition Proceedings seeking torevoke the European patent discussed above were brought by the Scripps ResearchInstitute, Amgen Inc., Abgenix, Inc., and YM Biosciences Inc. An OppositionProceeding is an administrative process, the outcome of which may be that theEuropean patent will be revoked. The Company has vigorously defended itsposition in this matter, which is suspended pending a final determination ofthe Yeda matter discussed above.

On May 4, 2004, acomplaint was filed against the Company by Massachusetts Institute ofTechnology (“MIT”) and Repligen Corporation (“Repligen”) in the U.S. DistrictCourt for the District of Massachusetts (04-10884 RGS). This actionalleges that ERBITUX infringes U.S. Patent No. 4,663,281, which is ownedby MIT and exclusively licensed to Repligen and that the Company shouldtherefore pay damages. On July 28, 2006, the Court denied the Company’smotion for summary judgment seeking to dismiss all claims on the basis that thepatent rights at issue were exhausted as a matter of law and granted MIT andRepligen’s cross motion that their patent rights were not exhausted. On September 26,2006, a hearing was held in response to a Motion for Sanctions filed byRepligen, which alleged that the Company’s counsel, Kenyon & Kenyon,and the Company acted improperly during and after the deposition of one ofRepligen’s potential witnesses. Repligen seeks evidentiary sanctions which maylimit the Company’s proofs on non-infringement issues, and the Court has raisedthe possibility that Kenyon & Kenyon may be disqualified from furtherrepresentation of the Company in the case. The Company and Kenyon &Kenyon deny any improper conduct. The Court has not ruled on the motion, and itis not possible to predict what impact, if any, this collateral matter may havein the case. Upon a ruling by the Court, the case will proceed to trial on themerits of the Company’s other defenses. The Company, having had the advice ofits patent counsel, believes that its defenses are sound, and it presentlyplans to vigorously defend against the claims asserted.

On February 5, 2007,a complaint was filed against the Company by Abbott Laboratories (“Abbott”) inthe U.S. District Court for the District of Massachusetts (07-cv-10216).This action alleges that the manufacture and sale of ERBITUX infringes U.S.Patent No, 5,665,578, which is owned by Abbott and that the Company shouldtherefore pay damages. As of this time, the Company has not yet filed an answerto this complaint. The Company plans to vigorously defend against any claimsasserted in this action. The Company is unable to predict the outcome of thisaction at the present time.

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

No reserve has beenestablished in the financial statements for any of the intellectualproperty-related legal proceedings described above because the Company does notbelieve that such a reserve is required to be established at this time underStatement of Financial Accounting Standards No. 5. However, if in a futureperiod, events in any such legal proceedings render it probable that a losswill be incurred and if such loss is reasonably estimable at that time, theCompany will establish such a reserve. Thus, it is possible that legalproceedings and settlements arising therefrom, if any, may have a materialadverse impact on operating results for that period, on our balance sheet orboth.

The Company is developinga fully-human monoclonal antibody, referred to as IMC-11F8. The Companybelieves it has the right to do so under its existing development and licenseagreement with Merck KGaA. However, Merck KGaA had advised the Company that itbelieved that IMC-11F8 was covered under the development and licenseagreement with Merck KGaA and that it could therefore have the exclusive rightsto market IMC-11F8 outside the United States and Canada and co-exclusivedevelopment rights in Japan, for which it would pay the same royalty as it paysfor ERBITUX  (see Note 10-Corporate Collaborations—Collaborations with Merck KGaA). In agreement withMerck KGaA, the Company submitted this dispute to binding arbitration throughan expedited process outside of the provisions of the development and licenseagreement. Merck KGaA subsequently took the position that the expeditedarbitration provision was no longer valid and the Company sued Merck KGaA infederal court in the Southern District of New York to either enforce thearbitration provision previously agreed to or to have the court decide thequestion of whether IMC-11F8 is or is not covered under the developmentand license agreement with Merck KGaA. On November 29, 2005, the Court grantedthe Company’s motion to enforce the expedited arbitration provision previouslyagreed to, and subsequently appointed a new arbitrator to hear and decide thisdispute. On March 31, 2006, the arbitrator decided the matter in favor ofthe Company, finding that Merck KGaA had no rights to IMC-11F8. Thatdecision is binding and unappealable pursuant to the parties’ arbitrationagreement and the parties have subsequently confirmed the arbitration award.

**(15) Commitments**

***Leases***

The Company leases office,operating and laboratory space under various operating lease agreements. Theeffects of scheduled and specified rent increases or any “rent holidays” arerecognized on a straight-line basis over the lease term. Rent expense wasapproximately $5.7 million, $5.6 million and $4.0 million for the years ended December 31,2006, 2005 and 2004, respectively.

In October 2001, theCompany entered into a sublease (the “Sublease”) for a four-story building at325 Spring Street, New York, New York, which includes approximately 100,000square feet of usable space. The Sublease has a term of 22 years, followed bytwo five-year renewal option periods. In order to induce the sublandlord toenter into the Sublease, the Company made a loan to the sublandlord in theprincipal amount of a $10.0 million note receivable, of which approximately$8.4 million is outstanding as of December 31, 2006. The loan is securedby a leasehold mortgage on the prime lease as well as a collateral assignmentof rents by the sublandlord. The loan is payable by the sublandlord over 20years and bears interest at 51¤2 % in yearsone through five, 61¤2%in years six through ten, 71¤2% in years eleven through fifteen and 81¤2 % in yearssixteen through twenty. In addition, the Company paid the owner a consent feein the amount of $500,000. Effective March 1, 2005, the Company amendedthe Sublease to add an additional 6,500 square feet of space upon all the sameterms and conditions set forth in the Sublease. In connection with thisamendment, the Company paid an up-front fee of approximately $1.7 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

millionwhich is being amortized, as a reduction in lease expense, over the respectiveterm of the Sublease. The future minimum lease payments remaining at December 31,2006, are approximately $46.5 million.

The Company leases itsresearch and corporate headquarters in New York City. In August 2004, theCompany modified its existing operating lease for its corporate headquarters inNew York City. The modification extends the term of the lease, which was toexpire at December 31, 2004, for an additional ten years for a portion ofthe premises and by an additional three years with renewal rights for the spacethat houses its research department. The future minimum lease paymentsremaining at December 31, 2006, are approximately $8.4 million.

In June 2004, theCompany entered into an operating lease for a building located at 59-61ImClone Drive in Branchburg, New Jersey. The building contains 54,247 squarefeet of floor area. The lease expires on December 31, 2022 with no optionto renew or extend beyond such date. The future minimum lease payments at December 31,2006, are approximately $9.8 million.

In August 2005, theCompany entered into an operating lease for a portion of a building located at41A ImClone Drive in Branchburg, New Jersey. The Company is leasing 10,704square feet of floor area. The lease expires on August 31, 2010, with twooptions to renew for five additional years each. The future minimum leasepayments at December 31, 2006, are $412,000.

Future minimum leasepayments under all of the Company’s operating leases are as follows:(in thousands)

| **Year ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                        |       | $          | 5,411      |       |
| 2008                                        |       | 4,253      |       |
| 2009                                        |       | 4,281      |       |
| 2010                                        |       | 4,174      |       |
| 2011                                        |       | 4,050      |       |
| 2012 and thereafter                         |       | 43,964     |       |
|                                        |       | $          | 66,133     |       |

 

***EmploymentAgreements***

On March 19, 2004,the Company entered into an employment agreement with Daniel S. Lynch inregards to his employment as Chief Executive Officer. In connection with Mr. Lynch’sresignation effective November 10, 2005 by mutual agreement with theCompany’s Board of Directors, such resignation was treated as a termination bythe Company without cause under Mr. Lynch’s employment agreement. As aresult, the Company has recorded severance benefit expense due Mr. Lynchof approximately $2.9 million in Marketing, general and administrative expensesin the fourth quarter of 2005. Payment of this severance was made in 2006.

***Supported Research***

The Company has enteredinto various research and license agreements with certain academic institutionsand others to supplement the Company’s research activities and to obtain rightsto certain technologies. The agreements generally require the Company to fundthe research, to pay milestones upon the achievement of defined events, such asthe submission or approval of regulatory filings and to pay royalties basedupon percentages of revenues, if any, on sales of products developed fromtechnology arising under these agreements.

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Contract Services***

On March 17, 2005,the Company entered into a five year multi-product supply agreement with LonzaBiologics PLC (“Lonza”) for the manufacture of biological material at the 5,000liter scale. The Company has discretion over which products to manufacture,which may include later-stage clinical production of the Company’s antibodiescurrently in Phase I clinical testing and those nearing Phase I testing. Thevalue of producing all batches under the Agreement is $68.0 million, unlessterminated earlier. The Agreement provides that the Company can cancel anybatches at any time; however, depending on how much notice the Company providesLonza, the Company could incur a cancellation fee that varies based on timingof the cancellation. This cancellation fee is only applicable if Lonza does notresell the slots reserved for the cancelled batches.

***License Agreements***

The Company has anexclusive license from the University of California to an issued United Statespatent for the murine form of ERBITUX, the Company’s EGFR antibody product. TheCompany has exclusively licensed from Rhone-Poulenc Rorer Pharmaceuticals, nowknown as Aventis, patent applications seeking to cover the therapeutic use ofantibodies to the EGFR in conjunction with anti-neoplastic agents. Theagreements with the University of California and Aventis require the Company topay royalties on sales of ERBITUX that are covered by these licenses. TheCompany has license agreements with Genentech, Inc. (“Genentech”) forrights to patents covering certain use of epidermal growth factor receptorantibodies and with both Genentech and Centocor, Inc. (“Centocor”) forrights to patents covering various aspects of antibody technology. Theseagreements with both Genentech and Centocor require us to pay royalties on thesale of ERBITUX that are covered by these licenses. The Company is obligated topay royalties of approximately 9.25% of North American net sales and asingle-digit royalty on sales outside of North America, which will increase ifsales outside of North America consist of ERBITUX produced in the United States.In 2006, the Company received reimbursements from its corporate partners of4.5% on North American net sales and a single-digit percentage on net sales  outside of North America. Effective January 1,2007, the reimbursement from our corporate partners will decrease to 2.5% onNorth American net sales.

**(16) EmployeeBenefit Plans**

***DefinedContribution Plan***

All employees of theCompany who meet certain minimum age and period of service requirements areeligible to participate in a 401(k) defined contribution plan. The 401(k) planallows eligible employees to defer up to 25 percent of their annualcompensation, subject to certain limitations imposed by federal law. Theamounts contributed by employees are immediately vested and non-forfeitable.Under the 401(k) plan, the Company, at management’s discretion, may matchemployee contributions and/or make discretionary contributions. Neither theemployee contributions nor voluntary matching contributions are invested in theCompany’s securities. Total expense incurred by the Company was approximately$2.2 million, $1.9 million and $580,000 for the years ended December 31,2006, 2005 and 2004, respectively.

***Change in ControlPlan***

During 2004, the Board ofDirectors of the Company adopted a Change in Control Plan to maintain the focusof certain key employees of the Company on the business, mitigate thedistractions that could be caused if the Company were to become the target ofan acquisition strategy, and provide certain benefits to the covered employeesif a change in control of the Company (as such term is defined in the plan)occurs 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

and/orthe employee’s employment is terminated in connection with such change incontrol. Participants in the Change in Control Plan are determined by theCompensation Committee.

In the event of a changein control, all equity-based compensation awards held by the plan participantswill vest in full (unless the Compensation Committee determines that theparticipants’ awards will be substituted for equity awards in the survivingentity of equivalent economic value) and any deferred compensation ofparticipants will become nonforfeitable. In addition, if a participant in theChange in Control Plan is terminated in connection with a change in control bythe Company without cause or by the participant for good reason (as such termsare defined in the plan), the Company will pay to the participant a cashpayment equal to the participant’s earned but unpaid base salary and bonus,unreimbursed expenses, any other accrued obligations, a pro rata bonus based ontarget bonus for the year of termination, and a multiple of base salary andbonus (with the multiplier ranging from 0.5 to three based on the tier assignedto the participant under the plan).

In connection with atermination described in the preceding sentence, if the participant signs awaiver and release of claims against the Company, each participant will vest infull in all long-term incentive arrangements he or she has with the Company andbe entitled to continued health coverage for six to 18 months (based onthe participant’s plan tier) and outplacement services for six months. Thesebenefits are reduced by any other severance amounts for which the participantsare eligible under any other arrangement of the Company or its subsidiary. As acondition to receipt of these benefits, each participant agrees to be bound bynoncompetition, nonsolicitation, confidentiality, return of Company property,and cooperation covenants contained in the plan. If a plan participant becomessubject to the change-in-control golden parachute excise tax under Section 4999of the Internal Revenue Code and the aggregate parachute payment exceeds thesafe harbor amount by ten percent or more, the plan provides that the Companyshall pay to the participant a tax gross-up payment such that after payment bythe participant of all federal, state and local excise, income, employment,Medicare and other taxes resulting from the payment of the parachute paymentsand the tax gross-up payments, the participant retains an after-tax amountequal to the amount that he or she would have retained in the absence of theparachute excise tax.

***Severance Plans***

The Compensation Committeeof the Board of Directors approved on February 10, 2005, a SeniorExecutive Severance Plan (the “Plan”) to enhance the predictability oftreatment for executives at the level of Vice President, Senior Vice Presidentand Executive Vice President whose employment with the Company is terminated bythe Company without cause (as such concept is explained in the Plan).

As a condition to receiptof benefits under the Plan, a participating employee must sign an agreement andgeneral release in a form acceptable to the Plan administrator under which theparticipant agrees to certain confidentiality and non-solicitation provisionsfor a period of one year following his or her employment termination date,agrees to certain non-competition provisions for the duration of the employee’sreceipt of severance pay, and releases and discharges the Company and relatedentities (as well as any third party for whom the employee provides services onthe Company’s behalf) from any and all claims and liabilities relating to theemployee’s employment with the Company or the termination of the employee’semployment. Receipt of benefits under the Plan is also contingent upon theemployee’s continued employment through the employment termination datedesignated by the Company. The severance amounts payable to an employee underthe Plan will be reduced, dollar-for-dollar, by the amount of any othertermination payments paid or payable to the employee under any other plan,program or law (excluding any right to exercise stock options, any unemploymentbenefits payable in accordance with state law and payment for accrued butunused vacation).

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The Senior Vice Presidents and Executive VicePresidents who participate in the Plan and sign the above-described agreementand release upon their termination without cause are entitled to receive anamount equal to one year’s base salary as severance and, if the employee wouldotherwise be eligible to elect employee-paid continued coverage under COBRA,Company-provided health insurance coverage for one year following a terminationwithout Cause, subject to cessation upon the employee’s becoming eligible forsimilar coverage offered by another employer. Senior Vice Presidents andExecutive Vice Presidents would also be entitled continue theirnon-voluntary life insurance coverage provided by the Company with the premiumspaid by the Company for 12 months after a termination without cause, subject tocessation when the employee becomes eligible for coverage under a lifeinsurance plan or policy of another employer. Vice Presidents who meet theabove criteria are entitled to the greater of six months base salary or twoweeks base salary for each year of service with the Company, as well as sixmonths Company-paid health and life insurance coverage, subject to theconditions described above.

On February 16, 2006,the Compensation Committee of the Board of Directors adopted a transitionseverance plan for certain employees of the Company whereby each such employeeis eligible to receive a severance payment from the Company (varying betweensix and twelve months of the employee’s base salary) upon any involuntary terminationof his or her employment by the Company without cause and, following any changein control of the Company, upon his or her voluntary termination of employmentfor good reason. The severance plan’s duration is 18 months.

***Annual Incentive Plan***

In September 2003,the shareholders approved and the Company adopted the Annual Incentive Plan.The plan permits the Compensation Committee to grant performance awards basedupon pre-established performance goals to executives of the Company and itssubsidiaries selected by the Compensation Committee, whether or not suchexecutives, at the time of grant, are subject to the limit on deductiblecompensation under Section 162(m) of the Internal Revenue Code. TheAnnual Incentive Plan became effective as of January 1, 2003.

**(17) Supplemental CashFlow Information and Non-cash Investing and Financing Activities:**

**(inthousands)**

| ** **                                                                                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash paid for:                                                                                                                              |       |                                       |       |   |   |   |   |
| Interest, net of  amounts capitalized of $2,640, $5,394 and $6,087 for the years ended  December 31, 2006, 2005 and 2004, respectively |       | $                                          | 5,610      |   | $ | 2,856 |   | $ | 8,729 |   |
| Income taxes                                                                                                                                |       | 5,358                                      |       | 1,400 |   | 6,167 |   |
| Non-cash investing and  financing activities:                                                                                               |       |                                       |       |   |   |   |   |
| Change in net  unrealized gain (loss) in securities available-for-sale                                                                      |       | 4,078                                      |       | (8,345 | ) | (987 | ) |
| Options exercised  and exchanged for mature shares of common stock                                                                          |       | —                                     |       | — |   | 200 |   |
| Common stock  issued from conversion of 51¤2%  subordinated convertible notes                                                          |       | —                                     |       | — |   | 239,997 |   |
| Reclassification of  unamortized deferred financing costs on the 51¤2%  subordinated convertible notes to stockholders’ equity    |       | —                                     |       | — |   | 1,193 |   |
|                                                                                                                                             |            |                                            |            |  |  |  |  |  |  |  |

 

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(18) Fair Value ofFinancial Instruments**

The carrying amounts ofcash and cash equivalents, receivables from corporate partners, accountspayable, and other current liabilities at December 31, 2006 and 2005approximate fair value because maturities are less than one year in duration.The fair value of the 13¤8% convertiblesenior notes of $600.0 million was approximately $545.6 million and $502.5million at December 31, 2006 and 2005, respectively, based on their quotedmarket price. See Note 3 for the fair value disclosures of securities availablefor sale.

**(19) Quarterly FinancialData (Unaudited)**

Thetables below summarize the Company’s unaudited quarterly operating results for2006 and 2005 (in thousands, except per share data):~~  ~~

| ** **                                                     | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                     | ** ** | **March 31,  2006**         | ** ** | **June 30,  2006** | ** ** | **September 30,  2006** | ** ** | **December 31,  2006** | ** ** |
| Revenues                                                       |       | $                                | 245,131    |   | $ | 149,856 |   |   | $ | 150,697 |   |   |   | $ | 132,163 |   |   |
| Net income                                                     |       | $                                | 229,591    |   | $ | 37,209 |   |   | $ | 57,316 |   |   |   | $ | 46,558 |   |   |
| Basic net income  per share allocable to common stockholders   |       | $                                | 2.75       |   | $ | 0.44 |   |   | $ | 0.68 |   |   |   | $ | 0.55 |   |   |
| Diluted net income per  share allocable to common stockholders |       | $                                | 2.51       |   | $ | 0.42 |   |   | $ | 0.65 |   |   |   | $ | 0.53 |   |   |

 

| ** **                                                     | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                     | ** ** | **March 31,  2005**         | ** ** | **June 30,  2005** | ** ** | **September 30,  2005** | ** ** | **December 31,  2005** | ** ** |
| Revenues                                                       |       |                             | $          | 85,771 |   |   | $ | 92,385 |   |   | $ | 106,525 |   |   |   | $ | 98,992 |   |   |
| Net income                                                     |       |                             | $          | 28,820 |   |   | $ | 26,031 |   |   | $ | 30,951 |   |   |   | $ | 694 |   |   |
| Basic net income  per share allocable to common stockholders   |       |                             | $          | 0.35 |   |   | $ | 0.31 |   |   | $ | 0.37 |   |   |   | $ | 0.01 |   |   |
| Diluted net income per  share allocable to common stockholders |       |                             | $          | 0.33 |   |   | $ | 0.30 |   |   | $ | 0.35 |   |   |   | $ | 0.01 |   |   |

 

F-47

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